The 18th Annual Global Hedge Fund Summit will be held in Bermuda on April 15-17, 2012. Jay Gould will be speaking at this event on a panel entitled “The Crossroads of Law & Finance,” that will examine the investment world and its interaction with the ever-evolving legal landscape.
For more information and to register, please visit www.marhedge.com or www.ii-alphahedge.com, or click here for information about a promotional discount for CHFA members.
Written by: Ildiko Duckor and Peter Chess
In light of the current regulatory environment, now more than ever, it is critical for you to comply with all of the legal requirements and best practices applicable to Investment Advisers. The beginning of the year is a good time to review, consider and, if applicable, satisfy these requirements and best practices.
As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) should be aware.
First, we wanted to address three situations where Investment Advisers may need to make changes with regard to their registration. These are:
(1) SEC-registered Investment Adviser switching to State registration. SEC-registered Investment Advisers are required to withdraw registration if they have less than $90 million in Assets under Management (“AUM”). Those Investment Advisers have a June 28, 2012 deadline for state approval. These advisers should submit a state Form ADV to the relevant state by March 20, 2012 to allow at least 90 days for state approval (California in particular).
(2) State-registered Investment Adviser switching to SEC registration. A state-registered Investment Adviser whose AUM as of December 31, 2011 was $110 million or more must register with the SEC by March 30, 2012. Going forward, state-registered Investment Advisers must apply for registration with the SEC within 90 days of becoming eligible for SEC registration and not relying on an exemption from registration. The threshold for registration with the SEC is $100 million or more in AUM, but you may stay registered with the state up to $110 million in AUM.
(3) Currently exempt Investment Adviser registering with the SEC. An Investment Adviser previously exempt from registration that is now registering with the SEC must do so by the March 30, 2012 deadline. The Form ADV should have been filed with the SEC by February 14, 2012.
The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers. The summary section begins with what we feel are “hot” areas of compliance for 2012, and then addresses continuing compliance and other regulatory issues. The summary is not intended to be a comprehensive review of an Investment Adviser’s tax, partnership, corporate or other year-end requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law. Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered. State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.
“Hot” Compliance Areas
Qualified Client Threshold Updated. In a Final Rule amendment recently released, the SEC clarified the calculation of the dollar amount thresholds applicable to the new qualified client standard which became effective on September 19, 2011. The changes that became effective September 19, 2011 for the “qualified client” definition under the Advisers Act involved changing the previous $750,000 AUM test to $1 million and the current net worth test to $2 million. The value of a person’s primary residence and certain debt secured by the property may not be included in the net worth test. Either of these tests must be met at the time of entering into the advisory contract. Investment Advisers that impose performance fees should prepare to amend form advisory agreements to account for the new thresholds for contracts entered into after September 19, 2011. Investment Advisers that manage hedge funds, private equity funds, or other private funds that impose performance fees or incentive/carried interest allocations should have revised subscription agreements as follow:
Accredited Investor Definition Changes. The “accredited investor” definition has been amended to include any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million except that the person’s primary residence may not be included as an asset for purposes of the calculation. Other final amendments to the relevant rules added provisions for the treatment of debt secured by the primary residence and a grandfathering provision that permits the application of the former net worth test in certain limited circumstances. Investment Advisers should revise subscription agreements for the clarified threshold calculation as follows:
Form PF. The SEC and the Commodity Futures Trading Commission (“CFTC”) adopted new reporting rules on October 31, 2011. The new SEC rule under the Advisers Act requires Investment Advisers that advise one or more private funds and have at least $150 million in private fund AUM to file the Form PF with the SEC. The new CFTC rule requires commodity pool operators (“CPOs”) and commodity trading advisors registered with the CFTC to satisfy specific filing requirements with respect to private funds by filing the Form PF with the SEC in certain circumstances. The Form PF has quarterly and annual filing requirements based on a number of factors, including amounts and types of assets.
