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The annual affirmation process started on December 3, 2013. Advisers who relied on an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from CTA registration under 4.14(a)(8) and filed a notice with the NFA must affirm the exemption or exclusion annually within 60 days after the end of the calendar year. Failure to affirm the exemption or exclusion will result in the exemption or exclusion being withdrawn at the end of the affirmation period. Accordingly, those who filed a notice of exemption or exclusion in 2013 have until March 3, 2014 to affirm the exemption or exclusion or face losing their exemption or exclusion. Those who filed a notice of exemption or exclusion during the affirmation period of December 3, 2013 to March 3, 2014 will not need to affirm until the 2014 calendar year end. To obtain information about the annual affirmation process and filing, please visit the NFA website.

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Written by guest contributor, Bruce Frumerman, Frumerman & Nemeth Inc.

This article first appeared in FINAlternatives on February 3, 2014 and is re-printed with permission below. 

‘Soft’ manager qualities are often what separates your fund from competitors is a summary finding in the recently reported survey of institutional consultants and gatekeepers by Market Strategies International’s Cogent Reports.  Investment consulting firms are now saying they are paying greater attention to ‘soft’, subjective factors in assessing money managers.  Firms that place a greater emphasis on increasing and demonstrating transparency in their communications and processes are favored, Cogent noted.

In 2013, assuming you were delivering acceptable risk/return characteristics and met AUM size and track record length requirements, did your firm find itself favored over competitors?

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Written by:  Jessica M. Brown

The Securities and Exchange Commission charged a registered investment adviser and its principal for making false claims over social media regarding their inflated performance claims with respect to a mutual fund managed by the adviser. Through a Twitter account and a widely circulated newsletter, Mark A. Grimaldi and Navigator Money Management (NMM), made various false statements in order to solicit more business. Grimaldi will pay a $100,000 penalty and, along with NMM, agree to be censured, obtain an independent compliance consultant and cease and desist from committing future violations.

A full text of the SEC press release is available HERE and the SEC order is available HERE.

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Written by:  Jessica M. Brown

The Securities and Exchange Commission (“SEC”) and the United States Department of Labor (“DOL”) announced sanctions today against Western Asset Management Company (“Western Asset”), a subsidiary of Legg Mason.  Western Asset is an SEC-registered investment adviser and reported $442.7 billion in assets under management as of September 30, 2013.

The SEC found Western Asset breached its fiduciary duty to certain ERISA clients when it failed to efficiently correct a coding error that caused losses to over 100 ERISA clients, and did not disclose the error for over two years.  The coding error caused an off-limit private investment to be allocated to the ERISA accounts, and such investment declined significantly in value before the error was discovered.  Western Asset concealed the error rather than reimburse the clients as it was obligated to do under its error correction policy.  In addition to other sanctions for the disclosure violations, Western Asset must distribute approximately $10 million to the harmed ERISA clients.  Further, Western Asset must pay a $1 million civil penalty in the SEC settlement and an additional $1 million penalty in the DOL settlement.

Western Asset was also found to have engaged in prohibited cross trades during the financial crisis.  Instead of crossing the securities at the average price between the bid and the ask price, Western Asset crossed the securities at the bid price.  As a result, the full benefit of the market savings was allocated to the buying clients and the selling clients lost out on approximately $6.2 million in savings.  Pursuant to a separate order settling the cross trade charges, Western Asset must distribute approximately $7.44 million to the clients who were harmed by the illegal cross trading, pay a $1 million penalty in the SEC settlement, and a $607,717 penalty in the DOL settlement.

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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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Written by: Jessica M. Brown

As a result of recent amendments made by the U.S. Department of Treasury to the Treasury International Capital Form B (“Form B”), private funds and investment advisers may be required to file Form B.  Form B requires a fund manager or investment adviser to report certain information concerning “claims” and “liabilities” of the reporting institution to or from foreign residents.

Filing obligations may arise for private funds that provide credit to foreign entities, invest directly in foreign debt instruments, directly hold foreign short-term securities, or have a foreign credit facility.  Claims or liabilities that are serviced by a U.S. entity or held by a U.S. custodian or subcustodian, do not need to be reported.  Claims or liabilities with a foreign subsidiary or affiliate of a U.S. entity (such as a swap counterpart) are reportable on Form B.  Investment advisers are required to report on behalf of the funds they manage and U.S. funds are not required to report on their own behalf.

There are a number of different Form B reports and generally advisers or managers with total claims or liabilities under $50 million in all geographical regions, or $25 million in an individual country, are exempt from filing.  Detailed filing requirements and descriptions of each Form B can be found here.

The Federal Reserve Bank of New York (the “NY Fed”) requires investment advisers who have reportable claims or liabilities to report this information on certain monthly and quarterly reports. Reportable claims and liabilities as of December 31, 2013, must be reported by January 15, 2014 on the first monthly report, by January 20, 2014 for the first quarterly report. 

The NY Fed will grant extensions and determine appropriate filing deadlines on an individual basis and encourages new filers to contact them.

Please contact us immediately if you have any questions.

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Written by: Jessica M. Brown

The Securities and Exchange Commission (the “SEC”) approved two new Financial Industry Regulatory Authority (“FINRA”) rules as part of FINRA’s ongoing rulebook consolidation process. The two new rules approved by the SEC on December 23, 2013 consolidate a number of existing NASD and NYSE rules and interpretations regarding supervision into the new FINRA Rules 3110 and 3120. The new rules will require broker-dealer firms to bring their current supervisory system and written policies and procedures into compliance with a handful of new requirements. Firms should be aware of the impact the new rules have on: (i) which personnel may act in a supervisory role; (ii) who may conduct office inspections; (iii) how certain internal communication must be reviewed; and (iv) additional requirements in regards to monitoring and reporting insider trading.

