Articles Tagged with SEC

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Written by Michael Wu

By order released by the SEC on November 10, 2011, Western Pacific Capital Management LLC, a San Diego-based investment adviser, and its President, Kevin James O’Rourke, were charged with fraud for failing to disclose a conflict of interest to clients and materially misrepresenting the liquidity of The Lighthouse Fund LP, a hedge fund they formed and managed. 

Western Capital and O’Rourke urged clients to invest in a security without disclosing that Western Pacific would receive a 10 percent commission. They also failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor’s interest ahead of another’s, and made material misstatements and omissions to clients regarding the fund’s liquidity.  As a result of these conducts, the SEC alleged that Western Capital and O’Rourke willfully violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.

A full text of the SEC release and order are available here.

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Date & Time
11/10/2011
12:30 pm – 7:00 pm PT

12:30 pm – 5:30 pm PT
Workshop
5:30 pm – 6:30 pm PT
Panel and Q&A
6:30 pm PT
Cocktails

Location
Pillsbury’s SF office
50 Fremont Street
San Francisco, CA 94105

Join us for an interactive, instructional workshop to learn step-by-step how to create unique and individualized marketing material to attract and engage investors and raise capital.

Who Should Attend:

  • Emerging Funds Managers
  • Established Funds Managers
  • Hedge Fund Marketers
  • Pre-Launch Managers
  • Fund of Funds Managers

This one day hedge fund marketing event will cover:

  • How to uncover or rebrand your fund identity
  • Defining your marketing message and how to tell it
  • Understanding who your potential investors are
  • How to avoid compliance pitfalls
  • Discovering opportunities that raise capital
  • What investors look for in marketing collateral

and much more…

Presented by
Maital S. Rasmussen,Founder & CEO, Rasmussen Communications, Inc.

Speakers
Ildiko Duckor

Guest Speakers
Rikke Jorgensen, Copywriter, Rasmussen Communications, Inc.
Seavan Sternheim, COO, CMO, QM Capital, LLC

Investor Panel and Q&A Session
Kermit Claytor, Fund of Funds Manager, Skyline Partners
Paul Perez, CFA, Springcreek Advisors, LLC
Ildiko Duckor, Counsel, Pillsbury
T. Jon Williams, Ph.D., CFA, South Avenue Investment Partners

Early Bird$675 for one participant
$975 for two participants
Early Registration ends October 27th, 2011

Regular Price$750 for one participant
$1,050 for two participants

To register, please visit Rasmussen Communications.

Event Contact
Jessica Slater

Sponsors
100 Women in Hedge Funds
California Hedge Fund Association
Rasmussen Communications

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Written by Jay Gould

The Pillsbury Investment Funds Team has over the past month reviewed several new Due Diligence Questionnaire (“DDQ”) forms on behalf of fund manager clients from institutional investors and family offices that contain a new inquiry that is potentially problematic for certain fund managers. Generally, this new inquiry requests information regarding any dispute over fees that the manager has had over a specific time period with certain service providers for the fund and the general partner of the fund. In its typical form, the question asks:

During the past three years, have you [the fund manager] or a controlled affiliate, had any amounts in dispute with or refused payment to any third party marketer or sales agent, any public relations firm or individual conducting a similar function, or any law firm or legal representative?

The DDQ goes on to request additional information about each disputed payment and requests permission from the fund manager for the potential investor to contact the service provider named with respect to the disputed fees. The Pillsbury Investment Funds Team found this question interesting and potentially troublesome and contacted one of the institutional investors with respect to this inquiry. We were informed that this particular investor was concerned that fund managers that do not honor their obligations to service providers are often the same ones that take a broad view regarding the services can be “soft dollared,” manager expenses that are chargeable to the fund, and creative calculations of management and performance fees. We were informed that these particular service providers to fund managers are often not in a position to pursue fees in dispute due to the potential public relations disaster such an action would cause to the allegedly aggrieved party. Or put another way, if a third party marketer brought an action against a fund manager for fees due on assets raised on behalf of a fund, what fund manager would ever retain that marketer again? Institutional investors are also concerned about the continuity of service providers and any pattern related to why high or constant service provider turnover. It is worth noting that auditors are not generally included in this type of question because changing auditors and the reason for it is covered in a separate inquiry. It is our understanding that this addition to the DDQ is gaining popularity among institutional investors and family offices and that follow up on the information provided in response to the inquiry is being conducted.

