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Written by: Ildiko Duckor

The California Commissioner of Business Oversight (“Commissioner”) recently amended California’s custody rule 10 C.C.R. Section 260.237 (the “New Custody Rule”).  The New Custody Rule will be effective on April 1, 2014.

All investment advisers licensed or required to be licensed in California must comply with the New Custody Rule.  California Exempt Reporting Advisers are not affected.

What is “having custody?”

Holding or having authority to obtain possession of client funds or securities, for example:

  • Possession of client funds or securities unless received inadvertently and returned to the sender promptly.
  • Any arrangement (such as a general power of attorney) that authorizes you to withdraw client funds or securities maintained with a custodian by instructing the custodian.
  • Any capacity with authority to access to client funds or securities (such as general partner of a limited partnership, managing member of a limited liability company or trustee of a trust).

If you “have custody” of assets.

  • Qualified Custodian.  You must maintain those assets with a “qualified custodian” such as a bank, trustee, or prime broker.
  • Notice on ADV.  You must notify the Commissioner on your ADV that you have or may have custody.
  • Notice to Clients*. You must notify your client in writing of the custodian’s name and address, and the manner in which the assets are maintained, and any changes to this information.
  • Quarterly Custodian’s Account Statement*.  You must reasonably ascertain that the custodian sends quarterly account statements with specific information to each client (for example, by being cc-d on electronic statements the custodian sends).
  • Surprise Exam*.  You must retain a CPA (by written agreement) to have an annual “surprise exam” of client assets, and report the examination and any resignation of the CPA on your ADV.
  • Internal Control Report.  If you or your affiliate serves as the qualified custodian:
    • The CPA firm conducting the surprise exam must be registered with and subject to examination by the PCAOB.
    • You must obtain an annual internal control report with specified content.
  • Exceptions.  There are certain exceptions from some of the New Custody Rule’s requirements for mutual fund shares, certain private securities, and for advisers that “have custody” only because they deduct fees (if certain conditions are also satisfied).

Fund Managers’ Obligations.

If you are a general partner of an investment limited partnership or a managing member of a limited liability company (or are in a similar position with respect to a pooled fund vehicle):

  • Quarterly Investor Account Statement.  You must send to all fund investors quarterly account statements showing:
    • the total amount of all additions to and withdrawals from the fund,
    • a listing of all additions to and withdrawals from the fund by an investor,
    • the opening and closing value of the fund at the end of the quarter,
    • the total value of an investor’s interest in the fund at the end of the quarter, and
    • a listing of securities positions on the closing date of the statement pursuant to FASB Accounting Standards Codification 946-210-50-4 through 6.
  • Independent Expense Verification*.  You must retain (by written agreement) an independent accountant or attorney obligated to act in your investors’ best interests and send him/her all invoices or receipts with details regarding calculations, so the independent person can:
    • review all fees, expenses and withdrawals from the fund,
    • determine that payments conform to the fund agreement, and
    • forward to the custodian approval for payments of the invoices.
  • Audited Fund Exceptions*.  You need not comply with the following requirements:  Notice to Clients, Quarterly Custodian’s Account Statement, Surprise Exam and Independent Expense Verification; if:
    • Your fund is audited annually, in accordance with GAAP, by an independent CPA registered with and subject to examination by the PCAOB.
    • The audited financials are distributed to all investors and the Commissioner within 120 days of the end of the fund’s fiscal year.
    • A final liquidation audit is performed, in accordance with GAAP, upon the fund’s liquidation, and the audited financials are distributed to investors and the Commissioner promptly upon completion of the audit.
    • The independent CPA is required by agreement to notify the Commissioner on Form ADV if it resigns or is terminated.
    • You notify the Commissioner that you intend to use the audit exception route.

For further details and interpretation of the intricacies of the New Custody Rule as they apply to you, please contact your Pillsbury Investment Funds and Investment Management team member.

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If your management company or fund was formed as a California limited liability company, you need to review your Operating Agreement to determine whether amendments need to be made.

On January 1, 2014, California’s Beverly-Killea Limited Liability Company Act (Old Act) was superseded by the California Revised Uniform Limited Liability Company Act (New Act). The New Act includes a number of substantive changes that may adversely affect existing California limited liability companies unless they amend their operating agreements.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.

