Category Archives: Regulatory Actions

Colorado Private Fund Adviser Exemption

As of July 15, 2017, the Colorado Division of Securities (“CDS”) adopted Rule 51-4.11(IA) of the Code of Colorado Regulations which exempts certain investment advisers whose sole clients are qualifying private funds from having to register with the state (the “Colorado Private Fund Adviser Exemption”). Investment advisers that meet the requirements of the Colorado Private Fund Adviser Exemption can file as an exempt reporting adviser (“ERA”) with the CDS. Previously, such investment advisers located in Colorado were required to register with the state. The Colorado Private Fund Adviser Exemption generally mirrors the SEC’s private fund adviser exemption and similar exemptions of other states; however, there are some important differences as discussed below.

Colorado Private Fund Adviser Requirements Generally.

In order to take advantage of the Colorado Private Fund Adviser Exemption, an investment adviser must:

provide investment advice solely to one or more “qualifying private funds” as defined by the SEC (generally, any private fund not registered under the Investment Company Act of 1940, as amended, (e.g., a 3(c)(1) or 3(c)(7) fund));
not be subject to any “bad actor” disqualification events under Regulation D (this does not apply specifically to SEC ERAs);
file a report (generally, Part 1A of the Form ADV) and any amendments thereto required of an SEC ERA; and
pay the fees prescribed by the Colorado securities commissioner.

Additional Requirements for Certain 3(c)(1) Fund Advisers

Investment advisers to 3(c)(1) funds that are not “venture capital funds” (as defined by the SEC) (such 3(c)(1) fund, a “Non-VC 3(c)(1) Fund”) must also satisfy the following conditions with respect to each Non-VC 3(c)(1) Fund:

such Non-VC 3(c)(1) Fund’s securities may only be beneficially owned by persons who, after deducting the value of the primary residence from such person’s net worth, meet the qualified client definition (which deviates from the accredited investor threshold adopted by some states);
disclose the services, duties and other material information affecting the rights and responsibilities of each beneficial owner, if any; and
obtain and deliver annual audited financial statements to the Non-VC 3(c)(1) Fund’s investors.

Relief from “Gatekeeper” Requirement

Generally, Colorado investment advisers to pooled investment funds must engage an independent representative (a CPA or attorney) as a “gatekeeper” to review all fees, expenses and capital withdrawals from the pooled investment fund. However, an investment adviser availing of the Colorado Private Fund Adviser Exemption is not subject to this requirement and, thus, is not burdened with the obligation or expense to engage such third-party gatekeeper.

Transitioning to Registration and SEC Eligibility

Investment advisers no longer eligible for the Colorado Private Fund Adviser Exemption must register with the state within 90 days of such ineligibility. Moreover, once an adviser’s assets under management equals or exceeds $110 million as of an annual updating amendment to Form ADV, such adviser must file as an SEC ERA or register with the SEC, as applicable.

Conclusion

The Colorado Private Fund Adviser Exemption is a welcomed and useful exemption for Colorado private fund advisers. If you would like assistance in filing for the exemption or have any questions, please contact Scott Kitchens (415-762-2847) or Tony Wise (415-762-2863) at Cole-Frieman & Mallon LLP’s Denver office.

****

Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. Please contact us if you would like more information on this topic.

Regulation A+ Deadline Passed by Congress

Leave a reply

Part of JOBS Act Regulations to be Finalized by October 31, 2013

On Wednesday May 15, the House of Representatives passed H.R. 701 which requires the SEC to finalize regulations with respect to “Regulation A+” of the JOBS Act. Regulation A+ would allow companies to more effectively raise money from the public, increasing the current offering limit of $5 million over 12 months to a limit of $50 million over 12 months.

House Statement on Regulation A+

The House Financial Services Committee released a statement which includes the following:

Specifically, H.R. 701 requires the SEC to implement Title IV of the JOBS Act by October 31, 2013. Title IV requires the SEC to adopt or amend regulations to encourage capital formation without requiring an SEC registration statement. These exemptions, referred to as “Regulation A+,” create a new category of public offerings exempt from SEC registration of up to $50 million raised over a 12-month period through issuance of equity securities, debt securities or debt securities convertible or exchangeable to equity interests, including any guarantees of such securities. Under current law, Regulation A provides a similar exemption for public offerings up to $5 million over 12 months.

To protect investors, the JOBS Act requires companies that make offerings under Regulation A+ to file audited financial statements with the SEC on an annual basis and gives the SEC the ability to require these issuers to make periodic disclosures about their operations, financial condition, use of proceeds and other information it deems appropriate.

What this means for the hedge fund industry

Right now this means little to the hedge fund industry except perhaps that Congress is getting tired of the SEC dragging their feet with respect to implementing the JOBS Act. As we have discussed previously, the major provision for fund managers is going to be the lifting of the ban on general solicitation. Perhaps this action indicates that Congress is going to continue to push the SEC to finalize all of the provisions of the JOBS Act.

Additionally, depending on the final Regulation A+ regulations, fund managers may be more inclined to start using that exemption instead of Rule 506 Regulation D, which is the de facto safe harbor used by fund managers. Our guess is that we will not see any real action on this issue until after mid-year and so we cannot know how this particular regulation may or may not affect managers for a few months.

****

Cole-Frieman & Mallon LLP provides legal advice to the hedge fund industry. Bart Mallon can be reached directly at 415-868-5345.

CPO Reporting Requirements | Commodity Pool Operator Compliance

3 Replies

CFTC Regulation 4.22 Overview

CFTC registered commodity pool operators have a number of regulatory and compliance issues to be aware of. In addition to a having a compliance program which addresses the business and regulatory issues applicable to the manager, one of the more important compliance requirements is found in CFTC Regulation 4.22 which provides the reporting framework with respect to (i) periodic reports to investors and (ii) annual reports to investors and the NFA. While many hedge fund administration firms provide a monthly or quarterly report/statement, generally those reports/statements do not provide the detailed information that is required for commodity pools. This article provides an overview of the information required to be included in the periodic and annual statements and will also discuss other aspects of the regulation.

Overview of the Statements

Generally CPOs are required to distribute, within 30 days of end of the required period (see below), an account statement to each investor the fund. The account statement must included an itemized “statement of operations” and “statement of changes in net assets” which is presented and computed in accordance with generally accepted accounting principles (“GAAP”).

