Category Archives: News and Commentary

SEC Chairman Discusses Potential New IA Custody Rules

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Hedge Fund Advisors May be Impacted

Yesterday SEC Chairman Mary Schapiro discussed many new SEC initiatives in a speech given to the Society of American Business Editors and Writers.  One of the new initiatives involves those advisors who have “custody” of client assets.  With respect to such advisors, Shapiro said:

I anticipate that this proposal will include a consideration of “surprise” examinations by a certified public accountant, and a requirement that investment advisers undergo third-party compliance audits.

The tone of the speech was that of a new gunslinger who has come into town to clean up – in addition to the new custody provisions, she discussed regulatory reform and giving SEC examiners more room to initiate investigations.  Many of the ideas expressed in the speech may be worrisome to investment advisors and investors because the initiatives are likely to add significantly to the operating costs of hedge fund managers who are registered as investment advisors.  Additionally, registered managers may face increase inquiries into their business by nosy SEC examiners which will not go over well within the industry.

Below I have reprinted what I thought were important or interesting parts of the speech; the full text can be found here.

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Speech by SEC Chairman:
Address to the Society of American Business Editors and Writers

by

Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
SABEW Annual Conference 2009
Denver, Colorado
April 27, 2009

…

Policies/Rules:

Enforcement has been the most visible program at the SEC in recent history. But the financial crisis teaches us that there are policy and regulatory gaps that the SEC must also address.

Again, if investors are to have confidence in the ratings assigned to securities, that corporate boards are working on behalf of stockholders, that investment advisers are not running Ponzi schemes, that money market funds won’t break the buck, then the SEC needs to be pushing forward a real agenda of reform.

Let me just highlight a few of these:

…

Custody:

In response to major investment scams — such as Madoff — and a rash of Ponzi schemes, we will be considering two proposals as part of a package of initiatives designed to better assure the safekeeping of investor assets.

In short order, the Commission will consider a proposal to strengthen the controls applicable to investment advisers with custody of client funds and securities. I anticipate that this proposal will include a consideration of “surprise” examinations by a certified public accountant, and a requirement that investment advisers undergo third-party compliance audits.

Also, as part of this package, I have asked the staff to draft a Commission requirement that a senior officer from broker-dealers and investment advisers with custody certify that controls are in place to protect investor assets.

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Reforming the Landscape:

As a result, there is significant debate about regulatory reform — not about whether it should happen, but about what form it will take. You might say the train has left the station, but no one quite knows for sure where it will come to stop.

Whatever form it takes, I support the view that there is a need for system-wide consideration of risks to the financial system and to create mechanisms to reduce and avert such systemic risks.

But, at the same time, I believe that any reform must not — and cannot — compromise the quality of our capital markets or the protection of investors.

If we cannot show investors that we are looking out for their interests as much as the interests of the financial institutions — then we will have little success in restoring confidence.

Investors need to see that we are going after those who engage in wrongdoing. They need to see that we are forcing companies to be truthful and transparent in their reporting. They need to see that we are limiting risk in areas where substantial risk is not what they’re buying. And, they need to see that we’re rooting out fraud.

In short, they need an agency that’s there for them — and primarily them. They need an independent agency that exists not just to protect Wall Street, but to protect Main Street.

By offering that to investors, we can help to restore confidence.

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In addition, I have streamlined our enforcement procedures by no longer requiring full Commission approval to launch an investigation. And, I’ve eliminated the need for full Commission approval before negotiating a settlement with a corporate defendant.

Before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.

Additionally, I brought on a consulting firm to assess and revamp the way we handle the nearly 1 million tips and complaints we get each year. Because we do not have unlimited resources we cannot pursue every lead — we get about 2,000 every day. But we can do a better job ensuring that each tip lands on the right desk and that the person reviewing it has the necessary skills.

Further, we are looking at improving our training programs and hiring new skill sets — from financial analysis to experts in complex trading strategies. It’s all an effort to keep pace with the fraudsters and the ever-changing financial concoctions of the day.

For me, the progress cannot be fast enough.

When I review the pipeline of cases I see how much we are confronting.

  • We have approximately 150 active hedge fund investigations, some of which include possible Ponzi schemes, misappropriations, and performance smoothing.
  • We have about two dozen active municipal securities investigations possibly involving offering frauds; arbitrage-driven fraud; public corruption; and price transparency.
  • And, we have more than 50 current investigations involving Credit Default Swaps, Collateralized Debt Obligations and other derivatives-related investments.

… and that’s just a small slice.

Please contact us if you have a question on this issue or if you would like to start a hedge fund.  If you would like more information, please see our articles on starting a hedge fund.  Other related hedge fund law articles include:

SEC to Examine Short Sales

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Last year we discussed the SEC’s ban on short sales and the implementation of the new Form-SH.  Next week the SEC will be considering modifications to the short sales rules.  The press release is below and we will continue to bring updated information on this issue.

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SEC to Hold Roundtable on May 5 to Examine Short Sale Price Test and Circuit Breaker Restrictions

FOR IMMEDIATE RELEASE
2009-88

Washington, D.C., April 24, 2009 — The Securities and Exchange Commission will hold a roundtable on May 5 beginning at 10 a.m. ET to further discuss whether short sale price test restrictions or short sale circuit breakers should be adopted.