This development raises several potential issues for fund managers that are asked to respond to this inquiry. First, all responses to DDQs and other “marketing” materials are subject to the fiduciary standard set forth in Investment Advisers Act Rule 206(4)-8 which was adopted in 2007 in response to the Goldstein decision. Rule 206(4)-8 applies to every investment adviser, whether or not registered, and imposes a strict liability fiduciary standard on information that is provided to investors and potential investors. Accordingly, to the extent a fund manager refuses to answer the DDQ or does not answer the question fully and truthfully, such manager faces a potential violation of Section 206 of the Investment Advisers Act, which is a very serious offense. Additionally, to the extent a potential investor seeks to obtain information regarding legal fees in dispute, fund managers should be aware that they are being asked to waive the attorney client privilege with respect to this aspect of the relationship with their attorneys. Fund managers should seek to condition disclosure of this information on confidentiality, however, it is likely that such information could still be obtained from the investor by way of a subpoena from the Securities and Exchange Commission, a state regulator, or even a third party litigant.

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Written by Jay Gould

On October 26, 2011, the SEC adopted a new rule requiring SEC-registered advisers to hedge funds and other private funds with at least $150 million in private fund assets under management to report information to the Financial Stability Oversight Council (“FSOC”) to enable it to monitor risk to the U.S. financial system.  The information which must be reported to the FSOC on Form PF will remain confidential, and not accessible to the general public.

These private fund advisers are divided into (1) large private fund advisers and (2) smaller private fund advisers.  Large private fund advisers are advisers with at least $1.5 billion in hedge fund, $1 billion in liquidity fund, and $2 billion in private equity fund assets under management.  All other advisers are regarded as smaller private fund advisers.  The SEC anticipates that most advisers will be smaller private fund advisers, but that the large private fund advisers represent a significant portion of private fund assets. 

Smaller private fund advisers must file Form PF once a year within 120 days of the end of the fiscal year, and report only basic information about their hedge funds, private equity funds and/or other private funds, such as information regarding size, leverage, investor types and concentration, liquidity, fund performance, fund strategy, counterparty credit risk and the use of trading and clearing mechanisms.

Large private fund advisers must provide more detailed information than smaller advisers.  The focus and frequency of the reporting depends on the type of private fund the adviser manages.

  • Large advisers to hedge funds must report on Form PF within 60 days of the end of each fiscal quarter, on an aggregated basis, information regarding exposures by asset class, geographical concentration and turnover.  If a hedge fund has a net asset value of at least $500 million, the adviser must report information regarding the fund’s exposures, leverage, risk profile, and liquidity.
  • Large advisers to liquidity funds must report on Form PF within 15 days of the end of each fiscal quarter, the types of assets in their liquidity funds, information relevant to the risks of the funds, and the extent to which the liquidity funds comply with Rule 2a-7 of the Investment Company Act of 1940, as amended.
  • Large advisers to private equity funds must file Form PF annually within 120 days of the end of the fiscal year and respond to questions regarding the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing and their funds’ investments in financial institutions.

Two-stage phase-in compliance with Form PF filing requirements:

  1. Advisers with at least $5 billion in hedge fund, liquidity fund, and private equity fund assets under management must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.
  2. Other private fund advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012.

Form PF Filing Fees:  $150 for initial, quarter or annual filing.

A full text of the SEC release is available here. 

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Written by Michael Ouimette

On October 11, 2011, the Federal Financial Regulators published for public comment a jointly proposed regulation implementing the so-called “Volcker Rule” requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule generally contains two prohibitions, both of which are subject to certain exemptions. First, it generally prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (“Banking Entities”) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for their own accounts. Second, it generally prohibits Banking Entities from owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund.

CONTINUE READING…

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Written by Michael Wu

On September 29, 2011, the SEC’s examination staff issued a Risk Alert warning of significant concerns regarding trading through sub-accounts, and offered suggestions to help securities industry firms address these risks.  In the alert, the staff identified certain risks associated with the master/sub-account trading model such as: i) money laundering, ii) insider trading, iii) market manipulation, iv) account intrusions, v) information security, vi) unregistered broker-dealer activity, and (vii) excessive leverage.  The alert is the first in a continuing series of Risk Alerts that the staff expects to issue.

