Investment Management Law Weekly Overview – Week Ending November 15

Please see below our notes on the past week.  If you have questions on any of these items, please feel free to contact us.


Pay to Play Fee Prohibition Relief Granted

Pursuant to Pay to Play Regulations (Rule 206 (4)-5 under the Investment Advisers Act) a fund manager is prohibited from making political contributions in certain situations. If a fund manager (or employee of the fund manager) makes political contributions to an elected official who could influence the allocation of assets to the adviser, the manager is prohibition from receiving fees on those assets for two years from the date of the political contribution. Managers can, however, ask for relief in certain situations from the prohibition on collecting fees. In this order (summary below), the SEC permits the manager to receive fees based on the facts of situation:

An order has been issued on an application filed by Davidson Kempner Capital Management LLC (“DKCM”) under Section 206A of the Investment Advisers Act of 1940 and Rule 206(4)-5(e) thereunder. The order permits DKCM to receive compensation from three government entities for investment advisory services provided to the government entities within the two-year period following a contribution by a covered associate of DKCM to an official of the government entities.

Insider Trading – Hedge Fund Manager

In a press release, the SEC announced insider trading charges against a hedge fund trader. The trader had a consulting agreement with a former high-level employee of a public company. The former high-level employee maintained connections at the public company and passed along inside information which he received from friends within the public company. According to the release, the trader was able to avoid approximately $2.4 million in losses and make $853,655 in illicit profits by trading shares ahead of positive or negative news. The SEC’s complaint charges Megalli with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement with prejudgment interest, and financial penalties.  For more information, please see the SEC press release.

CFTC Approves Two Position-Limits Proposals

With a 3-1 vote, CFTC Commissioners approved Proposed Regulation on Position Limits for Derivatives. The proposed rulemaking would establish limits on speculative positions in 28 physical commodity futures contracts traded pursuant to the rules of a designated contract market (“DCM”) as well as swaps that are economically equivalent to those contracts, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Additionally, CFTC Commissioners unanimously approved the Proposed Regulations for Aggregation of Accounts Under Part 150, Position Limits. The comment period for these proposals is now open.  More information (including an overview and a Q&A sheet) can be found here.  

Futures Industry Releases Study on Insurance for Customer Accounts

After the MF Global and PFG implosions, we have become acutely aware that the SIPC does not insure customer accounts with respect to futures positions. No one does. So members of the futures industry commissioned a study on the viability of insurance for futures positions.  The main author of the study stated:

The objective of the study was to analyze and quantify the potential costs of various scenarios, including a government-mandated solution similar to what exists today in the securities industry as well as voluntary market-based solutions provided by private insurance companies. The study does not provide any policy recommendations, but the hope is that it will assist policy makers by clarifying the amount of insurance coverage that could be obtained through these solutions and the potential costs for each.

It is likely this is the first step towards some sort of insurance and protection mechanism for futures customers.  More information on the study can be found here.  Full text of the study can be found here.

FINRA Makes Broker Check Easier to Use

The Financial Industry Regulatory Authority (FINRA) announced that it has released an enhanced version of BrokerCheck that allows investors to more quickly access and more intuitively understand the professional background of investment professionals.  For more information, please see the FINRA release.

Next Week Items

Regulation S-ID Becomes Effective November 20, 2013 – for more information on the new red flag rules for certain SEC and CFTC registrants, please see this article from the ComplianceFocus blog.

SEC Announces Panelists for Small Business Forum – on Thursday, November 21, the SEC will again have an annual forum that focuses on the capital formation concerns of small business. A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced.  There will be two panels throughout the day.  The first panel will focus on evolving practices in the new world of Regulation D exempt offerings. The second panel will focus on what might be next for small business and markets once the JOBS Act is fully implemented.  The forum agenda can be found here, and information on the panelists and what they will be discussing (powerpoint presentations) can be found here.

SEC Dodd-Frank Investor Advisory Committee Meeting – On Friday November 22, the SEC will have a meeting where a fiduciary duty standard for broker-dealers will be discussed as well as legislation to fund investment adviser examinations. The meeting will be webcast on the SEC website and more information can be found here.

Enforcement Proceedings


BD Rep Barred for Undisclosed Outside Business Activities – November 15, 2013.  A registered representative was effectively barred from the industry for, among other things, conducting an outside business activity without disclosing the activity to the representative’s employer and also for transferring customer assets to the outside business without the receiving the customer’s informed consent. The SEC order can be found here


Fraud Charges against Unregistered CPO – November 13, 2013. Among other items the unregistered CPO: (1) falsely claimed to have a successful and experienced trader for the pool, (2) misrepresented the likelihood of profits and the risks associated with trading commodity futures, (3) failed to disclose that they were not properly registered with the CFTC to operate a pool, and (4) failed to disclose their intended uses of pool participant funds. Press release can be found here.

Forex Fraud Charges – November 12, 2013. The forex trader made many misrepresentions with respect to its trading and other aspects of firm operations, including that almost 80 percent of customer funds were never traded or invested in any manner. The forex trader also misappropriated over $3.3 million of customer funds to pay personal and entertainment expenses, including Las Vegas casino expenses, purchase automobiles and clothing, and ATM or cash withdrawals. Press release can be found here.


Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive, and cost-effective legal solutions for financial services matters.  Bart Mallon can be reached directly at 415-868-5345.

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