The statement of operations must separately itemize the following:

Realized net gain/loss on commodity interest positions
Unrealized net gain/loss on commodity interest positions
Total net gain/loss on other transactions (including interest and dividends earned), unless the gain/loss from trading are part of a related trading strategy (see 4.22(e)(3))
Total management fees during period
Total advisory fees during period (including performance fees/allocations)
Total brokerage commissions during period
Total of other fees for investment transactions
Total of other expenses incurred or accrued by the fund during period

Note: most of the above items must be itemized according to 4.22(e)(1) and special allocations should be noted according to 4.22(e)(2).

The statement of changes in net assets must separately itemize the following:

Fund NAV at beginning of period
Fund NAV at end of period
Total contributions to fund during period
Total redemptions (voluntary or involuntary) during period
Total fund income/loss during period
Total value of investor’s interest in the fund at the end of the period

Monthly or Quarterly Commodity Pool Reporting

For funds which have more than $500,000 of assets, the account statements must be sent to investors on a monthly basis. The account statement is due to the investor within 30 days of the end of the month. For funds which have less than $500,000 of assets, the account statements must be sent to investors on (at least) a quarterly basis. The account statement is due to the investor within 30 days of the end of the quarter. In both cases, a final report for the year does not need to be sent to fund investors if the CPO’s annual report (described below) is sent to pool participants within 45 calendar days after the end of the fiscal year.

Annual Reporting Requirement

The CPO will need to provide, within 90 days after the end of the fund’s fiscal year (or within 90 days of the cessation of trading if the fund closes), an annual report to (i) each investor in the fund and (ii) the NFA. The annual report must be presented and computed in accordance with GAAP consistently applied and must be audited by an independent public accountant.*

Annual report must include:

Fund NAV for the preceding two fiscal years
Total value of investor’s interest in the fund at the end of the preceding two fiscal years
Statement of Financial Condition for the fund’s fiscal year and preceding fiscal year
“statement of operations” and “statement of changes in net assets”
Footnotes if required to make statements not misleading (including certain information on underlying funds if the fund invests in other commodity pools)
Certain information if there is more than onve ownership class or series.

In the event that the CPO will not be able to file the annual report with the NFA within the 90 day period, the CPO can file an extension under certain circumstances. It is very important that the CPO provides the annual report on time or files for the exemption. If a CPO cannot file the report within the time frame required and does not file for the exemption, the NFA will take action against the CPO see CFTC Fines CPOs For Late Annual Reports.

*Note: if the fund is organized offshore then the CPO may be able to prepare and calculate the annual report in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board, please generally see 4.22(d)(2).

Statements Required to be Signed by Principals

Both the account statement and the annual report must contain a signed affirmation (usually provided by a principal or associated person of the CPO) that the information contained in the account statement is accurate and complete.

Such information shall include:

Name of individual signing
Capacity of individual signing
Name of the CPO
Name of the fund

Other Items

Regulation 4.22 is intricate and there are many specifics for certain fund managers. Specifically, if a commodity fund invests in other commodity funds there are certain rules which I have not covered in-depth in this overview.

With regard to the fiscal year, most commodity pools will elect to have their fiscal year be the calendar year. A fund can elect to have the fiscal year end on a different date under certain circumstances, see generally 4.22(g).

With regard to account statements and annual reports, these can be provided to fund investors electronically (either through email or through a password-protected website). In the event a fund manager wants to provide statements in this way, the manager will need to make sure the commodity pool’s offering documents specifically discusses this possibility. Additionally, the manager should make sure the fund’s subscription documents include a specific place for the investor to consent to the electronic delivery of the account statement or annual report.

Conclusion

Regulation 4.22 is detailed and, for some groups, complicated. The NFA has shown a willingness to send a message to firms which do not follow NFA rules or CFTC regulations. If you are a CPO and have questions with regard to your account statements or annual reports, please feel free to contact us.

****

Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog as well as the forex registration website. He can be reached directly at 415-868-5345.

Hedge Fund Manager Registration to Cost Taxpayers $140 Million (at least)

Leave a reply

CBO Calculates Cost of House Hedge Fund Bill

This past week the Congressional Budge Office (“CBO”) released a cost estimate of H.R. 3818, the Private Fund Investment Advisers Registration Act of 2009. In a number of private conversations I have had about hedge fund registration over the last 9-12 months one of the issues that was continually raised was appropriate funding for the SEC. As we have seen recently (most notably from the Inspector General’s Madoff report), the SEC’s budget is not large enough to adequately fulfill their investor protection mandate. Adding hedge fund registration would obviously further burden the cash-strapped agency (for more see Schumer Proposal to Double SEC Budget). According to the CBO, and based on the SEC’s estimates that it will need to add 150 employees, the estimated outlays over four years will be equal to $140 million.

However, taxpayers should understand that this assumes that registration will only be required for those managers with at least $150 million in assets under management. At the $150 million AUM level, the CBO expects that 1,300 hedge fund managers would be required to register. The current draft of the Senate hedge fund registration bill calls for managers with $100 million in AUM to register – lowering the AUM exemption threshold will increase the amount of managers required to register. Additionally, there are outstanding political issues. First, it is unclear whether the final bill will require private equity fund managers and venture capital fund managers to register – we do not necessarily understand the arguably arbitrary carve-out for these industries. Second, it is clear that a majority of the state securities commissions are unable and unwilling to be responsible for overseeing managers with up to $100 million in assets. Hedge fund managers who would subject to state oversight would rightly want to be subject to SEC oversight (which does not say much for many state securities commissions). These issues will continue to be addressed during the political sausage-making process.

Of additional interest – the CBO estimates that hedge fund registration is likely to cost around $30,000 per each SEC registrant which is welcome news to investment adviser compliance consultants and hedge fund lawyers!

For full report, please see full CBO Hedge Fund Cost Estimate.

****
Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and provides hedge fund manager registration service through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.

Insider Trading Overview

1 Reply

In light of the recent focus on insider trading, we are publishing the SEC’s discussion on Insider Trading which can also be found here. The information below contains a broad overview of some of the important aspects which hedge fund managers should understand about the insider trading prohibitions.