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Written by Michael Wu

The SEC is recommending filing fees related to the new report filing on Form ADV for exempt reporting advisers and Form PF filing for private fund advisers.  The filing fee for exempt reporting advisers is expected to be $150 for each initial and annual report on Form ADV.  The filing fee for private fund advisers’ Form PF filing is expected to be $150 for each quarterly and annual filing.  Both Form ADV report and Form PF filings will be submitted through FINRA’s Investment Adviser Registration Depository system (IARD).

A full text of the SEC notice is available here.

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Written by Michael Wu

The SEC has adopted a new rule pursuant to Section 13(h) of the Securities Exchange Act of 1934 requiring large traders to register with the SEC and imposing reporting requirements on their broker-dealers.

In her speech on July 26, 2011, SEC Chairman Mary L. Shapiro said, “[t]his new rule…would significantly bolster our ability to oversee the U.S. securities markets by allowing the Commission to promptly and efficiently identify significant market participants on a cross-market basis, collect data on their trading activity, reconstruct market events, conduct investigations and, as appropriate, bring enforcement matters.”

Under the rule, large traders are required to register with the SEC using a new form, Form 13H.  Upon registration, each large trader is issued a unique large trader identification number (LTID).  Large traders are required to provide such LTID to their broker-dealers.  In addition, the rule imposes recordkeeping, reporting and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions.

A large trader is defined as a person whose transactions in exchange-listed securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

A full text of the final rule is available here.

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Written by Jay Gould

Pillsbury’s Investment Funds & Investment Management team has submitted a comment letter to the California Department of Corporations (the “DOC”) on behalf of the California Hedge Fund Association in connection with the DOC’s recently proposed amendments to the California custody rule.

In its letter to the Commissioner, Pillsbury requested that the DOC amend the California custody rule in a manner that balances investor protection and the need for fund managers to maintain confidentiality of certain portfolio positions.  Specifically, the letter requested  that the quarterly reports California-registered advisers to private funds are required to send to their investors be required to disclose only those positions that comprise more than 5% of the fund’s assets, and that the names of short positions not be disclosed at all, but be provided as an aggregate number.  “Implementing our suggestions would be consistent with the quarterly disclosure of schedule of investments based on the FASB’s U.S. financial reporting standards, and would also protect fund investors from short squeezes,” explained Jay Gould, head of the Pillsbury Investment Funds & Investment Management team.

The letter was provided in response to the  DOC Commissioner’s invitation for comment on the proposed changes to the California custody rule that will apply to California-registered investment advisers, including those investment managers that are currently either registered with the Securities and Exchange Commission or are not registered at all.  By February 15, 2012, investment advisers to private funds with less than $100 million under management will need to register with the DOC, if they have not already done so.

“The California Hedge Fund Association expects to provide comments to the DOC in connection with future rulemaking proposals and encourages California-based fund managers to become active in this process,” explains Chris Ainsworth, President of the Association.

A full text of the letter to the Commissioner is available here.

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Written by Jay Gould, Ildiko Duckor and Michael Wu

Effective on September 19, 2011, investors that pay performance fees to an adviser must either have at least $1 million managed by the adviser or a net worth of at least $2 million.

As mandated by the Dodd-Frank Act, the SEC today issued an order that raises two of the thresholds that determine whether an investment adviser can charge its clients performance fees.  As discussed in the article we posted here on May 11, under the current Rule 205-3 of the Investment Advisers Act of 1940, an investment adviser may charge its investors a performance fee if (i) the investor has at least $750,000 under management with the investment adviser (“asset-under-management test”), or (ii) the investment adviser reasonably believes that the investor has a net worth of more than $1.5 million (“net worth test”).  Today’s SEC order adjusted the amounts for the asset-under-management test to $1 million and the net worth test to $2 million.  The SEC order is effective on September 19, 2011.

Accordingly, it is important for investment fund managers to amend their offering materials to comply with the new requirements of Rule 205-3 under the Advisers Act.