New CFTC Rules. In a February 9, 2012 Final Rule, the CFTC rescinded Section 4.13(a)(4), which provided private pools with an exemption from registration as a CPO with the CFTC. Investment Advisers operating 3(c)(7) private funds will no longer be able to claim exemption from CPO registration for funds offered only to institutional qualified eligible purchasers (“QEP”) and natural persons that meet QEP requirements that hold more than a de minimis amount of commodity interests. The exemption under Section 4.13(a)(3) was retained, which provides exemption from CPO registration in cases where the pool trades minimal amounts of futures such that at all time either (a) the aggregate initial margin and premiums required to establish the fund’s commodity interest positions may not exceed 5% of the fund’s liquidation value or (b) the aggregate notional value of the fund’s commodity interest positions may not exceed 100% of the fund’s liquidation value. Advisers that had relied on the Section 4.13(a)(4) exemption will either need to avail themselves of the Section 4.13(a)(3) exemption or register as a CPO, i.e., both 3(c)(1) or 3(c)(7) pools will have to comply with the 4.13(a)(3) exemption or register.
Continuing Compliance Areas
Update Form ADV. An Investment Adviser must file an annual amendment to Form ADV Part 1 and Form ADV Part 2 within 90 days of the end of its fiscal year. Part 1 and Part 2A of the Form ADV must be filed with the SEC through the electronic IARD system. Accordingly, if you are SEC-registered adviser whose fiscal year ends on or after December 31, 2011, you must file Part 1A and Part 2A Brochure as part of your annual updating amendment by March 30, 2012. If you are a state-registered adviser whose fiscal year ends on or after December 31, 2011, you must also file Part 1A, Part 1B, Part 2A Brochure and 2B Brochure Supplement as part of your annual updating amendment by March 30, 2012.
New Form ADV Part 1. Part 1 of Form ADV has been amended, most importantly, with regard to the calculation of AUM and auditor information. The Form now contains a uniform method of calculating AUM, and eliminates adviser discretion in including or excluding certain assets from the AUM calculation.
Form ADV Ongoing Updates. Investment Advisers must amend Part 1 of their Form ADV promptly during the year if certain information becomes materially inaccurate. The brochure and supplement must also be updated promptly during the year if any information becomes materially inaccurate unless the material inaccuracies result solely from changes in the amount of client assets managed or changes to the fee schedule.
FINRA Entitlement Program. FINRA implemented changes to its Entitlement Program, which provides access to an Investment Adviser’s IARD account. Every adviser firm (new and existing) is now required to designate an individual as its Super Account Administrator (SAA). The SAA must be an authorized employee or officer of the adviser firm.
Fund IARD Account. An Investment Adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.
State Notice Filings/Investment Adviser Representatives. An Investment Adviser should review its advisory activities in the various states in which it conducts business and confirm that all applicable notice filings are made on IARD. In addition, an Investment Adviser should confirm whether any of its personnel need to be registered as “investment adviser representatives” in any state and, if so, register such persons or renew their registrations with the applicable states.
Brochure Rule. On an annual basis, an Investment Adviser must provide its clients and separate account client(s) with a copy of its updated Form ADV Part 2A, or provide a summary of material changes and offer to provide an updated Form ADV Part 2A. An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner. Delivery is required within 120 days of the end of the adviser’s fiscal year.
Annual Assessment of Compliance Program. At least annually, an Investment Adviser must review its compliance policies and procedures to assess their effectiveness. The annual assessment process should be documented and such document(s) should be presented to the Investment Adviser’s chief executive officer or executive committee, as applicable, and maintained in the Investment Adviser’s files. At a minimum, the annual assessment process should entail a detailed review of:
Custody; Annual/Surprise Audit. Private fund Investment Advisers should have their funds audited by a PCAOB registered independent account and provide audited financial statements of their fund(s), prepared in accordance with U.S. generally accepted accounting principles, to the fund(s)’ investors within 120 days of the end of the fund(s)’ fiscal year. Investment Advisers that do not have their private funds audited should determine whether they are deemed to have custody of those funds’ assets and therefore are subject to an annual surprise audit and other requirements.
Annual Privacy Notice. Under SEC Regulation S-P, an Investment Adviser must provide its fund investors or client(s) who are natural persons with a copy of the Investment Adviser’s privacy policy on an annual basis, even if there are no changes to the privacy policy.
New Issues. Compliance should now address FINRA Rule 5131, which became effective in May 2011 and prohibits quid pro quo and “spinning” allocations of new issues of securities and addresses the book-builiding, new issue pricing, penalty bids, trading and waivers of lock-up agreements by member firms and associated persons. This new rule must be observed in addition to Rule 5130, whereby an Investment Adviser that acquires “new issue” IPOs for a fund or separately managed client account must obtain written representations every 12 months from the fund or account’s beneficial owners confirming their continued eligibility to participate in new issues. This annual representation may be obtained through “negative consent” letters.