For a greater background discussion on the legal precedents which helped shaped the state of law today, please see Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

****

Insider Trading

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, please read “Forms 3, 4, 5” in our Fast Answers databank.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
Government employees who learned of such information because of their employment by the government; and
Other persons who misappropriated, and took advantage of, confidential information from their employers.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

For more information about insider trading, please read Insider Trading—A U.S. Perspective, a speech by staff of the SEC.

****

Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website. He can be reached directly at 415-868-5345.

Investment Adviser Representative Registration Requirement

2 Replies

Employees of Registered IAs Must Generally be Registered

State-registered investment advisory firms need to make sure that their employees who are deemed to be “investment advisory representatives” are appropriately registered. This means that any employee (or owner) of the IA firm who provides investment advice or who has supervisory authority will generally need to be registered with the state as a representative of the firm. In order to register, the applicant will need to have certain qualifications and generally the series 65 will be sufficient for these purposes.

There are consequences for not properly registering employees as investment advisor representatives. In an earlier article on whether IA firms can have silent owners, we discussed the fact that many state administrators have the power to censure or fine IA firms if they do not follow the registration rules. I recently stumbled across an example of a state taking such an action.

In the attached [intentionally removed], the Texas State Securities Board (“Board”) concluded that the “unregistered employee” of the registered investment advisory firm provided investment advice to IA clients for compensation and that the IA firm failed to maintain a supervisory system reasonably designed to ensure compliance with the Texas Securities Act and Board Rules. The Board reprimanded the IA firm and also ordered an administrative fine of $5,000. The firm was required to comply with the Act and Board Rules moving forward.

The two important take-aways from this order are:

Always make sure employees are registered or clearly exempt from registration, and
Always ensure that you have an up-to-date compliance program that helps to ensure that the firm will operate within all applicable laws and regulations.

We always recommend that registered IA firms discuss any registration and compliance related matters with an experienced investment management attorney with detailed knowledge of the laws of the state where the firm is registered.

****

Hedge Fund Manager Charged with Insider Trading

Leave a reply

SEC Brings Case Against Raj Rajaratnam

Below is another case of a hedge fund manager who was alledgedly engaged in insider trading. The SEC seems particularly excited about this cased because of the high profile nature of the manager who was involved. The major charge is against Raj Rajaratnam who reportedly has a net worth in excess of $1 billion and who is a member of the Forbes 400 richest persons in the world.

There will undoubtedly be continued press in this case which is not good news for the hedge fund industry. The industry has been subject to criticism and increased calls for regulation for the last year and high profile cases like this one only serve to rile up members of congress. The SEC seems to be particularly proud about this “catch” as the agency has itself been under increasing scrutiny as the details of the fumbled Madoff case have been made public.

****

SEC Charges Billionaire Hedge Fund Manager Raj Rajaratnam with Insider Trading

FOR IMMEDIATE RELEASE
2009-221

High-Ranking Corporate Executives Also Charged in Scheme That Generated More Than $25 Million in Illicit Gains

Washington, D.C., Oct. 16, 2009 — The Securities and Exchange Commission today charged billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme that generated more than $25 million in illicit gains. The SEC also charged six others involved in the scheme, including senior executives at major companies IBM, Intel and McKinsey & Company.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton and Sun Microsystems. He then used the non-public information to illegally trade on behalf of Galleon.

“This complaint describes a web of fraud that has been unraveled,” said SEC Chairman Mary L. Schapiro.

“What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies. He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be. Raj Rajaratnam is not a master of the universe, but rather a master of the rolodex,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.”

In addition to Rajaratnam and Galleon, the SEC’s complaint charges:

Danielle Chiesi of New York, N.Y. — a portfolio manager at New Castle Funds.
Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.
Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.
Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.
Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.
New Castle Funds LLC — a New York-based hedge fund

According to the SEC’s complaint, Rajaratnam and Galleon traded on inside information about the following events or transactions:

An unnamed source, identified in the SEC’s complaint as Tipper A, obtained inside information about earnings announcements at Polycom and Google, as well as a takeover announcement of Hilton. Tipper A then allegedly provided this information to Rajaratnam, who used it to trade on behalf of Galleon.
Goel provided inside information to Rajaratnam about certain Intel quarterly earnings and a pending joint venture concerning Clearwire Corp., in which Intel had invested. Rajaratnam then used this information to trade on behalf of Galleon. As payback for Goel’s tips, Rajaratnam, or someone acting on his behalf, executed trades in Goel’s personal brokerage account based on inside information concerning Hilton and PeopleSupport, which resulted in nearly $250,000 in illicit profits for Goel.
Kumar obtained inside information about pending transactions involving AMD and two Abu Dhabi-based sovereign entities, which he shared with Rajaratnam. Rajaratnam then traded on the basis of this information on behalf of Galleon.
Chiesi obtained inside information from an executive at Akamai Technologies and traded on the information on behalf of a New Castle fund, netting a profit of approximately $2.4 million. Chiesi also passed on the inside information to Rajaratnam, who then traded on behalf of Galleon.

The SEC also alleges that Moffat provided inside information to Chiesi about Sun Microsystems. Moffat obtained the information when IBM was contemplating acquiring Sun. Chiesi then allegedly traded on the basis of this information on behalf of New Castle, making approximately $1 million in profits.

The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Kumar and Moffat, violations of Section 17(a) of the Securities Act of 1933 and. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Goel, Kumar and Moffat from acting as an officer or director of any registered public company.

The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

The SEC’s investigation is continuing.

# # #

For more information, contact:
David Rosenfeld
Associate Director, SEC’s New York Regional Office
(212) 336-0153

Sanjay Wadhwa
Assistant Director, SEC’s New York Regional Office
(212) 336-0181

http://www.sec.gov/news/press/2009/2009-221.htm

****

Series 79 Exam Approved

6 Replies

http://www.hedgefundlawblog.com

SEC Approves New Exam for “Limited Representative” Investment Bankers

The long anticipated Series 79 Examination has finally received approval by the SEC, and information will now be made available to the public regarding the content of the exam, the modifications to the original licensure rules, and the scope and intent of the new rule in establishing the new “limited representative” classification among investment brokers. Information recently released to the public regarding the Series 79 is copied in full below, and can also be found here.

