Volcker Rule Conformance Period Clarified

Posted by Amit Shah on May 11, 2012

The Board of Governors of the Federal Reserve, the SEC and the CFTC jointly confirmed recently that entities subject to the Volcker Rule would the have the full two year period provided by Section 619 of the Dodd-Frank Act to fully conform its activities and investments, unless the Board extends the conformance period.  Banking entities now have until July 21, 2014 to fully conform their activities and investments to the Volcker Rule. 

The Volcker Rule has caused significant debate among politicians, regulators and Wall Street, making it possible, if not probable, that the conformance period may be extended in the future.  However, some regulators have stated that they expect a final Volcker Rule to be completed by September and possibly earlier.  

Special Committee Announces Recommendations Regarding Segregated Funds

Posted by Amit Shah on April 27, 2012

A special committee of representatives from the futures industry’s SROs proposed a series of recommendations for changes to SRO rules and regulatory practices.  The recommendations include: 

  • Requiring all FCMs to file daily segregation and secured reports, which will provide SROs with an additional means to monitoring firm compliance;
  • Requiring all FCMs to file bimonthly Segregation Investment Detail Reports, which reflect how customer segregated funds and secured funds are invested and where they are held;
  • Performing more periodic spot checks to monitor FCM compliance with segregation and secured requirements; and
  • Requiring a principal to approve any disbursement of customer segregated and secured funds not made for the benefit of the customer and that exceed 25% of the firm’s excess segregated or secured funds.  The firm must also provide immediate notice to the SROs.

Given how serious the NFA has been treating the issue of customer segregated funds, it is possible that at least some form of these recommendations could be made into final rules over the next several months. 

SEC AND CFTC LAUNCH AN ANTI MONEY LAUNDERING GROUP

Posted by Ernest E. Badway on April 24, 2012

The SEC and CFTC launched a working group to discuss and identify money laundering vulnerabilities. 

These issues have lingered for awhile.  Both agencies believe that there is an opportunity to clarify their positions relating to money laundering and if their programs could potentially uncover such events.  This group will also include representatives from the Treasury Department, the Financial Crimes Enforcement Network, as well as a variety of self regulatory organizations and agencies.

This announcement demonstrates that the SEC and CFTC are very much interested in the effects of money laundering in their respective markets.  Time will tell if this will impact examinations and enforcement actions, but the SEC and CFTC will, likely, concentrate on some of these issues in their future programs. 

CFTC Revises Registration and Reporting Requirements for CPOs and CTAs

Posted by Amit Shah on March 09, 2012

On February 9, 2012, the CFTC issued a final rule regarding changes to Part 4 of the CFTC’s regulations involving registration and compliance obligations for commodity pool operators (“CPO”) and commodity trading advisors (“CTA”).  Among other things, the rule rescinds the exemption from registration provided in Rule 4.13(a)(4) and sets forth additional annual reporting requirements for CPOs and CTAs.

Section 4.13(a)(4) exempted operators of private funds offered solely to sophisticated investors from registering as a CPO.  To qualify, the interests in the pool must have been exempt from registration under the Securities Act of 1933 and each participant must be a qualified eligible person or an accredited investor.  Now that the exemption has been rescinded, any private fund operating under the Rule 4.13(a)(4) exemption must register with the CFTC prior to December 31, 2012.

The CFTC also adopted Rule 4.27, which requires CPOs and CTAs to periodically report certain information.  CPOs and CTAs must annually file Form CPO-PQR and Form CTA-PR, respectively.  These forms are analogous to Form PF adopted by the SEC for reporting by registered investment advisors. 

Depending on the aggregate asset value of the CPO, CPOs must complete Schedules A, B and/or C of Form CPO-PQR.  A CPO with over $5 billion in assets as of June 30, 2012 must complete Schedules A, B, and C by November 29, 2012.  A CPO with over $1.5 billion in assets must complete Schedules A, B and C within 60 days after the first calendar quarter ending after December 14, 2012.  A CPO with between $150 million and $1.5 billion in aggregate assets must complete Schedules A and B within 90 days after December 31, 2012.  Finally, a CPO with under $150 million in assets must complete Schedule A within 90 days after December 31, 2012.

