Category Archives: Miscellaneous

The SEC Proposes Two New Rules Under the Dodd Frank Act

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Whistleblower Program

The SEC proposed a new whistleblower program under the Dodd Frank Act. The SEC’s proposed rule provides a simple, straightforward procedure for potential whistleblowers to provide critical information to the agency.  To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. The SEC is asking for comments on or before December 17, 2010.  To see the proposed rule please go to: http://www.sec.gov/rules/proposed/2010/34-63237.pdf

Rule to Prevent Fraud in Connection with Security-Based Swaps:

The rule is proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposed rule would add a definition of “security-based swap” to the U.S. Exchange Act of 1934 (the “Exchange Act”). “Security-based swaps” will be subject to the general antifraud provisions of the federal securities laws (for e.g., section 10(b) of the Exchange Act.

The proposed rule would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities.  The rule also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap. The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps.  Further, the rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries.  For further details please see http://www.sec.gov/rules/proposed/2010/34-63236.pdf

SEC November Activities Implementing Dodd-Frank

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The SEC staff continues its hard work on the rulemaking and studies mandated by the Dodd-Frank Act, signed into law by President Obama on July 21, 2010.

The SEC’s webpage captioned “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act” consolidates links to all of the SEC’s related accomplishments to date, and includes a calendar of its planned activities implementing the Dodd-Frank Act through July 2011.

Highlights of the November, 2010 calendar relevant to hedge funds and investment advisers include:

  • §§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
  • §410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act

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Joint CFTC-SEC Public Roundtable: Credit Default Swaps

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The SEC has been working closely with the CFTC to coordinate their respective agencies’ rulemakings related to derivatives markets.  Most recently, the SEC and CFTC  staffs held a joint public roundtable on October 22 from 9 a.m. to noon to discuss issues related to the clearing of credit default swaps. The roundtable is meant to assist both agencies in the rulemaking process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Agenda for the Roundtable follows.  A transcript of the public roundtable discussion will be published on the CFTC’s website. Continue reading →

Interim Final Rule: Security-Based Swap Transaction Data Reporting

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The SEC is steadily working through the rulemaking required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  In October 2010 alone, the SEC proposed eight new rules and adopted an Interim Final Rule. The SEC has been working closely with the CFTC to coordinate their respective agencies’ rulemaking related to derivatives markets.

On October 13, 2010, the SEC adopted Interim Final Exchange Act Rule 13Aa-2T requiring certain swap dealers and other parties to report any security-based swaps entered into prior to, and not expired as of, the July 21, 2010 passage of the Dodd-Frank Act. The Interim Final Rule requires parties to report security-based swap information to the SEC, or to a registered security-based swap data repository, by a compliance date to be set in the rules or within 60 days after a registered security-based swap data repository commences operation, whichever is earlier. Until such date, the parties are required to provide information regarding the swaps to the SEC upon request.  An Interpretive Note provides guidance on the type of information and documents that reporting parties should preserve in order to be prepared for the reporting requirements.

The Interim Final Rule became effective upon publication in the Federal Register on October 20, 2010,  and will remain in effect until the earlier of January 12, 2012 or the date on which a permanent rule is published.  The SEC will continue seeking public comments until December 20, 2010.

Financial Stability Oversight Council Seeks Public Comment on the Volcker Rule, Criteria for Designating Non-Bank Firms for Heightened Supervision

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As reported in a Treasury Department press release and by Reuters,  the Financial Stability Oversight Council, a new council of U.S. regulators established under Title I of the Dodd-Frank Act, held its first meeting on Friday, October 1, 2010.  The Council is meant to provide “comprehensive monitoring to ensure the stability” of the U.S.’ financial system, and is charged with “identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.”

The Council is headed by U.S. Treasury Secretary Timothy Geithner, joined by top officials from the Fed, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corp.  The Treasury Department has posted a complete listing of attendants at the October 1 meeting.

The council voted unanimously to seek public comment for a period of 30 days on the “Volcker” rule (Section 619 of the Dodd-Frank Act, discussed in a June 26th Compliance Avenue posting), which restricts banks from trading with their own money (proprietary trading), and only allows them to invest up to 3 percent of their Tier 1 capital in hedge funds and private equity funds.

