Advertising and Marketing | CFTC | FINRA Rule Changes | Investment Adviser Regulation | Mutual Funds | Private Funds | SEC Rule changes

SEC Agrees to Broaden Exemptions to New Issue and Spinning Rules; Comment Now on SEC Advertising and Cash Solicitation Rule Changes; CFTC Simplifies CPO/CTA Registration Exemptions; Actively-Managed ETFs Clear Regulatory Barrier: Regulatory Update for January 2020

For Investment Advisers and Broker-Dealers:  SEC and FINRA Actions

SEC Approves Amendments to FINRA New Issue and Anti-Spinning Rules. See also: FINRA Amends Rules Regarding Initial Public Offerings.  Effective January 1, 2020, FINRA Rules 5130 and 5131 have been amended to promote capital formation, aid firm compliance efforts and maintain the integrity of the public offering process.  FINRA Rule 5130 prohibits securities industry insiders, including broker-dealers, registered representatives, owners of broker-dealers, and portfolio managers (defined under Rule 5130 as “restricted persons”), from buying shares from initial public offerings (IPOs) through any account in which they have a “beneficial interest”.  FINRA Rule 5131 prohibits allocating IPOs to accounts in which executive officers or directors of a public company or a “covered non-public company” have a beneficial interest.  The rule is meant to stop “spinning”, where broker-dealers allocate new issues to executive officers and directors of current and potential clients in exchange for investment banking business.  The amendments:

  • Provide alternative conditions for satisfying the foreign investment company exemption;
  • Exempt employee retirement benefits plans provided they meet specified conditions;
  • Align and clarify the provisions relating to issuer-directed allocations;
  • Amend the definition of “new issue” to exclude special-purpose acquisition companies and foreign offerings made under Regulation S or otherwise made outside of the US, provided that the Regulation S securities are not concurrently registered for sale in the US;
  • Amend the definition of “family investment vehicle” so that key investment professionals employed by a family office will be able to invest together with immediate family members without jeopardizing the vehicle’s exemption from Rule 5130;
  • Exclude sovereign entities that own broker-dealers from the categories of restricted persons under Rule 5130;
  • Exclude certain transfers to immediate family members from Rule 5131’s public announcement requirement relating to lock-up agreements and codify FINRA’s existing guidance regarding the disclosure of a lock-up agreement release or waiver in a publicly-filed registration statement;
  • Exclude unaffiliated charitable organizations from the definition of “covered non-public company” in Rule 5131; and
  • Add an anti-dilution provision to Rule 5131, similar to the provision in Rule 5130.

While significant changes to systems and processes will not likely be necessary as a result of these amendments, firms that invest in new issues should consider whether to update their procedures for determining and monitoring “restricted person” or “exempted entity” status.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

For Investment Advisers:  SEC Actions

The Clock is Ticking: Comment Period on Proposed Amendments to Advertising Rule Ends February 10, 2020.  The comment period for the proposed amendments to the Advertising and Solicitors Rules started on December 10, 2019, and ends on February 10, 2020.  The SEC is asking “everyday investors” for their thoughts about investment adviser advertising by providing a questionnaire as Appendix B.  The SEC also included an 18-page questionnaire for smaller advisers to provide their feedback.

The proposal includes some positive changes, including scrapping the four specific prohibitions on advertisements in favor of a principles-based approach.  The proposal allows advisers to use testimonials, endorsements, and third-party ratings, hypothetical performance, and extracted and related performance in marketing materials, provided that certain disclosures are included.  The SEC also finally acknowledges that there is a difference between retail and non-retail investors, giving more latitude for ads aimed at more sophisticated audiences.

There are some negative implications, however, such as the expansion of the definition of advertisement to include “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser’s investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser” (emphasis added).  Advisers will carry a more significant record-keeping burden since the current rule only requires keeping records of ads sent to 10 or more persons.  The amended rule also requires keeping recordings of live broadcasts and communications to single recipients, even though these communications are exempt from the new review and approval requirements.

