RIA Compliance Blog

Colorado Refuses to Issue No-Action Letter to Financial Instructor

April 11, 2012 | Steve Parker

The Colorado Securities Division recently declined to issue a no-action letter in connection with a company that intends to educate and train people in stock market trading. Mark Espy, owner of MarkEspyMentorin.com, sent a letter to the Colorado Division of Securities on January 17, 2012 asking for either a no-action letter or the Staff’s clarification that he and his company do not need to be licensed as an investment adviser in Colorado. Espy plans to tutor people on how to use various tools in order to trade in the stock market. The course will be taught through webinars, and students will pay a fee to enroll.

According to Espy, the instruction provided in the course will include curriculum designed to teach various techniques and procedures to measure an equity’s viability for trading or investing, portfolio management, the importance of diversification, explanations of indicators, trading strategies, and building a trading plan, among other topics. Espy has also been approved to teach an adult education class on the stock market at a local community college.
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Rhode Island Issues Proposed Private Fund Exemption

April 10, 2012 | Steve Parker

Like numerous other states, Rhode Island has issued a proposed private fund exemption. We have previously discussed various other states that have created the same type of rule in Multiple States Create Private Fund Adviser Exemption, Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, and California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule.

Under the proposed rule, in order for a private fund adviser to be exempt from registration, the private fund adviser has to satisfy a number of conditions: (1) neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of SEC Regulation A, (2) pursuant to SEC Rule 204-4, the private fund adviser files with the state each report and amendment that an exempt reporting adviser is required to file with the Securities and Exchange Commission, and (3) the private fund adviser pays a $300 fee.
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President Signs JOBS Act Into Law

April 9, 2012 | Steve Parker

The President signed the Jumpstart Our Business Startups Act (JOBS Act) on April 5 during a Rose Garden signing ceremony. He called the bill a “game changer” that would remove barriers that prevent small businesses from growing and hiring. He stated that this bill was so important that he “called on Congress to remove a number of barriers that were preventing aspiring entrepreneurs from getting funding.” We have previously discussed the JOBS Act in JOBS Act Passes Both Chambers and Will be Sent to President and House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The purpose of the JOBS Act is to provide mechanisms for small businesses to raise capital more easily and efficiently, which proponents say would promote the creation of more jobs. The President stated “because of this bill, start-ups and small business will now have access to a big pool of potential investors – namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
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JOBS Act Passes Both Chambers and Will be Sent to President

April 2, 2012 | Steve Parker

The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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Multiple States Create Private Fund Adviser Exemption

March 28, 2012 | Steve Parker

Three more states have taken action either to adopt a private fund exemption or to create an interim exemption until final rules are proposed. As previously discussed in California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule and Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, California and Virginia have already started the process of creating a private fund adviser exemption. The states which have adopted exemption provisions most recently are Maine, Massachusetts and Wisconsin.

Maine issued an interim order exempting private fund advisers from registration, which became effective on February 16, 2012. It will remain effective until a private fund adviser rule is proposed. According to the exemption, in order to be exempt:

The investment adviser must advise one or more “qualified private funds” which are defined in SEC Rule 203(m)-1;
The adviser must maintain a place of business in Maine;
The adviser cannot hold himself/herself out to the public as an investment adviser;
Neither the adviser nor their advisory affiliates may be subject to “bad boy” disqualification provisions which are defined in Rule 262 of SEC Regulation A; and
Under Rule 204-4 of the Investment Advisers Act of 1940, the adviser must file with the Maine Office of Securities the SEC-filed reports and amendments required for exempt reporting advisers.

If a private fund adviser advises at least one 3(c)(1) fund, defined in the Investment Company Act of 1940, that is not a venture capital fund, the fund must satisfy the same additional requirements of the Virginia Proposed Rule that we have previously discussed. (A 3(c)(1) fund is a fund with less than 100 beneficial owners and which does not presently propose to make a public offering of its securities.)
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CFTC Initiates Multiple Enforcement Actions to Show Industry Stricter Rules

March 27, 2012 | Steve Parker

The Commodity Futures Trading Commission (CFTC) showed this week that it may be increasing scrutiny of firms in connection with customer funds. This may be a result of the MF Global collapse last fall, in which the firm had misplaced more than $1 billion in customer funds. Since then, the CFTC has adopted stricter rules designed to better ensure the segregation of client funds from firm money.