ERISA. An Investment Adviser may wish to reconfirm whether its fund(s)’ investors are “benefit plan investors” and whether investments by benefit plan investors result in fund assets being characterized as “plan assets” for purposes of reconfirming its fund(s)’ compliance with the 25% “significant participation” exemption under ERISA. This is particularly important if a significant amount of a fund’s assets have been withdrawn or redeemed, and some Investment Advisers may need to check compliance procedures with each investment or withdrawal. The reconfirmation may be obtained through “negative consent” letters.
Anti-Money Laundering. FinCEN may consider a new round of proposed anti-money laundering regulations for unregistered investment companies, certain investment advisers and commodity trading advisors. An Investment Adviser is still subject to the economic sanctions programs administered by OFAC and should have an anti-money laundering program in place. An Investment Adviser should review its anti-money laundering program on an annual basis to determine whether the program is reasonably designed to ensure compliance with applicable law given the business, customer base and geographic footprint of the Investment Adviser.
FBAR Reporting. A U.S. person is required to file a Report of Foreign Bank and Financial Accounts (“FBAR”) if they have a financial interest in or signature authority over a foreign bank, securities or other financial account (e.g., a prime brokerage account) in another country. Failure to file this form when required can result in significant penalties. Financial accounts that may be subject to FBAR reporting include accounts of a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions. Private offshore funds, such as hedge funds and private equity funds (e.g., a Cayman Island “mutual fund”) are not deemed to be a foreign financial account, and therefore investment advisers are not required to file an FBAR with respect to these funds. However, if these private funds have either a foreign bank account, foreign prime brokerage account, or other foreign financial account, and the adviser has signature authority over those accounts, then the adviser may have to file an FBAR with respect to those accounts.
“Pay-to-Play”. The SEC adopted two measures on June 30, 2010 to prevent “pay-to-play” practices by Investment Advisers seeking to manage funds for state and local governments. The SEC adopted amendments to these rules in 2011. The amendments cover a multitude of topics, including the prohibition of soliciting or coordinating campaign contributions from others for elected officials in a position to influence the selection of the adviser. With regard to California, generally employees of “external managers” fall under the definition of “placement agent” requiring lobbyist registration. There are exceptions. Employees (i.e., partners, members, etc.) who spend at least 1/3 of their time during a calendar year managing assets (i.e., securities) will not fall under the “placement agent” definition and may solicit from California state public plans. This would require a portfolio manager-type to be involved in marketing to covered entities. The second exception, a 3-prong test requires that the manager be selected through a competitive bidding process, which is rare, so this exception may not be helpful.
Special Purpose Vehicles of Investment Advisers. In January 2012, the SEC confirmed that, subject to certain conditions, it would not recommend enforcement action to the SEC under the Advisers Act against an Investment Adviser or a related Special Purpose Vehicle established to act as the general partner or managing member of a private fund managed by the Investment Adviser if the Special Purpose Vehicle does not separately register as an Investment Adviser.
Amend Schedule 13G or 13D. An Investment Adviser whose client or proprietary accounts, separately or in the aggregate are beneficial owners of 5% or more of a registered voting equity security, and who have reported these positions on Schedule 13G, must update these filings annually within 45 days of the end of the calendar year, unless there is no change to any of the information reported in the previous filing (other than the holder’s percentage ownership due solely to a change in the number of outstanding shares). An Investment Adviser reporting on Schedule 13D is required to amend its filings “promptly” upon the occurrence of any “material changes.” In addition, an Investment Adviser whose client or proprietary accounts are beneficial owners of 10% or more of a registered voting equity security must determine whether it is subject to any reporting obligations, or potential “short-swing” profit liability or other restrictions, under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Section 16 Filings. Individuals or entities that hold a beneficial ownership of ten percent of any class of equity securities registered under Section 12 of the Exchange Act, if an officer or director of such issuer, may be required to file Form 3, 4, or 5 regarding crossing certain thresholds, reporting certain sales, and making certain annual reports.
Form 13F. An “institutional investment manager,” whether or not an Investment Adviser, must file a Form 13F with the SEC if it exercises investment discretion with respect to $100 million or more in securities subject to Section 13(f) of the Exchange Act (e.g., exchange-traded securities, shares of closed-end investment companies and certain convertible debt securities), which discloses certain information about such its holdings. The first filing must occur within 45 days after the end of the calendar year in which the Investment Adviser reaches the $100 million filing threshold and within 45 days of the end of each calendar quarter thereafter, as long as the Investment Adviser meets the $100 million filing threshold.
