Category Archives: Best Practices

posts about compliance best practices

Upcoming 2012 SEC Regulatory Deadlines

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Congratulations to all newly registering investment advisers that have submitted their Forms ADV Part 1A and Part 2A via the Investment Adviser Registration Depository (“IARD”)  in anticipation of the March 30, 2012 deadline! The Securities and Exchange Commission (“SEC”) generally has up to 45 days after receipt of the Form ADV to declare the registration effective and generally will notify an adviser via email once its registration is declared effective.  Registrations may be declared effective at any time during that 45-day period. An adviser can also check on IARD under the heading “Registration/Reporting Status” to see if its registration has been declared effective.

Below is a review and reminder of certain of the annual regulatory requirements that may be applicable to investment advisers. This is not intended to be an exhaustive list of  SEC regulatory requirements and does not cover state-specific requirements.  In particular, it should be noted that the below information does not address any regulatory filings or reports required by the Internal Revenue Service, Department of the Treasury (such as TIC forms) or the Commodity Futures Trading Commission (“CFTC”).  We expect to release future articles on other required regulatory filings. The information below is for informational purposes only and is not legal advice. Continue reading →

SEC Division of Investment Management Staff Responds to Questions about Form ADV Part 2

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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:

  • compliance dates for delivery of Part 2A and Part 2B
  • Part 2A brochure format, material change and risk disclosure, filing and delivery requirements
  • “covered persons” for Part 2B brochure supplements
  • Part 2B brochure supplement delivery requirements

Among the responses offered are the following:

  • An offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV. (Question II. 6)
  • An adviser that is not required to deliver a brochure, but nevertheless chooses to prepare and deliver one, is not required to file the brochure with the SEC. (Question III. 1)
  • An adviser to a hedge or other private fund could meet its delivery obligation to the fund client by delivering the brochure to a “legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity.”  In its response, the staff cites the U.S. Court of Appeals D.C. Circuit 2006 decision in Goldstein v. Securities and Exchange Commission (“Goldstein”) that the “client” of an investment adviser managing a hedge fund is the fund itself and not any of the investors in the fund. (Question III. 2)

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.

Marketers to Public Plans in New York City and California Required to Register as Lobbyists

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As of the beginning of 2011, investment advisers, as well as individuals and third-party firms, soliciting business from New York City or the State of California public pension plans must determine if they have any registration obligations under the lobbying laws of those jurisdictions and comply with any applicable requirements as soon as possible. These regulations have been imposed in the wake of pay-to-play scandals in both locales and are in addition to any obligations an investment adviser may have under the Securities and Exchange Commission’s (“SEC”) pay-to-play rules. Continue reading →

Civil, Criminal Insider Trading Investigations Target Hedge Funds, Others

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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.

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Hedge Fund Charged with Multiple Violations of Rule 105 of Regulation M; Insufficient Policies and Procedures; $2.6 Million Settlement

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The SEC has fired a warning shot to hedge funds and other market participants that it will target Rule 105 violations in its enforcement efforts and that hedge funds are expected to have robust policies and procedures for preventing and detecting Rule 105 violations.  On Thursday, the SEC charged Dallas-based hedge fund manager Carlson Capital, L.P. with four violations of Rule 105 of Regulation M.  The regulation prohibits purchases of an equity security made available through a public offering from an underwriter or broker or dealer participating in the offering after having sold short the same security during a restricted period (which is generally five business days before the pricing of the offering).  Rule 105 is designed to prevent market participants from selling short a security just before a company prices a public offering, thereby artificially depressing the market price of the security and allowing the short seller to purchase the security at a lower price.  Rule 105 applies irrespective of a trader’s intent.  Carlson agreed to settle the charges for more than $2.6 million dollars and was also censured and ordered to cease and desist from further violations. Continue reading →

Insider Trading Case Against Mark Cuban Gets New Life; Implications for Hedge Funds

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In a case that should be watched closely by hedge fund managers, a federal appellate court has revived the SEC’s insider trading case against billionaire Dallas Mavericks owner Mark Cuban.  The appellate court found that there was “more than a plausible” basis to find in the SEC’s favor.  The case will now go back to the lower court for further litigation or settlement discussions.

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HedgeOp Announces New Personal Trading Compliance Tools

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HedgeOp Compliance, LLC announced today the version 2.0 release of it’s Employee Level Filing (ELF) platform with electronic linkages to over 2,800 brokerage institutions using patented state-of-the-art technology created by Yodlee™, the leading provider of online personal financial management (PFM) and revenue-generating payments solutions and services.

The ELF version 2.0 Platform contains a streamlined compliance workflow that allows employees to instantly connect to their brokerage accounts electronically, allowing for the seamless, automatic download of transaction and holdings data for compliance review purposes.

Typically, advisers comply with rule 204A-1 by receiving paper copies of employee brokerage statements.   The process of reviewing of these statements can be quite burdensome, even for smaller advisers.  The ELF platform streamlines this process by allowing for electronic links and automates much of the review process for CCO’s.

To learn more about the upgraded ELF platform, click here.

Massachusetts Data Security Regulations – Technology Perspective

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If you own or license personal information about a resident of the Commonwealth, you should already be familiar (and compliant, as of March 1, 2010) with the Massachusetts Data Security Regulations, set by The Massachusetts Office of Consumer Affairs and Business Regulation (OCABR).

While the Regulations themselves are best explained by Mr. Patrick Shea of HedgeOp Compliance in an earlier post of this blog, let’s take a moment to look at practical approaches to meeting (and exceeding) the requirements outlined in the Regulations. I will focus my post on the technological aspects of the Regulations but make sure you address the non-technology pieces, including risk identification and assessment, employee training, maintaining proper documentation, etc.

I would like to introduce you to what I call the C.I.A. of your data: Confidentiality, Integrity and Availability. As a business owner or IT gate keeper you want to make sure that your data remains secured, accurate and readily available to your employees and investors. We will get back to data C.I.A. in a second.

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Operational Tip: Use of an Email Signature

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In this day and age of digital communications where advisers distribute performance information, client newsletters and other sensitive communications via email, it is a best practice (and smart business move) for advisers to require all personnel to utilize a standard disclaimer underneath their email signature.   After the jump, you will find a sample of a recommended disclaimer.

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Webinar: Code of Ethics Compliance

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Rule 204A-1 under the Advisers Act (the “Code of Ethics Rule”) requires that all SEC-registered investment advisers establish, maintain and enforce a written Code of Ethics.

Last week, HedgeOp Compliance CEO Bill Mulligan conducted a seminar entitled: Code of Ethics Compliance: Understanding the Rule and Building an Infrastructure as part of HedgeOp’s Excellence in Compliance Seminar Series.

This seminar was focused on helping advisers overcome the burden of the Code of Ethics Rule by teaching about the specific provisions and reporting requirements that must be adhered to. Additionally, the seminar looked at how innovative technology can help automate many aspects of the Code of Ethics Rule and cut down on your paperwork. This seminar is not only geared towards SEC-registered managers, but also unregistered managers who have implemented (or want to implement) a Code of Ethics as a form of “best practice.”

You can watch the seminar and download the presentation materials below.

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