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Cole-Frieman & Mallon 2018 First Quarter Update

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Below is our quarterly newsletter. If you would like to be added to our distribution list, please contact us.

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April 5, 2018

Clients, Friends, Associates:

The first quarter of 2018 has seen many developments impacting traditional hedge fund managers as well as those in the digital asset space. We enter the second quarter with many topics worthy of discussion, including a number of important regulatory issues currently on the horizon.  Below, is our short overview of some of these items.

Before we begin though we’d like to quickly provide a couple of significant updates on Cole-Frieman & Mallon LLP. Effective January 1, 2018 we are delighted to announce that David C. Rothschild has been promoted to partner and welcome Kevin Cott as head of our Atlanta office following the merger of Cott Law Group, P.C. with our firm.

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CoinAlts East

CFM is a founding sponsor of the one-day symposium for digital asset managers in New York on April 19, 2018. The CoinAlts East Fund Symposium will feature a number of panelists (including Bart Mallon and Karl Cole-Frieman) with expertise in the legal and operational aspects of running a digital asset strategy. Keynote speakers are John Burbank of Passport Capital and Mark Yusko of Morgan Creek Capital Management, with opening remarks from Corey Johnson of Ripple and closing remarks by Don Wilson of DRW. The inaugural symposium, held in September in San Francisco, sold out with more than 450 attendees.

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SEC Matters

SEC Published Examination Priorities for 2018. The SEC announced its Examination Priorities for 2018, with a continued focus on examining matters of importance to retail investors, particularly risks to elderly and retiring investors. Specifically, the SEC will focus on: (i) disclosure and calculation of fees and other compensation, robo-advisers and other automated electronic investment advice platforms, never-examined investment advisers and exchange-traded funds, services offered to investors with retirement accounts, and regulatory compliance of advisers and broker-dealers in the cryptocurrency and initial coin offering (ICO) space; (ii) compliance and risk in critical market infrastructure, including clearing agencies, national securities exchanges, transfer agents, and Regulation Systems Compliance and Integrity (SCI) entities; (iii) FINRA and MSRB; (iii) cybersecurity; and (iv) anti-money laundering programs.

SEC Chairman Testifies on The Roles of the SEC and CFTC Concerning Virtual Currencies. On February 6, 2018, SEC Chairman Jay Clayton offered testimony to the Senate Committee on Banking, Housing, and Urban Affairs about the role of the SEC and CFTC in the regulation of cryptocurrencies, ICOs and related activities. Chairman Clayton expressed his support for new technological innovations in the financial markets, while emphasizing that these innovations should not be made at the expense of protecting investors and markets. The Chairman reaffirmed that whenever securities are bought and sold, investors are entitled to the protections and benefits of state and federal securities laws.

The Chairman also stressed that ICOs should be viewed in the context of securities laws and that many ICOs claiming to be “utility tokens” may be securities, notwithstanding labels or the provision of some utility. Further, the Chairman stated most ICOs to date that he has seen have been offers and sales of securities. As a sign of the SEC’s commitment to this policy, Clayton pointed to the establishment of a new cyber unit focused on misconduct involving ICOs and distributed ledger technology, and enforcement actions initiated against fraudulent ICOs.

SEC Staff Letter on Digital Asset Funds. On January 18, 2018, Dalia Blass, the Director of Investment Management at the SEC, published a staff letter addressing issues the SEC has identified for registered funds and products focused on cryptocurrency. While the letter does not address private funds, it outlines various questions addressing how cryptocurrency funds would satisfy the securities laws. The key concerns outlined in the letter include:

  • Uncertainty around valuation of cryptocurrencies;
  • Ensuring liquidity for fund investors;
  • Ability to satisfy custody requirements given the lack of qualified custodians;
  • Compliance by ETFs given market volatility; and
  • Potential manipulation of cryptocurrency markets.

In light of the questions and uncertainties identified, the letter expresses the belief that cryptocurrency funds should withdraw registration statements.