****

Regulatory Notice 09-41 – Investment Banking Representative
SEC Approves Rule Change Creating New Limited Representative – Investment Banker Registration

Category and Series 79 Investment Banking Exam
Effective Date: November 2, 2009

Notice Type

Rule Amendment

Suggested Routing

Compliance
Continuing Education
Investment Banking
Legal
Operations
Registration
Sales
SeniorManagement

Key Topic(s)

Continuing Education
Investment Banking
Qualification Examinations
Registration
Supervision

Referenced Rules & Notices

NASD Rule 1022
NASD Rule 1032

Executive Summary

Effective November 2, 2009, amendments to NASD Rules 1022 and 1032 require individuals whose activities are limited to investment banking and principals who supervise such activities to pass the new Limited Representative – Investment Banking Qualification Examination (Series 79 Exam). Individuals who are registered as a General Securities Representative (Series 7) and engage in the member firm’s investment banking business as described in NASD Rule 1032(i)may “opt in” to the new registration category by May 3, 2010 (within six months of the effective date).

Frequently asked questions about registration as an investment banking representative are listed in Attachment A. The text of the rule change is set forth in Attachment B. Questions concerning this Notice should be directed to:

Philip Shaikun, Associate Vice President and Associate General Counsel, at (202) 728-8451;
JoeMcDonald, Director, Qualifications and Examinations, at (240) 386-5065; or
Tina Freilicher, Director, Psychometrics and Qualifications, at (646) 315-8752.

Background and Discussion

NASD Rule 1032(i) requires an associated person to register with FINRA as a Limited Representative – Investment Banking (Investment Banking Representative) and pass a corresponding qualification examination if such person’s activities involve:

Advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
Advising on or facilitatingmergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

The registration category does not cover individuals whose investment banking work is limited to public (municipal) finance or direct participation programs as defined in NASD Rule 1022(e)(2). Moreover, individuals whose investment banking work is limited to effecting private securities offerings as defined in NASD Rule 1032(h)(1)(A)may continue to function in such capacity by registering as a Limited Representative – Private Securities Offerings and passing the corresponding Series 82 exam. Individuals whose activities require registration as an Investment Banking Representative will be required to pass the Investment Banking Representative Qualification Examination (Series 79) or obtain a waiver. FINRA has developed this exam to provide amore targeted assessment of the job functions performed by the individuals that fall within the registration category.

The exam will be required in lieu of the current General Securities Representative (Series 7) exam or equivalent exams1 by the individuals who perform the job functions described in the new registration category. Any person whose activities go beyond those of the Investment Banking Representative registration category must separately qualify and register in the appropriate category or categories of registration attendant to such activities.

Transition “Opt-In” Period

Beginning on the effective date of NASD Rule 1032(i) and ending May 3, 2010, six months following implementation of these requirements, registered individuals as well as new applicants whose job functions are described in Rule 1032(i) will be able to register as an Investment Banking Representative as follows:

Currently registered representatives who have passed the Series 7 or a Series 7-equivalent exam
Investment bankers who hold the Series 7 registration, as well as those who have passed and are registered with a “Series 7-equivalent exam”may opt in to the Investment Banking Representative registration,2 provided that, as of the date they opt in, such individuals are engaged in investment banking activities covered by Rule 1032(i).3 Those individuals who choose to opt in will retain their Series 7 or Series 7-equivalent registered representative registration in addition to the investment banking registration. After May 3, 2009, any person who wishes to engage in the specified investment banking activities will be required to pass the Series 79 Exam or obtain a waiver.
New Investment Banking Representative Candidates
During the six-month transition period, FINRA will permit new Limited Representative – Investment Banking candidates to take either the Series 7 Exam, Series 7-equivalent exam (if eligible) or Series 79 Exam. Those who choose to take and pass the Series 7 Exam or Series 7-equivalent exam may then opt in to the Investment Banking Representative registration.

Training Program Exception

Rule 1032 provides an exception for member firms that operate training programs in which certain new employees are exposed to the firm’s various business lines by rotating among departments, including investment banking. Specifically, Rule 1032(i) does not require an employee placed in such program to register as an Investment Banking Representative for a period of up to six months from the time the employee first engages in activities that otherwise would trigger the requirement to register as an Investment Banking Representative. This exception is available for up to two years after the employee commences the training program. Firms that wish to avail themselves of this exception are required to maintain documents evidencing the details of the training program and identifying the program participants who engage in activities that otherwise would require registration as an Investment Banking Representative and the date on which such participants commenced such activities.

Principals

The Series 79 Exam will be added to the list of representative exams that satisfy the prerequisite requirement for the General Securities Principal exam (Series 24). Note that the scope of the general securities principal’s supervisory responsibility will be determined by the representative-level exam passed. Individuals who wish to act as a general securities principal for activities requiring registration under Rule 1032(i)must obtain the Investment Banking Representative registration—either by opting in or passing the Series 79 Exam—and also pass the General Securities Principal exam. Such individuals will be limited to acting as a general securities principal for the investment banking activities covered by Rule 1032(i). Individuals who wish to function in the capacity of general principal for broader securities-related activities must take another appropriate qualification examination, such as the Series 7 or Series 7-equivalent exam, in addition to the General Securities Principal exam.

Individuals currently functioning as a general securities principal supervising investment banking activities as described in Rule 1032(i) have the same six-month period during which they may opt in to the Investment Banking Representative registration. Those individuals who choose to opt in will retain their Series 7 or Series 7- equivalent registered representative registration in addition to the Investment Banking Representative registration. After the end of the opt-in period, individuals who wish function as a general securities principal overseeing investment banking activities covered by the rule change will be required to pass the Series 79 Exam to function as a general securities principal supervising investment banking activities pursuant to Rules 1022 and 1032(i).

Exam Content

The qualification exam consists of 175 multiple-choice questions. Candidates are allowed 300minutes (five hours) to take the exam. Candidates will receive an informational breakdown of their performance on each section of the exam, along with their overall score and pass/fail status at the completion of the exam session.

A content outline that provides a comprehensive guide to the topics covered on the examination and is intended to familiarize candidates with the range of subjects covered by the examination is available at the FINRA website.