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Written by:  Joseph T. Lynyak, III and Anthony H. Schouten

More than three years following the passage of the Dodd-Frank Act, and intense inter-agency negotiations, the federal financial regulatory agencies collectively adopted the final version of the “Volcker Rule,” or “Rule”—which imposes new and potentially severe limitations on domestic and foreign banking entities’ activities in regard to proprietary trading and investments in “covered funds.”  The 72-page final Rule is accompanied by over 800 pages of interpretative guidance, to address more than 1,200 questions that the federal agencies asked commenters to address.

This Alert provides an overview of the principal elements of the Rule and identifies several significant concerns that have already been raised by industry participants. Importantly, we provide our thoughts regarding the process by which banking entities might analyze their current business models and transactional structures, with the goal of avoiding an interruption in deal flow and/or business models by identifying possible coverage by the Rule, as well as adopting modifications to comply with the Rule and prevent or minimize adverse business consequences.

Additional client communications will explore in detail categories of activities and transactions impacted by the Rule, as well as interpretative guidance issued by the federal banking agencies.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.

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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”) and Commodity Pool Operators (“CPOs”) or Commodity Trading Advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers, CPOs and CTAs.  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual 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.

List of annual compliance deadlines in chronological order:

 

State registered advisers pay IARD fee November-December (of 2013)
Form 13F (for 12/31/13 quarter-end) February 14, 2014
Form 13H annual filing February 14, 2014
Schedule 13G annual amendment February 14, 2014
Registered CTA Form PR (for December 31, 2012 year-end) February 14, 2014
TIC Form SLT Every 23rdcalendar day of the month following the report as-of date
TIC Form SHCA March 3, 2014
Affirm CPO exemption March 3, 2014
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 3, 2014
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2014
Registered Mid-Size and Small CPO Form CPO-PQR year-end report March 31, 2014
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2014
Annual ADV update March 31, 2014
Delivery of Brochure April 30, 2014
Form PF filers pay IARD fee Before submission of Form PF
Form PF (for advisers required to file within 120 days after December 31, 2013 fiscal year-end) April 30, 2014
FBAR Form TD F 90-22.1 (for persons meeting the filing threshold in 2013) June 30, 2014
FATCA registration Must be completed by April 25, 2014
Form D annual amendment One year anniversary from last amendment filingIf the fund will be using 506(c) to generally solicit, the Form D must be amended to check the box that indicates the offering will be made under 506(c) 

 

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This is a reminder that the 2014 IARD account renewal obligation for investment advisers starts this November.  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.

Key Dates in the Renewal Process:

November 11, 2013 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 13, 2013 – Deadline for full payment of Preliminary Renewal Statements.  By December 10, 2013, an investment adviser should have submitted to FINRA through the IARD system, its preliminary renewal fee in order for the payment to be posted to its IARD Renewal account by the December 13 deadline.

January 2, 2014 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 10, 2014 – Deadline for full payment of Final Renewal Statements.

For more information about the 2014 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

 

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This article was published by The FCPA Report and is reprinted here with permission.

More and more, venture capital firms are investing in start-ups seeking to expand internationally or with nascent cross-border operations in place.  Such investments offer opportunities for lucrative returns but also carry significant anti-corruption risk that VC firms are often ill-equipped to manage.  For many businesses, managing anti-corruption risk is a necessary cost center.  But VC firms are uniquely positioned to use that risk to drive a better deal and gain greater control over management and direction of the business.

The overlapping and increasingly aggressive anti-corruption regimes, including the FCPA, the U.K. Bribery Act, the anti-bribery laws in China, Germany and the newly enacted law in Brazil, coupled with the heightened risk of corruption in emerging economies, can quickly derail an otherwise strong investment.  Not only are VC firms subject to fines, penalties and reputational harm through the conduct of the start-up, but the conduct itself may have occurred before the VC firm even considered taking a stake.

This article offers an assessment of the opportunities and risks that VC firms should consider, and concludes with four strategies for maximizing returns while limiting anti-corruption risks.

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Written by:  Kimberly Mann

Private investment fund structures frequently include one or more vehicles that are organized under the laws of the Cayman Islands. The Cayman Islands is a preferred jurisdiction because there is no tax on income, profits or capital gains, nor is there withholding tax. In addition, at the time of its formation, an entity may purchase a tax exemption certificate which will preserve its tax-free status for several years. Formation in the Cayman Islands is relatively efficient and inexpensive and a number of different types of business organizational structures that offer limited liability for investors may be used. Advisors to Cayman funds also may avoid licensing requirements if they fall within an available exemption.

