On August 27, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert regarding business continuity and disaster recovery planning for investment advisers. The alert was prompted by a review of responses to Hurricane Sandy, which caused widespread damage to Northeastern states and closed U.S. equity and options markets for two days in October 2012. Risk Alert.
Asset Management
Disclosure and Compliance Matters for Investment Companies that Invest in Commodity Interests
The Staff of the Division of Investment Management of the SEC has published a Guidance Update with respect to Disclosure and Compliance Matters for Investment Company Registrants that Invest in Commodity Interests. Although this Guidance is directed primarily to investment companies registered under the Investment Company Act of 1940, it sets forth principles of general applicability to all investment fund and investment advisers. Among other things, the Guidance discusses the need: (i) to disclose the risks associated with investing in commodities; (ii) to ensure that performance presentations that are included in marketing materials are not materially misleading; and (iii) for an effective compliance and risk management function. It concludes by emphasizing that a Risk and Examinations Office has recently been created within the Division of Investment Management, and this office, in coordination with the SEC’s Office of Compliance Inspections and Examinations, will focus on risk management activities related to commodity interests and other derivatives. Guidance.
CFTC Final Rules on Registration and Operation of SEFs
On May 17, pursuant to Sections 721, 723 and 733 of the Dodd-Frank Act, the CFTC approved final rules governing the registration and operation of swap execution facilities (SEFs). The final rules implement the Dodd-Frank Act’s new statutory framework that, among other requirements, adds a new Section 5h to the CEA regarding the registration of SEFs and adds a new Section 2(h)(8) to the CEA concerning the execution of swaps on SEFs. The final rules will become effective 60 days following publication in the Federal Register; however, compliance is required with most provisions of the final rules 120 days following publication. CFTC Fact Sheet. CFTC Final Rule.
SEC Amendments to OTC Equity Trade Reporting Rules
On May 23, the SEC approved amendments to FINRA trade reporting Rules 6282, 6380A, 6380B, 6622, 7130, 7230A and 7230B to require member firms to report over-the-counter transactions in equity securities to FINRA as soon as practicable, but no later than 10 seconds following execution. The amendments also apply to trade cancellations as well as stop stock and prior reference price trades. The amendments will become effective on November 4. FINRA Notice. FINRA Amendments.
Roland Berger SEC No-Action Letter on Broker Dealer Registration
On May 28, the Staff of the Division of Trading and Markets of the SEC issued a no-action letter to Roland Berger Strategy Consultants, a German-based entity that provides certain strategy consultancy services to non-U.S. clients, including buy-side or sell-side merger and acquisition services. As part of its process of contacting potential target buyers or sellers, the firm would contact U.S. based entities or non-U.S. based entities that have U.S. based parents involved in investment decisions of the non-U.S. entity (each, a U.S. Target). Relief was granted with respect to the broker-dealer registration requirements of the Exchange Act based, in particular, on the fact that Roland Berger will not represent or advise any U.S. Target and will not receive, acquire or hold funds or securities. SEC No-Action Letter.
SEC No-Action Relief Under the JOBS Act
On March 26, the Staff of the Division of Trading and Markets of the SEC provided no-action letter relief from the broker-dealer registration requirements of the Securities Exchange Act of 1934 to FundersClub Inc. and its wholly-owned subsidiary in connection with their internet based, Rule 506 compliant securities offerings. FundersClub and its subsidiary are venture capital fund advisers under Rule 203(l)-(1) of the Investment Advisers Act of 1940. The FundersClub no action relief sets forth the Staff’s interpretation of Section 201 of the JOBS Act, which provides an exemption from broker-dealer registration for persons providing certain services in connection with an offering under Rule 506 of Regulation D. In granting the requested relief, subject to numerous conditions, the Staff noted that FundersClub and its subsidiary comply with the JOBS Act, in part, because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities (transaction-based compensation), rather they receive compensation for their traditional advisory and consulting services, i.e., carried interest. SEC No Action Letter.
SEC Issues FAQs Regarding Rule 15a-6 and Foreign-Broker Dealers
On March 21, the Staff of the Division of Trading & Markets of the SEC published a set of FAQs on Rule 15a-6 under the Securities Exchange Act of 1934, which provides conditional exemptions from Exchange Act broker-dealer registration requirements for foreign broker-dealers that engage in specified activities involving U.S. investors. Among the topics covered are distribution of research to U.S. institutional investors, delivery of confirmations and account statements directly to U.S. counterparties, and the application of prior no-action guidance to chaperoning arrangements with non-affiliated broker-dealers. SEC FAQs.
SEC Charges Private Equity Firm, Former Executive, and Consultant for Improperly Soliciting Investments
On March 11, the SEC announced charges against a private equity firm, a former senior executive of the firm and an individual based solely on the allegation that the individual acted as an unregistered broker-dealer in violation of the Securities Exchange Act of 1934. The parties agreed to settle the charges. The significance of this action is that the SEC did not allege that the parties defrauded clients, but rather only that the individual, who purported to be a “finder” (and not a broker-dealer), engaged in activities that went far beyond merely making initial introductions and, therefore, should have been registered. In turn, the SEC’s order found that the private equity firm “caused” the violation and that the former executive who oversaw the marketing efforts “aided and abetted and caused” the individual’s violation of the registration requirements of the Exchange Act. SEC Press Release.
SEC No Action Relief for Advisory Agreement Amendment Without Shareholder Approval
On February 27, the SEC Division of Investment Management granted no action relief to Emerging Global Advisors, LLC (EGA) and Emerging Global Shares Trust (Trust), allowing EGA to amend its investment advisory agreement with the Trust without obtaining majority shareholder approval as required under Section 15(a) of the Investment Company Act. This no action relief is preconditioned upon (i) the proposed amendments not reducing or modifying the nature and level of advisory services provided by EGA and (ii) the total advisory fees paid to EGA under the amended advisory agreement would not exceed the advisory fees payable under the current agreement. SEC No Action Letter.
SEC Proposes Rules to Improve Systems Compliance and Integrity
On March 7, the SEC proposed Regulation SCI to require certain SROs, alternative trading systems, disseminators of market data under certain National Market Systems plans and clearing agencies exempt from SEC regulation to have comprehensive policies and procedures in place surrounding their technological systems. The proposed Regulation SCI would replace the current voluntary compliance program with enforceable rules designed to better insulate securities markets from vulnerabilities posed by systems technology issues. Comments must be submitted within 60 days after publication in the Federal Register. SEC Release. SEC Proposed Rules.