The Commission voted unanimously on April 8 to propose two approaches to restrictions on short selling. If adopted, the price test approach would apply on a permanent market-wide basis, and the circuit breaker approach would apply to a particular security during severe market declines in the price of that security.

“This roundtable will help ensure that any policy decisions going forward in the area of short selling regulation are the product of a highly deliberate review process,” said SEC Chairman Mary L. Schapiro.
Roundtable participants will include leaders from self-regulatory organizations, trading venues, the financial services industry, investment firms, and the academic community. The final agenda and list of panelists will be announced at a later date.

The roundtable will be held in the auditorium at the SEC’s headquarters at 100 F Street, N.E., in Washington, D.C. The roundtable will be open to the public with seating on a first-come, first-served basis. The roundtable also will be webcast on the SEC Web site.

For additional information about the roundtable, contact the SEC’s Division of Trading and Markets at (202) 551-5720.

* * *

Preliminary Agenda for Short Sale Restrictions Roundtable

May 5, 2009
U.S. Securities and Exchange Commission
100 F St., N.E.
Washington, D.C. 20549

Format: Chairman and Commissioners will question several panelists
(with a staff member facilitator).
________________________________________
Welcome from the Chairman
10:00 a.m. – 10:10 a.m.
________________________________________
Panel 1
10:10 a.m. – 11:20 a.m.
Market Changes and Investor Confidence; Are short sale price tests or short sale circuit breakers necessary or effective?
________________________________________
Break
11:20 a.m. – 11:30 a.m.
________________________________________
Panel 2
11:30 a.m. – 12:45 p.m.
Bid versus Tick versus Circuit Breakers; Discussion of short sale price tests and views on short sale circuit breakers.
________________________________________
Lunch
12: 45 p.m. – 1:45 p.m.
________________________________________
Panel 3
1:45 p.m. – 3:00 p.m.
Lessons and Insights from Empirical Data; Short sale price tests and short sale circuit breakers by the numbers.
________________________________________
Closing Remarks
3:00 p.m. – 3:15 p.m.

Revising the Hedge Fund Compensation Structure

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Syndicated Post on Hedge Fund Fees

I have recently come across a very good blog called Ten Seconds Into the Future by Bryan Goh of First Avenue Partners, a hedge fund seeder.  Bryan’s posts are very insightful and I recommend all managers take a look at his writings.  The post below discusses some possible ways which hedge fund fees may be designed in the future – this is an especially good topic as I am often asked for suggestions on alternative fee structures.

Please feel free to comment below or contact me if you have any questions or would like more information on starting a hedge fund.

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Hedge Fund Fees. Suggestions for the Future

I have argued before that hedge fund fees were poorly designed, and in that article had suggested a possible design for performance fees. Here I provide more detail into what I think is a practical solution which addresses some but not all of the problems with current fee structures.

Management fees:

This is the simpler issue to deal with. First of all, one has to question what is the purpose of management fees. In traditional long only mutual funds, management fees are the compensation for the manager for managing the fund. With the rise of absolute return funds, and their performance fees, management fees were no longer intended to be the primary compensation for managing of assets. The industry generally represents that management fees are compensation for overheads and the costs of running the asset management business.

If this is in fact the case, then the current flat percentage of assets management fee does not do as represented. The costs and overheads of running an asset management business are not linear in the size of assets under management. There are economies of scale. By charging a flat percentage of assets under management, these economies of scale accrue to the investment manager and not to the investor.

If management fees are indeed intended to cover overheads and costs, then a sliding scale is closer to the intended purpose. One can envisage management fees being charged as follows: 2% of assets as long as assets under management in the fund are under a certain amount, 1.5% when assets rise to a certain level, and 1% whenever assets are over a certain amount. This is just an example of course and there are other ways management fees can be designed to reflect the represented purpose.

A further finessing of management fees which is useful is to waive management fees for side pocketed investments. This encourages the manager to think carefully about side pocketing any assets. Certainly investors would not appreciate management fees being charged on assets that have been ‘gated’ or suspended.

Performance Fees:

Hedge funds fees typically include a profit share by the manager. This can range from 15% to 30% but for the vast majority of funds is 20% of profits. Pre-2005 there were a significant minority of funds which had a hurdle rate (strictly positive). That is, performance fees were only applied once the fund’s returns were higher than some positive return. In the later years, this practice had mostly disappeared as demand outstripped supply and hedge fund managers were able to increase their prices. Almost all hedge funds still operate a ‘High Watermark’ by which is meant that the investor pays fees only if the fund’s NAV is above the previous high. Should the fund’s value fall, performance fees are not collected until the previous high NAV is exceeded again.

This all sounds fair except that there are timing issues. Fees are accrued and at some point crystallized. This usually happens annually. A situation can arise therefore where performance fees are paid out at the end of the year or quarter, the NAV falls thereafter. Even if there is a recovery but the high watermark is not re-attained, fees paid out are not reclaimed.

A simple solution is as follows:

  • Fees are accrued semi-annually.
  • 50% of the performance fee is paid out semi-annually.
  • 50% of the performance fee is retained in Escrow (not to be invested in the fund.)
  • Each retained performance fee vests and is paid out 30 months later (for example, the delay can be made equal to the lock up for example).
  • All retained fees in Escrow are subject to negative performance fees = 20% of loss from the NAV of last performance fee calculation period.
  • When redemptions are paid in full, fees held back are released to the manager.