Cayman entities likely will become even more attractive to fund managers, sponsors and investors as a result of recent changes to Cayman law pertaining to fiduciary duties, third party beneficiaries of indemnification provisions, the manner in which fund documents may be executed, the use of foreign partnerships as general partners of Cayman limited partnerships and the adoption of a limited liability company statute, all of which help to bring Cayman law in line with Delaware law. However, fund managers are advised to remember important anti-money laundering obligations that apply to investment funds under Cayman law.

Anti-money Laundering Requirements

Notwithstanding the recent liberalization of certain laws and the absence of registration or licensing requirements in many cases, managers of Cayman vehicles are subject to strict anti-money laundering compliance requirements under the Proceeds of Crime Law (“PCL”) and the Money Laundering Regulations promulgated under the PCL. In addition, the Cayman Islands Monetary Authority Guidance Notes on Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (“Guidance Notes”) provide important guidelines for anti-money laundering compliance. Under the Cayman anti-money laundering regime, fund managers must
(i) establish client identification procedures, (ii) implement suspicious transaction reporting procedures, (iii) maintain know-your-client information and suspicious transaction records, (iv) develop internal controls, policies and procedures that are appropriate to prevent money laundering, (v) implement an anti-money laundering training program for staff members and (vi) designate a compliance officer at the management level with the requisite skills and experience to manage the compliance program and report to the board of directors or its equivalent.

The purpose of the Guidance Notes is to assist funds and other financial services providers to comply with applicable Cayman Islands Money Laundering Regulations. The Guidance Notes describe the types of documentation that should be used as evidence of the identity of investors and their beneficial owners and signatories. The type of documentation required depends, in large measure, upon the nature of the investor or beneficial owner. For example, identification documents for natural persons would include a current valid passport, a recent utility bill and a reference letter from a lawyer, accountant or other respected professional. Appropriate documentation for a corporate investor would include a certificate of incorporation, a copy of recent financial statements of the company, identification evidence of each of the principal beneficial owners holding a 10% or greater interest in the company or otherwise exercising control over the company and copies of the resolutions of the board of directors authorizing the investment in the fund. If copies of identifying documents are submitted, they should be certified by a lawyer, accountant, notary public, member of the judiciary or other suitable certifier. The Guidance Notes are not required to be followed slavishly; rather, the Cayman Islands Monetary Authority expects financial services providers to exercise prudent judgment and take the Guidance Notes into account when devising their anti-money laundering policies and procedures.

A Pragmatic Approach – Using an Intermediary

Under the Money Laundering Regulations, evidence of identity is satisfactory if it is reasonably capable of establishing that the investor is who it claims to be. There are circumstances under which it may be duplicative, onerous or unhelpful for a fund manager to obtain and verify identification evidence about a prospective investor. In those cases, it may be appropriate to rely on the due diligence of a third party intermediary that will serve as an “eligible introducer.” An eligible introducer is, among other things, (i) a lawyer or certified or chartered accountant or firm of lawyers or certified or chartered accountants, conducting business in a country with legislation equivalent to the Money Laundering Regulations, (ii) a member of a professional body in a country listed in Schedule 3 of the Money Laundering Regulations that is subject to disciplinary action for failure to comply with guidelines similar to the Guidance Notes or (iii) a financial institution in a country listed in Schedule 3 of the Money Laundering Regulations that has regulations equivalent to the Money Laundering Regulations, if the financial institution is subject to the jurisdiction of a regulatory authority outside the Cayman Islands that is the functional equivalent of the Cayman Islands Monetary Authority. Use of an eligible introducer may be pragmatic in order to create efficiencies in cases where the introducer would have already conducted procedures to verify the identity of the prospective investor. An eligible introducer must ensure that its documentation is accurate and up-to-date. The nature of the relationship between the introducer and the fund manager and between the introducer and the prospective investor, as well as the bona fides of the introducer, will determine whether it is appropriate to use the introducer as an intermediary for anti-money laundering purposes.