Form 13H. The SEC adopted Rule 13h-1 under the Exchange Act which requires “Large Traders” meeting certain definitional thresholds in transactions in NMS securities to identify themselves to the SEC and make certain disclosures to the SEC on Form 13H, effective October 3, 2011. “Large Traders” are defined as any person that exercises investment discretion over one or more accounts and effects transactions of NMS securities for or on behalf of such accounts, in an aggregate amount of at least $20 million in a day or $200 million in a month. In addition to an initial filing, all large traders must submit an annual filing on Form 13H within 45 days after the end of the calendar year and submit any amendments promptly after the end of any calendar quarter where information in the form becomes materially inaccurate.
Treasury International Capital System (“TIC”) Forms:
Offering Materials. As a general securities law disclosure matter, and for purposes of U.S. federal and state anti-fraud laws, including Rule 206(4)-8 of the Advisers Act, an Investment Adviser must continually ensure that each of its fund offering documents is kept up to date, consistent with its other fund offering documents and contains all material disclosures that may be required in order for the fund investor to be able to make an informed investment decision.
Full and accurate disclosure is particularly important in light of Sergeants Benevolent Assn. Annuity Fund v. Renck, 2005 NY Slip op. 04460, a recent New York Appellate Court decision, where the court held that officers of an investment adviser could be personally liable for the losses suffered by a fund that they advised if they breached their implied fiduciary duties to the fund. The fiduciary nature of an investment advisory relationship and the standard for fiduciaries under the Advisers Act includes an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, and an affirmative obligation to use reasonable care to avoid misleading clients.
Accordingly, it may be an appropriate time for an Investment Adviser to review its offering materials and confirm whether or not any updates or amendments are necessary. In particular, an Investment Adviser should take into account the impact of the recent turbulent market conditions on its fund(s) and review its fund(s)’ current investment objectives and strategies, valuation practices, performance statistics, redemption or withdrawal policies and risk factors (including disclosures regarding market volatility and counterparty risk), its current personnel, service providers and any relevant legal or regulatory developments.
Blue Sky Filings/Form D. Many state securities “blue sky” filings expire on a periodic basis and must be renewed. Accordingly, now may be a good time for an Investment Adviser to review the blue-sky filings for its fund(s) to determine whether any updated filings or additional filings are necessary. We note that all Form D filings for continuous offerings will need to be amended with the SEC on an annual basis.
Liability Insurance. Due to an environment of increasing investor lawsuits and regulatory scrutiny of fund managers, an Investment Adviser may want to consider obtaining management liability insurance or review the adequacy of any existing coverage, as applicable.
If you have any questions regarding the summary above, please feel free to contact us.
[1] Large hedge fund advisers are advisers with at least $1.5 billion under management attributable to hedge funds.
[2] Large liquidity fund advisers are advisers with at least $1 billion in combined AUM attributable to liquidity funds and registered money market funds.
[3] This group includes smaller private fund advisers and large private equity fund advisers, which are advisers with at least $2 billion in AUM attributable to private equity funds. All advisers with at least $150 million in AUM that are not considered large hedge fund advisers, large liquidity fund advisers, or large private equity fund advisers are considered smaller private fund advisers.
Last week’s article on HFMWeek entitled “Disclosure Gets Closer” discussed registration requirements of investment advisers to hedge funds under the Dodd-Frank Act. The article, which was written by Will Wainewright, quoted Jay Gould, a partner and member of our Investment Fund and Investment Management team, who said “[T]he most difficult part of SEC registration – not an onerous process in itself – is implementing, testing, internally enforcing and updating the compliance procedures that the SEC will be checking on once you are registered.”
A full text of the article is available here.
Written by: Jay Gould and Peter Chess
1. What is the Form PF?
The Form PF (PF is short for “private funds”) is a new form that focuses mainly on private fund reporting with regard to information such as counterparty dealings, leverage, and investment exposure. A “private fund” under the Form PF refers to any issuer that would be an investment company under the Investment Company Act of 1940, as amended, if not for the exemptions provided by Sections 3(c)1 or 3(c)7 of that Act. Under some circumstances, non-“private funds” such as money market funds registered with the SEC may be required to report on the Form, in addition to “private funds.”
