HedgeOp would like to take the opportunity to highlight recent enforcement actions brought by the SEC Enforcement Division’s Asset Management Unit and remind all about the importance of implementing a thorough compliance program and of maintaining a robust culture of compliance.
IA Watch is reporting that the Division of Investment Management has formally requested that the Securities and Exchange Commission (SEC) move to next year the deadlines for mid-sized advisers (certain advisers with between $25 million and $100 million in assets under management) to switch to state registration and for private fund advisers with more than $150 million in assets under management to register with the SEC. IA Watch states: “The formal request moves this closer to becoming reality, should the Commission act on it.”
Robert E. Plaze, Associate Director of the Division of Investment Management, had suggested that extensions to the first quarter of 2012 were a possibility in his April 8, 2011 letter to David Massey, President, North American Securities Administrators Association, Inc. and Deputy Securities Administrator, North Carolina Securities Division.
“We anticipate that the Commission will complete its implementing rulemaking by July 21,2011 in accordance with the Dodd-Frank Act, but expect in connection therewith that the Commission will consider providing additional time for investment advisers affected by these provisions to come into compliance.”
With respect to the switch of mid-sized advisers to state registration, Mr. Plaze’s letter noted that once the SEC adopts the implementing rulemaking, the Investment Adviser Registration Depository system (lARD) will “require re-programming to accept advisers’ transition filings” and that they “understand that the re-programming process will take until the end of the year to complete.” As a result, under consideration was the possibility that “all SEC-registered advisers would be required to report their eligibility for registration with the Commission in the first quarter of 2012.” He went on to say that, even if the implementing rulemaking is completed prior to July 21, 2011, private fund advisers will need time to register and come fully into compliance with the accompanying obligations, and that they “expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”
IA Watch‘s report is not surprising given recent reports in industry publications (including a May 2 report by IA Watch) that SEC staff members have indicated the expectation that the delays will go through. One such statement was reported to have been made by Sara Crovitz, a Branch Chief in the Office of Chief Counsel in the Division of Investment Management, as a participant in a DC bar luncheon panel discussion on “Cross Border Issues Affecting Investment Advisers in the World of Dodd-Frank.”
On March 18, 2011, the staff of the SEC’s Division of Investment Management issued responses to questions about the amended Part 2 of Form ADV.
The Division answered questions regarding the following topics, generally restating information already known about the compliance dates for delivery questions, but providing guidance not previously offered on the remaining issues:
Among the responses offered are the following:
Despite the Goldstein decision, many advisers provide copies of their brochures to all investors in their funds, as a matter of best business practice. It is expected that many advisers will continue to do so, as a matter of best business practice, despite the staff’s response to Question III. 2.
In their introduction to these responses, the staff of the Division of Investment Management state that they expect to update the site with their responses to additional questions “from time to time.” Investment advisers will continue to look for further guidance from the staff.
The full text of the Division of Investment Management staff responses may be found here and the final rule adopting the related amendments to Part 2 may be found here.
This past week, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (“CFTC”) jointly proposed rules requiring SEC-registered investment advisers, CFTC-registered commodity pool operators (“CPOs”) and CFTC-registered commodity trading advisers (“CTAs”) that advise private funds to report certain information about their businesses and the private funds they manage. Information reported on the new proposed forms will be confidential, to the extent permitted under applicable law, and will be used by the Financial Stability Oversight Council to help the Council assess and monitor the potential risk posed to the U.S. financial markets by the private funds.
The CFTC separately proposed related modifications to CPO and CTA regulations, including rescinding Commodity Exchange Act Rule 4.13(a)(3) and Rule 4.13(a)(4), two exemptions from CFTC registration used by many advisers to private funds investing in commodities. Unless otherwise exempt or excluded from the requirement to register, advisers previously exempt under these Rules would be required to register with the CFTC and the advisers and the commodity pools they advise would become subject to certain requirements, including disclosure, financial reporting and recordkeeping. Registration with the CFTC generally includes registration of the adviser’s principals and associated persons, who would have to satisfy certain proficiency or examination requirements.
The Comment Period on the Proposed Rules will be open for 60 days following publication of the Proposed Rules in the Federal Register.
The Managed Funds Association (the “MFA”), a global alternative investment industry organization, had a busy December, 2010, submitting seven comment letters to the SEC and/or the CFTC, five of which related to proposed rulemakings in the derivatives area and two more broadly to investment advisers. Links to all comment letters may be found here.
In a December 16, 2010 comment letter, the MFA addressed Section 914 of the Dodd-Frank Act which calls for the SEC to “seek authority to establish one or more self-regulatory organizations (SROs) for investment advisers” and requires the SEC to conduct a study to “review and analyze the need for enhanced examination and enforcement resources for investment advisers.” The MFA reiterated its position that the SEC should retain its authority to oversee investment advisers, rather than have an SRO perform that function, arguing that an SRO would “lack experience in regulating private fund managers, create inconsistent regulation for investment advisers, face difficult conflicts of interest, increase regulatory costs and ultimately diminish the quality of regulatory oversight of the industry.”
Section 914 has elicited many comment letters from industry participants. In November, the Financial Industry Regulatory Authority (“FINRA”) filed a comment letter supporting the establishment of one or more SROs and exploring the possibility that FINRA be the SRO to oversee investment advisers. FINRA has its supporters; however, a number of comment letters have been submitted to the SEC opposing the oversight of investment advisers by SROs. These include a September comment letter from the MFA, letters in October from the Investment Company Institute and the Investment Adviser Association, a letter in November from the American Institute of CPAs and letters in December from the Financial Planning Coalition and the CFA Institute. The Association of Institutional Investors had opposed the creation of such an SRO in a meeting with the SEC staff.
