SEC Examination Insights, DOL Conflict of Interest Rule and SEC Proposes Rule on Business Continuity and Succession Plans for Advisers
- CCO Speaks: Insights from a Recent SEC Examination. Hardin Compliance Consulting LLC and Focus 1 Associates present this one-hour interview with CCO Steven Weiss about his experience during a recent SEC examination. Find out what Steven wishes he knew before the exam, what went well, and what he would have done differently.
- Webinar: DOL Conflicts of Interest Rule and its Impact on Investment Advisers. Check out the recording of our recent webinar along with a Q&A from the presenters.
- SEC increases “net worth” dollar amount for “qualified clients”. On June 14, 2016, the SEC issued an order adjusting for inflation the dollar-amount thresholds for “qualified clients” under Advisers Act Rule 205-3. The dollar amount of the assets-under-management test remains at $1,000,000, and the net worth test increased from $2,000,000 to $2,100,000. The Order is effective as of August 15, 2016.
- SEC Proposes New Rule requiring Advisers to Adopt Business Continuity and Succession Plans. On June 28, 2016, the SEC proposed new Advisers Act Rule 206(4)-4 that would require registered investment advisers to adopt and implement written business continuity and transition plans. Although most advisers already have developed plans for dealing with business disruptions, many smaller advisers have not determined how to deal with situations where key personnel become unavailable.
Lessons Learned from Recent SEC Actions:
- SEC Finds Private Equity Fund Adviser acting as an Unregistered Broker Dealer. The SEC has finally lowered the boom on a private fund adviser for acting as an unregistered broker-dealer. In its press release, the SEC said Blackstreet Capital Management and its owner received transaction-based fees of more than $1.8 million for putting together deals for the purchase and sale of underlying portfolio companies. The firm and its owner paid more than $3.1 million to settle these charges. It is difficult to predict the precedential value of this case, since the SEC also found that the adviser engaged in a number of activities that resulted in investors paying various fees that were undisclosed, some of which were used to line the pockets of the adviser’s principals. For example, fund assets were used to pay for political and charitable contributions as well as entertainment expenses, without disclosure to, or consent by, investors. The firm also charged the funds for providing operational oversight to the portfolio companies, a practice which was not disclosed to investors. Of course, the SEC also found the firm violated the “Compliance Program Rule” (Rule 206(4)-7), an allegation that seems de rigueur in cases against investment advisers. If the adviser and its owner had disclosed these fees and/or offset them against the funds’ management fees, the outcome could have been much less punitive.
- Hedge Fund Manager and CIO Charged with Disclosure Failures Relating to Allocation of Investment Opportunities. In an administrative proceeding against an investment adviser James Caird Asset Management LLP and its Chief Investment Officer, Timothy G. Leslie, the SEC alleged that the firm and its CIO misled investors by telling them that there would be little or no overlap in the trading activity of the two private funds managed by the firm. In reality, the firm distributed new issues by allocating one-third to one fund, and two-thirds to the other fund. The SEC required the CIO to disgorge more than $1.7 million and a pay a fine of $200,000. The firm was fined $400,000.
- FGIMC Settles Charges Relating to Failure to Oversee Consulting Relationships. An SEC investigation found that for approximately nine years, Federated Global Investment Management Corp. (FGIMC) used a consultant who had access to material, nonpublic information with respect to four companies, since the consultant served on the boards of these public companies. Although FGIMC had policies and procedures concerning the personal trading activities of employees who had access to confidential information regarding mutual funds advised by the firm, FGIMC did not have a process for identifying the outside consultant as an “access person” under the firm’s Code of Ethics. FGIMC was required to pay a $1.5 million fine as a result of the proceeding.
- Morgan Stanley Failed to Safeguard Customer Data, Pays $1 million penalty. The SEC agreed to settle an administrative proceeding with Morgan Stanley Smith Barney LLC (“Morgan Stanley”), after finding the firm failed to adopt policies and procedures reasonably designed to protect customer data. The SEC’s order states that Morgan Stanley violated Rule 30(a) of Regulation S-P, more commonly known as the “Safeguards Rule.” From 2011 through 2014, an employee accessed and transferred data regarding more than 730,000 accounts to his home computer, which was hacked by third parties who, in turn, tried to sell the information. The SEC found that Morgan Stanley’s policies and procedures were not reasonable, since they did not restrict access to customer data based on legitimate business need. Moreover, the firm failed to monitor who was accessing this data.
- Merrill Lynch Pays $415 million For Misusing Customer Cash and Failing to Protect Client Assets. Merrill Lynch agreed to pay $415 million in fines and admitted wrongdoing to settle SEC charges. An SEC investigation found that broker-dealer Merrill, Lynch, Pierce and Smith Incorporated and Merrill Lynch Professional Clearing Corporation (“Merrill Lynch”) used customer cash to finance its own trading activities. The regulator also found that Merrill Lynch violated the Customer Protection Rule by failing to put customer securities in lien-free accounts. Basically Merrill Lynch used customer cash for complex options trades, instead of depositing it in a protected reserve account. If the firm had failed while the cash was being used, Merrill Lynch’s creditors could have seized the client funds, and customers could have been left high and dry. In a separate action, Merrill Lynch’s former Head of Regulatory Reporting is also being pursued by the SEC’s Enforcement Division, due to allegations that he was responsible for determining how much the firm was supposed to hold in reserve and for failing to monitor the trading activity.
Filing Deadlines and to do List for July
For Investment Advisers that manage Cayman Islands investment entities
- DEADLINE EXTENDED TO AUGUST 10, 2016: Every Cayman Islands investment entity that is a “Reporting Financial Institution” under U.S. FATCA and (or its “sponsoring entity,” if applicable):
- Is required to notify the Cayman Islands Tax Information Authority (TIA) of its first annual report under U.S. FATCA.
- Must provide contact information for the natural person responsible for corresponding with the TIA about the investment entity’s FATCA compliance; and
- Complete due diligence on pre-existing accounts.
For Investment Advisers
- Quarterly transaction reports under Code of Ethics. Quarterly transaction reports are generally due within 30 days of the end of Q2 (June 30) under an adviser’s code of ethics.
- Quarterly Form PF filing for advisers to “large” hedge funds and “large” liquidity funds. “Large” hedge fund advisers (hedge fund advisers with more than $1.5 billion in private fund assets under management) and “large” liquidity fund advisers (liquidity fund advisers with at least $1 billion in combined money market and liquidity fund assets under management) are required to make their quarterly Form PF filings. For large hedge fund advisers, the Form PF filing is due within 45 days after the quarter end, and for large liquidity fund advisers, the Form PF filing is due within 15 days after the quarter end.
- 13F, 13H, and 13D filings. The deadline for Form 13F is within 45 days of the end of each calendar quarter. Investment advisers that meet the definition of “institutional investment managers” should prepare this filing. Form 13H filings for large traders are typically annual filings but must be promptly amended following the end of any calendar quarter in which any of the information contained in a Form 13H filing becomes inaccurate for any reason. Similarly, an adviser is required to promptly file an amendment to its Schedule 13D if there are any material changes to their current filing.