Compliance Avenue

The House Committee on Financial Services released details of yesterday’s vote on H.R. 3818 (the “Kanjorski private adviser registration bill) on their website.  It looks like an amendment was originally proposed, but later withdrawn, to have the registration threshold at $500M.

As the bill makes its way through the rest of the House and then Senate, it will be interesting to watch how the details related to: AUM threshhold, inclusion of offshore and venture funds, etc change.

If you need a refresher about the steps for a bill to become a law, take a look at this classic video.

Today the House Financial Services Committee voted to approve a private adviser registration bill in a 67-1 vote.  As reported by the Wall Street Journal and other news sources reported:

• The bill would require private fund managers with at least $150 million in AUM to register with the SEC.  This  threshold is significantly higher than the $30 million threshold included in the original version of the House bill and in the legislation proposed by the Administration in July.
• Registered advisers would be required to keep additional records and make new disclosures about their transactions to both the SEC and a proposed systemic risk regulator. The SEC would disclose additional information about trading to investors, creditors and other counterparties.
• Venture capital advisers would be exempt from registration requirements under the bill.
• Certain offshore funds will be subject to SEC oversight
• Private fund managers would be given a one-year transitional period before being required to register with the SEC.

Read the rest of this entry »

The NFA recently approved NFA Compliance Rule 2-46 which will introduce new quarterly reporting requirements for certain registered CPOs.  Back in May 2009 the NFA sought comments from CPOs on a proposal to modify the NFA’s web-based disclosure document system.  The proposal was aimed at requiring CPOs to report limited pool performance and operational data for all their listed pools to the NFA on a quarterly basis.  Our expectation is that the NFA will be requiring such quarterly reporting for any commodity pools for which the CPO has reporting requirements under CFTC Rule 4-22.  Taking this a step further, we are of the view the NFA Compliance Rule 2-46 will prompt quarterly reporting for pools operated pursuant to CFTC Rule 4.7, but it will NOT require information to be filed for pools which claim exemption pursuant to Rule 4.13 (e.g., 4.13(a)(3) or 4.13(a)(4)). Read the rest of this entry »

According to a New York Times article posted Sunday evening, a senior administration official said on Sunday that after extensive consultations with Treasury Department officials, Representative Barney Frank, the chairman of the House Financial Services Committee, would introduce legislation as early as this week to address the issue of “too big to fail” institutions.

The measures expected to be proposed by Rep. Frank will be even more aggressive than the White House plan outlined so far, making it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.

The senior administration official said the Treasury secretary, Timothy F. Geithner, is planning to endorse the changes contained in Rep. Frank’s proposal in testimony before the House Financial Services Committee on Thursday.

“These changes will impose market discipline on the largest and most interconnected companies,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

Congress and the Obama administration consider the “too big to fail” quandary, i.e., how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble, as one the most fundamental issues stemming from the near collapse of the financial system last year.

Please refer to the NY Times article, which was written by Stephen Labaton, for a more detailed discussion on this subject.

Preliminary Note:
All advisers to offshore funds set up in the Cayman Islands are strongly advised to contact their offshore counsel regarding the matters discussed in this post.

According to recent changes to the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (the “Guidance Notes”), offshore funds registered in the Cayman Islands and regulated by the Cayman Islands Monetary Authority (“CIMA”) should designate and appoint a compliance officer (“Compliance Officer”) at the management level, who:

– has sufficient skills and experience;

– reports directly to the fund’s Board of Directors (the “Board”);

– has sufficient seniority and authority so that the Board reacts to and acts upon any recommendations made;

– has regular contact with the Board so that the Board is able to satisfy itself that statutory obligations are being met and that sufficiently robust measures are being taken to protect itself against the risk of money laundering and terrorist financing;

– has sufficient resources, including sufficient time and (where appropriate) a Deputy Compliance Officer and support staff; and

– has unfettered access to all business lines, support departments and information necessary to appropriately perform the function. Read the rest of this entry »

Today the SEC voted unanimously to issue proposals designed to increase the transparency of so-called “dark pools” of liquidity, which are a type of private alternative trading system (”ATS”)  in which participants can transact their trades without displaying quotations to the public.

According to the press release issued by the SEC earlier today, the SEC’s proposals generally would require that information about an investor’s interest in buying or selling a stock be made available to the public instead of just a select group operating with a dark pool, and that dark pools publicly identify that it was their pool that executed the trade.

Read the rest of this entry »

All registered investment advisers must file a Form ADV with the SEC and update it as necessary.   In this brief educational post, we discuss some of the basics about the Form ADV and the important compliance issues that all registered managers should know about.

The Form ADV has two parts:

• Part 1 - This online form discloses general information about the Manager and its key personnel (e.g., disciplinary history, number of clients, assets under management, custody issues, identity of Chief Compliance Officer, etc.).  Form ADV Part 1 is filed electronically via the IARD system, is publicly available and must be updated on an annual basis.
• Part II – This part discloses the Manager’s services, fees, privacy policies, proxy voting procedures, brokerage practices, conflicts, and investment strategies.  Part II serves as the brochure that MUST be provided to potential clients prior to entering into an advisory services agreement and it must also be offered to clients on an annual basis.  The Part II is not regularly submitted to the SEC and is not publicly available.  It should be noted however that the SEC has released a proposed rule that WOULD result in significant changes to ADV Part II.  If adopted, ADV Part II would become “ADV Part 2”, would be electronically filed via the IARD system, and would require a “plain English” format. Read the rest of this entry »

We’ve previously highlighted the joint meetings that the SEC and CFTC held earlier this fall to discuss a coordinated approach between the two regulators.    It seems like these meetings have born some fruit, as last week the two agencies jointly issued their report identifying the areas where their respective regulatory regimes differ and outlining actions to harmonize those differences.   You can read the full report and bask in the harmony here.

Last week’s big enforcement news was that Galleon Group founder, Raj Rajaratnam, was charged  with insider trading in the stocks of several companies, including Advanced Micro Devices, Clearwire and Akamai, earning millions of dollars in the process.

Federal prosecutors for the Southern District of New York accused Raj Rajaratnam with illegally obtaining and trading on information on these companies, which also included Polycom, Hilton Hotels, Google and People Support. He has been charged with four counts of conspiracy and eight counts of securities fraud. Others charged by prosecutors include Rajiv Goel, an executive Intel Capital, the venture capital arm of Intel, and Anil Kumar, an executive at McKinsey & Company.

You can view the full complaint here.

According to FINalternatives, this is just the tip of the Insider-Trading Iceberg:

Other hedge fund managers are among those expected to be charged, according to Bloomberg News, the result of a two-year-long investigation. Among those likely to be charged are individuals who came up during the surveillance of Rajaratnam, which included wiretaps. Authorities are also being helped by at least three former Rajaratnam colleagues, including California-based hedge fund managers Ali Far and Choo Beng Lee, according to The Wall Street Journal.

What does a preliminary background check consist of?  Generally speaking, before making an investment the following basic steps should be taken: Read the rest of this entry »