The reporting requirements become effective on July 2, 2012 and will apply to all registered CPOs.  Registered CTAs must file Form CTA-PR annually, within 45 days after a CTA’s fiscal year.  The first compliance date is February 14, 2013.

SEC Issues guidelines for Form PF Reporting

Posted by Ernest E. Badway on March 05, 2012

The SEC published a small entity compliance guide for investment advisers relating to the new Form PF.  These new reporting requirements affect SEC registered investment advisers with at least $150 million dollars in assets under management.  Some of these new guidelines will also apply to CFTC commodity pool operators and commodity trading advisers.

The SEC registered advisers will be divided into 2 groups, small advisors and large advisers.  The definitional requirements for large advisers are specific and may require certain calculations, however.  Clearly, large advisers have assets under control of anywhere between a billion dollars and more.  For the purposes of the Form PF, all other advisers would be considered small private advisers.

Generally, an investment adviser is a small business pursuant to the Investment Advisers Act and the Regulatory Flexibility Act if it has assets under management of less than $25 million dollars.  As such, these advisers will, generally, have no reporting requirements on a Form PF.  However, for those advisers, who are not defined as a small business, there may be certain reporting requirements.  For example, advisers with over $150 million dollars in private fund assets under management, but are not large advisors must file a Form PF once a year within 120 days at the end of the fiscal year.  Large private advisers must file a Form PF within 60 days.  Moreover, the requirements for advisers with over $150 million dollars, but who are not large advisers, are less than those of large private fund advisers.  Essentially, the more money you have under management, the more information you must provide.

In short, advisers should consult with securities counsel to ensure accurate reporting in the future.

Investment Advisors and Broker-Dealers Use of Social Media - Beware!!

Posted by Ernest E. Badway on January 03, 2012

Although the use of social media has been embraced by many industries, it is of particular concern for investment advisors and broker-dealers.

In many situations, the use of these outlets touch upon several areas.  For investment advisors and broker-dealers, the advertising requirements under the Investment Advisors Act of 1940 and certain Securities Exchange Act of 1934 provisions may be implicated when one uses social media, including various features on Linked In or Facebook.  Additionally, recordkeeping is a critical function required by both acts since this information must be maintained.  Further, it is likely that those who work for either and use social media sites, may require supervision.  Additionally, when one uses these types of communications, there are various regulations that require the firms to monitor these third party communications to ensure that, among other things, non-public information is not disclosed.  Firms would also be required to apply their audit function to these media policies and procedures internally, to determine if the procedures are effective.  Moreover, the SEC, FINRA and the states may begin to regulate these types of social media in amore forceful manner. 

As such, although social media venues may present certain benefits, the risk is palpable.

CFTC Adopts Rule To Limit Repos

Posted by Amit Shah on December 09, 2011

On Monday, the CFTC unanimously voted to approve a rule to prevent futures commission merchants from using customer funds for repurchase agreements.  Such agreements, commonly known as “repos”, allowed a futures firm to swap customer assets for securities, such as municipal bonds or foreign government bonds, held in another division of the firm.  The futures firm would then pocket the higher interest rates the securities yield. 

After the vote, CFTC chairman, Gary Gensler, said that he believed “there is an inherent conflict of interest between parts of a firm doing these transaction.”  Under the new rule, a futures merchants can still invest customer cash, but must do so through a third party, such as a bank.  The rule also limits the ability of firms to invest client money in risky foreign sovereign debt.  The new rule will take be published in the Federal Register within 60 days and will take effect within 180 days.

Swap Dealer Registration - Here It Comes

Posted by Ernest E. Badway on November 15, 2011

The Dodd-Frank Act required that security based swap dealers or major security based swap participants to register with the SEC.  These swap based entities are required to register with the SEC while all others are under the jurisdiction of the CFTC. 

The SEC proposed rules requiring these entities to register electronically with the SEC on a Form SBSE, similar to the Form BD for broker-dealer registration.  CFTC swap entities register using the shorter Form SBSE-A.  Additionally, the SEC will require that these forms be updated promptly if there are any inaccuracies.  There will also be something new according to one SEC Commissioner.  The rules may require a knowledgeable senior officer to provide a certification as to the firm’s financial, operational and compliance capabilities.  This person will also have to disclose how the firm arrived at those conclusions.  Further, non-U.S. swap entities will have to identify a U.S. Agent, and submit an opinion of counsel that the SEC will be able to access its books and records, as well as a requirement to submit to an on-site inspection. 