SEC Action against Initial Coin Offering. On January 30, 2018, the SEC obtained a court order for an immediate asset freeze to halt an allegedly fraudulent ICO targeting retail investors and claiming to be the world’s first “decentralized bank”. The complaint alleges among other violations, the ICO was an illegal offering of securities and the sponsors made multiple false and misleading statements, including that its customers could be covered under federal deposit protections due to its purchase of a bank. The SEC is seeking preliminary and permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties, and bars against the two co-founders to prohibit them from serving as officers or directors of a public company or offering digital securities again in the future. This SEC complaint highlights the SEC’s increased vigilance in pursuing securities violations in the cryptocurrency and ICO space.

SEC Statement on Unregistered Digital Asset Exchanges. On March 7, 2018, the SEC released a public statement affirming its view that platforms that trade securities and operate as exchanges must register as a national securities exchange or operate under an exemption from registration. This announcement reflects the SEC’s growing interest in online virtual currency trading platforms. The public statement offers advice to investors about how to stay safe while investing on these platforms. Additionally, the statement lists considerations for market participants operating online trading platforms and encourages those market participants to consult with legal counsel and contact SEC staff for assistance in analyzing and applying the federal securities laws.

CFTC Matters

CFTC Issues Virtual Currency Pump-and-Dump Customer Protection Advisory. On February 15, 2018 the CFTC issued its first Customer Protection Advisory focused on virtual currency, specifically warning against “pump-and-dump” schemes. As described in the advisory, pump-and-dump schemes are coordinated online efforts to artificially drive up demand for a virtual currency then quickly sell. In the advisory, the CFTC asserted its general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity. The CFTC advises all customers to only purchase virtual currency or tokens after thorough research.

District Judge Agrees with CFTC Jurisdiction Over Virtual Currencies. On March 6, 2018, a district court judge in the eastern district of New York found that the CFTC has standing in a case related to virtual currency fraud. The judge agreed with the CFTC that virtual currencies can be regulated as a commodity, despite other regulatory agencies asserting jurisdiction over virtual currencies in some cases. The judge also agreed the CFTC’s jurisdiction can be justifiably expanded into spot trade commodity fraud, beyond the classic “futures” contracts for commodities traditionally focused on by the CFTC. The court granted the CFTC a preliminary injunction against the defendants as the case continues.

CFTC Launches Virtual Currency Resource Web Page. The CFTC launched its own resource dedicated to virtual currency, designed to provide information to the public regarding possible risks involved with investing or speculating in virtual currencies. It includes a primer on virtual currency, tips to avoid fraud, a podcast that includes CFTC staff discussing virtual currencies, and other reference sources relating to the CFTC and virtual currency.

FINRA Matters

FINRA Published Regulatory and Examination Priorities Letter for 2018. Similar to the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”) recently published its 2018 Regulatory and Examination Priorities Letter, outlining the organization’s enforcement priorities for the current year. FINRA’s specific focus areas for 2018 will include: (i) fraud, particularly microcap fraud schemes that target senior investors; (ii) hiring and supervisory practices for high-risk firms and brokers; (iii) cybersecurity; (iv) anti-money laundering; (v) sales practices and product suitability for specific investors, including the supervisory, compliance, and operational infrastructure firms have put in place with respect to ICOs; and (vi) investor protections related to market manipulation. We recommend that you speak with your firm’s outside counsel and service providers to learn more about these specific priorities and review your firm’s compliance with the applicable regulations.

Other Digital Asset Matters

We have detailed some of the major digital asset regulatory releases for the first quarter of this year in a separate post.  In addition to this information, there are some other items of note below.

U.S. Deputy Secretary of Treasury Provides Testimony On Financial Threats. On January 17, 2018, the U.S. Deputy Secretary of Treasury, Sigal Mandelker, testified before the Senate Committee on Banking, Housing, and Urban Affairs regarding a litany of financial threats to national security as well as the U.S. and global financial systems. Among the threats mentioned were emerging technologies including virtual currency. Mandelker emphasized FinCEN’s global focus on ensuring virtual currency providers and exchangers improve compliance activities. Mandelker’s testimony further evidences governmental agencies’ increasing focus on virtual currencies.

