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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CFTC Seeks Comment on National Futures Association (“NFA”) Petition to Limit Registered Investment Company Exclusion from Definition of Commodity Pool Operator
September 21, 2010 1:41 PM
The CFTC has published in the Federal Register notice of the NFA’s petition to amend CFTC Regulation 4.5 to limit the registered investment company exclusion from the definition of commodity pool operator. Comments are due on October 18, 2010.
As indicated in the notice, the petition requests that any registered investment company claiming the exclusion must include its notice of eligibility a representation to the effect that it
For more information, please see the Federal Register notice and the discussion of the NFA petition in the August 31 issue of the WilmerHale Investment Management Industry News Summary at:
SEC Charges Investment Adviser with Fraud and Breach of Fiduciary Duty
September 21, 2010 1:34 PM
On September 7, 2010, the SEC charged the principal of two SEC-registered investment advisers with breach of fiduciary duty and fraud. According to the SEC order instituting administrative and cease and desist proceedings, the principal served as chief executive officer of an adviser whose clients were primarily conservative, older individuals. He also served as head portfolio manager for an affiliated adviser that managed a family of hedge funds which used leverage and concentrated in a small number of investments. In addition, he was the principal of a registered broker-dealer, and a substantial majority of the individual advisory clients invested in the hedge funds on his recommendation. The hedge funds suffered substantial losses as a result of their investments in third-party funds that were involved in two separate fraudulent schemes, including the Madoff fraud.
The SEC alleges, among other things, that:
Other allegations in the SEC order include inadequate compliance policies and procedures, failure to comply with the custody rule under the Advisers Act, improper payment of personal expenses by one of the funds and failure to refund fee overcharges properly.
For more information, please see the SEC press release and order at:
Rating Agency Proposes New Rating Methodology and Symbols for Money Market Funds
September 21, 2010 1:27 PM
On September 7, 2010, Moody’s Investor Service (“Moody’s”) published a proposed framework for its new methodology forrating money market fundsand new ratings symbols . Moody’s indicated that it was proposing these changes in part due to the provisions of the Dodd-Frank Act requiring the SEC to adopt rules that would require nationally recognized statistical rating organizations (“NRSROs”) to apply credit rating symbols in a consistent manner for all securities for which the symbols are used. That is, under the legislation and eventual rule-making, the credit rating symbols for money market funds would have to be different from the symbols for debt securities.
The proposed new methodology addresses the following quantitative metrics:
The proposed methodology also expands Moody’s assessment of the ability and willingness of a money market fund’s sponsor (or other third party) to provide support to the fund. The proposed ratings symbols would be on a five-point scale, ranging from MF1+ (strongest) to MF4 (weakest). Moody’s requested public comment regarding the proposal by November 5, 2010.
For more information, please see:
Dodd-Frank Act May Subject Investment Advisers and Registered Investment Companies to Broad Authority by Federal Regulators regarding Payment, Clearing and Settlement Activities
September 21, 2010 1:20 PM
As noted in the September 7, 2010 WilmerHale Regulatory Reform Alert: “Dodd-Frank Title VIII: The Devil is in the Details,” this Title of the Dodd-Frank Act “Payment, Clearing, and Settlement Supervision” has received little attention compared to other parts of the Act. Nonetheless, Title VIII grants vast new authority over activities that are extremely significant to a wide variety of market participants. Under Title VIII, the newly established Financial Stability Oversight Council (“Council”) will have the ability to designate certain payment, clearing, or settlement activities as systemically important (or likely to become systemically important). If the Council makes such a designation, financial institutions, including among others, investment advisers, registered investment companies and broker-dealers, will potentially be subject to new rulemaking, examination and enforcement authority by the SEC, the Federal Reserve System and the CFTC with respect to such activity. This new grant of power to federal regulators could change the manner in which many key market functions are performed, leading market participants to reevaluate current business models.