This design has the following features:

  • The investor pays performance fees on the net performance for their holding period, unless the performance is negative over the entire holding period. Unfortunately the manager cannot be expected to pay a negative performance fee over the entire holding period if the performance turned out to be negative over the holding period.
  • The manager is incentivized to make money over the long term instead of making money only in a given year.
  • The manager has 50% of their performance fee at risk on a rolling basis. On a cumulative basis, the manager may have a whole year’s performance fee at risk.
  • It has the same kind of incentive as a private equity clawback fee structure.
  • The above fee structure can be adjusted for the length of the holdback. The longer the holdback, the more performance fee is at risk.
  • A manager who is confident in generating returns over the length of their lock up should not object to such a fee schedule.
  • It incentivizes a manager to force redeem investors if they do not expect to be able to make money.

The Future:

Customers are the ultimate regulator of an industry, so it is investors who ultimately regulate the hedge fund industry. As long as investors are small and numerous, there may not be the aggregation of bargaining power to negotiate with fund managers. The huge concentration of assets under control in the fund of funds industry afforded funds of funds the opportunity to negotiate, not harshly but fairly with hedge fund managers. Not just on fees but on liquidity terms, transparency and controls. This was an opportunity that was missed. The battering taken by funds of funds in 2008 has greatly impaired their powers. We can only hope that investors find some way of communicating their needs to fund managers. And we can only hope that fund managers are enlightened enough to see that investors are not deliberately antagonistic, although it may seem so today.

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Other related hedge fund law blog articles:

CPOs and CTAs Now Submit Disclosure Documents Electronically

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NFAs Electronic Filing System Went Live Yesterday

The NFAs new electronic filing system for CPO and CTA disclosure documents went live yesterday.  All NFA members are required to use the electronic system for filing their disclosure documents.   While I have not yet used the new system, it is expected to be a big improvement over the previous system which relied on emails to an anonymous system.  The NFA says that this new system should help both the NFA and the Member Firm by speeding up and streamlining the disclosure document approval process.

I will provide an update on whether this system does in fact make the process more efficient.  Also, I will provide updates on how this system works with the new forex registration requirements.  It is expected that forex CPOs and forex CTAs will also use this same electronic submission process for their forex disclosure documents.

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Notice I-09-09

March 26, 2009

Using NFA’s Electronic Disclosure Document Filing System becomes mandatory for CPOs and CTAs
Effective April 6, 2009, CPOs and CTAs filing a disclosure document with NFA for review will be required to submit the filing through NFA’s Electronic Disclosure Document Filing System. NFA will not accept any disclosure document filings through any other mode (i.e., email, fax, or regular mail) after this date. CPOs and CTAs are encouraged to begin using the new system prior to the effective date to make the transition as smooth as possible.

This new system will benefit NFA’s CPO and CTA Members by creating a more efficient document review process. Electronic filing will allow NFA to identify issues sooner in the review process. Firms will also be able to track the status of their submissions online, in real-time, and will have instantaneous access to NFA’s comment and acceptance letters. Additionally, all correspondence, including filed disclosure documents and NFA’s comment or acceptance letters, will be archived in the system, creating an electronic file cabinet that will be easily accessible to CPOs and CTAs at any time.

To use the new electronic system, a security manager entering the system for the first time must designate himself as a disclosure document user in NFA’s Online Registration System (“ORS”). The security manager can also designate additional users to file disclosure documents through the system. Filers can access the system at https://www.nfa.futures.org/appentry/Redirect.aspx?app=DDOC. Once in the system, filers will be required to enter certain information specific to the filing and to upload the filing in either a PDF or Word format.

NFA also has prepared a web seminar to assist users with the new system. This online seminar is entitled “How to File CPO and CTA Disclosure Documents Electronically with NFA” and is available at: http://video.webcasts.com/events/pmny001/viewer/index.jsp?eventid=29268.
If you have any questions about the new filing system, please contact Susan Koprowski at [email protected] or (312) 781-1288 or Mary McHenry at [email protected] or (312) 781-1420.

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Other articles related to the CPO and CTA disclosure document filing process:

MFA Releases Sound Practices Guide for Hedge Funds

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Guide Focuses on Hedge Fund Risk Management and Other Operational Issues

Unfortunately the new world of hedge fund investing and hedge fund due diligence has become more complicated and hedge fund management companies now need to increase their focus on operational and business issues.  While many managers are happy to attend to their trading strategies and risk management procedures, the managers who will be able to grow their AUM most successfully in the coming years are those managers who focus on many of the business and operational issues which investors are now wholly concerned with.  The updated 2009 Sound Practices guide by the Managed Funds Association (press release below) provides an outline of the major issues which managers should address with respect to their businesses.

Overview of Sound Practices Guide

The Sound Practices guide is similar to the President’s Working Group report Hedge Fund Best Practices, but also includes more information for managers.  I skimmed through the Sound Practices guide (it is 277 pages) and found that much of the information is extremely useful.  One of the overarching themes of the guide is that it does not ask managers to take the “one size fits all” approach, but asks managers to individually assess whether or not a certain practice is appropriate for their particular business.

I found the section dealing with the disclosures and hedge fund offering documents particular good.  As a reminder to hedge fund managers, offering documents should be updated at least annually, or more frequently if there are material changes in the fund’s investment program, structure or management company.  Additionally, any changes to offering documents should be communicated to all existing investors (either by sending out a new PPM or through another type of disclosure).

