A firm faced with a regulatory investigation should hire outside counsel to bring objective analysis to the situation. Although it may seem simple, the question that must first be addressed is who the lawyer represents.

If the firm itself is the subject of the inquiry, then the firm needs representation. However, that same lawyer should not represent any individual employees who are subject to the review as well because there could be conflicts of interest between the firm and the employee.

In this situation, the company’s lawyer should advise the individual that they should retain their own counsel. Depending upon the situation, the firm should consider whether to pay for that separate counsel.

Similarly, the communications between the company lawyer and the firm should be limited to those in the firm who are part of what has been termed the “legal control” group. In other words, the group should comprise of individuals who are specifically designated to address the regulatory issue before the firm. By keeping the communications between the firm and its counsel limited, there is less likelihood of any attorney-client privilege being inadvertently waived.money.jpg

Although this may all seem to be promoting the legal profession, there is much more to the story. How a firm handles an investigation of a regulatory issue may say more about the firm than the issue itself. Will the firm portray the image that it is simply trying to sweep everything under the carpet by keeping the review in-house? Or, will the firm be able to meet the regulatory review and be able to say and demonstrate that it took an objective approach to address the situation.

How you decide this matter may have a large bearing on what happens as a result of the regulatory review. Think twice before you decide.

* photo from freedigitalphotos.net.

confusion.jpgLawyers have often been the brunt of cruel jokes. But now, a recent study reported on by the Bureau of National Affairs shows, lawyers are the target of securities regulators. Why the sudden interest?

For one, cooperation initiatives between regulators and those caught violating securities law convince these people to turn on their lawyer who may have been involved in the offering. After all, clients do not owe their lawyers a fiduciary duty.

Second, lawyers may have malpractice insurance that cover their actions. As such, there is a financial incentive for regulators to target lawyers.

So what can securities lawyers do to protect themselves? Unfortunately, there is no sure fire way to protect yourself as regulators will look in the direction of anyone associated with an offering that results in a securities violation.

The best protection for lawyers is to be vigilant when it comes to client selection. Also, be certain that you are comfortable with the content of the offering to avoid being accused in promulgating a fraudulent statement.

Be diligent and careful if you are a securities lawyer, and avoid being a trophy on a regulators’ mantle.


* photo from freedigitalphoto.net

Its not often I write about criminal cases but this is one that all executives in the commodities industry need to know about.  In Brooks v. United States, 681 F.3d 678 (5th Cir. 2012), the Court affirmed the convictions of three executives in the natural gas industry for falsely reporting natural gas trades in violation of the Commodity Exchange Act.  The government claimed that the energy executives reported false data to two privately owned industry publications in a manner that would benefit their corporate financial positions.  According to the Court, market index prices for physical gas (meaning the gas is sold by physically delivering it to a particular location) are prominently published in two privately owned newsletters.  Both publications are highly influential to the market price for physical gas.

The CEA provides that it is unlawful for any person who knowingly delivers inaccurate reports concerning market information or conditions that affect or tend to affect the price of any commodity.  The issue in front of the Court was whether the reports to the publications were “reports” pursuant to the CEA.  The defendants argued that the term “reports” in the CEA refers only to formal reports under the statute that are submitted to regulators or customers.  In a matter of first impression, the Court held that the defendants’ communications to the industry publications constituted “reports” under the CEA.  The United States Supreme Court declined to review the Court’s ruling last month.

Energy executives should take note of the case and its potential impact.  As a result of the Court’s ruling, any false or fraudulent statements made to third parties could result in a potential criminal liability to the individual executives, and civil liability for the corporate entity.

The CFTC announced today that it had a record enforcement year.  The CFTC filed 102 enforcement actions in its fiscal year ended September 30, 2012, which is up slightly from the 99 actions it filed in fiscal year 2011.  Prior to the Dodd-Frank Act, the CFTC filed just 57 cases in fiscal year 2010.  The CFTC also opened 350 new investigations in 2012 and obtained orders imposing over $585 million in sanctions, including orders imposing more than $416 million in civil monetary penalties. 