Firms may wish to use the content outline to structure or prepare training material, develop lecture notes and seminar programs, and as a training aide for the candidates.
The examination questions are distributed among four major functions reflecting the overall knowledge, skills and abilities required of an investment banker. Detail on the content of each of these four major job functions, the tasks associated with the job functions and the knowledge necessary to perform the tasks is included in the text of the content outline. The allocation of test questions among the four major functions is described below:

Section Description Number of Questions

1 Collection, Analysis and 75
Evaluation of Data

2 Underwriting/New Financing 43
Transactions, Types of Offerings
and Registration Of Securities

3 Mergers and Acquisitions, Tender 34
Offers and Financial Restructuring
Transactions

4 General Securities Industry Regulations 23

Total 175

The questions used in the examination will be updated to reflect the most current interpretations of the rules and regulations on which they are based. Questions on new rules will be added to the pool of questions for this examination within a reasonable time period of the effective dates of those rules. Questions on rescinded rules will be deleted promptly from the pool of questions. Candidates will be asked questions only pertaining to rules that are effective at the time they take the exam.

The test is administered as a closed-book exam. Severe penalties are imposed on candidates who cheat on FINRA-administered examinations. The proctor will provide scratch paper, an exhibits book and a basic electronic calculator to candidates. These items must be returned to the proctor at the end of the session.

The Investment Banking Representative Qualification Examination will be administered at test centers operated by Pearson VUE and Prometric professional testing center networks. Appointments to take the examinations can be scheduled through either network:

Pearson Professional Centers: contact Pearson VUE Registration Center at (866) 396-6273 (toll free), or (952) 681-3873 (toll number).
Prometric Testing Centers: contact Prometric’s National Call Center at (800) 578-6273 (toll free).

Registration Procedures

A Uniform Application for Securities Industry Registration or Transfer Form(FormU4) must be submitted to FINRA via Web CRD in order to register an individual as an Investment Banking Representative. For persons already registered with a firm who currently hold the Series 7 or Series 7-equivalent registration and who are opting in to the Investment Banking Representative registration category, the firm need only submit an amended FormU4 to request the Limited Representative—Investment Banking registration.

For new employees, a firm must submit a full FormU4 application to request the registration and any other documents required for registration. The exam fee is $265; the registration fee for new applicants is $85.

For new Investment Banking Representative candidates who choose to first take the Series 7 Exam or Series 7-equivalent exam during the opt-in period and then opt in to the Investment Banking Representative registration, the firm must first submit a Form U4 to request the General Securities Representative or Series 7-equivalent registration.
Once the candidate has passed the Series 7 Exam or Series 7-equivalent exam, the Firm may then submit an amended FormU4 to request the Limited Representative— Investment Banking Representative registration.

Effective Date

The registration and qualification requirements for Investment Banking Representatives will become effective November 2, 2009. The six-month opt-in period will begin November 2, 2009, and end May 3, 2010.

Endnotes

1. The “Series 7 equivalent exams” and registrations are the Limited Representative— Corporate Securities (Series 62), the United Kingdom (Series 17) or Canada (Series 37/38) Modules of the Series 7.

2 The Web CRD registration position code for individuals who pass the Investment Banking Representative Series 79 Exam is “IB. ”The registration position codes for individuals who pass the Limited Representative—Corporate Securities Series 62 exam, Limited Registered Representative Series 17 exam and Canada
Modules of the Series 7 exam Series 37/38 exams are “CS,” “IE” and “CD/CN,” respectively.

3 No associated persons of a firm will be eligible to opt in unless the firm’s current Form BD indicates that the firm engages in investment banking activities.

Attachment A

FAQ About Registration as an Investment Banking Representative
General

Q 1: If I currently hold a Series 7 registration and am engaged in investment banking activities, must I take the Series 79 Exam to engage in a member firm’s investment banking business?

A 1: No, provided you opt in by May 3, 2010. Current Series 7 or Series 7-equivalent registered representatives who function in the firm’s investment banking business as described in NASD Rule 1032(i)may opt in to the Investment Banking Representative position without having to take the Series 79 Exam for a period of six months after implementation of the registration category. Such persons also will be able to retain their Series 7 or Series 7 equivalent registration.

Q 2: How do I opt in to the new investment banker registration category?

A 2: For persons registered with a firm who currently hold the Series 7 or Series 7- equivalent registration and who function in the firm’s investment banking business as described in NASD Rule 1032(i), the person’s firm need only submit an amended FormU4 to request the Limited Representative – Investment Banking registration. The submission must be made during the six-month opt in period (November 2, 2009 –May 3, 2010). The FormU4 will not reflect the new registration category until the start of the opt-in period.

Q 3: My firm has not yet developed a training program for the Series 79 Exam. Will I have to take the Series 79 Exam once it is implemented in order to get the Investment Banking Representative registration?

A 3: No, during the six-month transition period (November 2, 2009 –May 3, 2010), new Investment Banking Representative candidates who are in the process of qualifying for the new Investment Banking Representative registration category can take either the Series 79, the Series 7 or a Series 7-equivalent exam. A candidate who takes and passes the Series 7 Exam or Series 7- equivalent exam could then opt in to the Investment Banking Representative registration.

Q 4: I plan on taking the Series 79 Exam to qualify for the Investment Banking Representative registration. If in the future I move into a different position
Within my firm, such as retail sales, will I need to take the Series 7 Exam?

A 4: Yes. The Series 79 Exam will qualify an Investment Banking Representative for only those activities covered under Rule 1032(i). If the representative engages in activities not covered by the Investment Banking Representative registration, such as retail or institutional sales, the representative will need to take the appropriate qualification exam, such as the Series 7 or Series 7-equivalent exam.

Q 5: I currently have a Series 7 registration. If I do not opt in to the Investment Banking Representative registration during the opt-in period, but subsequently decide to become an investment banker, must I take the Series 79 Exam to get the Investment Banking Representative registration?

A 5: Yes. FINRA is providing a grace period of six months for Series 7 or Series 7-equivalent representatives who function in the member firm’s investment banking business as described in NASD Rule 1032(i) to opt in to the Investment Banking Representative registration position. After May 3, 2010, persons who seek Investment Banking Representative registration will need to take and pass the Series 79 Exam, regardless of whether or not they have a Series 7 or Series 7-equivalent registration.