The proposal also defines “non-retail” persons to include only persons who are one or both of “qualified purchasers” (as defined in Section 2(a)(51) of the Investment Company Act of 1940) or “knowledgeable employees” (as defined in Rule 3c-5 under the Investment Company Act).  This definition conflicts with the definition of “retail” in Form CRS, which refers to “a natural person or legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes”.  “Qualified client”, as defined in Section 205-3 of the Advisers Act, would make more sense since advisers are already counting these types of clients for Form ADV Item 5.D.   Unfortunately for advisers, the proposal as currently written adds yet another nuanced iteration for defining sophisticated investors to complicate their advertising policies and procedures.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

CFTC Approves CPO & CTA Exemptions from Registration for Qualifying Family Offices and BDCs, Simplifies Reporting Obligations.  The CFTC approved final amendments to the CPO and CTA registration exemptions and exclusions in Part 4 of its regulations (here and here) on November 25, 2019.  The amendments are effective on January 9, 2020, and have various compliance dates.  Highlights include:

  1. Forms CPO-PQR and CTA-PR have been required by all “Reporting Persons,” even if they were only operating exempt or excluded pools. Over time, the CFTC offered no-action relief from these filing requirements to CPOs and CTAs only operating such exempt or excluded pools through two no-action letters (see CFTC No-Action Letters 14-115 and 15-47).  The amendments codify this no-action relief in the regulations and will replace the no-action letters.
  2. For registered investment companies, CFTC Rule 4.5 now clarifies that the entity required to claim an applicable exemption under Rule 4.5 is “the entity most commonly understood to solicit for or ‘‘operate’’ the RIC, i.e., the RIC’s investment adviser”. Advisers to investment companies where another party has previously filed to claim the exemption will have until March 1, 2021 to make the appropriate new filing.
  3. Family offices relying on the “family office exemption” from investment adviser registration requirements under the Adviser’s Act will now find similar CFTC rulemaking for a family office exemption from CPO/CTA registration. These amendments formalize the exemptive relief from CPO/CTA registration that was previously available to qualifying family offices under two no-action letters (see CFTC No Action Letters No 12-37 and 14-143).
  4. Finally, the amendments to CFTC Rule 4.5 codify an exclusion from CFTC registration that has been available to advisers of Business Development Companies (“BDCs”) through CFTC No Action Letter No 12-40 amendments do not contain new requirements, so BDCs that comply with the no action relief now will also comply with the new rules. However, BDC advisers must file with the NFA to rely on the exclusion “as soon as practicable after these amendments go into effect” on January 9, 2020.  Going forward, advisers to BDCs will be required to submit a filing to confirm their continued reliance on this exclusion within 60 days after each calendar year end.

The CFTC’s rationale for these amendments is “to simplify the regulatory landscape for CPOs and CTAs without reducing the protections or benefits provided by those regulations, to increase public awareness about available relief by incorporating commonly relied upon no-action or exemptive relief in Commission Regulations, and to generally reduce the regulatory burden without sacrificing the Commission’s customer protection and other regulatory interests”.

Affected advisers should review their current CFTC exemptions, update their filings as needed according to the new rules and incorporate any new, ongoing filings into their annual compliance calendar going forward.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

For Mutual Fund Managers:  SEC Actions

Regulatory Baby Steps: SEC Approves Four New Semi-Transparent Active ETFs.  In a regulatory trend underscored earlier this year with the SEC’s approval of a semi-transparent active ETF by Precidian Investments, the SEC recently approved four new types of actively-managed ETFs.  These approvals signal that the regulatory door is opening further to managers previously reticent to launch an ETF due to the daily holdings’ transparency required.  The following articles provide details about each of the four newly-approved approaches and how each ETF will satisfy the holdings disclosure requirements, such as disclosing a representative portfolio or basket that is either based on current holdings with some of the portfolio weights disguised or based on current holdings reported with a specified lag time:

  1.’s “Coming Soon: New Twist to ETFs
  2. Thompson Hine LLP’s “The ETF Evolution Continues: SEC Approves Four New ‘Proxy Basket’ Active Semi Transparent ETFs”.