Proposed Virtual Currency Regulations Introduced in Hawaii and Nebraska. Multiple bills proposing to regulate cryptocurrency have been introduced in Hawaii and Nebraska. In Hawaii, one  proposal defines virtual currency and exempts virtual currency money transmitters from the state requirement to possess reserves to cover all outstanding customer investments. A second  proposal in Hawaii requires certain persons engaging the exchange, transfer, or storage of virtual currency in the state to be licensed. The proposal also outlines various other requirements for such a licensee, including the requirement to provide extensive personal information. Additionally, proposals in Hawaii, Connecticut, and Nebraska have been introduced to adopt the Uniform Regulation of Virtual-Currency Businesses Act (URVCBA) developed by the Uniform Law Commission (ULC), which provides a three-tiered structure for registration and licensing.

In Wyoming, multiple bills were passed related to virtual currency. A law was passed that exempts virtual currency from the Wyoming Money Transmitter Act. The Wyoming legislature also passed a law that specifies criteria by which an issuer of virtual currency will not be deemed an issuer of a security in Wyoming. Another law was also passed in Wyoming that exempts virtual currency from Wyoming property tax.

President issues executive order on Venezuela’s Digital Currency. On March 19, 2018, the President of the United States issued an executive order prohibiting transactions by United States persons or within the United States related to any digital currency issued by the Venezuelan government on or after January 9, 2018. This order was made in response the Venezuelan’s government’s issuance of a digital currency in an attempt to avoid United States sanctions. The order also provides that no prior notice is necessary for this order given the ability to transfer assets instantaneously.

Other Items

Fifth Circuit Vacates DOL Fiduciary Rule. On March 15, 2018, the Fifth Circuit Court of Appeals  issued a judgment vacating the Department of Labor Fiduciary Rule in its entirety, which we  discussed in an earlier update. The Fiduciary Rule expanded the definition of a “fiduciary” to include anyone making a securities or investment property “recommendation” to an employee benefit plan or retirement account. The rule also included a Best Interest Contract (“BIC”) Exemption, which permits investment advisers to retail retirement investors to continue their current fee practices, including receiving variable compensation, without violating prohibited transactions rules, subject to certain safeguards. The Court vacated the rule, finding that the Department of Labor lacked the authority to enact the rule under ERISA. The Court stated, in part, that Congress did not intend to expand the definition of fiduciary in passing ERISA in 1974. Just days earlier, the Tenth Circuit upheld a portion of the Fiduciary Rule, opening up additional uncertainty about the rule and inviting the Supreme Court to provide clarification.

CIMA Releases Guidance Notes for changes to its AML regulations. The Cayman Islands Monetary Authority (CIMA) has released guidance notes on its 2017 revisions to its Anti-Money Laundering Regulations, which were discussed in our previous quarterly update. The new guidance, in part, provides details of the requirements when compliance under the revisions are outsourced or delegated. If you have any questions, we recommend that you reach out to your administrator or offshore counsel.

Supreme Court Narrows Dodd-Frank Whistleblower Protection. On February 21, 2018, in a unanimous decision, the Supreme Court of the United States held in Digital Realty Trust, Inc. v. Somers, that the anti-retaliation provision of the 2010 Dodd-Frank Act covers only individuals who have reported a violation of the securities laws to the SEC. The Dodd-Frank Act does not protect individuals who only report violations internally. This ruling does not affect the anti-retaliation provisions of the Sarbanes-Oxley Act which protects whistleblowers who report certain types of misconduct internally in public companies.

IRS Clarifies Carried Interest Taxation Regulation. On December 22, 2017, Congress passed the Tax Reform Act which, among other items, alters the taxation of carried interest. Under section 1061 of the Act, carried interest must be held for at least three years in order to recognize long-term capital gains on the distribution of that interest. Section 1061 provides an exception for partnership interests held by a corporation.