Q 6: I work at a small investment banking firm and engage in activities ranging From investment banking to institutional and retail sales. I have a Series 7 registration. How will this new exam and registration category affect me?

A 6: If you opt-in to the Investment Banking Representative registration position within the designated time period, you will have both the General Securities Representative and Investment Banking Representative registrations. Therefore, you would be able to engage in activities covered in both registration categories.

Q 7: I own a small investment banking firm and have employees that engage in activities ranging from investment banking to institutional and retail sales. These employees have a Series 7 registration. If I hire a new employee after the end of the opt-in period, how will this new exam and registration category affect this employee?

A 7: If the new employee engages in activities that fall into both the General Securities Representative and Investment Banking Representative registration categories, then he or she will need to take and pass both the Series 7 and Series 79 Exams.

Q 8: Will I be able to register as agent with a state after passing the Series 63 Exam if I have the Investment Banking Representative registration?

A 8: Yes (provided all of the other state requirements are met).

Q 9: Currently, for a candidate to qualify to register as agent and investment adviser with a state with the Series 66 Exam in lieu of the Series 63 and 65 Exams, the Series 7 Exam is required. Will the Series 79 Exam also allow me to qualify in those capacities with the Series 66 Exam?

A 9: No. States will continue to require the Series 7 Exam for use with the Series 66 Exam.

Test Administration

Q 10: Since the Series 79 Exam is a five-hour test, will I be allowed to take a break during the session?

A 10: The Series 79 Exam must be taken in one continuous, five-hour session. Candidates are permitted to take an unscheduled break during the exam session. However, the test clock will not stop while the candidate takes a break.

Q 11: Will I be allowed to use my own calculator during the exam session?

A 11: No. Series 79 Exam candidates are only allowed to use a basic electronic calculator provided by the testing center.

Principals

Q 12: I am currently a General Securities Principal supervising investment bankers. Do I need to opt in to the Investment Banking Representative position?

A 12: Yes. However, if you do not opt in prior to the end of the opt-in period, you will need to take and pass the Series 79 Exam in order to continue supervising Investment Banking Representatives.

Q 13: I plan on taking the Series 79 Exam. In the future, will I be able to qualify for the General Securities Principal registration category by taking and passing the Series 24 exam?

A 13: Yes, the Series 79 Exam will meet the prerequisite for taking the Series 24 Exam. However, such persons will be limited to acting as a general principal for investment banking-related activities and will need to take and pass another qualification examination, such as the Series 7 or Series 7 equivalent exam, to act as a general securities principal for broader securities-related activities.

Q 14: I am currently a General Securities Principal in a non-investment banking firm. If I do not opt in now and then move in five years to an investment banking Firm in which I will supervise investment bankers, will I need to take the Series 79 Exam?

A 14: Yes. The opt-in accommodation is available only to individuals who are currently functioning in a firm’s investment banking business. A General Securities Principal who qualifies via the Series 7 or Series 7 equivalent exam cannot act as a general principal for investment banking activities. Such person would need to take and pass the Series 79 Exam to do so.

Q 15: I currently hold a Series 7 registration and plan to opt in to the Investment Banking Representative position. If in the future I become a General Securities Principal by passing the Series 24 Exam, will I be able to supervise other securities-related activities including investment banking activities?

A 15: Yes. If you are eligible to opt in and do so, you will be able to supervise the firm’s investment banking activities upon passing the Series 24 Exam. In addition, because you also held the Series 7 position, you will be able to act as a general securities principal for broader securities-related activities.

Public Financing

Q 16: Are public finance offerings (municipals) covered on the Series 79 Exam?

A 16: No. Individuals who work on public finance offerings will continue to take the Series 7 or Series 52 Exams.

Q 17: I work on both corporate and public finance offerings. I have a Series 7 registration. How will this new exam and registration category affect me?

A 17: If you opt in to the Investment Banking Representative position by May 3, 2010, you can continue to engage in all activities without taking the Series 79 Exam.

Q 18: I plan on taking the Series 79 Exam to qualify for the Investment Banking Representative position. If in the future I want to work on public finance offerings, will I need to take the Series 7 or Series 52 Exams?

A 18: Yes. The Series 79 Exam will qualify you for only the Investment Banking
Representative position and activities covered under that registration position. If you begin to work on public finance offerings, you will need to take the Series 7 or Series 52 Exam.

Prerequisites

Q 19: Aside from satisfying the prerequisite for taking the Series 24 Exam, will the Series 79 Exam meet the prerequisite for any other exams that currently require either a Series 7 or Series 7 equivalent exam?

A 19: No. The Series 79 Exam will not fulfill the prerequisite requirement for the following exams:

Series 4 – Registered Options Principal
Series 9/10 – General Securities Sales Supervisor
Series 23 – General Securities Principal Sales Supervisor Module
Series 26 – Investment Company Products/Variable Contracts Principal
Series 39 – Direct Participation Program Principal
Series 42 – Registered Options Representative
Series 52 –Municipal Securities Principal
Series 55 – Equity Trader Limited Representative
Series 86/87 – Research Analyst/Research Principal

Continuing Education

Q 20: If I pass the Series 79 Exam and hold an Investment Banking Representative registration, will I still take the Regulatory Element S101 continuing education session?

A 20: Yes. A person holding an Investment Banking Representative registration will continue to take the Regulatory Element S101. However, in the future, FINRA is planning to modify the Regulatory Element to tailor it to certain types of job functions, such as investment banking.

Attachment B

Text of Amended Rule
New language is underlined; deletions are in brackets.

****

1022. Categories of Principal Registration

(a) General Securities Principal
(1) Each person associated with a member who is included within the definition of principal in Rule 1021, and each person designated as a Chief Compliance Officer on Schedule A of Form BD, shall be required to register with the Association as a General Securities Principal and shall pass an appropriate Qualification Examination before such registration may become effective unless such person’s activities are so limited as to qualify such person for one or more of the limited categories of principal registration specified hereafter. A person whose activities in the investment banking or securities business are so limited is not, however, precluded from attempting to become qualified for registration as a General Securities Principal, and if qualified, may become so registered.