Required Due Diligence on the Intermediary

It is important for a fund manager to keep in mind that it is responsible for ensuring that the procedures utilized by the introducer are substantially in accordance with the Guidance Notes and that documentary evidence of the introducer upon which the manager will rely is satisfactory. Evidence is satisfactory if it complies with the requirements of the anti-money laundering regime of the country from which the introduction is made. Fund managers or administrators typically require an eligible introducer to provide a comfort letter or eligible introducer form providing assurances that (i) the intermediary qualifies as an eligible introducer, (ii) the introducer’s due diligence procedures are satisfactory, (iii) the introducer has information that clearly establishes the identity of the investor or the investor’s beneficial owner, (iv) the introducer will make available upon request copies of documentation that it has obtained regarding the identity of the prospective investor or the prospective investor’s beneficial owner and (v) due diligence and other identification documentation will be retained by the introducer for the time period required by the regulations to which the introducer is subject. In addition to the comfort letter or eligible introducer form, the fund manager should obtain independent evidence of the eligibility of the introducer, such as confirmation that the introducer is a regulated entity or a member in good standing of a professional body. It is also advisable to test, from time to time, the introducer’s ability to furnish requested identifying documentation promptly. If it turns out that reliance should not have been placed on an introducer, the fund manager must carry out its own due diligence procedures on the prospective investor or beneficial owner.

Exemptions for Certain Types of Investors

Documentary evidence of identity is not required under all circumstances. For example, evidence of identity is not typically required where the investor is a governmental entity, agency of government or a statutory body. In addition, financial institutions in countries listed in Schedule 3 of the Money Laundering Regulations, companies with securities that are listed on exchanges or other markets approved by the Cayman Islands Monetary Authority and pension funds are examples of entities for which exemptions exist.  For pension funds, evidence that the investor is a pension fund may consist of a copy of a certificate of registration or an order, approval or regulation of a governmental, regulatory or fiscal authority in the jurisdiction in which the pension fund was established. In the absence of any such evidence, the fund manager should obtain the names and addresses of the trustees or other persons authorized to make investment decisions on behalf of the pension fund.

Summary

The failure to take the Guidance Notes into account could result in sanctions under Cayman law. The Guidance Notes make clear that fund managers should consider money laundering and terrorist financing prevention as part of their risk management strategies and not as a stand-alone requirement. Policies should be tailored to the nature and scope of the fund’s business. Prior to accepting subscribers, a fund manager or its administrator should ensure that documentary evidence of the identity of each prospective investor has been provided and reviewed. Where there are questions, or if insufficient information has been provided by a prospective investor, the manager or administrator should follow up until the prospective investor and its beneficial owners have been adequately identified and determined to be suitable from an anti-money laundering perspective. Subscription materials should be reviewed and modified, if necessary, to include anti-money laundering attestations and documentary requests. Fund managers that are U.S. persons also should check the names of prospective investors and their beneficial owners to determine whether they are on the list of specially designated nationals published by the Office of Foreign Assets Control.  Managers that are registered with the U.S. Securities and Exchange Commission as investment advisors likely have an anti-money laundering system in place that meets the requirements of the Guidance Notes. Managers that are not registered investment advisors may not have such policies and procedures in place and may benefit from assistance from counsel or a consultant in establishing and maintaining a satisfactory system.

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Written by:  Jay B. Gould and Jessica Brown

On July 10, 2013, the Securities and Exchange Commission (“SEC”) voted to lift the ban on general solicitation and advertising by private funds (and other private company issuers) as mandated by Congress in the Jumpstart Our Business Startups Act (“JOBS Act”). In addition to lifting the ban on general solicitation, the SEC approved a disqualification rule that will prospectively prohibit any felon or “bad actor” from relying on Rule 506 exemptions. Finally, the SEC voted to propose amendments to the current private offering rules.

I.          New Rule 506(c) 

Summary

Rule 506(c), as adopted by the SEC, permits private issuers to use general solicitation and general advertising when making a securities offering, provided the issuer only sells to accredited investors.[1] Issuers must take affirmative and reasonable steps to verify that each investor is accredited under the Rule 501 definition, and cannot simply rely upon a representation from the investor.

Verification Rule

The burden now shifts to private fund managers to determine “reasonableness” when making a determination of an investor’s accredited status. In response to comments it received, the SEC has provided some ideas an issuer can consider when determining its verification procedures. The non-exclusive, non-required verification methods published by the SEC include: (i) review federal tax forms, (ii) confirm net worth through documentation, or (iii) obtain written confirmation from a registered broker-dealer, registered investment adviser, licensed attorney in good standing, or registered CPA.  Accordingly, private fund managers will be able to rely upon certain third parties to make a determination of accreditation.

Current Rule 506 Exemptions

Rule 506(c) does not modify or repeal any of the current Rule 506 exemptions and issuers may still rely on those exemptions as written.   Therefore, private fund managers that do not see the value in advertising or soliciting to the public, or find the conditions of the new rules too onerous, may continue under the current private offering regime and will remain subject to all of the same restrictions on communications with the public to which they are currently subject. 