Other sections I was particularly interested in were: (i) the section dealing with investor letters and communications, (ii) side letters and parallel separately managed accounts (which are becoming more popular), (iii) valuation and policies, (iv) risk management, (v) due diligence, (vi) AML.  A due diligence guide for hedge fund investors was also included, but I felt like this was a pretty weak DD questionnaire – managers are likely to receive much more detailed requests for information.

Recommendation for Hedge Fund Managers

I recommend that hedge fund managers who are immediately seeking capital from institutions and high net worth investors read through this Sound Practices guide and take notes.  Managers should reach each practice and asses whether it applies to their fund operations and, if so, how such a practice should be implemented.  Managers may want to highlight certain items and ask their attorney what they should do.  These sound practices will help managers to create strong businesses which are able to grow over the long run.

[http://www.hedgefundlawblog.com]

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Managed Funds Association Takes Steps to Restore Investor Confidence with Enhanced Best Practices & Investor Due Diligence Recommendations

WASHINGTON, Mar 31, 2009 — Managed Funds Association (MFA) today took steps to restore investor confidence in the markets with the release of its newly enhanced Sound Practices for Hedge Fund Managers, including a due diligence questionnaire for investors to use as they consider whom to trust with their investments.

The 2009 edition of Sound Practices, MFA’s fifth version of its pioneering guidance that was first published in 2000, incorporates the recommendations provided in the final President’s Working Group’s (PWG) Best Practices for the Hedge Fund Industry Report of the Asset Managers’ Committee plus additional guidance that goes above and beyond the scope of those recommendations.

Richard H. Baker, MFA President and CEO, said, “The hedge fund industry has a strong role in helping to restore financial stability and investor confidence, and to hasten economic recovery. While policy makers consider sweeping regulatory reforms in the U.S. and abroad, and economic leaders gather for the G-20 in London, on April 2, the hedge fund industry is taking steps to restore investor trust through the promotion of sound business practices and tools for investors to use as they conduct ongoing due diligence of money managers.”

Sound Practices is the cornerstone of the Association’s initiative to collaborate with international organizations with the goal of establishing uniform global principles and guidance. MFA, the PWG Asset Managers’ Committee and the Alternative Investment Management Association (AIMA) have committed to providing the Financial Stability Forum (FSF) with a set of unified principles of best practices before April 30, 2009.

“The hedge fund industry recognizes its responsibilities as liquidity providers and risk dispersers in the markets, and continues to take the lead in its approach to disclosure and investor protection as well as active market disciplines such as risk management and valuation which contribute to market soundness and investor protection. This latest edition of MFA’s seminal Sound Practices concludes many months of diligent work by leading hedge fund managers, service providers and MFA staff to provide updates and revisions for voluntary adoption by hedge fund managers.

“MFA has a decade-long tradition of robust Sound Practices. Today, more than ever before, investors will benefit from our due diligence questionnaire as they undertake robust diligence when considering an investment in a hedge fund. Investors can also benefit from reviewing the recommendations in Sound Practices as they consider operational, governance and other matters as part of their diligence when making an investment.” added Baker.

The 2009 edition of Sound Practices provides comprehensive updates in every area of guidance including recommendations for disclosure and responsibilities to investors; valuation policies and procedures; risk management; trading and business operations; compliance, conflicts of interest, and business practices; anti-money laundering; and business continuity and disaster recovery practices.

Major Revisions

Sound Practices is a dynamic blueprint written by the industry, for the industry, to provide peer-to-peer guidance to:

  • Strengthen business practices of the hedge fund industry through a strong framework of internal policies and practices;
  • Encourage individualized assessment and application of recommendations on one size does not fit all; and
  • Enhance market discipline in the global financial marketplace.

The revised edition includes substantially updated and expanded guidance in seven areas:

  • Disclosure and Investor Protection: Establishes practices intended to assist a hedge fund in fulfilling its responsibilities to its investors;
  • Valuation: Establishes a framework, governance and policies and procedures for valuations of assets;
  • Risk Management: Establishes an overall approach to risk monitoring, measurement and management. Also describes types of risk and recommendations on management thereof;
  • Trading and Business Operations: Establishes policies and procedures for management of trading operations including relationships with counterparties, use of service providers, accounting, technology, best execution and soft dollar arrangements;
  • Compliance, Conflicts and Business Practices: Establishes guidance for the adoption of a culture of compliance including a code of ethics, compliance manual, record keeping, conflicts of interest, training/education of personnel and more;
  • Anti-Money Laundering: Updates MFA’s seminal AML guidance; and
  • Business Continuity/Disaster Recovery: Establishes general principles, contingency planning, crisis management and disaster recovery.

Baker noted that, “Ultimately, each hedge fund manager must determine whether and how to tailor these Sound Practices to its individual business. We believe that the strong business practices in Sound Practices are an important complement to a smart regulatory framework and that strong business practices and robust investor diligence are critical to addressing investor protection concerns.”

