Industry News

Hedge Fund Impact of Dodd-Frank Discussed by Paredes

June 9, 2011 | Steve Parker

Hedge funds will be impacted by the Dodd-Frank Act in numerous ways, some more well-known than others. Some of the better known examples of such impact are the repeal of the private adviser exemption, thus requiring registration for hedge fund managers that do not qualify for other exemptions. Among the exemptions added, of course, is the much-publicized exemption for private funds with less than $150 million in annual assets under management.

Other areas of impact on the hedge fund industry are not as widely discussed. As the SEC Commissioner Troy A. Paredes highlighted in his June 8, 2011 address at The George Washington University Law School, other aspects of Dodd-Frank have less direct, but no less significant, impact on the hedge fund industry.

For example, Dodd-Frank directs the SEC to adopt regulations or guidelines that prohibit incentive-based compensation arrangements that might “encourage inappropriate risks” by financial institutions. This would prohibit investment advisers with $1 billion or more under management from paying excessive compensation that could lead to material financial loss.
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Social Media and the Investment Adviser

June 7, 2011 | Steve Parker

More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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Investment Adviser Trust Eroding

May 12, 2011 | Steve Parker

The latest financial debacle has done more than drain retirement accounts, it has caused investors to lose faith and trust in their financial advisers.

Investors are encouraged to plan for the future. Common wisdom dictates that someone who knows the business, an “expert,” is the best one to turn to for advice. During the 1990s when times were good investors could not lose with the market climbing ever higher. Then came, in succession, 9/11, the housing bubble, the crash of 2008 and the resulting financial scandals in brokerages large and small.

This was apparently a real wake up call to investors. A recent survey reveals that, as a result, over one-half of all investors fear that their financial advisers are taking unfair advantage of them!
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Performance-Based Fee Threshold Increase Sought by SEC in Proposed Order

May 11, 2011 | Steve Parker

Yesterday the Securities and Exchange Commission published a notice of intent to issue an order that would increase the performance fee threshold, i.e., the definition of “qualified client” under Adviser’s Act Rule 205-3, to $2.0 Million from $1.5 Million (under the client net worth test), and to $1.5 Million from $750,000 (under the client asset under management test). The SEC also notified that it intended to adopt a rule requiring inflation adjustment reevaluation of these thresholds every five years.

The order proposal is a result of a study required by Section 418 of the Dodd-Frank Act. The proposed inflation-adjustment amendment would require the use of the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”), published by the Department of Commerce. The PCE Index is often used as an indicator of inflation in the personal sector of the U.S. economy.

The proposed amendment to Rule 205-3 would also specify that the value of a prospective client’s personal residence and any debt associated therewith should be excluded in determining net worth for purposes of determining whether he or she is a “qualified client” to whom performance fees may be charged.
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Custody Rule for States Proposed by NASAA

April 19, 2011 | Steve Parker

The North American Securities Administrators Association (NASAA) today published for comment a proposed custody rule for investment advisers. The proposed rule modifies the account statement detail requirement in subsection (b)(4)(A) of a proposed rule previously issued by NASAA relating to the same subject.

Comments to the previous proposed rule focused on the requirement that an investment adviser to private funds provide detailed quarterly statements to all clients. In response to these overwhelming comments, NASAA modified subsection (b)(4)(A) to reduce the level of detail to be contained in the quarterly statements that are to be sent to investment fund participants. Under the new proposed rule, the quarterly statements need only contain the quarter-end holdings and transactions during the quarter.

The basic structure of the proposed custody rule is consistent with prior model custody rules proposed by NASAA pursuant to Uniform Securities Acts of 1956 and 2002 and adopted by many states. More specifically, it provides for a number of safekeeping requirements including, among other things, providing notice to the state’s securities administrator, employing a qualified custodian, and giving certain notices to clients. In particular, the NASAA proposed rule requires any investment adviser who sends a statement to a client to urge the client to compare the account statements received from a qualified custodian with those received from the investment adviser. Any adviser who has a reasonable basis for believing that the qualified custodian sent account statements to the investors directly need not provide a separate account statement.
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RIA Switch for Mid-Sized Advisers Delayed by SEC

April 15, 2011 | Steve Parker

According to a recent letter addressed to the North American Securities Administrators Association (NASAA) from Robert Plaze, Associate Director for Regulation of the SEC’s Division of Investment Management, a switch in regulators for advisers who manage between $25 million and $100 million in assets that was supposed to start occurring this summer may now be extended to the first quarter of 2012. The reason is that regulators need until the end of 2011 to reprogram a national registration database for advisers.

Advisers are still waiting for the SEC to adopt the proposed rules that will make the regulatory transition official. The extension of the deadline also must be considered in a rule-making procedure by the SEC.

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.

Georgia Notifies of RIA Switch Deadline Postponement

April 12, 2011 | Steve Parker

According to a Press Release issued today, Georgia Secretary of State Brian Kemp informed investment advisers that Georgia will likely extend the current July 21, 2011 deadline for transitioning mid-sized advisers to state registration. The new deadline will likely be some time in the first quarter of 2011.

According to the Press Release, the SEC has indicated that it will likely extend the date by which investment advisers with between $25 million and $100 million in assets under management must transition to state registration in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Although the provision in the Dodd-Frank Act requiring the change in registration becomes effective July 21, 2011, the SEC’s Division of Investment Management is recommending to the Commissioners that the transition to state regulation be delayed until sometime in the first quarter of 2012.

The SEC notified the North American Securities Administrators Association that once the SEC adopts the implementing rules, the investment adviser online registration system, known as the Investment Adviser Registration Depository system (IARD), will require reprogramming that will take until the end of 2011 to complete.
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Florida Urges Dual Registration for RIAs Required to Switch

April 8, 2011 | Steve Parker

The Florida Office of Financial Regulation (OFR) issued a press release this week encouraging all federal covered investment advisers with less than $100 million under management to consider dually registering with OFR and the SEC, and to initiate OFR registration as soon as possible. Dual registration would allow the investment adviser to continue as a federal covered adviser while Florida reviews the firm’s application. Upon being approved by OFR, the firm can then withdraw its SEC registration after July 21, 2011.

Florida’s recommendation was prompted by the time it takes to renew and approve applications. Early application increases a firm’s chance of being approved prior to July 21.
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Departing Advisers Taking More Assets, Study Says

April 1, 2011 | Steve Parker

According to the 2011 Broker and Advisor Sentiment Index recently published by Fidelity Investments, investment advisers and brokers who moved to an independent firm or who started their own independent firm are more effective than ever in taking their assets with them when they switch firms. The study was conducted in late 2010. Its results showed that 1,046 respondents, including brokers and investment adviser representatives, who recently had moved to an independent reportedly took 70% of their client assets with them. In 2008, the number of total client assets taken was 61%. Moreover, the professionals reported that they voluntarily left part of their book behind.

The respondents gave further insights. More than half of them said that in the current economic climate, they found the independent model more attractive and concluded that it had the highest earning potential of all business models in the near term. Of those brokers and representatives that reportedly anticipate switching firms within the year, 63% said they would move to an independent business model, mainly for better pay. Another key change compared to the 2008 results is that larger number of teams of reps rather than individuals are making the transition to independent firms.

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.

Dodd-Frank’s Impact on Hedge Funds

February 7, 2011 | Steve Parker

Most private fund managers and registered investment advisers who advise funds based in the United States will be affected by the revisions to the Investment Advisers Act of 1940 contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010. The major impact will be felt by funds, fund managers and advisers in the form of new registration requirements and different, more highly defined, exemptions from registration. Dodd-Frank also mandates increased compliance obligations for those required to register, enhanced record-keeping requirements for both registered and exempt managers and funds, and, in some cases, a requirement to file reports detailing information necessary to assess systemic risks.

The most direct impact of Dodd-Frank is the elimination of the exemption for registration for an investment adviser with “fewer than fifteen” clients. This broad stroke eliminates the basis upon which hedge fund managers have traditionally been exempt from investment adviser registration. In place of the “fewer than fifteen” client exemption, Dodd-Frank carves out exemptions for investment advisers based upon either assets under management or the type of fund advised.
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