2. Do investment advisers need to file the Form PF?
Yes, in certain circumstances. Only investment advisers registered with the SEC that meet a $150 million threshold must report on the Form PF. The $150 million threshold refers to a specific and somewhat complicated calculation with regard to regulatory assets under management.
3. What are the categories of filers?
Advisers required to file the Form PF need to determine which category of filer corresponds to them. Large private fund advisers are categorized as either large hedge fund advisers, large liquidity fund advisers, or large private equity fund advisers. Large hedge fund advisers are those having at least $1.5 billion in regulatory assets under management attributable to hedge funds, subject to other conditions. Large liquidity fund advisers are those having at least $1 billion in regulatory assets under management attributable to “liquidity funds” and money market funds registered with the SEC, subject to other conditions. Large private equity fund advisers are those having at least $2 billion in regulatory assets under management attributable to private equity funds, subject to other conditions. All other filers are categorized as smaller private fund advisers.
4. What are the reporting deadlines?
Initial compliance under the Form PF will be in phases. The first required filers will be large private fund advisers with at least $5 billion attributable to hedge funds, to liquidity funds, or to private equity funds. These large hedge fund advisers will have 60 days, and large liquidity fund advisers will have 15 days, after the end of the first fiscal quarter ending on or after June 15, 2012, to file their first Form PF.
Other filers will have to make their first filing by the deadline following the end of the first fiscal quarter for each adviser, as applicable, on or after December 15, 2012. Under the initial compliance, many advisers will not need to file their first Form PF until 2013.
Going forward, the Form PF must be filed:
5. What constitutes the Form PF?
The Form PF, in its entirety, contains sixty pages, and is divided into four sections with corresponding subsections. Most advisers will not have to complete all four sections. The four sections feature reporting on, among other things: identifying information about the adviser; fund-by-fund reporting by all advisers about items such as fund identification, performance and valuation; fund-by-fund reporting by hedge fund advisers about items such as strategies, counterparties, and trading practices; aggregated private fund reporting for large hedge fund advisers; fund-by-fund reporting by large hedge fund advisers about items such as asset classes, portfolio liquidity, and risk metrics; fund-by-fund reporting for large liquidity fund advisers; and, fund-by-fund reporting for large private equity fund advisers.
6. What about the confidentiality of information reported?
Because of the nature of governmental sharing of the data provided on the Form PF, advisers should consider the options available to them with regard to preserving confidentiality. Consequently, advisers should consider changing their overall recordkeeping practices so that they routinely identify funds solely by numerical or alphabetical designations.
7. How is the Form PF filed?
The Form PF will be filed using the same IARD system on which advisers make the Form ADV filing.
Written by Peter J. Chess
On November 30, 2011, FINRA and the SEC’s Office of Compliance Inspections and Examinations (OCIE) released a National Exam Risk Alert on effective procedures and policies for broker-dealer branch inspections. This follows other recent guidance for broker-dealers regarding the Market Access Rule and reasonable investigations in Regulation D Offerings, in addition to recent FINRA sanctions against broker-dealers related to Regulation D Offerings.
Under Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act, the SEC can impose sanctions on any firm or any person that fails to reasonably supervise someone subject to supervision that violates the federal securities laws. A broker-dealer can defend such a charge with a showing of effective procedures and policies designed to prevent and detect potential violations.
The National Exam Risk Alert jointly released on November 30 by FINRA and the OCIE (“November 30 Alert”) concerns broker-dealer branch inspections which are required by the Exchange Act and FINRA rules. Examination staff have observed that firms that execute these inspections well typically:
The November 30 Alert also lists typical findings about firms with deficiencies in their inspection process, including the utilization of generic examination procedures for all branch offices; the use of novice or unseasoned branch office examiners; the performance of “check the box” inspections; and, the lack of adequate procedures and policies.
The November 30 Alert is the second such Alert released this quarter by the OCIE. On September 29, 2011, OCIE released a National Exam Risk Alert (September 29 Alert) regarding the master/sub-account structure and potential risks of noncompliance for broker-dealers with the recently adopted Rule 15c3-5 (the Market Access Rule).
The Market Access Rule requires broker-dealers to have a system of risk management control and supervisory procedures reasonably designed to manage the financial, regulatory and other risks of the business activity associated with providing a customer or other person with market access. Deficiencies in risk management control and supervisory procedures raise significant regulatory concerns with respect to money laundering, insider trading, market manipulation, account intrusions, information security, unregistered broker-dealer activity, and excessive leverage.