The swap dealer registration proposal will be open for a 60 day comment period, and all are encouraged to consider commenting.

Josh Horn's Ponzi Scheme Response Road Map

Posted by Ernest E. Badway on November 08, 2011

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

Securities Podcast with Ernest Badway

Posted by Ernest E. Badway on October 28, 2011

Thought you might be interested in a recent podcast I did concerning my securities law practice.  http://web.me.com/cordpar/Client_Development_Tips/Law_Consulting_Coaching_Podcast/Entries/2011/10/28_Developing_a_Securities%2C_White_Collar_and_Complex_Litigation_Practice.html

The Volcker Rule: the Greatest and/or Worst Regulation Ever?

Posted by James Saksa on October 13, 2011

The SEC recently joined the FDIC, the OCC and the Federal Reserve in advancing the Volcker Rule for public comment.  The Volcker Rule is shaping up to be one of Dodd-Frank’s most contentious and confusing new regulations.

Volcker Rule proponents hope that it will, like the late-great Glass-Steagal Act before it, rein in risk-relishing bankers by prohibiting short-term proprietary trading of securities.  Opponents fear it will be overly broad, capturing market-making activities and needlessly raising the cost of capital.  Both want big changes, clouding any predictions on what the final version will look like. 

So, basically, Wall Street has a few months to respond to a 298-page rule proposal jointly issued by four Federal regulators that asks nearly 400 questions which could cost millions of dollars.  Hence the impression some folks get that the only thing certain about the Volcker Rule is the uncertainty surrounding it.  Some analysts seem terrified of this zombie regulation – once dead, now crawling out of the grave with a sickly hunger for brains profits.         

Then again, this resurrected rule might not be so scary.  Stock prices of the major US financial institutions that will fall under its purview remained steady despite the announcement.  The Volcker Rule really is just the watered-down second coming of the law from 1933 until 1999.  The uncertainty of the law is really only found around its margins – trying to determine exactly where market-making ends and proprietary trading begins.  In other words, the devil – that scary boogieman, uncertainty – remains in the details. 

Sure, it seems like everyone is unhappy with the proposal, which took over a year to draft but only minutes to attract detractors.  It has either too many exemptions or too few, depending on who you ask.  But I’ve found that when two groups that never seem to agree on anything suddenly agree on something, you should take that something and do the exact opposite.  A rule that upsets everyone for different reasons tends to be one that is moderate, sensible and likely to have a real and lasting impact.   

In the mean time, we will follow the developments closely.  Histrionics about how awful/amazing the finalized rule will look aside, it will be one of the more arcane of Dodd-Frank's new regulations.  Anyone falling under its penumbra would do well to tread cautiously and with counsel.

CFTC Overwhelmed By Dodd-Frank

Posted by Amit Shah on September 09, 2011

The CFTC announced earlier today that it will not complete the rule-writing process for the derivatives market until the first quarter of 2012.  Chairman Gensler stated that the CFTC is “focused on considering these rules thoughtfully – not against a clock.”  Under the Dodd-Frank Act, Congress directed the CFTC to regulate the over-the-counter derivatives market, which had been largely unregulated.  The Act required the CFTC to complete more than 60 rules by July 2011, but the rulemaking process has been delayed and only 12 rules have been completed.

The CFTC outlined the rules it will consider in the remainder of this year, which include data recordkeeping and reporting rules, external and internal business conduct (duties, recordkeeping and chief compliance officers), entity definitions and registrations and real-time reporting rules.

The most contentious and anticipated rules will be finalized in the first quarter of 2012.  They include the capital and margin requirements for derivative trading and rules governing the operation of swap-execution facilities, where the trading will take place.  Other rules that will be considered in the first quarter of 2012 include governance, conflict of interest and conforming rules.

Although the rulemaking process has been delayed, leaving areas of the financial markets unregulated, the CFTC will not require companies to comply with the derivative rules until all rules are finalized.  Even if the proposed rules are finalized on time, they will not take effect until the third quarter of 2012, at the earliest.