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Written by Michael Wu

On December 15, 2010, FINRA Rule 3270 became effective.  FINRA Rule 3270 requires each registered representative of a broker-dealer to provide it with prior written notice of an outside business activity.  FINRA Rule 3270, which replaced NASD Rule 3030 and NYSE Rule 346, specifically identifies the types of activities that would be subject to the rule and requires registered representatives to disclose to the broker-dealer whenever he or she intends to serve as an employee, independent contractor, sole proprietor, officer, director or partner of another entity, or will be compensated, or reasonably expects to be compensated, from another entity in connection with any business activity outside the scope of such individual’s relationship with the broker-dealer.  Passive investments and activities subject to NASD Rule 3040 (i.e., the private securities transaction rule) are exempt from the requirements under FINRA Rule 3270.

Upon receipt of notice of an outside business activity from a registered representative, a broker-dealer must determine whether the proposed activity would (i) interfere with such registered representative’s responsibilities to the broker-dealer and/or its clients or (ii) be viewed by clients or the public as part of the broker-dealer’s business.  Based on such analysis, the broker-dealer may impose specific limits or conditions on such activity or prohibit such activity.  The broker-dealer must document the review process of each written notice received and keep appropriate records.  If a registered representative was actively engaged in an outside business activity prior to December 15, 2010, the broker-dealer must review such activity in accordance with FINRA Rule 3270 by June 15, 2011.

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Written by Michael Wu

On July 28, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to Part 2 of Form ADV, and related rules under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), to require registered investment advisers to provide clients with a “brochure” under Part 2A of Form ADV and a “brochure supplement” under Part 2B of Form ADV written in plain English.  The brochure contains information about the advisory firm and the brochure supplement contains information about the personnel who provide investment advice.

On December 28, 2010, the SEC extended the compliance dates for the brochure supplement.  Specifically, the new compliance dates are as follows:

  • New Investment Advisers: investment advisers filing their applications for registration between January 1, 2011 and April 30, 2011, have until May 1, 2011 to begin delivering brochure supplements to new and prospective clients and until July 1, 2011 to deliver brochure supplements to existing clients.  The compliance dates for investment advisers filing their applications for registration after April 30, 2011 remain unchanged.
  • Existing Investment Advisers: existing investment advisers with a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011 to begin delivering brochure supplements to new and prospective clients and until September 30, 2011 to deliver brochure supplements to existing clients.  The compliance dates for existing investment advisers with fiscal years ending after April 30, 2011 remain unchanged.

Please note that the SEC is not extending the compliance date for filing and delivery of the brochure required by Part 2A of Form ADV and the related rules under the Advisers Act.  The full text of the adopting rule is available here.

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Written by Michael Wu

On December 7, 2010, the Securities and Exchange Commission (the “SEC”) proposed joint rules with the Commodity Futures Trading Commission (the “CFTC”) to define the types of swap traders that would be subject to the new derivatives regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The proposed rules attempt to implement the provisions of the Dodd-Frank Act, which established a comprehensive framework for regulating the over-the-counter swaps market.

The Dodd-Frank Act creates new categories of market participants that are subject to registration, capital and margin, record keeping, reporting and other regulatory requirements.  The proposed rules define the categories of market participants that would be deemed “Security-Based Swap Dealers” and “Major Security-Based Swap Participants.”

