Compliance

Fewer Firms Make Switch to State Oversight Than Expected

April 18, 2012 | Steve Parker

As a result of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), mid-sized firms of less than $100 million in assets under management should make the switch from Securities and Exchange Commission (SEC) oversight to state regulatory oversight. Most advisers know that under the newly adopted SEC rules, mid-sized advisers that were SEC registered prior to Dodd-Frank must remain SEC registered through the first quarter of 2012, and then complete their switch to state regulation by June 28, 2012. Firms wishing to switch should have already completed the state registration process to become effective in the state or states in which the adviser is registering.

It was estimated by this time that 3,200 firms would have made the switch to state regulation. However, spokesman John Nester for the SEC announced that as of April 5, a little more than 1,900 firms claimed that they were no longer eligible for SEC registration and needed to make the switch.
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Florida Law Increases Penalties for Selling Unregistered Securities

April 16, 2012 | Steve Parker

The Florida Legislature has recently passed a law which imposes harsher penalties for those who sell unregistered securities. The bill, HB 777, was signed into law by Governor Rick Scott on April 6, 2012. The bill will take effect July 1, 2012. As a result, the lowest permissible sentence for violations is increased.

The bill provides that all those who do not register securities offerings with the state’s Office of Financial Regulation may be charged with a third-degree felony at a higher level than previously allowed. A third-degree felony in the state of Florida carries up to a five year prison sentence. Broker-dealers, appointed persons, and issuers of securities who do not register with the Office of Financial Regulation are also subject to the same penalty.
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Update: Georgia Adopts Proposed Rule Amendments

April 13, 2012 | Steve Parker

In a previous blog, Georgia Securities Commissioner Proposes Rule Amendments, we discussed the proposed amendments to rules previously promulgated under the Georgia Uniform Securities Act of 2008. The amendments were recently adopted and became effective on March 29, 2012.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

Colorado Refuses to Issue No-Action Letter to Financial Instructor

April 11, 2012 | Steve Parker

The Colorado Securities Division recently declined to issue a no-action letter in connection with a company that intends to educate and train people in stock market trading. Mark Espy, owner of MarkEspyMentorin.com, sent a letter to the Colorado Division of Securities on January 17, 2012 asking for either a no-action letter or the Staff’s clarification that he and his company do not need to be licensed as an investment adviser in Colorado. Espy plans to tutor people on how to use various tools in order to trade in the stock market. The course will be taught through webinars, and students will pay a fee to enroll.

According to Espy, the instruction provided in the course will include curriculum designed to teach various techniques and procedures to measure an equity’s viability for trading or investing, portfolio management, the importance of diversification, explanations of indicators, trading strategies, and building a trading plan, among other topics. Espy has also been approved to teach an adult education class on the stock market at a local community college.
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JOBS Act Passes Both Chambers and Will be Sent to President

April 2, 2012 | Steve Parker

The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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CFTC Initiates Multiple Enforcement Actions to Show Industry Stricter Rules

March 27, 2012 | Steve Parker

The Commodity Futures Trading Commission (CFTC) showed this week that it may be increasing scrutiny of firms in connection with customer funds. This may be a result of the MF Global collapse last fall, in which the firm had misplaced more than $1 billion in customer funds. Since then, the CFTC has adopted stricter rules designed to better ensure the segregation of client funds from firm money.

On March 13, the CFTC brought numerous enforcement actions against firms to show that it plans to monitor firms’ treatment of customer funds more closely. These actions come during the same week in which the Futures Industry Association conference in Boca Raton was held. A former chief trial attorney for the CFTC, Allison Lurton, stated it has used trade conferences in the past as a means to drive home a point, so it may be no coincidence that the CFTC waited until the week of the conference to bring disciplinary actions. She stated, “They want to make sure that they’re sending the message to the market that they’re still on the beat and serious about protecting customer funds.”
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SEC Increases Examination of Private Equity Industry

March 23, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) has decided to increase regulation of the private equity industry, which has previously faced less regulatory scrutiny than other industries such as banking and hedge funds. At the end of 2012, the SEC sent several letters to private equity funds as “informal inquiries.” It is unclear which firms actually received the letters. The SEC maintains that its actions are not a result of suspecting any particular wrongdoing by specific firms, and it claims that its goal is to investigate possible violations of securities laws.

In the letter, the SEC requested information from private equity firms in relation to 12 broad areas including:

Financial statements;
Support for valuations of fund assets;
Documents setting forth a value of any assets owned by a fund over the past three years; and
Information on agreements between the firms and those that value fund assets.

The SEC is placing greater emphasis on the valuation of private equity firms since the firms are not publically traded and there is no listing price on the stock market. As a result, there is no easily ascertainable price for private companies. This allows for subjective judgments to play a large role in valuation. Private equity managers use varying, complex methodologies to value their holdings, which are often private companies bought using debt.
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SEC Experts Warn of Possible Enforcement Actions Against CCOs

March 21, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) is taking an increased interest in examining chief compliance officers (CCO) to determine whether enforcement action should be taken against them. At the Investment Adviser Association’s annual compliance conference, CCOs were given a number of stern warnings. Director of the SEC’s Division of Investment Management Robert Plaze spoke about changes and improvements being made by the SEC. He warned CCOs that a newly created Asset Management Unit, which is part of the Division of Enforcement, “is dedicated to suing you.” He also claimed that the new unit will be staffed with people who understand the asset management business. It will also collaborate with both the Investment Management Division and the agency’s Office of Compliance Inspections and Examinations. Mr. Plaze stated that the unit will make the SEC’s oversight of registered investment advisers more efficient, allowing it to be able to perform more effective examinations. These warnings should concern CCOs who have taken a supervisory role within their firm.

The SEC has the authority to impose sanctions on people who are associated with a broker-dealer or an investment adviser if those people have reasonably failed to supervise. Both broker-dealers and investment advisers employ legal and compliance personnel to provide advice to them and their firms regarding the application of laws and regulations. One major issue that arises is whether the CCO is considered a supervisor within the firm. If so, the CCO could be subject to sanctions by the SEC for failure to supervise.
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CFTC Adopts Final Amendments to Commodity Pool Operators Exemption Rule

March 13, 2012 | Steve Parker

The Commodities Future Trading Commission (CFTC) has adopted a final rule that makes several amendments to Regulation 4.5, which relates to commodity pool operators. The amendments add new limitations to an exclusion from the definition of a commodity pool operator (CPO) upon which registered investment companies have commonly relied. Currently, the rule excludes from the CPO definition entities that operate under other regulatory regimes, such as registered investment companies, banks, certain pension funds and insurance companies.

The amended regulations now impose two restrictions on registered investment companies that seek to use this exclusion. The first restriction is a trading threshold which would require an adviser to a registered investment company to either certify in a notice of eligibility filed with the NFT that it uses commodity futures, options or swaps only for “bona fide hedging purposes,” or, alternatively, that it meets one of the following two tests:

Five percent test: In relation to positions in commodity futures, commodity option contracts or swaps, the aggregate initial margin and premiums required to establish those positions will not exceed five percent of the liquidation value of its portfolio, after taking into account unrealized profits and unrealized losses; or
Net notional value test: the aggregate net notional value of commodity futures, commodity option contracts or swap position not solely used for “bona fide hedging purposes,” determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the registered investment company’s portfolio, after taking into account unrealized profits and unrealized losses. The net notional value is calculated as described in CFTC Regulation 4.13(a)(ii)(B)(1) and 4.13(a)(ii)(B)(2).

SEC Issues Risk Alert to Prevent Unauthorized Trading

March 1, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) issued a Risk Alert on February 27 designed to help firms detect and prevent unauthorized trading in brokerage and advisory accounts. Carlo di Florio, director of the Office of Compliance Inspections and Examination, stated, “Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators. We hope that the observations shared in the Risk Alert will be helpful for firms as they review their compliance and supervisory controls to detect and deter unauthorized trading.”

The Risk Alert defines the term “unauthorized trading” as a broad range of activities, including: (1) rogue or other unauthorized trading or trade execution in customer or client or propriety accounts, (2) exceeding firm limits on position exposures, risk tolerances and losses, (3) intentional mismarking of positions, and (4) creating records of nonexistent (or sham) transactions. If a firm notices a change in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client, then the firm may need to apply additional scrutiny.
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