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.”

Senate Spending Bill would Increase SEC and CFTC Budgets; SEC and CFTC Meetings this Week

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Senate Spending Bill

Reuters is reporting that a Senate spending bill released today will give an increase of 18% in the SEC’s 2011 budget  to $1.3 billion and an increase of 69% in the CFTC’s 2011 budget to $286 million (in excess of the funding requested by that agency).  These increases should give the agencies the monies they need to implement the many new rules being put in place pursuant to Dodd-Frank, in particular the rules governing the over-the-counter derivatives market.  Both agencies had warned of delays resulting from lack of funds and the SEC (whose fiscal year began October 1) recently announced that, because of budget uncertainty, it was deferring setting up new offices, including the whistleblower office and those overseeing credit rating agencies and municipal securities.

In order for the agencies to receive their funds, the Senate must now pass the bill and then merge its bill with the House spending bill which has already been passed and includes large increases for these agencies.

SEC Open Meeting

Among the items to be discussed at tomorrow’s Open Meeting at the SEC:

  • Rule and form amendments to establish a process for the submission for review of security-based swaps for mandatory clearing and notice filing requirements for clearing agencies; and
  • An end-user exception to mandatory clearing of security-based swaps for certain counterparties.

CFTC Public Meeting

The CFTC will hold a public meeting on Thursday, December 16, to consider rules whose effect will be to limit speculation in the commodity derivatives markets.  The CFTC plans to propose rules that will set:

  • “Position limits” on how many physical commodity derivative contracts a single speculator can hold;
  • Confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers and major swap participants;
  • Risk management requirements for derivatives clearing organizations;  and
  • Core principles and other requirements for swap execution facilities.

The CFTC is expected to produce new rules by late January.

Analyst Exposes Names of Contacts and Clients in a Blast Email

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John Kinnucan, a research analyst and principal at Broadband Research, gained industry notoriety when he refused to cooperate with the Federal Bureau  of Investigation’s widespread investigation into insider trading and would not wiretap conversations with one of his clients. 

Mr. Kinnucan who has been very vocal in the media, also circulated a blast email to clients and contacts informing them of his decision not to work with federal authorities.  Reuters  gained access to Kinnucan’s email recipient list (which failed to use blind carbon copy) and noted that in addition to those associated with hedge funds and mutual funds, the email may have gone to some individuals in finance not previously considered by federal authorities for investigation into insider trading.   Advisory firms like Friess Associates and Sonar Capital Management, giant hedge fund Citadel Group, and money manager Ameriprise Financial are just a few that have been revealed.

 According to an article published by Reuters,

“Officials for a few of the funds said that Kinnucan, in disclosing the identity of his clients, may have violated an expectation of privacy that traders and analysts had when they signed up with him.”

Some of Mr. Kinnucan’s current or former clients include SAC Capital Advisors and mutual funds Janus Capital Group and Wellington Management, all of whom have already either been subpoenaed or asked by federal prosecutors to provide information.  As such, it is likely that those email recipients who were not previously affected by the recent insider trading probe are probably anxiously wondering if they too may now receive a visit from federal authorities.

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 →

Webinar Replay: The New Pay-to-Play Rules

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Earlier this year, the SEC adopted anti-fraud rule 206(4)-5 (the “Pay to Play Rule”) which serves to limit political contributions and “pay to play” activities. Prior to the effective date of this rule, all investment advisers should ensure that they build out comprehensive political contribution reporting and pre-clearance policies.

On November 11th HedgeOp CEO Bill Mulligan to a look at the “Pay to Play Rule” with a focus on the following areas:

  • What are the basics of the Rule and who does it apply to?
  • What types of policies should advisers build out?
  • How should political contribution reporting and pre-clearance work?
  • When does the Rule become effective?
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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 →