  • Security-Based Swap Dealers.  Under the Dodd-Frank Act, a Security-Based Swap Dealer is any person that holds itself out as a dealer in security-based swaps, makes a market in security-based swaps, enters into security-based swaps with counterparties in the ordinary course of its business, or is commonly known in the trade as a dealer or market maker in security-based swaps.  The CFTC proposal would exempt a firm from registration as a Security-Based Swap Dealer if (i) its notional aggregate amount of security-based swaps in the prior 12 months did not exceed $100 million (of which only $25 million can be with “special entities” as defined in the Commodity Exchange Act), (ii) it did not enter into security-based swaps as a dealer with more than 15 counterparties (other than security-based swap dealers) in the prior 12 months, and (iii) it did not enter into more than 20 security-based swaps as a dealer in the prior 12 months.
  • Major Security-Based Swap Participants.  Under the Dodd-Frank Act, a Major Security-Based Swap Participant is any person that is not a Security-Based Swap Dealer and has (i) a “substantial position” in any major security-based swap categories (held other than for hedging or mitigating risk), (ii) whose security-based swaps create “substantial counterparty exposure,” which could have a serious adverse effect on the financial stability of the United States banking systems or financial markets, or (iii) is a “financial entity” that is “highly leveraged” and that has a substantial position in any of the major security-based swap categories.
    • The CFTC proposed that a firm has a “substantial position” in swaps if it (i) has a daily average or current uncollateralized exposure of at least $1 billion on a net basis for credit, equity or commodity swaps or $3 billion for rate swaps, or (ii) has a daily average of current uncollaterized exposure and future exposure of at least $2 billion for credit, equity or commodity swaps or $6 billion for rate swaps.
    • The CFTC proposed that a firm has “substantial counterparty exposure” if it has uncollateralized exposure of more than $5 billion or current and future exposure exceeding $8 billion.
    • The CFTC proposed that a “financial entity” be defined under Section 3C(g)(3) of the Securities Exchange Act of 1934, as amended.
    • The CFTC proposed two definitions of “highly leveraged”; the first is an 8 to 1 ratio of total liabilities to equity determined in accordance with US GAAP and the second is a 15 to 1 ratio of total liabilities to equity determined in accordance with US GAAP.

In addition, the proposed rules permit clearinghouses to provide portfolio margining of futures and securities in futures accounts.  The proposed rules also require Security-Based Swap Dealers and Major Security-Based Swap Participants to keep daily trading records regarding the security-based swaps and all related records, which would be open to inspection by the CFTC.  The CFTC and the SEC are expected to vote on the final rule in July of 2011.

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Written by Michael Wu

The Alternative Investment Fund Managers Directive (the “Directive”) establishes a regulatory regime for all alternative fund managers, such as private equity and hedge fund managers, that are based in the European Union (the “EU”), manage funds based in the EU and market non-EU fund interests in the EU.  A general summary of the Directive is available here.

Although the majority of the Directive’s rules are likely to become effective by January 2013, some of the rules affecting non-EU funds and non-EU fund managers will be deferred until 2015 or later.  Thus, non-EU managers may still actively raise funds in the EU, but will have to comply with a number of additional regulatory requirements beginning in January 2013.

Beginning in January 2013, non-EU managers may actively fund raise in the EU provided that:

  • A regulatory cooperation agreement is in place between all of the relevant regulators (i.e., the regulator in the non-EU manager’s home jurisdiction and the EU country where the fund raising occurs) under which the regulators agree to cooperate on monitoring and managing systemic risk.  In addition, the home jurisdiction must not be designated by the Financial Action Task Force as a non-cooperative country or territory.
  • Non-EU managers comply with the following provisions of the Directive:
    • Transparency and Disclosure: the non-EU manager must prepare an annual fund report for investors in a prescribed format and disclose certain other prescribed information to investors and will be subject to regulatory reporting requirements aimed at monitoring systemic risk.  The European Commission will publish measures specifying the format and content of the reports.
    • Portfolio Company Disclosures: if a private equity fund acquires or disposes of a substantial stake in an EU company, the manager must formally notify the target company, the shareholders and the regulators.  Additional disclosures are required if a controlling stake is acquired.
    • “Asset-Stripping” Restrictions: the Directive restricts certain shareholder distributions for a period of 24 months after acquisition of an EU company (to prevent dividend recapitalizations during the period).
  • Non-EU manager is aware of the securities laws of each EU country in which it intends to raise funds, which may impose more onerous rules.

Beginning in early-2015, non-EU managers may be able to participate in the “passport” regime (i.e., they can fund raise in every EU country without obtaining separate regulatory authorization in each country) if the European Securities and Markets (“ESMA”) Authority decides to make the passport regime available to non-EU managers.  If the passport regime becomes available to non-EU managers, they would become authorized and regulated on the same basis as EU managers with respect to the passporting rights.  However, because the passport regime’s compliance obligations are onerous, non-EU managers may want to forgo the passporting rights and fund raise subject to country-by-country private placement regimes and the minimum directive requirements described above.

Beginning in mid-2018, non-EU managers may be required to operate under the passport regime in order to fund raise in the EU.  The Directive contains provisions that would ultimately terminate the national private placement regimes, leaving full authorization as the only option for non-EU firms that wish to fund raise in the EU.

ESMA and the European Commission have been tasked with issuing extensive implementing measures and guidance.  However, the details of these rules will not become clear for some time.