Category Archives: Regulation

MFA Comment Letters: Against SRO Oversight of Investment Advisers, Recommending Amendments to Proposed Say-on-Pay Rules

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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.

No New Funds Expected for SEC and CFTC

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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.”

SEC December Activities Implementing Dodd-Frank

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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 →

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.

Continue reading →

SEC To Propose Hedge Fund Manager Registration Rules

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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:

  • requiring advisers to hedge funds and other private funds to register with the SEC;
  • addressing reporting by certain investment advisers that are exempt from registration;
  • increasing the statutory threshold for SEC  registration of investment advisers from $25 million in assets under management to $100 million;
  • implementing new exemptions from the registration requirements  for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States; and
  • clarifying the meaning of certain terms included in a new exemption for foreign private advisers.

The SEC will consider proposed security-based swaps rules: Continue reading →

SEC Approves New Rules Prohibiting Market Maker Stub Quotes

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Yesterday, the SEC approved new rules proposed by the U.S. exchanges and FINRA which will effectively prohibit “stub quotes” in the U.S. equity markets.  The new rules will require exchange-listed equities market makers to post continuous two-sided quotations within a designated percentage of the national best bid and offer (NBBO).  These rule changes are part of continuing efforts to restore investor confidence and minimize the likelihood of a recurrence of the May 6, 2010 “flash crash.”  For further background, see previous Compliance Avenue posts.

As noted in the Joint SEC-CFTC Report on the Market Events of May 6th 2010, executions against stub quotes significantly contributed to the flash crash as they represented a high proportion of the trades that were executed at extreme prices on May 6 and subsequently broken.  A “stub quote” is an offer to buy or sell a stock at a price so far away from the prevailing market price that it is  not intended to be executed (such as an order to buy at a penny or sell at $100,000).  In the past, when a market maker did not want to actively provide liquidity, it might enter a stub quote to technically comply with its obligation to maintain a two-sided quotation.

The new rules require exchange-listed equities market makers to maintain continuous two-sided quotations during regular market hours that are within a certain percentage of the NBBO.  The percentage band will vary based on different criteria: Continue reading →

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

    • Continue reading →

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 →