(A) Subject to paragraphs (a)(1)(B), (a)(2) and (a)(5), [E]each person seeking to register and qualify as a General Securities Principal must, prior to or concurrent with such registration, become registered, pursuant to the Rule 1030 Series, either as a General Securities Representative or [as] a Limited Representative-Corporate Securities.
(B) A person seeking to register and qualify as a General Securities Principal who will have supervisory responsibility over investment banking activities described in NASD Rule 1032(i)(1)must, prior to or concurrent with such registration, become registered as a Limited Representative– Investment Banking.
(C) A person who has been designated as a Chief Compliance Officer on Schedule A of Form BD for at least two years immediately prior to January 1, 2002, and who has not been subject within the last ten years to any statutory disqualification as defined in Section 3(a)(39) of the Act; a suspension; or the imposition of a fine of $5,000 or more for violation of any provision of any securities law or regulation, or any agreement with or rule or standard of conduct of any securities governmental agency, securities self-regulatory organization, or as imposed by any such regulatory or self-regulatory organization in connection with a disciplinary proceeding shall be required to register as a General Securities Principal, but shall be exempt from the requirement to pass the appropriate Qualification Examination. If such person has acted as a Chief Compliance Officer for a member whose business is limited to the solicitation, purchase and/or sale of “government securities,” as that term is defined in Section 3(a)(42)(A) of the Act, or the activities described in Rule 1022(d)(1)(A) or Rule 1022(e)(2), he or she shall be exempt from the requirement to pass the appropriate Qualification Examination only if he or she registers as a Government Securities Principal, or a Limited Principal pursuant to Rules 1022(d) or Rule 1022(e), as the case may be, and restricts his or her activities as required by such registration category. A Chief Compliance Officer who is subject to the Qualification Examination requirement shall be allowed a period of 90 calendar days following January 1, 2002, within which to pass the appropriate Qualification Examination for Principals.

(2) through (5) No change.
(b) through (h) No change.

****

1032. Categories of Representative Registration

(a) through (h) No change.
(i) Limited Representative-Investment Banking

(1) Each person associated with a member who is included within the definition of a representative as defined in NASD Rule 1031 shall be required to register with FINRA as a Limited Representative-Investment Banking and pass a qualification examination as specified by the Board of Governors if such person’s activities involve:
(A) advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
(B) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

(2) Notwithstanding the foregoing, an associated person shall not be required to register as a Limited Representative-Investment Banking if such person’s activities described in paragraph (i)(1) are limited to:
(A) advising on or facilitating the placement of direct participation program securities as defined in NASD Rule 1022(e)(2);
(B) effecting private securities offerings as defined in paragraph
(h)(1)(A); or
(C) retail or institutional sales and trading activities.

(3) An associated person who participates in a new employee training Program conducted by a member shall not be required to register as a Limited Representative-Investment Banking for a period of up to six months from the time the associated person first engages within the program in activities described in paragraphs (i)(1)(A) or (B), but in no event more than two years after commencing participation in the training program. This exception is conditioned upon the member maintaining records that:
(A) evidence the existence and details of the training program, including but not limited to its scope, length, eligible participants and administrator; and
(B) identify those participants whose activities otherwise would require registration as a Limited Representative-Investment Banking and the date on which each participant commenced such activities.

(4) Any person qualified solely as a Limited Representative-Investment Banking shall not be qualified to function in any area not described in paragraph (i)(1) hereof, unless such person is separately qualified and registered in the appropriate category or categories of registration.

(5) Any person who was registered with FINRA as a Limited Representative-Corporate Securities or General Securities Representative (including persons who passed the UK (Series 17) or Canada (Series 37/38) Modules of the Series 7) prior to [effective date of the proposed rule change], shall be qualified to be registered as a Limited Representative-Investment Banking without first passing the qualification examination set forth in paragraph (i)(1), provided that such person requests registration as a Limited Representative-Investment Banking within the time period prescribed by FINRA.

****

Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about the Series 79 or investment banking activities, please call Mr. Mallon directly at 415-296-8510.

SEC Announces New Short Sale Rules

1 Reply

One of the major regulatory pushes this year by the SEC has been to revamp the short sale rules. Today the SEC announced some specific measures which are intended to curtail abusive short sales. We will likely have more comments on this issue going forward and will publish hedge fund industry reaction.

****

SEC Takes Steps to Curtail Abusive Short Sales and Increase Market Transparency
FOR IMMEDIATE RELEASE
2009-172

Washington, D.C., July 27, 2009 — The Securities and Exchange Commission today announced several actions that would protect against abusive short sales and make more short sale information available to the public.

“Today’s actions demonstrate the Commission’s determination to address short selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets,” said SEC Chairman Mary Schapiro.

First, the Commission made permanent an interim final temporary rule, Rule 204T, that seeks to reduce the potential for abusive “naked” short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.

Additional Materials

Rule 204: Amendments To Regulation SHO (Release No. 34-60388)

Second, the Commission and its staff are working together with several self-regulatory organizations (SRO) to make short sale volume and transaction data available through the SRO Web sites. This effort will result in a substantial increase over the amount of information presently required by another temporary rule, known as Temporary 10a-3T. That rule, which will expire on August 1, applies only to certain institutional money managers and does not require public disclosure.

Apart from these measures, the Commission is continuing to actively consider proposals on a short sale price test and circuit breaker restrictions.

Third, the Commission intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.

Overview

Short selling often can play an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. There are, however, circumstances in which short selling can be used as a tool to manipulate the market.

“Naked” Short Sales: In a “naked” short sale the investor sells shares “short” without first having borrowed them. Such a transaction is permitted because there is no legal requirement that a short seller actually borrow the shares before effecting a short sale.

But, before effecting a short sale, Rule 204T requires that the broker-dealer, as opposed to the seller, “locate” an entity that the broker reasonably believes can deliver the shares within three days after the trade — what’s known as T+3. Also, if reasonable, a broker-dealer may rely on a short seller’s assurance that the short seller has located his or her own lender that can deliver shares in time for settlement.