On March 13, the CFTC brought numerous enforcement actions against firms to show that it plans to monitor firms’ treatment of customer funds more closely. These actions come during the same week in which the Futures Industry Association conference in Boca Raton was held. A former chief trial attorney for the CFTC, Allison Lurton, stated it has used trade conferences in the past as a means to drive home a point, so it may be no coincidence that the CFTC waited until the week of the conference to bring disciplinary actions. She stated, “They want to make sure that they’re sending the message to the market that they’re still on the beat and serious about protecting customer funds.”
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IAA Becomes More Outspoken as SRO Bill Redraft Nears

March 26, 2012 | Steve Parker

The Investment Advisers Association (IAA) believes that it needs to become more outspoken and involved in order to deter Congress from passing legislation requiring a self-regulatory organization (SRO) be designated for registered investment advisers. The IAA is concerned because Congress is fully aware of the Financial Industry Regulatory Authority’s (FINRA) position and its desire to become the SRO for investment advisers. IAA vice president for government relations Neil Simon stated, “Despite our best efforts, there is still a woeful ignorance of the role investment advisers play. They’re aware of FINRA. We need to help educate policymakers so they make informed decisions.”

Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Securities and Exchange Commission (SEC) prepare a report considering whether there should be an SRO for investment advisers, as there is for broker-dealers. The SEC set forth three possible models to help the agency better oversee advisers: (1) allow the SEC to charge user fees for exams, (2) establish a new SRO, or (3) allow FINRA to be the SRO for both registered investment advisers and broker-dealers. The IAA is supporting the user fee approach, while FINRA is aggressively pursuing becoming the designated SRO. House Financial Services Committee Chairman Spencer Bachus (R-Ala) previously offered a bill which would provide for an SRO in response to the SEC’s recommendations, which were delivered to Congress in January 2011. Some industry observers believe that Rep. Bachus is likely to release a revised discussion draft of his bill and push it, because he will leave his post of Financial Services Chairman in January 2013 due to term limits.
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SEC Increases Examination of Private Equity Industry

March 23, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) has decided to increase regulation of the private equity industry, which has previously faced less regulatory scrutiny than other industries such as banking and hedge funds. At the end of 2012, the SEC sent several letters to private equity funds as “informal inquiries.” It is unclear which firms actually received the letters. The SEC maintains that its actions are not a result of suspecting any particular wrongdoing by specific firms, and it claims that its goal is to investigate possible violations of securities laws.

In the letter, the SEC requested information from private equity firms in relation to 12 broad areas including:

Financial statements;
Support for valuations of fund assets;
Documents setting forth a value of any assets owned by a fund over the past three years; and
Information on agreements between the firms and those that value fund assets.

The SEC is placing greater emphasis on the valuation of private equity firms since the firms are not publically traded and there is no listing price on the stock market. As a result, there is no easily ascertainable price for private companies. This allows for subjective judgments to play a large role in valuation. Private equity managers use varying, complex methodologies to value their holdings, which are often private companies bought using debt.
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SEC Experts Warn of Possible Enforcement Actions Against CCOs

March 21, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) is taking an increased interest in examining chief compliance officers (CCO) to determine whether enforcement action should be taken against them. At the Investment Adviser Association’s annual compliance conference, CCOs were given a number of stern warnings. Director of the SEC’s Division of Investment Management Robert Plaze spoke about changes and improvements being made by the SEC. He warned CCOs that a newly created Asset Management Unit, which is part of the Division of Enforcement, “is dedicated to suing you.” He also claimed that the new unit will be staffed with people who understand the asset management business. It will also collaborate with both the Investment Management Division and the agency’s Office of Compliance Inspections and Examinations. Mr. Plaze stated that the unit will make the SEC’s oversight of registered investment advisers more efficient, allowing it to be able to perform more effective examinations. These warnings should concern CCOs who have taken a supervisory role within their firm.

The SEC has the authority to impose sanctions on people who are associated with a broker-dealer or an investment adviser if those people have reasonably failed to supervise. Both broker-dealers and investment advisers employ legal and compliance personnel to provide advice to them and their firms regarding the application of laws and regulations. One major issue that arises is whether the CCO is considered a supervisor within the firm. If so, the CCO could be subject to sanctions by the SEC for failure to supervise.
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FINRA Significantly Increases Number of Sanctions in 2011

March 16, 2012 | Steve Parker

As a result of the financial crisis, the Financial Industry Regulatory Authority (FINRA) has significantly increased number of enforcement actions and the amount of sanctions imposed on broker-dealers in the previous year. According to Sutherland Asbill & Brennan LLP’s annual sanctions survey, the 13% increase in disciplinary actions resulted in increased fines of 51%.

FINRA filed 1,488 disciplinary actions in 2011, an increase from the 1,310 actions that it initiated in 2010. This made 2011 the third straight year in which the number of FINRA disciplinary actions has grown. The survey also found that the number of professionals barred by FINRA increased from 288 in 2010 to 329 in 2011.

Total fines jumped from $45 million in 2010 to $68 million in 2011, which is a 51% increase. The survey report stated, “While the $68 million reported in 2011 is still a far cry from the $184 million and $111 million that FINRA fined firms and representatives in 2005 and 2006, respectively, it may signal continued enforcement efforts for the near future.”
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