For a copy of Sound Practices please visit: www.managedfunds.org

About Managed Funds Association

MFA is the voice of the global alternative investment industry. Its members are professionals in hedge funds, funds of funds and managed futures funds, as well as industry service providers. Established in 1991, MFA is the primary source of information for policy makers and the media and the leading advocate for sound business practices and industry growth. MFA members include the vast majority of the largest hedge fund groups in the world who manage a substantial portion of the approximately $1.5 trillion invested in absolute return strategies. MFA is headquartered in Washington, D.C., with an office in New York. For more information, please visit: www.managedfunds.org

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Other related hedge fund law articles include

CFTC Fines BD/FCM For Books and Records Violations

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Firm Fails to Institute Procedure for Bunched Orders

(www.hedgefundlawblog.com)

The fines can be hefty for breaking CFTC regulations or NFA rules.  We have seen a large number of actions both with the SEC and the CFTC as well as with the NFA.  Below is another example of a group who has been fined for failing to supervise its employees.  I think maybe even more importantly the group below got into trouble for not having written policies regarding “bunching” client orders.

Yesterday I wrote a post about hedge fund bunched orders and I specifically stated how important it is for managers to understand how bunched orders are allocated to their separately managed account clients.  I discussed how it is important from a disclosure standpoint and that each manager should have the broker’s back office or compliance group review the disclosures regarding bunched orders so that the manager is sure that the disclosure is accurate.  Evidently the broker below did not have managers who followed this protocol.  I would imagine that it is likely that managers had a broad statement that gave them the ability to allocate trades to client accounts in their own discretion.  In the future broad statements like these are going to become less prevalent and specific statements regarding the actual allocation procedures will become the industry best practice, if not the industry standard.

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Release: 5639-09
For Release: March 26, 2009

CFTC Sanctions ADM Investor Services, Inc. $200,000 For Failing To Diligently Supervise Its Employees

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today simultaneously filed and settled charges against ADM Investor Services, Inc. (ADMIS) for violating rules governing post-execution allocations, maintenance of books and records, and supervision of its employees. The CFTC order sanctioned ADMIS with a $200,000 civil monetary penalty, among other things.

The CFTC entered an order on March 26, 2009, which finds that during 2002 to 2004, ADMIS, a Chicago-based registered futures commission merchant, failed to diligently supervise its employees concerning post-execution allocations of bunched orders.

According to the order, ADMIS had no written policy or procedures concerning post-execution allocations of bunched orders. To the extent ADMIS had unwritten procedures concerning such allocations, ADMIS on certain occasions failed to implement those procedures, the order finds. Additionally, ADMIS allowed an account manager to conduct post-execution allocations days after orders were originally executed and failed to maintain records that identify orders subject to the post-execution allocations. Finally, the order finds that ADMIS prepared, but failed to keep, forms related to such allocations.

Post-execution allocation is a procedure where an account manager is permitted to bunch customer orders together for execution, and to allocate them to individual accounts at the end of the day. Bunching of orders involves an account manager placing trades for two or more customers at the same time in the same order. By allowing all customers the opportunity to have their orders bunched, customers may receive better execution and better pricing of their orders. After the bunched orders are executed, an account manager must assign the trades to customers’ accounts, a process known as allocation. The allocation must be made in a manner that is fair and equitable.

The order also requires ADMIS to implement enhanced procedures to assure adherence to rules governing post execution allocation of trades.

The CFTC wishes to thank the National Futures Association for its cooperation in this matter.

The following Division of Enforcement staff was responsible for this case: W. Derek Shakabpa, Eliud Ramirez, Nathan Ploener, Manal Sultan, Lenel Hickson, Jr., Vincent A. McGonagle, and Stephen J. Obie.

Last Updated: March 26, 2009

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Please feel free to contact us if you have any questions on this article or if you are interested in starting a hedge fund.  Other related articles include:

NFA Prohibits CPO Firm From Doing Business

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For Immediate Release

For more information contact:
Larry Dyekman (312) 781-1372, [email protected]
Karen Wuertz (312) 781-1335, [email protected]

NFA takes an emergency enforcement action against GlobeFX Club, Inc.

March 24, Chicago – National Futures Association (NFA) announced today that it has taken an emergency enforcement action against GlobeFX Club, Inc. (GlobeFX Club), a Commodity Pool Operator located in Homestead, Florida. Effective immediately, the Member Responsibility Action (MRA) is deemed necessary to protect pool participants, customers and other NFA Members because GlobeFX Club has provided contradictory information in regards to whether it is conducting business, has customer accounts and is operating a pool. NFA has been unable to determine the nature of GlobeFX Club’s business, the identities of its customers, the treatment of customer funds and the identity of two individuals who purportedly loaned money to the firm. The firm has also failed to produce books and records requested by NFA and answer questions concerning its operations.

The MRA suspends GlobeFX Club from NFA membership until further notice. GlobeFX Club is prohibited from soliciting or accepting any customer or pool participant funds or placing trades for any pool that its operates or customer accounts that it holds. Additionally, the MRA prohibits GlobeFX Club from disbursing or transferring any funds from any accounts without prior NFA approval.

The MRA will remain in effect until GlobeFX Club has demonstrated that it is in complete compliance with all NFA requirements. GlobeFX Club may request a prompt hearing before NFA’s Hearing Committee.

The complete text of the MRA can be found on NFA’s Website (www.nfa.futures.org).

NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

hedgefundlawblog x Dress-Lace Store Lace Dress

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hedgefundlawblog x Dress-Lace Store Lace Dress with Zip Front
This hedgefundlawblog x dress-lace fully lined dress dress has a rocky mountain French style. It’s flippy and with a zip front. Since it’s made from elastane and polyester / viscose, it’s going to be a soft and sensitive fabric. The dress features a plunge neckline as well as a hem that goes down to the thigh. The pleated dress is summer white and comes in sizes 12 and 14 UK. The lace dress fits most women of average height, around five foot eight inches or less. It’s a great look for a summer day or night.
Some features of this lace dress include:
Printed design
Semi-sheer finish
Fully lined
Scoop neckline
Stretch waistband
Semi-sheer finish

Hedge Fund Law – State Law Issues

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Dealing with Ambiguous State Securities Laws

An issue which often arises during the planning phase of the hedge fund formation process is whether certain state securities or investment advisory laws or regulations apply to a certain fact situation.  Many times these issues arise in the context of investment advisor registration (especially with regard to “custody” and net worth requirements), but they can also apply to less common issues (such as spot forex registration and matters involving commodities and futures licensing).  The problem is not only that the laws and regulations may not apply to a specific situation (many state laws are based on a model code which was written over 50 years ago), but also that there are no judicial or administrative actions which can provide valuable insight into how the state or the enforcement division would view a similar situation.

Unfortunately it can be very hard to receive clarification on these laws and regulations  and sometimes reaching out to state regulators can be an exercise in futility.  In a recent call with the California Department of Corporations (which is in charge of, among other things, administering the state securities laws) I was practically scolded by the staff attorney for first reaching out to the state to determine if they had any informal thoughts on my question.  In situations where we cannot receive informal guidance from a state, the client may choose to request a no-action letter from the state with regard to their situation.

Requesting a No-Action Letter or Interpretive Opinion

NASAA, the North American Securities Administrators Association, has provided this description of no-action letters and interpretive opinions:

Many state securities regulators have the authority issue “no-action letters” in which staff confirms that a transaction carried out under a set of assumed facts will not result in a recommendation for enforcement action.  Some states also issue “interpretive opinions” in which staff provides guidance by indicating how a provision of law applies to a situation presented.

Generally states will allow groups to submit either request.  The request letter will include a restatement of the applicable facts and laws and an argument as to why the requested relief or opinion should be granted.  The attorney will draft this letter on behalf of the manager.  The manager will also need to pay a fee to the state, usually $100-$300 to receive an answer to the request letter.  There is no guarantee that the state will agree with manager and grant any relief.  It will usually take a minimum of 30 days to receive an answer from the state.

Unfortunately the process is both expensive and time consuming.

Fixing the Problem

There are many problems with the federalism system with regard to securities regulation.  One of the biggest issues is the lack of uniformity between the state laws and the disparity between states with regard to enforcement.  I posted an article yesterday about what NASAA is doing this area.  I commend NASAA for taking this step forward – it will be a big improvement over the current system and hopefully will lead to more uniform laws (and application of those laws) throughout the states.  However, this is not a panacea and we are unlikely to see truly fair and efficient enforcement of laws unless there is a wholesale scrapping of the current system and unfortunately even then we are still left with federalism which provides state securities commissions with powers that most do not understand how to deal with.

Ultimately this increases costs to the managers and ultimately investors.

NASAA Proposes Multi-State No-Action Request Process

2 Replies

Currently each state has their own securities laws and their own interpretation of those laws.  While many of the laws and regulations are based on the same set of model rules, no two states seem to take the same interpretation with regard to the rules.  Enforcement is completely different as well.  This presents many problems for those involved in the securities and investment management industries because of the disparate treatment under similar circumstances in different states.

NASAA is taking a step forward to try to unify the laws of the states through a multi-state no-action request process.  Basically questions on the application or interpretation of state securities laws would be decided on a multi-state level instead of at just a single state(each state would have the ability to issue a distinct opinion or opt out of the discussion, see below for more details).  This is good because it (1) allows all states to address an issue which may be applicable (currently or in the future) to a resident of their state and (2) it will promote discussion between the states as to how to handle certain situations.  Hopefully this create a more uniform set of laws between the states which will decrease lawyer fees in the future and will increase certainty in the application of current laws and regulation.

With regard to the specific proposal we will likely respond to the NASAA with the following comments:

Section 5, number 7 – this section should be deleted unless it goes directly to an issue with the request at hand.  Disclosing this information otherwise would serve no purpose with regard to the request.

Suggestion – NASAA should also create a database on their website to track all of requests as well as the rulings on the requests.

We will be covering this in greater detail over the next few weeks.  Please contact us if you have questions or ideas with regard to the proposal.

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Notice of Request for Public Comment on NASAA’s Proposed Adoption of a Statement of Policy Regarding Multi-State Review of Requests for Interpretive Opinions and No-Action Letters

The NASAA Coordinated Interpretations Project Group requests comment from the public on the adoption of a new Statement of Policy Regarding Multi-State Review of Requests for Interpretative Opinions and No-Action Letters.

The comment period begins February 20, 2009 and will remain open for 30 days.  Accordingly, all comments should be submitted on or before March 22, 2009.  Comments should be directed by email or in writing to:

Rick A. Fleming
General Counsel
Office of the Securities Commissioner
618 S. Kansas Avenue
Topeka, Kansas  66603
[email protected]

Rex Staples
General Counsel
NASAA
750 First Street, NE, Suite 1140
Washington, DC  20002-4251
[email protected]

Background and Purpose of the Proposed Statement of Policy

Many state securities regulators have the authority issue “no-action letters” in which staff confirms that a transaction carried out under a set of assumed facts will not result in a recommendation for enforcement action.  Some states also issue “interpretive opinions” in which staff provides guidance by indicating how a provision of law applies to a situation presented.  These types of no-action letters and interpretive opinions are authorized by subsection 413(e) of the Uniform Securities Act of 1956, as amended, and subsection 605(d) of the Uniform Securities Act (2002).