“Fails-to-deliver”: If an investor or its broker-dealer does not deliver shares by T+3, a “failure to deliver” occurs. Where an investor or its broker-dealer neither locates nor delivers shares, a “naked” short sale has occurred.

A “fail to deliver” can occur for legitimate reasons, such as mechanical errors or processing delays. Further, a “fail to deliver” could occur as a result of a long sale — that is the typical buy-sell transaction — as well as a short sale.

“Fails to deliver”, such as fails resulting from potentially abusive “naked” short selling, may have a negative effect on shareholders, potentially depriving them of the benefits of ownership such as voting and lending. They also may create a misleading impression of the market for an issuer’s securities.

Adopting Regulation SHO: Due to its concerns regarding persistent “fails to deliver” and potentially abusive “naked” short selling, the Commission adopted Regulation SHO, which became effective in early 2005. This regulation imposes, among other things, the requirement that broker-dealers locate a source of borrowable shares prior to selling short.

In addition, it requires that firms that clear and settle trades must purchase shares to close out these “fails to deliver” within a certain time frame, 13 days. This “close-out” requirement only applies to certain equity securities with large and persistent “fails to deliver,” known as threshold securities.

The requirement included two major exceptions: the so-called “grandfather” and “options market maker” exceptions. Both of these exceptions provided that certain “fails to deliver” in threshold securities never had to be closed out. The Commission eliminated both exceptions in August 2007 and September 2008, respectively.

Making Permanent A Rule to Curtail Naked Short Selling

Adopting Rule 204: The Commission has made permanent a temporary rule that was approved in 2008 in response to continuing concerns regarding “fails to deliver” and potentially abusive “naked” short selling. In particular, temporary Rule 204T made it a violation of Regulation SHO and imposes penalties if a clearing firm:

does not purchase or borrow shares to close-out a “fail to deliver”
resulting from a short sale in any equity security
by no later than the beginning of trading on the day after the fail first occurs (T+4).

Cutting Down Failures to Deliver: An analysis conducted by the SEC’s Office of Economic Analysis, which followed the adoption of the close-out requirement of Rule 204T and the elimination of the “options market maker” exception, showed the number of “fails” declined significantly.

For example, since the fall of 2008, fails to deliver in all equity securities has decreased by approximately 57 percent and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009.

Due to the success of these measures in furthering the Commission’s goals of reducing fails to deliver and addressing potentially abusive “naked” short selling, the Commission has made permanent the requirements of Rule 204T with only limited modifications to address commenters’ operational concerns.

Increasing Transparency Around Short Sales

In the fall of 2008, the Commission also adopted a short sale reporting interim rule, Rule 10a-3T. The rule requires certain market participants to provide short sale and short position information to the Commission.

The Commission made the rule temporary so that it could evaluate whether the benefits from the data justified the costs associated with the rule.

Instead of renewing the rule, the Commission and its staff, together with SROs, are working to substantially increase the public availability of short sale-related information through a series of other actions. These actions should provide a wealth of information to the Commission, other regulators, investors, analysts, academics, and the media.

Specifically, the Commission and its staff are working together with several SROs in the following areas:

Daily Publication of Short Sale Volume Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites the aggregate short selling volume in each individual equity security for that day.
Disclosure of Short Sale Transaction Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites on a one-month delayed basis information regarding individual short sale transactions in all exchange-listed equity securities.
Twice Monthly Disclosure of Fails Data. It is expected in the next few weeks that the Commission will enhance the publication on its Web site of fails to deliver data so that fails to deliver information is provided twice per month and for all equity securities, regardless of the fails level. For current fails to deliver information, see http://www.sec.gov/foia/docs/failsdata.htm.

Hosting a Roundtable

Finally, the Commission also is examining whether additional measures are needed to further enhance market quality and transparency, as well as address short selling abuses.

As part of its examination, the Commission intends to hold a public roundtable on Sept. 30, 2009, to solicit the views of investors, issuers, financial services firms, self-regulatory organizations and the academic community regarding a variety of trading and market related practices. The roundtable will focus on issues related to securities lending, pre-borrowing, and possible additional short sale disclosures.

The roundtable panelists will consider, among other things, additional means to foster transparency, such as adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities, and requiring public disclosure of individual large short positions. Panelists will also consider whether it would be appropriate to impose a pre-borrow or enhanced “locate” requirement on short sellers, potentially on a pilot basis. Additionally, panelists will discuss issues related to securities lending such as compensation arrangements, disclosure practices, and methods of collateral and cash-reinvestment.

# # #

http://www.sec.gov/news/press/2009/2009-172.htm

****

Series 79 Exam

1 Reply

FINRA to Announce New Investment Banking Examination

For many years now all brokers have been treated equally with regard to examination requirements. Whether a broker was working solely with retail clients or solely with institutions on a private placement basis, each such broker would need to take and pass the Series 7 examination in order to become a representative (broker) at the BD (broker firm or broker-dealer). Now, however, there will be a new exam for those brokers whose only acitivites are “investment banking” activities. In the near future these brokers will only need to take and pass a new exam called the Series 79 exam which will presumably be more focused and shorter than the all-day Series 7 exam. I will continue to update this article after the 4th of July weekend, but below I have included the full text of the new FINRA Rule 1032(i) which provides for a new Investment Banking representative registration.

Text of Rule 1032(i)

FINRA Rule 1032. Categories of Representative Registration

(a) through (h) No change.

(i) Limited Representative-Investment Banking

(A) advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or

(B) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

(A) advising on or facilitating the placement of direct participation program securities as defined in NASD Rule 1022(e)(2);

(B) effecting private securities offerings as defined in paragraph (h)(1)(A); or

(3) An associated person who participates in a new employee training program conducted by a member shall not be required to register as a Limited Representative-Investment Banking for a period of up to six months from the time the associated person first engages within the program in activities described in paragraphs (i)(1)(A) or (B), but in no event more than two years after commencing participation in the training program. This exception is conditioned upon the member maintaining records that:

(A) evidence the existence and details of the training program, including but not limited to its scope, length, eligible participants and administrator; and

(B) identify those participants whose activities otherwise would require registration as a Limited Representative-Investment Banking and the date on which each participant commenced such activities.

****

Please contact us if you have any questions or would like to learn how to start a hedge fund. Other related hedge fund law articles include: