This Summary, which draws from a wide range of sources, endeavors to condense important investment management regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This Summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.
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Special Review Committee Issues Report on FINRA’s Examination Program in Light of Stanford and Madoff Schemes
October 26, 2009 1:57 PM
On October 2, 2009, a Special Review Committee of FINRA’s Board of Governors issued a report discussing FINRA’s examination program, with an emphasis on the examinations of firms associated with R. Allen Stanford and Bernard Madoff. The report recommended that FINRA seek new jurisdiction from Congress to regulate activities under the Advisers Act to be more effective in detecting fraud by broker-dealers and investment advisers. With the additional jurisdiction, the report suggested that FINRA would be able to confirm the accuracy of data and identify patterns and potential fraud by conducting joint examinations and analyzing and comparing data on both broker-dealer and investment adviser activity. The report also recommended that FINRA clarify its current jurisdiction to regulate member firms and associated persons, expand its jurisdiction to obtain information from affiliates of member firms when it believes there is evidence of fraud, and restructure its examination program.
For a copy of the report, please see:
Congressman Kanjorski Introduces Two Reform Bills in House of Representatives
October 26, 2009 1:36 PM
On October 15, 2009, Congressman Paul E. Kanjorski introduced two bills that were referred to the House Committee on Financial Services.
Bill Providing SEC Additional Authority to Protect Investors, Including Establishing Uniform Standard of Care for Certain Broker-Dealers and Investment Advisers
The “Investor Protection Act” (H.R. 3817) includes provisions establishing a uniform standard of care for certain broker-dealers and investment advisers similar to the draft legislation the Department of the Treasury delivered to Congress in July. Like the prior draft legislation, H.R. 3817 would authorize the SEC to: (1) require any brokers, dealers, and investment advisers that provide investment advice to retail customers (or other customers the SEC designates) to be subject to the same standard of conduct, which would require them to act in the best interest of the customer without regard to the firm’s financial or other interests (but would not preclude commission based compensation); (2) require straightforward disclosure to investors regarding the terms of their relationships with investment professionals; and (3) prohibit conflicts of interest, compensation schemes and sales practices that are contrary to the public interest and interests of investors. H.R. 3817 adds a definition for the term “retail customer,” requires the SEC to harmonize the enforcement options and remedies applicable to broker-dealers that violate the uniform standard with the enforcement options and remedies for violations of the standard of conduct under the Advisers Act, and clarifies that receiving compensation based on commissions will not violate the uniform fiduciary standard of care applied to a broker or dealer.
H.R. 3817 includes provisions that are similar to provisions in the prior draft legislation covering point of sale disclosure, pre-dispute arbitration clauses, compensating whistleblowers, consumer testing, an Investor Advisory Committee, collateral bars, and aiding and abetting liability. H.R. 3817 also adds new provisions covering the following:
Custody. Each person with custody or use of the securities, deposits or credits of a registered investment company or client of a registered adviser would be required to maintain and preserve records that relate to the person’s custody or use of such securities, deposits or credits.
Fees. Registered investment advisers would be required to pay a fee determined by the SEC based on certain factors including the adviser’s size, risk profile, and types of clients.
Interested Persons. The SEC would be authorized to determine that certain classes of persons should be deemed “interested persons” under the 1940 Act because they are unlikely to exercise an appropriate degree of independence as a result of a material relationship with the investment company or its affiliate.
Illiquid Securities. Section 22(e) of the 1940 Act would be amended to authorize the SEC to limit the extent to which a registered open-end investment company may own, hold or invest in illiquid securities or property.
Securities Lending. Section 10 of the Exchange Act would prohibit effecting or accepting a transaction involving the loan or borrowing of securities in contravention of rules and regulations the SEC adopts.
Enforcement. Several provisions would seek to enhance enforcement of the federal securities laws. For example, a new section under the Exchange Act would require the SEC to complete any examination, investigation, or enforcement action within 180 days, and new provisions under the Exchange Act, 1940 Act and Advisers Act would authorize the SEC to require responses to information and document requests to conduct surveillance or risk assessments of the securities markets, registered persons, or otherwise further the purposes of the securities laws.
Extraterritorial Jurisdiction. The jurisdiction of the U.S. district courts in actions under the Securities Act, Exchange Act and Advisers Act would be expanded to include conduct in the United States that constitutes significant steps to further the violation (even if the securities transaction occurs outside of the United States and involves only foreign investors) or outside of the United States that has a foreseeable substantial effect in the United States.
Independent Consultant. The SEC would be required to hire an independent consultant to examine the operations, structure, funding, and need for reform of the SEC and self-regulatory organizations.