Subsection 420(b)(7) of the 1956 USA and subsection 608(c)(9) of the 2002 USA authorize the states to cooperate with each other in the development of no-action letters and interpretive opinions in order to encourage uniform interpretation of laws and maximize the effectiveness of regulation.  Toward those ends, NASAA proposes this Statement of Policy.

Summary of the Proposed Statement of Policy

The proposed Statement of Policy describes the application and review process for multi-state consideration of requests for interpretive opinions and no-action letters.  The proposed Statement of Policy contains the following major elements:

  • Section II contains definitions, including the terms “interpretive opinion” and “no-action letter.”
  • Section III places restrictions on the types of matters that qualify for multi-state review.  For example, it prohibits requests concerning purely hypothetical situations and transactions that have already occurred.
  • Sections IV and V contain rules governing the content of the request letter, citation to state laws, payment of fees, etc.
  • Section VI describes the review process.  Conference calls and a list-serve will be used to facilitate communication between states, and responses to requests for interpretive opinions and no-action letters should be generated within 60 days.
  • Section VII contains optional disclaimers for the states to consider using.

The full policy statement, reprinted below, can also be found here.

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STATEMENT OF POLICY REGARDING
MULTI-STATE REVIEW OF REQUESTS FOR
INTERPRETIVE OPINIONS AND NO-ACTION LETTERS

(Adopted ____)

I. OVERVIEW

1. This Statement of Policy of the North American Securities Administrators Association (NASAA) describes the application and review process for multi-state consideration of requests for Interpretive Opinions and No-Action Letters.

2. The policy is intended to promote efficiency in the review of applications and produce responses to requests within 60 days.

3. This policy is intended to promote consistency in the interpretation of blue sky laws, particularly when the laws are based upon uniform or model provisions. However, the issuance of Interpretive Opinions and No-Action Letters is done solely at the discretion of each state, and each state is ultimately responsible for interpreting and enforcing its own law.

II. DEFINITIONS

1. “Interpretive Opinion” means a letter that states a conclusion regarding the applicability of a relevant provision of law to a situation presented. An Interpretive Opinion represents a judgment based solely on the fact situation as described by the applicant and an analysis of existing law and judicial, legislative, and administrative history.

2. “No-Action Letter” means a letter by which a person is advised that a transaction carried out under a set of assumed facts will not result in a recommendation by staff that an enforcement action be taken. An Interpretive Opinion often includes an assurance of “no action;” however, a No-Action Letter does not necessarily include any interpretation of law.

3. “Participating Jurisdictions” means those states that have agreed to accept applications for multi-state review of requests for Interpretive Opinions or No-Action Letters in accordance with this Statement of Policy. Authority for a multi-state review is provided in section 608(c)(9) of the Uniform Securities Act of 2002 and section 420(b)(7) of the Uniform Securities Act of 1956, as amended by NASAA. All Participating Jurisdictions are listed on Form MS-ONA.

4. “Selected Jurisdictions” means the states from whom an applicant seeks an Interpretive Opinion or No-Action Letter, as indicated by the applicant on Form MS-ONA.

III. CRITERIA FOR ELIGIBILITY

1. An application for multi-state review of a request for an Interpretive Opinion or No-Action Letter shall not involve a hypothetical situation, a past transaction, or an issue that is currently subject to or in preparation for litigation.

2. An application shall not involve a matter that the applicant knows or should know is currently under investigation or subject to regulatory action.

3. An application shall not relate to an interpretation of antifraud provisions.

IV. APPLICATION PROCESS

1. To apply for multi-state review of a request for an Interpretive Opinion or No-Action Letter, the applicant shall file the following documents with each Selected Jurisdiction and the Program Administrator:

a.  A copy of “Form MS-ONA – Application for Multi-State Review of Request for Interpretive Opinion or No-Action Letter.” The form is available on the NASAA web site at [insert current web address] and contact information for each state is available at [insert current web address].

b.  A request letter that complies with the requirements set forth below; and

c.  Any supporting materials.

2. The applicant shall submit an application fee directly to each Selected Jurisdiction in the amount indicated on Form MS-ONA.

V. CONTENT OF REQUEST LETTER

1. A request for an Interpretive Opinion or No-Action Letter shall succinctly present the issue to be considered and provide a thorough recitation of all material facts. The request shall contain the applicant’s reasoning and legal analysis, including references to applicable law and previous Interpretive Opinions or No-Action Letters that support the interpretation or relief requested. Additionally, the request should include a discussion of previous Interpretive Opinions or No-Action Letters that militate against granting the interpretation sought or relief requested and set forth the applicant’s reasoning and legal analysis distinguishing them from the facts and issues presented in the request.

2. The request should be limited to one legal issue and should be narrowly tailored to resolve the specific issue. The request should not attempt to discuss every possible situation.

3. The request must identify the persons or entities that are the subject of the request or will rely upon the response and identify the states in which such persons reside or maintain their principal places of business. The request may state that the person or entity seeks confidential treatment to the extent permitted by the open records or public records laws of the Selected Jurisdictions (e.g., state laws modeled after section 607 of the Uniform Securities Act of 2002). However, the applicant should take note that the laws of some states do not permit confidential treatment, and this Statement of Policy does not assure that any state will maintain the confidentiality of the person or entity or any other information contained in the application.

4. If a request for an Interpretive Opinion or No-Action Letter relates to a definition, exemption, or other provision that is derived from the Uniform Securities Act of 1956, the Uniform Securities Act of 2002, a NASAA model rule, or a NASAA Statement of Policy (SOP), the request letter shall include in the heading a citation to the relevant provision(s) of each applicable uniform act, model rule, or SOP.

5. The request shall set forth in tabular form, as an appendix, a specific citation to the relevant laws of each Selected Jurisdiction.

6. The request shall include a representation that any proposed transaction has not yet been consummated, that the matter is not currently subject to or in preparation for litigation, and that the applicant is not aware of any regulatory investigation involving the matter.

7. The request shall disclose whether any of the persons who are the subject of the request or will rely upon the response, or any of the persons’ predecessors, affiliates, directors, officers, general partners, beneficial owners of 10 percent or more of any class of its equity securities, any promoter presently connected with the persons in any capacity, any underwriter to be involved in a transaction described in the request, or any partner, director or officer of the underwriter:

a.  Within the last five years, has filed a registration statement which is the subject of a currently effective registration stop order entered by any state securities administrator or the United States Securities and Exchange Commission;

b.  within the last five years, has been convicted of any criminal offense in connection with the offer, purchase or sale of any security, or involving fraud or deceit;

c.  is currently subject to any state or federal administrative enforcement order or judgment, entered within the last five years, finding fraud or deceit in connection with the purchase or sale of any security; or

d.  is currently subject to any order, judgment or decree of any court of competent jurisdiction, entered within the last five years, temporarily, preliminary or permanently restraining or enjoining such party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.

8. If the applicant has communicated with any state securities administrator concerning the transaction or subject matter that is the subject of the request, the applicant shall disclose the nature of the communication and any response received from the state. If a separate request for an Interpretive Opinion or No-Action Letter has already been filed with one or more states in connection with the same transaction or subject matter, the applicant shall (1) provide a copy of any requests that have been filed and disclose the status of each state’s response; (2) provide a copy of any response that has been issued by a state; and (3) explain the reason that it did not initially seek multi-state review.

VI. REVIEW PROCESS

1. Within 5 business days after receipt of an application, the Program Administrator will determine whether the application is eligible for multi-state review and in proper form. If the application is ineligible or deficient, the Program Administrator will notify the applicant and the Selected Jurisdictions. If the application is eligible for multi-state review, the Program Administrator will notify the applicant and Selected Jurisdictions of the deadline to review the application and issue responses in accordance with paragraph VI.3. The Program Administrator will also send a copy of the application to any other state that provides contact information in accordance with Paragraph VI.6.

2. Within 45 days after receipt of a proper application by the Program Administrator, the Program Administrator shall arrange for a conference call to discuss the application and shall provide notice of the call to all states who submit contact information in accordance with paragraph VI.6. The Program Administrator may appoint a facilitator for the conference call, and the Program Administrator or facilitator may schedule additional conference calls as needed.

3. Within 60 days after receipt of a proper application by the Program Administrator, each Selected Jurisdiction shall use its best efforts to issue its response to the applicant. The response may include an Interpretive Opinion, No-Action Letter, or letter declining to give any such assurance. Failure of a Selected Jurisdiction to issue a response does not indicate assent to the granting of the interpretation or relief requested. A copy of the response should be sent to the Program Administrator and added to an electronic library containing the Interpretive Opinions and No-Action Letters issued under this Statement of Policy.

4. The Program Administrator may seek additional information from the applicant on behalf of any Selected Jurisdiction, and the applicant shall file copies of all supplemental material with each Selected Jurisdiction and the Program Administrator. If supplemental material is requested, the review period may be extended up to 30 additional days after receipt of the supplemental material at the discretion of the Program Administrator. The Program Administrator will notify the applicant and Selected Jurisdictions of the extension and send copies of the supplemental material to states that are not Selected Jurisdictions.

5. The timelines contained herein may be postponed at the discretion of the Program Administrator in extenuating circumstances. The Program Administrator will notify the applicant and the Selected Jurisdictions of the new deadlines and the reasons for any postponement.

6. Each Participating Jurisdiction and any other state that wants to receive notices from the Program Administrator must provide and update the Program Administrator with the name, title, address, phone number, fax number, and e-mail address of one or more contact persons. The Program Administrator will maintain a list-serve or other electronic system to facilitate communication between such persons.

VII. DISCLAIMERS

1. Each Participating Jurisdiction is encouraged to use the following disclaimers in any letter issued under this policy:

a.  The letter applies only to the party requesting it, and persons having similar fact situations should submit a separate request.

b.  The letter is conditioned upon the specific facts set forth in the request and the accuracy of any representations that are required to be made under this Statement of Policy.

c.  The conclusions are based upon current law, should not be regarded as precedent, and are not binding on any court, agency, or tribunal.

d.  The letter does not preclude investors, other regulatory agencies, or other persons from asserting their rights under the law.