As Thompson Hine notes, although the regulatory landscape seems to be warming up to these approaches to semi-transparent active ETFs, they are not yet market-ready.  “None of the exchanges that would list these products have received the necessary relief under Rule 19b-4 under the Securities Exchange Act of 1934 to list them.  Once the SEC’s Division of Trading and Markets issues the orders, it will take a reasonable period of time to implement the plumbing (e.g., NSCC protocol for creating portfolio composition files of the various types of active semi-transparent ETFs) that supports the ETF product.  Advisory firms electing to use one of the approved models discussed above will have to enter a licensing agreement with the product’s sponsor.  In addition to the four new approved platforms and the ActiveShares platform, other semi-transparent ETF exemptive applications will be filed.”   Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

SEC Publishes Small Entity Compliance Guide on New ETF Rule.  The SEC recently published guidance to assist small entities in their compliance with Rule 6c-11, also known as the new “ETF Rule”.  The crux of the new ETF Rule is that certain exchange-traded funds (“ETFs”) will no longer need to apply for and obtain an exemptive order provided certain conditions are satisfied.  The guidance addresses topics that include: which ETFs are impacted by the ETF Rule, the exemptive relief provided by the ETF rule and the corresponding conditions, and what disclosure and recordkeeping requirements will apply.  The guidance also addresses related amendments adopted by the SEC regarding Forms N-1A, N-8B-2, and N-CEN.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

For Hedge Fund Managers:  NFA Actions

Advisers Relying on Exemptions from CPO or CTA Registration Should Mark their Calendars for February 29. The CFTC requires any person claiming an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5, or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end, which is February 29, 2020.  Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 1, 2020.  For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

Lessons Learned from SEC and FINRA Cases

The Case Against Putting all your Eggs in One Basket. Registered investment adviser Kornitzer Capital Management, Inc. (“KCM”), and its owner, President and CEO, John Kornitzer (“Kornitzer”), paid a $2.8 million fine and had to reimburse investors for failing to follow client instructions and investment policies.  Starting in 2011, KCM and Kornitzer began making larger and larger bets in a specific company for three collective investment trusts (“CITs”) managed by the firm.  Over four years, these positions significantly appreciated, resulting in the CITs having concentrated positions in that company, with one CIT holding close to 90% of its assets in that one position.  Predictably, the company’s stock price fell significantly in 2016, and the board of the trust company sponsoring the CITs instructed KCM and Kornitzer to reduce the concentration of the stock.  Kornitzer and KCM promised to do so but failed to follow up.  The board then adopted specific investment policies for the CITs, restricting concentration in a single issuer to 10% of assets.  Again, KCM and Kornitzer agreed to reduce the CITs’ exposure to the requested levels but failed to provide the board with a plan to bring the CITs into full compliance with the concentration limits.  Finally, in 2018, the CITs’ board requested that Kornitzer step down, and other KCM portfolio managers took over.  The new team was able to bring the CITs into compliance with the concentration limits within five months.

The takeaway from this case is that even when an adviser has full discretion over an account, it cannot ignore a client’s instructions.  And when an adviser fails to comply with the client’s investment policy, this rises to the level of a fiduciary breach.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Caught Between a Rock and a Hard Place. It’s easy to sympathize with the plight of Channing Capital Management, LLC (“Channing”), an adviser that got fined by the SEC because of a failure to follow its block trading policy.  Channing had some clients that imposed limits on trading commissions.  The firm informed its brokers and requested that lower commissions be charged for those clients.  The problem was that Channing included these client accounts in block trades with other clients resulting in some clients paying lower commission rates than others.

Like many firms, Channing had trade aggregation and allocation procedures that said transaction costs would be allocated pro rata among all the clients participating in block trades.  I am not surprised that there was a disconnect between the clients’ trading restrictions and firm policy on block trading.  Firms don’t always recognize the implications of a client restriction on their policies and procedures.  Channing cooperated with the SEC and revised its policies and procedures to require that clients who limited commissions provide Channing with standing authority either to: (1) depart from the restriction to participate in an aggregated trade at the same price and commission rate as all other clients, or (2) remove the clients’ trades from the block and execute it at a possibly higher price while observing the clients’ restriction.  Despite these efforts, the SEC fined the firm $50,000 by elevating a failure to comply with the firm policy as a violation of Rule 206(4)-7 of the Advisers Act (the Compliance Program Rule).  The critical takeaway from this case is that failing to follow written policies and procedures can lead to Rule 206(4)-7 violation and fines.  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Jefferies Caught in SEC Investigation Over ADR Pre-Release Abuses and Fined $1.25 million. Jefferies LLC submitted an Offer of Settlement with the SEC regarding improper practices concerning securities lending transactions involving pre-released American Deposit Receipts (“ADRs”).  The SEC found that Jefferies violated Section 17(a)(3) of the Securities Act of 1934 for negligence in obtaining pre-release ADRs that were not backed by ordinary shares.  According to the SEC order, Jefferies’ securities lending desk knowingly used pre-release brokers whom it knew were not following the requirements for obtaining ADRs.  Also, the SEC cited Jefferies for failure to supervise the securities lending desk because it did not establish reasonable policies and procedures, nor a system to implement those policies and procedures, which could have served to detect the violations of the Securities Act.  In this case, a business decision was made to change the securities lending practices because the compliance obligations were becoming too burdensome to Jefferies.

One tool compliance professionals can use to communicate with other business leaders is the annual compliance report, which is intended to summarize the findings and state of the firm’s compliance program.  Changed processes can be documented in this annual report, as well as any concerns the CCO has regarding a lack of policies and procedures.  It’s unfortunate in this case that members of the securities lending desk did not raise more concerns, as it seems reasonable they would have understood that the new process was developed to skirt compliance obligations.  The SEC noted that Jefferies cooperated with the investigation, but Jefferies had to disgorge all the revenue they made between 2012 and 2014 on the pre-release ADRs ($2.275 million), plus another $400k in penalties.  This appears to be a case of a weak “tone at the top” and compensation driving bad behavior.  Contributed by Heather D. Augustine, Senior Compliance Consultant.

Worth Reading

  • Dechert on ESG: An Overview for Asset Managers and Money Stuff: The SEC Is Asking About ESG from  Both articles dig into the very timely topic of the increasing number of financial products that claim to provide an investment strategy focused on investing in companies that demonstrate positive environmental, social and governance (“ESG”) characteristics.  Given the wide variety of these strategies and the present lack of a single global set of ESG standards, it is no surprise that the SEC is raising questions.
  • FinCEN Releases Report of Recent SAR Analysis re: Senior and Vulnerable Investor Exploitation. Bressler & Amery updates readers on the recent FinCEN press release discussing the results of its review of SAR filings related to senior exploitation.  See also: Training of Financial Institution Employees Leads to Significant Decline in Senior Exploitation for one more reason firms benefit from investments in training.
  • New Japanese Foreign Investment Regulation Could Impact the Financial Services Industry and Undermine Japan’s Corporate Governance Reform.  K&L Gates explains recent amendments to Japan’s Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended) (the “FEFTA”) and their potentially material impacts on foreign investment in Japanese public companies in terms of shareholder engagement and the advance notification requirement associated with certain sizeable investments.
  • CFIUS: Recent Regulatory Developments. In this podcast and transcript, Ropes & Gray LLP recaps the Committee on Foreign Investment in the United States (CFIUS) pilot program launched in October 2018.  The program requires reporting of certain proposed transactions by “foreign persons” with companies in 27 designated industries that are engaged in certain activities that may involve a national security interest. The podcast discusses how the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) expanded the scope of CFIUS’s jurisdiction to review foreign investments in U.S. businesses and the remaining regulations that come online in February 2020.
  • Investment Fees? Some Investors Don’t Think They Pay Any. Karen Demasters writes in Financial Advisor magazine that many investors still do not think they pay fees for investors, according to a study compiled by the FINRA Investor Education Foundation.  Results like this explain why the SEC remains so focused on fee disclosures and investor education.
  • Keynote Address – 2019 ICI Securities Law Developments Conference.  Dalia Blass, Director, SEC Division of Investment Management, summarizes recent investment company regulatory developments and initiatives.

Filing Deadlines and To-Do List for January 2020


  • Form 13H. Amendments to Form 13H are due promptly if there are any changes to information for Form 13H Filers. The SEC’s “Frequently Asked Questions Concerning Large Trader Reporting,” response 2.5 says Form 13H Filers may file an amendment and an annual amendment together if any changes occurred during the fourth quarter to the information contained in Form 13H. Amendments are due “promptly,” which we interpret as within ten days. Recommended due date: January 10, 2019. (Note: Neither the SEC nor its staff has provided guidance on the definition of “promptly” for Form 13H.)
  • Form PF for Large Liquidity Fund Advisers: Large Liquidity Fund Advisers must file Form PF with the SEC on the IARD system within 15 days of each fiscal quarter end. Due January 15, 2020.
  • Blue Sky Filings (Form D). Advisers to private funds should review fund blue sky filings and determine whether any amended or new filings are necessary.  Generally, most states require a notice filing (“blue sky filing”) within 15 days of the first sale of interests in a fund, but state laws vary.  Did you know that Hardin Compliance Consulting offers a convenient and economical blue sky filing service to help firms manage this complicated monthly task?  Learn more here and give us a call to discuss your needs further.  Due January 15, 2020.
  • Final Renewal Statement: Final statements will be released on January 2, 2020. Download your final renewal statement and arrange for payment of any additional fees as needed by January 17, 2019.


  • FINRA Accounting Support Fee: Quarterly invoice to support the GASB budget. Based on the municipal securities the firm reported to the MSRB. De Minimis firms (that owe less than $25) will not receive an invoice. Invoices are sent to the firm via WebCRD’s E-Bill.  Due date to be determined.
  • Customer Complaint Quarterly Statistical Summary: For complaints received during the 4th Quarter, 2019. FINRA Rule 4530 requires Firms to submit statistical and summary information regarding complaints received during the quarter by the 15th day of the month following the calendar quarter.  Due January 15, 2020.
  • Final Renewal Payment: Full payment of your FINRA 2020 Final Renewal Statement is due January 17, 2020.
  • FINRA Contact System Annual Review: FINRA Rule 4517 requires Firms to review and, if necessary, update the required FINRA Contact System information within the first 17 business days of each calendar year.  Due January 24, 2020.
  • MSRB Form A-12 Annual Affirmation. MSRB Rule A-12(k) requires each broker that is a member of the MSRB to review, update as necessary, and affirm the information in Form A-12 during the Annual Affirmation Period that begins on January 1 of each calendar year and ends 17 business days thereafter.  Due January 24, 2020.
  • Quarterly FOCUS Part II/IIA Filings: For Quarter ending December 31. SEC requires that member firms file a FOCUS, (Financial and Operational Combined Uniform Single) Report Part II or IIA on a quarterly basis.  Clearing firms and firms that carry customer accounts file Part II and introducing firms file Part IIA.  Due January 27, 2020.
  • Annual FOCUS Schedule I Filing for 2019: SEC requires all broker-dealers to submit operational information as of December 31st via the Annual FOCUS Schedule 1 Filing.  Due January 27, 2020.
  • Quarterly Form Custody: SEC requires that member firms file Form Custody pursuant to Securities Exchange Act Rule 17a-5(a)(5) for the quarter ending December 31.  Due January 27, 2020.
  • Annual Audit Reports for Fiscal Year-End November 30, 2019: SEC requires that member firms submit their annual audit reports in electronic form.  Firms must also file the report at the regional office of the SEC in which the firm has its principal place of business and the SEC’s principal office in Washington, DC.  Firms registered in Arizona, Hawaii, Louisiana, or New Hampshire may have additional filing requirements.  Due January 29, 2020.
  • SIPC-7 Assessment: For firms with a Fiscal Year-End of November 30, 2019. SIPC members are required to file the SIPC-7 General Assessment Reconciliation Form together with the assessment owed (less any assessment paid with the SIPC-6) within 60 days after the Fiscal Year-End.  Due January 29, 2020.
  • Supplemental Statement of Income (“SSOI”): For the quarter ending December 31, 2019. FINRA requires firms to submit additional, detailed information regarding the categories of revenues and expenses reported on the Statement of Income (Loss) page of the FOCUS Report Part II/IIA.  Due January 30, 2020.
  • Supplemental Inventory Schedule (“SIS”): For the month ending December 31, 2019. The SIS must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, with inventory positions as of the end of the FOCUS or FOGS reporting period, unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000; or (2) inventory positions consisting only of money market mutual funds. A firm with inventory positions consisting only of money market mutual funds must affirmatively indicate through the eFOCUS system that no SIS filing is required for the reporting period.  Due January 30, 2020.
  • SIPC-6 Assessment: For firms with a Fiscal Year-End of June 30th.  SIPC members are required to file, for the first half of the fiscal year, a SIPC-6 General Assessment Payment Form together with the assessment owed within 30 days after the period covered.  Due January 30, 2020.
  • SIPC-3 Certification of Exclusion from Membership: For firms with a Fiscal Year-End of December 31st AND claiming an exclusion from SIPC Membership under Section 78ccc(a)(2)(A) of the Securities Investor Protection Act of 1970.  This annual filing is due within 30 days of the beginning of each fiscal year.  Due January 30, 2020.



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