Bill Requiring Registration for Managers of Private Funds
The “Private Fund Investment Advisers Registration Act of 2009” (H.R. 3818) is similar to the “Private Fund Investment Advisers Registration Act of 2009” draft legislation the Department of the Treasury delivered to Congress in July and the “Private Fund Transparency Act of 2009” (S. 1276) that Senator Reed introduced in the Senate in June. Like the Senate bill, H.R. 3818 would: (1) require advisers of “private funds” to register with and provide information to the SEC; (2) exclude advisers to private funds from the exemptions from registration under Section 203(b) of the Advisers Act for intrastate advisers and advisers registered with the CFTC; (3) eliminate the exemption from registration for advisers with fewer than fifteen clients; and (4) exempt from registration any investment adviser that is a foreign private fund adviser. H.R. 3818 also would mandate an exemption from the registration requirements for advisers to “venture capital funds” as defined by the SEC, but would authorize the SEC to require these advisers to maintain records and provide the SEC with annual or other reports. Private equity funds are not mentioned in the bill, so managers of these funds would be required to register unless included in the SEC’s definition of venture capital funds. It may be noteworthy that, notwithstanding the carve out for “venture capital fund” advisers, the Congressman’s website describes the draft bill as requiring that “Everyone Registers”.
Like the prior bills, H.R. 3818 would authorize the SEC to require registered advisers to maintain records and file reports for each private fund they advise, including the amount of assets under management, use of leverage, counterparty credit risk exposures, trading and investment positions and trading practices, and would require the adviser to provide reports, records and other documents to a private fund’s investors, prospective investors, counterparties and creditors. H.R. 3818 adds a provision enabling the SEC to impose different reporting requirements for classes of private fund advisers based on the type and size of the private funds they advise.
Also like the prior bills, H.R. 3818 would: (1) eliminate the prohibition from requiring an adviser to disclose the identity of and information about the adviser’s clients, (2) authorize the SEC to make the information in the reports available to other regulators, Congress and courts; (3) authorize the SEC to define terms under the Advisers Act and to ascribe different meanings to terms (including “client”) used in different sections of the Advisers Act; and (3) within six months after the Act is enacted require the SEC and CFTC to jointly promulgate rules to establish the form and content of the required reports.
For the text of the Investor Protection Act of 2009, H.R. 3817, 111th Cong. 1st Sess. (2009), please see:
SEC and Commodity Futures Trading Commission (“CFTC”) Release Joint Report on Regulatory Harmonization
October 26, 2009 1:34 PM
On October 16, 2009, the SEC and CFTC issued a report that addresses key areas in which their regulatory schemes are different and recommends legislative and regulatory actions to address these differences. The report recommends legislation to impose a uniform fiduciary duty for any commodity trading advisor, futures commission merchant, introducing broker, broker-dealer, or investment adviser providing similar investment advice regarding futures or securities, like the uniform standard of care proposed under the Investor Protection Act of 2009. The report also suggests that the CFTC and SEC eliminate inconsistencies in requirements for investment advisers, commodity trading advisors, and commodity pool operators providing services to private funds, harmonize the length of time records must be maintained, and seek greater consistency in risk disclosure documents. Additionally, the report recommends granting the SEC authority for aiding and abetting liability under the Securities Act and 1940 Act and authorizing the CFTC to require futures commission merchants and introducing brokers to separate research and analysis activities from trading and clearing activities.
The report includes additional discussions regarding product listing and approval, exchange/clearinghouse rule changes, risk-based portfolio margining and bankruptcy/insolvency regimes, linked national markets and common clearing versus separate markets and exchange-directed clearing, price manipulation and insider trading rules, and cross-border regulatory matters. Chairman Schapiro highlighted the recommendations to permit investors to manage risk more efficiently in accounts holding products regulated by the SEC and CFTC, to authorize a Joint Advisory Committee to develop common solutions for the futures and securities markets, and to create a Joint Enforcement Task Force to enhance and coordinate enforcement efforts.