Recent FINRA Enforcement Actions Against Broker-Dealers
On September 29, 2011, FINRA also announced it had sanctioned another eight firms and ten individuals and ordered restitution totaling more than $3.2 million due to violations related to private placements. FINRA previously announced similar sanctions against broker-dealers in April 2011, and the most recent announcement brings the total to ten firms and seventeen individuals sanctioned by FINRA since April for involvement in problematic private placements.
The sanctions stem from a variety of issues uncovered by FINRA related to firms selling private placement offerings, including the lack of a reasonable basis for recommending the offering; failure to conduct a reasonable investigation of the offering; failure to have adequate supervisory systems in place; failure to conduct adequate due diligence of offerings; lack of reasonable grounds regarding the suitability of the offering for customers; and, lack of reasonable grounds to allow registered representatives of firms to continue selling the offerings, despite numerous “red flags.”
These sanctions follow FINRA’s release of a Regulatory Notice in April 2010 (“April 2010 Notice”) regarding the obligation of broker-dealers to conduct reasonable investigations in Regulation D, or private placement, offerings. The April 2010 Notice provided guidance on many of the issues at the heart of the recent sanctions by FINRA related to private placements. The April 2010 Notice noted that broker-dealers had many requirements triggered by private placement offerings, including: a duty to conduct a reasonable investigation concerning the security and the issuer’s representations about it; a duty to possess reasonable grounds to recommend transactions that are suitable for the customer; and, other specific responsibilities that could be triggered based on specific factors with each transaction.
Written by Ildiko Duckor
An entity that meets the definition of a “Large Trader” after October 3, 2011 must file its initial Form 13H with the SEC by December 1, 2011 to be assigned a large trader identification number (LTID). The filing is done electronically through the SEC’s EDGAR system. The LTID must be disclosed to registered broker-dealers effecting transactions on behalf of the Large Trader.
If you as a general partner or investment adviser (including any entities or individuals over which you have control, e.g., the right to vote or direct the vote of 25% or more of a class of voting securities of an entity) have investment discretion over aggregate transactions in exchange-listed securities that equal or exceed the Identifying Activity Level of: (i) 2 million shares or $20 million during any calendar day or (ii) 20 million shares or $200 million during any calendar month, you may qualify as a Large Trader and may have to file a Form 13H.
When calculating the “Identifying Activity Level:” (i) aggregate all transactions during the specified period (one day and/or one month) (ii) for all “NMS securities” (national market securities, generally (exchange-listed securities including equities and purchases and sales (but not exercises) of options) and (iii) exclude the specified transactions that are exempt from consideration (as listed in the below-linked documents).
Form 13H filing is required to be filed annually with the SEC within 45 days after the end of a Large Trader’s full calendar year.
A full text of the SEC Final Rule and Form 13H is available here.
Please contact the IFIM team for assistance.
Written by Jay Gould
On November 28, 2011, the SEC charged OMNI Investment Advisors, Inc. of Utah, Feltl & Company Inc. of Minneapolis and Asset Advisors LLC of Troy, Michigan for failing to adopt and implement compliance procedures designed to prevent securities law violations.
The three enforcement actions discussed below should send a clear signal to investment advisers that are already registered and have implemented written compliance policies and procedures, as well as those advisers that will need to register by February 15, 2012, that the SEC is serious about adviser compliance and is willing to make examples of those advisers that do not fully implement a tailored compliance program.
All three investment advisers, including OMNI’s owner and chief compliance officer Gary R. Beynon, were found to be in violation of the “Compliance Rule” under Rule 206(4)-7 of the Investment Advisers Act and were separately ordered to pay penalty fees and institute a series of corrective measures to settle the SEC charges.
OMNI and Beynon failed to adopt and implement written compliance policies and procedures, failed to establish, maintain and enforce a written code of ethics and failed to maintain and preserve certain books and records. Under the settlement, Beynon agreed to pay a $50,000 penalty. He also agreed to be permanently barred from acting within the securities industry in any compliance or supervisory capacity and from associating with any investment company. In addition, as part of the settlement, OMNI agreed to provide a copy of the proceeding to all of its former clients between September 2008 and August 2011.
