Funds of Funds and FINRA 5131(b)

Posted on February 22, 2012 by Jeff

It appears that certain funds of funds are likely to see an easing up on their due diligence obligations vis-a-vis their investors under Financial Industry Regulatory Authority (“FINRA”) Rule 5131(b), the “anti-spinning” rule governing a fund’s purchase of new issues that was effective September 26, 2011. Spinning is the practice of allocating new issues to executive officers and directors of current or potential investment banking clients in exchange for their investment banking business. For your reference, Rule 5131(b) and the de minimis exception available to funds are reviewed below.

At a meeting last week, the FINRA Board of Governors authorized FINRA staff to submit a proposed rule change to the Securities and Exchange Commission (“SEC”) that would exempt certain funds of funds from the requirement to assess the status of indirect beneficial owners for purposes of purchasing new issues under the anti-spinning provisions of FINRA Rule 5131(b). Continue reading →

Upcoming 2012 SEC Regulatory Deadlines

Posted on February 16, 2012 by Jeff

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 Provides Guidance on Registration of Advisers Related to Registered Investment Advisers

Posted on January 27, 2012 by Jeff

On January 18, 2012, the Securities and Exchange Commission (the “SEC”) issued a No-Action letter (the “2012 ABA Letter”) to the American Bar Association (the “ABA”), Business Law Section, providing guidance as to when certain entities affiliated with a registered investment adviser would be permitted to rely on the registered investment adviser’s registration, and would not be required to register separately as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”). The 2012 ABA Letter confirms the SEC’s guidance on these issues in Question and Answer G.1. of its December 8, 2005 letter addressed to the ABA’s Subcommittee on Private Investment Entities and responds to additional related questions. Question and Answer G.1. is referred to as the “2005 ABA Letter” and is further described below. The continued applicability of the 2005 ABA Letter had been called into question by the amendments resulting from the repeal of the section 203(b)(3) private adviser exemption under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Continue reading →

Recent SEC Investment Adviser Enforcement Cases – Deficient Compliance Programs and Aberrational Performance

Posted on December 15, 2011 by Jeff

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.

Continue reading →

Insider Trading Action: Exchange-Traded Funds (“ETFs”)

Posted on November 30, 2011 by Jeff

The SEC appears to be focusing on markets and products not previously investigated in the insider trading context. According to Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, the SEC is “aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations.”
Continue reading →

Final Form PF Approved by CFTC

Posted on November 27, 2011 by Jeff

Recently, the Commodity Futures Trading Commission (the “CFTC”) approved joint final rules under the Commodity Exchange Act (the “CEA”) and the Investment Advisers Act of 1940 (the “Advisers Act”) and the final Form PF (report by private fund advisers). The new rules implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Continue reading →

SEC Database Improves Tracking of Tips and Complaints

Posted on July 29, 2011 by Zabrina

The SEC received heavy criticism for their failure to conduct a proper investigation into early tips received relating to the Madoff scandal. In response, they have developed the Tips, Complaints and Referrals Database (the “TCR Database”) which significantly improves their ability to track and respond to tips and complaints on potential wrongdoers. The TCR Database has emerged alongside a new program by the FBI’s criminal profiling group in Quantico, Va. that is creating a series of behavioral composites to help agents investigate white collar crime.

In recent years, financial crimes have been on the rise.

In the US government’s 2010 fiscal year, the FBI’s economics crime unit reports the bureau had 1,703 active securities and commodities fraud investigations, a 41 percent increase over the number of active investigations in 2008. Over the past year, the amount of monetary penalties the SEC has imposed on wrongdoers has almost tripled…

Prior to the creation of the TCR Database tips would come in via phone calls, e-mails, faxes and even handwritten letters into the SEC’s 11 regional offices and Washington headquarters and often were not properly recorded or followed up. The TCR database now provides a systematic and organized approach to reviewing the information provided by tipsters, whistle-blowers and self-regulatory organizations. Once a tip or complaint is entered into the system through the online questionnaire available in the TCR Database portal, about 2,300 SEC employees can see it, analyze the information and add to it.

While the TCR Database can not yet be cross-checked against other internal databases or against trading activity, company filings or news feeds, it is a start and a positive reform and improvement for the SEC.

FINRA 5131 Anti-Spinning Rule Delayed

Posted on May 20, 2011 by Tim

On May 18, 2011, the U.S. Securities and Exchange Commission approved certain amendments to the originally adopted version of FINRA Rule 5131 (the “anti-spinning rule”). Most importantly, the recent amendments delay the implementation date from May 27, 2011 until September 26, 2011. In addition, the old FINRA Rule 5131(b)(1) is deleted. Such provision had required FINRA members to establish and maintain policies and procedures to ensure that investment banking personnel have no involvement or influence in the new issue allocation decisions of FINRA members.

The rule change can be found here.

President nominates SEC commissioners

Posted on May 20, 2011 by Tim

President Obama plans to nominate Republican Daniel Gallagher and Democrat Luis Aguilar as commissioners at the U.S. Securities and Exchange Commission.

Gallagher is currently a partner in the securities department of Wilmer Cutler Pickering Hale and Dorr LLP. He previously worked at the SEC from 2006 through 2010. Gallagher would replace Commissioner Kathleen Casey should he be confirmed. Kathleen Casey’s term expires later this year. She is one of two Republicans on the five-person Commission and Gallagher would keep the party split 3-2.

Current SEC Commissioner Luis Aguilar was appointed in 2008. The term expired last year but he has continued serving in that position, as permitted by law.

Both nominations are subject to approval by the U.S. Senate.

Division of Investment Management Requests Extensions of Deadlines for Mid-Sized Advisers and Private Fund Advisers

Posted on May 9, 2011 by Yonina

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.”

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