The deadline for these letters is closing in. The SEC is required to submit a report to Congress by January 17, 2011, including a discussion of “regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.”
In a December 22, 2010 letter, the MFA commented on the SEC’s “say-on-pay” proposal under which institutional investment managers would report how they vote proxies relating to executive compensation matters, as required by Section 951 of the Dodd-Frank Act The MFA agreed with the comment letter submitted by the American Bar Association, recommending that the SEC require an institutional investment manager to report its votes on Form N-PX only when the manager has instructed an intermediary to vote its shares. As currently proposed, the rule would require the manager to file a report even if the manager elects not to vote the proxy. In addition, the MFA suggested that, because of the difficulty a manager may have in determining how its shares were actually voted by the intermediary, the manager should be required to report how it instructed the shares to be voted, rather than how they were actually voted.
It is expected that the SEC will adopt “say-on-pay” rules in the first quarter of 2011.
The Wall Street Journal Online reports that the Senate voted 82-14 this morning to end debate on a continuing resolution for $250 billion to fund the government through March 4, 2011. It is expected that, after a final vote in the Senate, the resolution will be sent to the House of Representatives for a vote prior to the expiration of the current stop-gap measure at midnight tonight.
According to a Senate Appropriations Committee summary produced late Sunday, the resolution provides a small increase of $1.16 billion over 2010 spending, but it appears that there will be no new funds to help the SEC or CFTC with regulatory reform under Dodd-Frank. According to the Wall Street Journal Online, the proposed spending plan would give the SEC authority to set up five offices mandated by Dodd-Frank, including a whistleblower office.
A $1.1 trillion omnibus bill, supported by the Democrats and hailed by the SEC and CFTC, would have included an 18% increase in the SEC’s budget ($200 million in new funding), and a 69% increase in the CFTC’s budget ($100 million of additional money). That bill failed to garner sufficient support and, last Thursday night, the Dow Jones Newswire reported that Senate Majority Leader Harry Reid (D-Nev.) had announced that the Senate would focus instead on a short-term funding measure. At that time, it was reported that the Senate Republicans were considering only a resolution proposed by Minority Leader Mitch McConnell (R-Ky.), which would have simply maintained funding at the 2010 budget levels until February 18, 2011. The House’s version of a new measure, released in early December, would have shifted more funds to the SEC and the CFTC while maintaining the 2010 budget.
The SEC and CFTC had expected to use the new funding under the omnibus bill to allow the agencies to more effectively carry out their new responsibilities and implement the many new rules under the Dodd-Frank Act. These include both agencies’ supervision of the over-the-counter derivatives markets and the SEC’s new power to regulate and examine certain private fund advisers and municipal advisers. Now, it appears that, despite these new duties, which both SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler have said require hiring hundreds of new staff members and significant upgrades in technology, the SEC and CFTC will be forced to operate within their 2010 budgets.
Although the Obama administration could shift money around to help the SEC and CFTC, it is likely that the Republicans, who did not support Dodd-Frank and will take control of the House of Representatives in January 2011, will attempt to block any such shifts through legislation.
The Wall Street Journal Online reports that Senate Finance Committee Chairman Max Baucus (D., Mont.) remains confident that the Democrats could still win funding battles for financial regulation. Sen. Richard Shelby (R., Ala.), however, is quoted as saying, “It’s going to be a big political fight. I think the odds shift toward Republicans.”
The SEC staff continues to carry out the rulemaking and proceed with the studies mandated by the Dodd-Frank Act.
The SEC’s “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act” web page consolidates links to all of the SEC’s related accomplishments to date, includes a calendar of its planned activities implementing the Dodd-Frank Act through July 2011 and provides a link to comments the SEC has received on both rulemaking and planned studies.
In November, the SEC proposed the following: an anti-manipulation rule for security-based swaps, a Whistleblower Incentives and Protection Program, rules regarding the registration and regulation of security-based swap repositories and security-based swap reporting and, most recently, exemptions from investment adviser registration for venture capital firm advisers and certain private fund advisers, as well as rules and changes to forms to implement the transition of mid-sized investment advisers from SEC to State regulation.
Highlights of the December, 2010 calendar most relevant to hedge funds and investment advisers include: Continue reading
According to a Wall Street Journal report, federal authorities are conducting civil and criminal investigations of insider trading that could involve hedge funds, mutual funds, research consultants, investment bankers, and analysts. The scope of the investigations appears to be exceptionally broad and has several areas of focus, including whether:
(1) independent analysts and consultants working with expert networks provided material non-public information to hedge funds and mutual funds;
(2) investment bankers selectively leaked material non-public information about transactions;
(3) independent analysts and research boutiques provided non-public information to clients; and
(4) traders at hedge funds and trading firms improperly gained material non-public information about merger deals.
The SEC continues to closely follow its calendar of anticipated Dodd-Frank rulemaking activity and has posted a notice of an Open Meeting, to be held on Friday, November 19, 2010 at 10:00 a.m.
The SEC plans to propose Investment Advisers Act of 1940 rules:
The SEC will consider proposed security-based swaps rules: Continue reading