Feltl & Company failed to adopt and implement written compliance policies and procedures for its growing advisory business. It further neglected to adopt a code of ethics and collect the required securities disclosure reports from its staff. Under the settlement, Feltl & Company agreed to pay a penalty of $50,000 and return more than $142,000 to certain advisory clients. In addition, the firm will hire an independent consultant to review its compliance operations annually for two years, provide a copy of the SEC’s order to past, present and future clients, and prominently post a summary of the order on its website.
Asset Advisors failed to adopt and implement a compliance program. Asset Advisors adopted policies and procedures after SEC examiners brought it to the firm’s attention, but never fully implemented them. Similarly, Asset Advisors only adopted a code of ethics at the behest of the SEC exam staff and then failed to adequately abide by the code. Under the settlement, Asset Advisors agreed to pay a $20,000 penalty, cease operations, de-register with the Commission, and with clients’ consent, move advisory accounts to a new firm with an established compliance program.
A full text of the SEC release and orders is available here.
Written by Jay Gould
On Wednesday, November 16, 2011, the SEC charged Morgan Stanley Investment Management (“MSIM”) with violating securities laws in a fee arrangement that costs a fund and its investors approximately $1.8 million in sub-adviser fees.
MSIM is the primary adviser to The Malaysia Fund (the “Fund”), a closed-end investment company that invests in equity securities of Malaysian companies. AMMB Consultant Sendirian Berhad (“AMMB”) was an SEC registered adviser located in Malaysia. AMMB is a wholly owned subsidiary of AM Bank Group, one of the largest banking groups in Malaysia. Pursuant to a Research and Advisory Agreement entered into by the Fund with AMMB and MSIM in 1987, AMMB undertook to provide advice, research and assistance to MSIM for the benefit of the Fund. Every year AMMB submitted a report to MSIM which MSIM provided to the Fund’s board of directors in its evaluation for the renewal of the advisory and sub-advisory agreements. The board evaluated and approved AMMB’s sub-adviser agreement based on representations from MSIM that AMMB was providing advisory services to the Fund. AMMB did not actually provide those advisory services. MSIM also prepared and filed the Fund’s annual and semi-annual reports to investors that inaccurately represented AMMB’s services.
The SEC found that “MSIM failed its duty to provide the fund’s board members with the information they needed to fulfill their significant responsibility of reviewing and approving the sub-adviser’s contract.” In addition, MSIM did not adopt and implement policies and procedures governing the advisory contract renewal process and its oversight of AMMB.
According to the SEC’s order, MSIM willfully violated Section 15(c) and 34(b) of the Investment Company Act and Section 206(2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder.
The SEC ordered MSIM to pay the Fund $1.845 million as reimbursement of the advisory fees the Fund paid to AMMB from 1987 to 2008. MSIM was also ordered to pay $1.5 million penalty fee. MSIM agreed to pay over $3.3 million to settle the SEC’s charges.
A full text of the SEC release and order are available here.
Written by John L. Nicholson
On October 13, the Securities and Exchange Commission (SEC) Division of Corporation Finance released CF Disclosure Guidance: Topic No. 2 – Cybersecurity (the “Guidance”), which is intended to instruct companies on whether and how to disclose the impact of the risk and cost of cybersecurity incidents (both malicious and accidental) on a company.
This represents a reminder that companies should think about cybersecurity and data breach incidents when deciding how to fulfill their obligations under the SEC’s existing disclosure requirements. Up to this point, the market’s focus has been on how U.S. law requires disclosure of data breaches affecting personal information of specific types. Other security incidents only became public knowledge because of unofficial disclosures or because of their effect (e.g., a denial of service attack). Now, the SEC has made it clear that the risks associated with cyber incidents, the costs of mitigating those risks, and the consequences of a cyber incident may rise to the level of materiality that would require disclosure to investors and regulatory authorities.
MORE…
Written by Michael Wu
By order released by the SEC on November 10, 2011, Western Pacific Capital Management LLC, a San Diego-based investment adviser, and its President, Kevin James O’Rourke, were charged with fraud for failing to disclose a conflict of interest to clients and materially misrepresenting the liquidity of The Lighthouse Fund LP, a hedge fund they formed and managed.
Western Capital and O’Rourke urged clients to invest in a security without disclosing that Western Pacific would receive a 10 percent commission. They also failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor’s interest ahead of another’s, and made material misstatements and omissions to clients regarding the fund’s liquidity. As a result of these conducts, the SEC alleged that Western Capital and O’Rourke willfully violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
A full text of the SEC release and order are available here.
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