Not surprisingly, the Dodd-Frank Act has had a profound effect on CFTC enforcement activities and it is likely that enforcement activities will continue to expand.  In fiscal year 2013, the CFTC is seeking to increase its overall budget by 49% and its enforcement budget by over 33%.  The CFTC wants to hire 48 new full time employees – an increase of over 28% in manpower – in its enforcement division.  In its request, the CFTC states that its workload will increase for a number reasons, including: 

  • new prohibitions targeting disruptive trading practices and conduct on registered entities;
  • establishment of anti-fraud and anti-manipulation authority over swaps;
  • new prohibitions against reporting false information;
  • increase in the number and types of registrants; and
  • new regulations applying to swaps and other intermediaries including those involving business conduct standards, fraud, record-keeping, reporting and trade practice;

Last year, Congress significantly cut the CFTC’s budget request.  This year, Congress passed a continuing resolution, with spending rates slightly higher than last year, to avoid the possibility of a government shutdown just before the November elections.  As a result, whether Congress provides the CFTC everything it wants will not be determined until early in 2013.  However, given the political landscape, there is a strong possibility that Congress will cut the CFTC’s budget request.

In February, the CFTC issued a final rule amending Part 4 of the CFTC regulations to rescind the exemption from CPO registration for certain qualifying pools under Regulation 4.13(a)(4).  To read my blog about the new rule, click here.  On Wednesday, the NFA held a 90 minute webinar for CPOs that were previously exempt from registration under 4.13(a)(4).  To see the webinar and view the presentation slides, click here

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. 

Much has happened in nearly one since since the Dodd-Frank Act became effective, and much more remains.  According to the recent thoughts of one commentator, Kyle Colona of Compliance EX, Dodd-Frank may be doomed to fail as it faces it first year of existence.

Colona noted five factors working against the full implementation of the law: (1) the CFTC and SEC are far behind schedule; (2) the regulatory authority under the Act is shared by too many entities; (3) recent comments from the Federal Reserve Bank suggest that the Volcker Rule may not become law because of its impossibility to implement; (4) the financial services industry has unleashed a full-scale effort to defeat the full implementation of the Act; and (5) certain banks are trying to influence the public that implementation of the Volcker Rule would be bad.

I think that there is now a sixth factor that may work against the full implementation of the Dodd-Frank Act; namely, a presidential election this fall.  With the politicalclimate becoming more and more focused on the election, it is only natural that there would be less attention devoted to a law that the financial services industry is committed to pealing back or doing away with altogether.  If the President loses the election, there are some who believe that Dodd-Frank may be in trouble.  Even if the President prevails, it is unlikely that there will be full implementation because attention will surely be focused elsewhere.

Although it is unlikely that there may ever be full implementation of the Act, we need to still anticipate that many provisions of the Act will come to pass.  For example, at some point, the SEC will finally commit to the adoption of the uniform fiduciary duty rule and there will be a decision on who will serve as the SRO for investment advisors.  Dodd-Frank is not dead; it just may limp along for the next year.

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.

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.

Although the SEC’s rulemaking deferral regarding the uniform fiduciary standard has gained much press, the SEC’s other rulemaking initiatives pursuant to the Dodd-Frank Act march on, and will have a significant effect on broker dealers and investment advisors in the upcoming year.

In particular, the SEC has scheduled a joint SEC-CFTC report to Congress on stable value contracts, and the adoption of rules pertaining to trade reporting, data elements and real time public reporting for security-based swaps.  Further, the SEC and CFTC will define key terms for swap products and intermediaries as well as security-based swap clearing agencies.  The SEC will also look to register and regulate security swap based data repositories and for mandatory clearing of security-based swaps.  Additionally, the SEC will look at the end user exceptions for the mandatory clearing of security-based swaps. 

The SEC will also consider a permanent rule to register municipal advisors this year.  However, certain controversial rules relating to conflict materials rule finalization and resource extraction disclosures as well as corporate governance rules relating to executive compensation claw backs, performance disclosure pay, compensation ratio and hedging policies have been pushed forward to the first part of this year.  Moreover, the SEC still has not set up certain offices that the Dodd-Frank Act required including, but not limited to, the credit ratings and municipal securities oversight function offices.  Currently, the SEC believes these functions are being performed by its Division of Trading and Market’s Staff. 

In sum, the SEC’s Dodd-Frank Act rule making is still ongoing and will continue as it moves forward.