Form D

The current Form D filing document will be amended to include a “check-the-box” option to designate if the issuer is relying on the new Rule 506(c) in its present offering.  For those private funds and other issuers that do intend to generally advertise, the SEC has proposed that a Form D would need to be filed with the SEC 15 days in advance of the offering and again within 30 days after the offering closes.  It is proposed that an issuer that fails to make these filings would be prohibited from using the public advertising rules in the future.

II.        Rule 144A

Similar to the changes to Rule 506, under the new rules, securities sold pursuant to Rule 144A may be “offered” to investors other than qualified institutional buyers, because information about such offerings would be made public by way of general advertising, but the securities may only be sold to investors the seller reasonably believes to be qualified institutional buyers.[2]

III.       Felons and “Bad Actors” Disqualification

The SEC unanimously adopted a rule that disqualifies certain felons and “bad actors” from relying on any Rule 506 exemption.[3] This disqualification will be effective sixty days after the publication of the final rules in the Federal Register. 

The SEC identified a number of events that would disqualify an issuer from relying on Rule 506, such as securities-related criminal convictions, court injunctions and restraining orders, final orders from regulators and agencies, certain SEC disciplinary orders, anti-fraud or registration-related cease-and-desist orders from the SEC, SEC stop orders, suspension or expulsion from membership or association with a self-regulated organization, or recent U.S. Postal Service false representation orders. 

However, much to the consternation of the lone dissenting Commissioner Luis Aguilar, this provision will not bar persons who have committed financial and other crimes in the past.  It will only bar such bad actors on a going forward basis. Presumably, the fact that a principal of an issuer is a convicted felon would be a material fact that would be required to appear in the offering materials of the issuer, and for private funds, this information would, in most cases, get picked up in the Form ADV of the fund manager.

IV.       What Happens Next

Timing

The effective date of Rule 506(c) and the disqualification rule is 60 days following the date the rule is published in the Federal Register. For an ongoing offering under Rule 506 that began before the effective date of Rule 506(c), the issuer may elect to continue the offering after the effective date in accordance with the requirements of either the current Regulation D rule or new Rule 506(c), which permits general solicitation and advertising.  Accordingly, if an issuer chooses to continue its offering under Rule 506(c), any general solicitations that take place after the effective date, will not impact the exempt status of offers and sales that took place prior to the effective date in reliance on Rule 506(b).

What Funds Can Do Now

After the effective date of Rule 506(c), private funds that are not otherwise disqualified from using the Rule 506 exemptions may begin advertising and soliciting generally. An issuer that chooses to advertise or solicit generally must put policies and procedures in place to ensure that reasonable steps are taken to verify that each purchaser is accredited and that no sales are made to non-accredited investors.

Limitations, CFTC Considerations and Fund Advertising

Since February 2012, when the Commodity Futures Trading Commission (“CFTC”) rescinded Rule 4.13(a)(4), most private funds have relied upon the de minimus exemption of Rule 4.13(a)(3) in order to be exempt from CFTC registration. Other funds that trade futures or other instruments that are subject to CFTC oversight above the de minimus threshold, avail themselves of the “registration lite” exemption in Rule 4.7, pursuant to which all fund investors must be “qualified eligible persons.”  However, both of these exemptions require that the fund securities must be offered and sold without any marketing to the public in the United States.  Therefore, until the CFTC acts to amend these exemptive rules on which many private fund managers rely, none of these private funds will be able to use the general solicitation provisions of new Rule 506(c).  The Managed Funds Association submitted an outline of proposed rule amendments to the CFTC that would harmonize the CFTC rules with the SEC’s JOBS Act rules, but it is uncertain when the CFTC will act on this matter.

For a discussion of these provisions, see this discussion on Bloomberg. 

Proposed Amendments to Regulation D, Form D and Rule 156

In connection with the approval of Rule 506(c), the SEC proposed amendments to Regulation D, Form D and Rule 156 under the Securities Act. These proposed “investor protection” amendments are intended to enhance the SEC’s ability to evaluate market changes, the nature of advertising used by issuers, the steps taken by the issuer to verify that all investors were accredited and the intended use of the proceeds of the sale. It is likely that these provisions will soon become part of the new Form D and be applicable to private fund managers that advertise or solicit to the public. 

Finally, fund managers and their compliance officers should familiarize themselves with the requirements of Rule 156, as it appears likely that this anti-fraud rule will soon apply to the sales literature and advertising produced by hedge fund and private equity funds.