For a copy of the Joint Report, please see:
SEC Publishes Draft Strategic Plan for 2010 to 2015
October 26, 2009 1:25 PM
On October 8, 2009, the SEC published for public comment its Draft Strategic Plan for fiscal years 2010 through 2015. The plan outlines the SEC’s strategic goals and over 70 initiatives to support those goals. The initiatives include harmonizing the regulatory structures for investment advisers and broker-dealers to protect investors and strengthening investment adviser and broker-dealer oversight. The plan contemplates a top to bottom review of the effectiveness of the examination process in response to findings of the Office of the Inspector General. On a separate but related note, the plan contemplates bolstering the experience of SEC staff members, including staff obtaining professional designations such as that of a “Certified Fraud Examiner” The plan contemplates examination of one-third of all “high risk” advisers each year, 9% of all advisers, 15% of all investment companies and 55% of all broker-dealers. The plan notes the SEC’s current rule proposals regarding pay-to-play arrangements and custody requirements under the Advisers Act, and suggests that the SEC also will consider amending the broker-dealer and investment adviser registration forms and requiring those who provide investment advice to provide enhanced disclosure of their business practices, conflicts of interest and backgrounds. The initiatives also include reconsidering Rule 12b-1 and the factors fund boards must consider when approving or renewing distribution fees, enhancing disclosures related to asset backed securities and other structured financial products and complex financial instruments, enhancing the regulatory regime for money market funds, continuing to enhance the registration, oversight and transparency of credit rating agencies, and addressing issues regarding target date funds. The SEC also will consider whether to let exchange-traded funds be introduced to the market without submitting an application and receiving an SEC order. The plan also contemplates enhanced oversight over OTC derivatives. Other topics the plan discusses include strengthening proxy infrastructure and promoting high-quality accounting standards. The plan contemplates only a continued review of the no-action and exemptive order processes. Comments are due by November 16, 2009.
For a copy of the SEC’s draft Strategic Plan, please see:http://www.sec.gov/about/secstratplan1015.pdf
SEC Adopts and Proposes Rule Amendments Related to Nationally Recognized Statistical Rating Organizations (“NRSROs”)
October 26, 2009 1:22 PM
SEC Adopts Amendments to Rules 5b-3 and 10f-3
Changes to New York Power of Attorney Law
October 6, 2009 12:28 PM
On September 1, 2009, amendments to New York’s power of attorney laws became effective. These amendments may impact documents relating to corporate transactions, SEC filings, tax filings and other regulatory filings. The new law requires, among other things, that powers of attorney executed within the state of New York:
It should be noted that powers of attorney executed outside of New York that are in compliance with such other jurisdiction’s laws, will still be valid in New York.
For the text of amended Section 5-1513 of the New York General Obligations Law, please see:
For more information, please see:
Remarks by Commissioner Paredes Regarding the Proposed Amendments to the Custody Rule and Rule 2a-7 and Jones v. Harris Associates
October 6, 2009 12:25 PM
On September 24, 2009, SEC Commissioner Troy A. Paredes spoke at the Investment Company Institute’s Annual Capital Markets Conference. Among other things, Commissioner Paredes used the occasion to voice his concerns relating to the proposed amendments to the custody rule and Rule 2a-7 and the pending Jones v. Harris Associates Supreme Court Case.
Commissioner Paredes first addressed his concerns regarding the amendments to Investment Advisers Act Rule 206(4)-2, the custody rule. Under the proposed amendments, an investment adviser with custody of client assets would be required to submit to yearly “surprise exams” by an independent public accountant, which would verify the proper handling of the client’s assets. Commissioner Paredes questioned (i) whether the surprise exam should cover investment advisers with an independent qualified custodian or be limited to instances where the investment adviser or a related person is the qualified custodian and (ii) whether the new custody rules should cover investment advisers who have custody only because they withdraw their advisory fees from client accounts. Commissioner Paredes expressed concern that the rule amendments, specifically the “surprise examinations,” would result in considerable out-of-pocket compliance costs for investment advisers and distract time and effort away from other productive matters that could better benefit investors.
Money Market Funds
Commissioner Paredes expressed significant reservations about two features of the SEC’s proposed amendments to Rule 2a-7, namely (i) the prohibition on Second Tier securities and (ii) the possibility of requiring a “floating NAV” to replace a stable $1 NAV.
Commissioner Paredes noted that he was not aware of any causal link between Second Tier Securities and the stresses that impacted money market securities last year, and he questioned whether the elimination of Second Tier Securities would result in a less diversified money market fund portfolio and subject investors to greater risk. Additionally, Commissioner Paredes was concerned with the possible chilling effect that prohibiting money market fund from holding Second Tier Securities may have on the businesses that rely on money market funds to help finance their businesses.
With respect to the proposal for a floating NAV, Commissioner Paredes questioned whether a floating NAV could adequately address the perceived causes behind some money market funds “breaking the buck.” In particular, he indicated that he does not believe that a floating NAV would reduce the likelihood of a “run” on the fund during times of financial stress. Ultimately with respect to amending Rule 2a-7, Commissioner Paredes believes that the SEC should “be cautious, particularly if certain reforms would fundamentally alter a multi-trillion dollar industry that, on the whole, has served our economy extremely well.”
Jones v. Harris Associates L.P.
Finally, Commissioner Paredes expressed his views with respect to the pending oral arguments before the U.S. Supreme Court in the case of Jones v. Harris Associates L.P. He said that he believes that much has changed since section 36(b) of the Investment Company Act was adopted in 1970 and since the Gartenberg case was decided in 1982, and that “in the face of sufficient market forces that constrain advisory fees, the need for courts to monitor as strictly the advisory/board fee negotiations is mitigated.” Commissioner Paredes further noted that he did not believe that the courts were well positioned to second guess the business decisions of boards made in good faith.
For the text of Commissioner Paredes’ speech, please see:http://sec.gov/news/speech/2009/spch092409tap-ici.htm
SEC Adopts Portfolio Reporting Rule for Money Market Funds
October 6, 2009 12:23 PM
On September 18, 2009, the SEC adopted a temporary rule requiring any money market fund with a market-based net asset value per share (“market-based NAV”) below $.9975 to report portfolio holdings and valuation information to the SEC. The reporting requirements under the new Rule 30b1-6T are substantially similar to the reporting requirements of the Department of the Treasury’s Temporary Guarantee Program for Money Market Funds, which expired on September 18, 2009.
Rule 30b1-6T requires a money market fund with a market-based NAV below $.9975 to notify the SEC by electronic mail and provide a portfolio schedule to the SEC promptly, but in no event later than the next business day. Subsequently, the fund must report its portfolio schedule as of the last business day of the week, and submit it no later than the second business day of the following week, until the fund’s market-based NAV at the end of a week is $.9975 or greater.
A fund’s reports must include certain specific items of information, including: (A) the net asset value per share used to effect shareholder transactions; (B) the most recent market-based net asset value (including the value of any capital support agreement); (C) the most recent market-based net asset value (excluding the value of any capital support agreement); (D) the date as of which the most recent market-based net asset value was calculated; (E) the total assets of the fund; (F) the total net assets of the fund; and (G) the number of shares outstanding.
In addition, the money market fund is required to report certain information regarding each portfolio security held by the fund, including: (A) the name of the security; (B) CUSIP number (if any); (C) principal amount; (D) maturity date; (E) final maturity date, if different from the maturity date as determined under rule 2a-7; (F) categorization of the security’s status as a “First Tier Security,” “Second Tier Security” or a security that is no longer an “Eligible Security” under rule 2a-7; (G) the most recent market-based price, or appropriate substitute for such price, in which case the portfolio schedule or an exhibit to it must describe with reasonable specificity the appropriate substitute; (H) the amortized cost value of the security; and (I) in the case of a tax-exempt security, whether there is a demand feature.
The rule became effective on September 18, 2009, and will expire on September 17, 2010. The SEC also requested comment on the rule, and the comment period will end on Oct. 26, 2009.
For a copy of the SEC Rule Release, please see:http://sec.gov/rules/final/2009/ic-28903.pdf
SEC Reviewing Securities Lending; Holds Roundtable
October 6, 2009 8:44 AM
On September 24, 2009, SEC Chairman Mary L. Schapiro spoke to the 2009 Fall Conference of the Financial Services Roundtable regarding the SEC’s role as a capital markets regulator. Chairman Schapiro noted that the SEC was conducting a “wholesale review” of the securities lending market. She also discussed the issues with securities lending that were revealed during last year’s crisis. She noted that investors such as pension plans, endowments, foundations and mutual funds had believed that securities lending was a relatively risk-free way to create extra earnings. That proved to be untrue when many lenders suffered losses in their collateral reinvestment vehicles last year. Chairman Schapiro hinted that further regulation of securities lending may be needed.
On September 29, 2009, the SEC hosted a roundtable with corporate issuers, financial services firms, beneficial owner lenders, lending agents, borrowers of securities, self-regulatory organizations, international regulators and the academic community to have an in-depth discussion of securities lending issues. The various panels covered, among other things: an overview of securities lending; investor protection concerns in securities lending; ways to improve securities lending to benefit investors; the future of securities lending; and potential regulatory solutions.
For SEC Chairman Mary Schapiro’s speech, please see:
SEC and Commodity Futures Trading Commission (“CFTC”) Chairmen Issue Update on Harmonization Report
October 6, 2009 8:36 AM
The chairmen of the SEC and the CFTC announced on September 30, 2009 that they anticipate, in two weeks, the two agencies will issue a report that will address key areas in which their regulatory schemes are different. The chairmen also expect the report will recommend legislative and regulatory actions to address those differences where appropriate.
It is anticipated that the report will include discussion of the following issues:
For additional information, please see: http://www.sec.gov/news/press/2009/2009-211.htm