The Council has issued an Advanced Notice of Proposed Rulemaking which requests public comment on the criteria to be used in designating certain systemically important large hedge funds and other non-bank financial companies for heightened supervision by the end of the year, and anticipates a vote on a final proposal is anticipated by the end of March 2011.   The President’s regulatory reform plan and the Volcker G-30 report had identified these firms as a shadow banking system in need of systemic regulation.   The designated institutions would be supervised by the Federal Reserve and subject to the government’s new powers to seize and liquidate failing financial giants to prevent chaos in the financial system.

In addition, the Council presented an “Integrated Implementation Roadmap,” which sets out a coordinated timeline of goals, both of the Council and its independent member agencies, to fully implement the Dodd-Frank Act, and  includes statutory deadlines as well as non-statutory targets for agency work that may be updated over time.

Joint SEC-CFTC Report on May 6th “Flash Crash” Implicates High-Frequency Trading

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On October 1, the SEC and CFTC issued a Joint Report on the Market Events of May 6th 2010 which will be presented to the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues.  The report builds on the preliminary analysis released by the SEC and CFTC staffs on May 18, 2010 and implicates high-frequency trading.

Focusing on the relationship between E-Mini Standard & Poor’s 500 futures and S&P 500 “SPDR” exchange-traded funds, the staffs concluded that a computer-driven sale worth $4.1 billion by a single trader helped trigger the May “flash crash.”  The report describes how the “interaction between automated execution programs and algorithmic trading strategies” set off a liquidity crisis and resulted in disorderly U.S. futures and stock markets.

In the past months, the SEC has aggressively pursued ways to respond to the flash crash.  Within weeks of May 6th, the SEC proposed establishing a consolidated audit trail of all stock trading (reported in a May 28 Compliance Avenue post).  In June, the SEC initiated a program of new trading curbs known as circuit breakers (reported in a June 17 Compliance Avenue post) and in September approved rules expanding the stock-by-stock circuit breaker program.

CFTC Chairman Gary Gensler and SEC Chairman Mary L. Schapiro issued the following statement in connection with the report:

“We appreciate the incredible effort of all the professionals at both agencies who have worked tirelessly, scouring the data, interviewing market participants and reconstructing the events of May 6th.  This report identifies what happened and reaffirms the importance of a number of the actions we have taken since that day.  We now must consider what other investor-focused measures are needed to ensure that our markets are fair, efficient and resilient, now and for years to come.”

In the wake of the Joint Report, regulators are urging that additional rules be put in place to ensure proper functioning of the U.S. markets.

International Investigations: Last Thursday, there were reports of plans by both Britain and the European Union to investigate high-frequency trading.   Reuters reported that Britain has commissioned a UK Treasury study into the practice of high-frequency trading amid concerns that a computer-generated error could affect the economy.  Bloomberg reported that the Committee of European Securities Regulators will also investigate high-frequency trading and consider setting up a consolidated tape for the European Union.

Joint Statement by CFTC Chairman Gary Gensler and European Commissioner Michel Barnier on the Financial Reform Agenda

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Washington, DC –United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and European Commissioner Michel Barnier spoke today and reaffirmed their strong determination to cooperate closely in strengthening the global financial system. Specifically, Chairman Gensler and Commissioner Barnier discussed regulatory reform of the over-the-counter (OTC) derivatives markets with respect to Dodd-Frank Wall Street Reform and Consumer Protection Act and the September 2010 European proposal for a Regulation on OTC derivatives, central counterparties and trade repositories. Continue reading →

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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Uncertain Future for New Dodd-Frank FOIA Confidentiality Provision Applicable to Hedge Fund Managers

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As the SEC increases the frequency and intensity of its periodic examinations of hedge fund managers, many will wonder whether materials produced to the SEC during the course of  examinations will be kept confidential upon a request for such materials made pursuant to the Freedom of Information Act.  FOIA, a complex law designed to give citizens a window into the operations of government, contains a number of exemptions that permit the SEC to withhold the production of materials in its possession.  The Dodd-Frank Wall Street Reform and Consumer Protection Act added a new confidentiality provision that attracted little attention at first, but has recently become a lightning rod for criticism.

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