Questions regarding new Rule 506(c), the CFTC rules, Rule 156 and other implications regarding this recent SEC action should be directed to your Pillsbury attorney contact.

 

[1] Rule 501 of Regulation D defines an individual as an “accredited investor” if they have individual net worth, or joint net worth with the person’s spouse, in excess of $1 million at the time of the purchase, excluding the value of the primary residence of such person, or with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

[2] Rule 144A defines “qualified institutional buyers” as certain institutions that own and invest at least $100 million in securities of issuers that are unaffiliated with the institutions, banks and financial institutions must also have a net worth in excess of $25 million. A registered broker-dealer qualifies if it owns and invests on a discretionary basis over $10 million in securities of issuers that are unaffiliated with the broker-dealer. 

[3] An issuer will be disqualified from relying on Rule 506 exemptions if any “covered person” has had a “disqualifying event.” The rule defines “covered persons” as: (i) the issuer, (ii) the issuer’s predecessors and affiliated issuers, (iii) directors and certain officers, general partners and managing members of the issuer, (iv) 20 percent beneficial owners of the issuer, (v) promoters, (vi) investment managers and principals of pooled investment funds, and (vii) persons compensated for soliciting investors as well as the general partners, directors, officers, and managing members of any compensated solicitor.

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Written by: G. Derek Andreson

The U.S. Securities and Exchange Commission (“SEC”) is poised to modify its “no-admit, no-deny” policy to seek more admissions of wrongdoing from defendants as a condition of settlement in enforcement cases. The change comes on the heels of recent criticism of the policy from two federal judges and a U.S. Senator and would result in potentially far-reaching consequences for companies, their directors, officers, and employees.

The Proposed Policy Change
At the Wall Street Journal CFO Network’s Annual Meeting on Tuesday, June 18, SEC Chairman Mary Jo White announced her intention to require more admissions of wrongdoing from defendants in the settlement of enforcement actions. Prior to this announcement, the SEC only required such admissions in a narrow sub-set of cases in which parties admitted certain facts as part of a guilty plea or other criminal or regulatory agreement. Such an approach would represent a radical departure from the SEC’s longstanding no-admit, no-deny policy, under which defendants settle cases without admitting or denying wrongdoing. Chairman White emphasized that the no-admit, no-deny policy will still be used in the “majority” of cases and that “having ‘no-admit, no-deny’ settlement protocols in your arsenal as a civil enforcement agency [is] critically important to maintain.”1

 

Details are still forthcoming on the scope of the proposed changes to the SEC policy, which will require approval from a majority of the five SEC commissioners. However, Chairman White presumably would not have announced her intention to depart from tradition and require admissions of wrongdoing in certain settlements if such a change lacked majority support from the other Commissioners. In a memo written to the Enforcement Division staff, the Division’s Co-Directors, George Canellos and Andrew Ceresney, have suggested that the SEC would only require admissions of wrongdoing where it would be in the public interest. According to the memo, this may include “misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the Commission’s investigative processes.”2

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.

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Written by: Jay B. Gould

The SEC recently proposed rules to reform the way money market funds, which currently have over $2.9 trillion in assets, operate in order to make them less susceptible to large redemptions that could harm investors.  Specifically, the SEC proposed two alternatives that could be adopted alone or in combination.  The first alternative would require a floating net asset value for prime institutional money market funds.  The floating NAV is intended to address the heightened incentive for shareholders that have to redeem shares in times of high volatility and to improve the transparency of money market fund risks through more visible valuation and pricing methods.  The second alternative would allow the use of liquidity fees and redemption gates during times of high volatility. 

The proposed rules would also (i) require money market funds to provide additional disclosures pertaining to their levels of liquid assets, certain material events and sponsor support; (ii) eliminate the 60-day delay on public access to the information filed on Form N-MFP regarding portfolio holdings; (iii) amend Form PF to improve private liquidity fund reporting; (iv) strengthen the diversification requirements of a money market fund’s portfolio by requiring that money market funds and their affiliates aggregate their holdings for purposes of complying with the 5% concentration limit, removing the “25% basket” and requiring money market funds to aggregate all of the asset-backed securities vehicles sponsored by the same entity for purposes of the 10% guarantor diversification limit; and (v) enhance the stress testing requirements for money market funds adopted by the SEC in 2010.     

The SEC press release regarding the proposed rule can be found here and the full text of the proposed rule can be found here. 

 

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