For more information, please see the WilmerHale Regulatory Reform Alert at:http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9595
Industry Groups Comment on Harmonization of Standard of Care for Investment Advisers and Broker-dealers
September 21, 2010 1:09 PM
A number of key industry groups recently submitted comments to the SEC in connection with the SEC’s six-month study mandated by the Dodd-Frank Act regarding standards of care for broker-dealers and investment advisers and their associated persons. The comment letters of the Securities Industry and Financial Markets Association (“SIFMA”), the Investment Advisers Association (“IAA”) and the North American Securities Administrators Association (“NASAA”) are briefly summarized below. Each focused on the themes it had expressed during the legislative process leading up to the enactment of the Dodd-Frank Act.
SIFMA’s comment letter encouraged the SEC to develop a new uniform standard of care, rather than extending the existing fiduciary standard applicable to advisers under the Investment Advisers Act of 1940 (“Advisers Act”) to broker-dealers. SIFMA articulated the following key principles for SEC focus during the study:
With respect to Access and Choice, SIFMA noted the importance of permitting disclosure and consent to material conflicts of interest in a pragmatic way. SIFMA argued, among other things, that extending requirements for written transaction-by-transaction disclosure and consent inherent in the adviser regulatory model, could harm, rather than benefit, retail investors. SIFMA reasoned that if required consent cannot be obtained in a practical way, the products and services offered to retail customers could be limited or offered only at higher cost
By contrast, the IAA urged the SEC to extend the existing fiduciary duty under the Advisers Act to broker-dealers that provide personalized investment advice to retail investors. The IAA pointed out that the existing Advisers Act fiduciary standard is applicable to investment advisers, including broker-dealers providing discretionary investment advice, while broker-dealers providing advisory services incidental to their broker-dealer activities without special compensation are subject to standards of suitability and high standards of commercial honor and just and equitable principles of trades. The IAA then explained that the fiduciary standard is higher and more protective of investors than the suitability standards and argued that this gap should be eliminated by uniform application of the fiduciary standard. The IAA also sought to counter SIFMA’s arguments that extending the fiduciary standard to broker-dealers could harm retail investors. In the IAA’s view, the fiduciary standard properly applied would generally not restrict Access and Choice; if it did have that effect in particular circumstances, the restriction may be in the retail investor’s best interest or the SEC may grant relief to avoid the restriction.
NASAA similarly urged the SEC to extend the existing fiduciary duty under the Advisers Act to broker-dealers that provide personalized investment advice to retail investors. NASAA also elaborated on the superiority of the fiduciary standard over the suitability standard. As for industry arguments that extension of the fiduciary standard could limit Access and Choice, NASAA characterized them as “hollow,” especially given concessions built into the Dodd-Frank Act, such as those relating to receipt of broker-dealer commissions.
For more information, please see the SEC’s request for comments and the comment letters from SIFMA, the IAA and NASAA at:
Securities and Exchange Commission (“SEC”) Posts Tentative Rule-Making Schedule under Dodd-Frank Act
September 21, 2010 1:01 PM
The SEC recently released its tentative schedule for rule-making as contemplated by the Dodd-Frank Act. Selected provisions affecting investment advisers include:
October – December 2010
Systemic Risk: propose (jointly with the Commodity Futures Trading Commission (“CFTC”) for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk
Family Offices: propose rules defining “family office”
Qualified Client: propose rules to adjust the threshold for qualified client
Accredited Investor: propose rules to revise the accredited investor standard
January- March 2011
Study of Obligations of Broker-Dealers and Investment Advisers: report to Congress regarding the SEC study of the obligations of brokers-dealers and investment advisers
Resources: report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement
Adopt Rules Proposed in 4th Quarter 2010: adopt rules referenced above scheduled to be proposed in October – December 2010
Obligations of Broker-Dealers and Investment Advisers: propose rules as may be appropriate, based on study of the obligations of brokers-dealers and investment advisers referenced above
Credit Ratings: report to Congress on review of existing references to credit ratings in statutes and regulations and adopt revisions to rules in accord with review
For more information, please see Dodd-Frank Wall Street Reform and Consumer Protection Act — Upcoming Activity and Advisers to Hedge Funds and Other Private Funds at: