Articles Tagged with Dodd-Frank

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The Investment Advisers Association (IAA) believes that it needs to become more outspoken and involved in order to deter Congress from passing legislation requiring a self-regulatory organization (SRO) be designated for registered investment advisers. The IAA is concerned because Congress is fully aware of the Financial Industry Regulatory Authority’s (FINRA) position and its desire to become the SRO for investment advisers. IAA vice president for government relations Neil Simon stated, “Despite our best efforts, there is still a woeful ignorance of the role investment advisers play. They’re aware of FINRA. We need to help educate policymakers so they make informed decisions.”

Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Securities and Exchange Commission (SEC) prepare a report considering whether there should be an SRO for investment advisers, as there is for broker-dealers. The SEC set forth three possible models to help the agency better oversee advisers: (1) allow the SEC to charge user fees for exams, (2) establish a new SRO, or (3) allow FINRA to be the SRO for both registered investment advisers and broker-dealers. The IAA is supporting the user fee approach, while FINRA is aggressively pursuing becoming the designated SRO. House Financial Services Committee Chairman Spencer Bachus (R-Ala) previously offered a bill which would provide for an SRO in response to the SEC’s recommendations, which were delivered to Congress in January 2011. Some industry observers believe that Rep. Bachus is likely to release a revised discussion draft of his bill and push it, because he will leave his post of Financial Services Chairman in January 2013 due to term limits.
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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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The Securities and Exchange Commission (SEC) and the Commodities Future Trading Commission (CFTC) issued a joint proposed rule and guidelines to help protect investors from identity theft enacted by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This proposal currently does not apply to registered investment advisers. The SEC has recognized that registered investment advisers are unlikely to hold transaction accounts and thus would not qualify as a “financial institution.” The SEC is requesting comments on the proposed rule asking whether the rule should “omit investment advisers or any other SEC-registered entity from the list of entities covered by the proposed rule?” When the proposal is published in the federal register there will be a 60-day comment period.

Section 1088 of the Dodd-Frank Act transferred authority over parts of the Fair Credit Reporting Act (FCRA) from the Federal Trade Commission (FTC) to the SEC and the CFTC. The provisions amended section 615(e) by adding the CFTC and SEC to a list of federal agencies required to create identity theft regulations. The purpose of an identity prevention program is to detect, prevent and mitigate identity theft.
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The Obama administration released a proposed budget last week that will boost the Securities and Exchange Commission’s (SEC) budget for the next fiscal year. The SEC claims the need for an increased budget stems from the mandatory creation of 100 rules which is required by the Dodd-Frank Act and the need to hire new examiners to regulate the market more efficiently. The proposed budget would increase the SEC’s funding by 18.5 percent from $1.32 billion to $1.57 billion.

Prior to the release of the Obama administration budget, the SEC submitted a budget request which stated that the new budget would allow for 222 new examiners. That request estimated that in 2013 it will be responsible for examining 10,000 advisers with $44 trillion in assets under management. Currently, it only has 10 examiners per $1 trillion in assets under management, a decrease since 2005 when it had 19 examiners for every $1 trillion in assets under management. The SEC is capable of reviewing only eight percent of registered advisers each year. Investment advisers have also shown a preference to be regulated by the SEC as opposed to FINRA or another self regulatory authority (SRO), as we discussed in a previous blog, BCG Report Claims FINRA Cost Will Exceed SEC Cost as RIA SRO.
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The Securities and Exchange Commission (SEC) released Final Rule No. IA – 3372 which changes the qualifications for advisers who charge performance fees. We discussed the proposed amendment to the rule in a previous blog post, Performance Based Fee Threshold Increase Sought by SEC in Proposed Order. These amendments are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will take effect 90 days after publication in the Federal Register, which is anticipated shortly. Until then advisers can rely on the grandfather provisions.

While advisers are generally unable to accept performance fees, there are exceptions. For example under certain circumstances, a client may become a “qualified client,” under Rule 205-3, meaning he or she is deemed to be capable of bearing the risks associated with performance fee arrangements. Under the new rule, an adviser may charge performance fees to “qualified clients” who have at least $1 million of assets under management for that definition to apply. Under the previous rule, $750,000 in assets were required to be under management. Also, the net worth of an investor may also be a qualification for an exception. The amended rule raises the minimum net worth standard for qualified clients from $1 million to $2 million. (The other “qualified client” basis includes clients who immediately before entering the advisory contract are either executive officers, directors, trustees, general partners of the adviser or employees of the adviser and who have participated in the adviser’s investment activities for at least twelve months. This definition has not changed with the amendment.)
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As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed on July 21, 2010, there have been significant reforms applicable to non-US advisers conducting business in the United States, including new registration requirements under the Advisers Act (the “Act”).

Non-U.S. advisers may need to register with the Securities and Exchange Commission (SEC) in order to conduct future business within the United States. A non-U.S. adviser is defined in the Advisers Act as an investment adviser that:

  • Has no place of business in the United States;
  • Has a total of less than 15 U.S. clients and investors in private funds;
  • Has less than $25 million in assets under management associated with the U.S. clients and investors; and
  • Does not hold itself out generally as a U.S. investment adviser.

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One year ago, the Securities and Exchange Commission (SEC) staff recommended that a uniform fiduciary standard be applied to both broker-dealers and investment advisers. Recently, however, the SEC postponed a corresponding rule proposal for a second time.

In January, SEC Chairman Mary Schapiro sent a letter to Congressman Scott Garrett, Chairman of the House Capital Markets Subcommittee, stating that it needs to gather additional information for an economic analysis of the impact of a standard of care regulation. Although the SEC had previously set it for action in 2011, that time frame has now been changed to “date to be determined.” The SEC has already designated specific time frames for 51 other rules and reports required by the Dodd-Frank Act.

In the letter to Rep. Garrett, Chairman Schapiro wrote, “SEC staff are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. In this request, it is our hope commentators will provide information that will allow commission staff to continue to analyze the various components of the market for retail financial advice.”
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Boston Consulting Group (BCG) released a report last month comparing the cost of the various possible options of different agencies examining investment advisers. This report was conducted as a follow-up to a study released by the Securities and Exchange Commission (SEC) in January 2011, which created these scenarios based on Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The three possible options would be:

  • Authorizing the SEC to conduct the examinations and fund them by collecting user fees;
  • Authorize a new self-regulatory organization (SRO) to examine the advisers; or
  • Authorize the Financial Industry Regulatory Authority (FINRA) to examine the advisers

The economic analysis of the options was based on public research along with more than 40 in-depth interviews with various investment advisory firms. The SEC and FINRA were not interviewed or consulted in this analysis. The report concluded that the creation of enhanced SEC capabilities would cost $240-$270 million, while setting FINRA up as the investment adviser SRO would cost $550-$610 million, and creating a new SRO would cost $610-$670 million. These estimates were developed by projecting setup costs, ongoing mandate costs, and the cost associated with SEC oversight of an SRO.
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The Securities and Exchange Commission (SEC) has adopted a new rule that redefines the standard for “accredited” investors. Required by the Dodd-Frank legislation enacted in 2010, the accredited investor standard is intended to protect less sophisticated investors in less regulated investments. The rule change, which eliminates an investor’s principal residence from consideration in determining accredited status, may dramatically affect whether some potential investors remain eligible for Regulation D offerings.

Most of the accredited investor qualification criteria remain the same, but the net worth criteria has changed. In order to qualify as an accredited investor, the qualifying net worth amount remains $1,000,000; however, the value of the investor’s principal residence must now be excluded from the calculation of the investor’s assets. In addition, subject to some exceptions, the amount of the mortgage debt on the principal residence is also excluded from the investor’s liability calculation. The overall purpose of the changes is to insure that accredited investor status is determined without regard to the value of any equity in the principal residence.
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As we first reported on this blog site in September, the North American Securities Administrators Association (NASAA) held a forum, through its Investment Adviser subcommittee, to discuss transition issues for Mid-Sized Advisers under the Dodd-Frank Wall Street Reform Act. As we approach the annual December moratorium on new registrations and renewals, it seems appropriate to review and comment on some of NASAA’s suggestions.

The first step that any Mid-Sized Adviser should take should be to contact his or her state regulatory agency to determine whether it has adopted special rules, forms, or timetables for use. However, the NASAA committee generally provided the following procedure that its state members intended to follow:
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