Supervisory Personnel

FINRA Rule 3110 requires a broker-dealer to have a supervisory system that designates at least one principal on-site to supervise the activities in each of the broker-dealer’s offices of supervisory jurisdiction (“OSJs”). The designated on-site principal for each OSJ must have a “regular and routine” physical presence and, absent certain circumstances, should not be responsible for the supervision of more than one OSJ.

Inspections of Offices

FINRA Rule 3110 requires broker-dealers to, at minimum, inspect (i) supervisory branch offices and OSJs annually, (ii) non-supervisory branch offices every three years, and (iii) non-branch locations (including “home offices”) on a “regular periodic schedule” which period should not be longer than three years.

Conflicts of Interest with Inspections

The new FINRA Rule 3110(c)(3) requires broker-dealers to establish policies and procedures that are reasonably designed to prevent conflicts of interest from compromising office inspections. Broker-dealers may not permit, except under certain special circumstances, an associated person to perform the inspection of a location where that person is assigned to or is directly/indirectly supervised by, or reports to, a person assigned to that location.

Investment Banking/Securities Transactions

New Rule 3110(b)(2) requires a principal to perform a written review of transactions related to the broker-dealer’s securities or investment banking business. The review does not need to be detailed for each transaction if the broker-dealer’s review system meets certain criteria.

Written and Electronic Communication Review

The new FINRA Rule 3110(b)(4) requires supervisory procedures be in place to review written and electronic communications which relate to the broker-dealer’s securities or investment banking. Further, broker-dealers must put procedures in place to review internal communications which may contain subject matter needing to be reviewed for compliance with securities laws and FINRA rules. While the supervisor is ultimately responsible, Rule 3110(b)(4) permits the delegation of certain communication review duties to unregistered personnel.

Insider Trading

In order to identify potential insider trading or other types of manipulative or deceptive devices, new FINRA Rule 3110(d) requires broker-dealers to have procedures in place to supervise the broker-dealer’s transactions and well as those of its associated persons or family members of the associated persons. In the event of a questionable trade, the broker-dealer must promptly perform an internal investigation. If the broker-dealer is engaged in investment banking services, it must supply FINRA with a quarterly report concerning insider trading investigations in the prior quarter, as well as a report within five days of the completion of an internal investigation where violations of insider trading policies were found.

Annual Report

New FINRA Rule 3120 requires broker-dealers to test and verify supervisory procedures and provide senior management with an annual report. Further, the annual report to senior management of a broker-dealer with more that $200 million in gross annual revenue must detail the reports made to FINRA concerning customer complaints and internal investigations, as well as information on the previous year’s compliance procedures.

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Today, the Securities and Exchange Commission published its 2014 priorities for its National Examination Program (“NEP”).  These priorities cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents.  Similar to the 2013 priorities, the 2014 priorities were published to focus on areas that are perceived by the SEC staff to have heightened risk.

The examination priorities address market-wide issues and those specific to each of the NEP’s four program areas — (i) investment advisers and investment companies(“IA-IC”), (ii) broker-dealers (“B-D”), (iii) exchanges and self-regulatory organizations (“SROs”, and collectively, “market oversight”), and (iv) clearing and transfer agents (“CA” and “TA”).  For investment advisers and investment companies, the SEC has specifically outlined its priorities as follows: 

  • Core Risks
    • Safety of Assets and Custody
    • Conflicts of Interest Inherent in Certain Investment Adviser Business Models
    • Marketing Performance 
  • New and Emerging Issues and Initiatives
    • Never-Before Examined Advisers
    • Wrap Fee Programs
    • Quantitative Trading Models
    • Presence Exams
    • Payments for Distribution in Guise
    • Fixed Income Investment Companies 
  • Policy Topics
    • Money Market Funds
    • “Alternative” Investment Companies
    • Securities Lending Arrangements

The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations, and retirement investments and rollovers. 

The full SEC press release can be found HERE and a full text of the 2014 Examination Priorities can be found HERE. 

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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 guest post from Blake, Cassels & Graydon LLP, co-authored by Ross McKee, Partner, Blake, Cassels & Graydon LLP, is reprinted here with permission. 

INTRODUCTION

The Canadian Securities Administrators have proposed a new uniform Canadian registration exemption for investment sub-advisers, as part of a package of proposed amendments to Canadian registration rules. The proposed exemption will add a chaperone requirement that does not exist under the current sub-adviser exemptions in Ontario and Quebec. In addition, no adviser registration exemptions (such as sub-adviser or international adviser) could be relied upon by anyone registered as an adviser in any jurisdiction of Canada.

When registration reforms were introduced in 2009, one of the missing elements was a uniform national sub-adviser registration exemption for foreign advisers to a registered Canadian portfolio manager. This can arise when a Canadian portfolio manager seeks specialized investment expertise from a foreign adviser.

Ontario has long had an automatic exemption for sub-advisers under section 7.3 of OSC Rule 35-502 Non-Resident Advisers. Quebec has the similar exemption under Decision No. 2009 PDG-0191. In 2009, other provinces stated they were prepared to grant similar sub-adviser exemptions but only upon application. 

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