On March 1, 2018, the Internal Revenue Service and Department of the Treasury issued Notice 2018-18 announcing their intent to issue regulations providing guidance for section 1061 of the Internal Revenue Code. Specifically, the guidance would exclude “S corporations” from the definition of a “corporation” as applied to carried interest taxation. This guidance will be applied retroactively and is effective for taxable years beginning after December 31, 2017. Managers should discuss further implications with their tax advisor and legal counsel.

Supreme Court Narrows Scope of Bankruptcy Code Securities Clawback Safe Harbor. In a unanimous opinion, the United States Supreme Court narrowed the scope of transactions qualifying for protection under section 546(e) of the Bankruptcy Code. This provision generally provides an exception that disallows a bankruptcy trustee from recovering a settlement payment made by a financial institution in connection with a securities contract. The court’s ruling means that such exception will not apply when the financial institution acts only as an intermediary.

SEC Encourages Self-Reporting of Share Class Selection Disclosures. The SEC announced its Share Class Selection Disclosure Initiative (SCSD Initiative) which encourages investment advisers to self-report securities violations with respect to failure to make disclosures concerning mutual fund share class selection. Investment advisers are required to disclose the conflict of interest that arises when an adviser receives 12b-1 fees for a share class when a less expensive share class is available for the same fund. Generally, qualifying settlements with the SEC will require the adviser to return profits on the transaction to the harmed clients, but not impose any further monetary penalties. For those advisers that do not take advantage of the initiative, the SEC is still focused on violations associated with mutual fund share class selection.

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Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline – Filing

  • March 31, 2018 – Deadline to update and file Form ADV Parts 1, 2A & 2B
  • April 10, 2018 – Amendment to Form 13H due if necessary
  • April 16, 2018 – 1st Quarter 2018 Form PF filing for quarterly filers (Large Liquidity Fund Advisers)
  • April 30, 2018 – Collect quarterly reports from access persons for their personal securities transactions
  • April 30, 2018 – Distribute code of ethics and compliance manuals to employees. Require acknowledgement form to be executed in connection with such delivery
  • April 30, 2018 – Annual Privacy Notice sent to all clients or fund investors (for Advisers with Fiscal Year ending December 31)
  • April 30, 2018 – Distribute audited financial statements to investors (most private fund managers, including SEC, state and CFTC registrants)
  • April 30, 2018 – Distribute Form ADV Part 2 to clients
  • April 30, 2018 – Quarterly NAV Report (registered commodity pool operators claiming the 4.7 exemption)
  • April 30, 2018 – 2017 Annual Form PF due date for annual filers (Large Private Equity Fund Advisers and Smaller Private Fund Advisers)
  • May 15, 2018 – Quarterly Commodity Trading Advisor Form PR filing
  • May 15, 2018 – File Form 13F for first quarter 2018
  • May 31, 2018 – First deadline for Cayman Islands Financial Institutions to submit their CRS returns to the Cayman Islands Tax Authority
  • May 31, 2018 – Third reporting deadline (full reporting) for Cayman Islands Financial Institutions with reporting obligations under the Cayman FATCA regulatory framework to report their U.S. Reportable Accounts to the Cayman Islands Tax Authority
  • June 30, 2018 – Distribute audited financial statements to investors (private fund managers to funds of funds, including SEC, state and CFTC registrants)

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

Cole-Frieman & Mallon 2017 Third Quarter Update

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Below is our quarterly newsletter. If you would like to be added to our distribution list, please contact us.

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October 26, 2017

Clients, Friends, Associates:

This summer saw many exciting developments in the digital assets space as well as case law evolution that may expand the liability of fund managers. We would like to provide you with a brief overview of those topics and a few noteworthy items as we move into the fourth quarter of 2017.

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SEC Matters:

SEC Adopts Amendments to Form ADV and the Books and Records Rule. SEC amendments to Form ADV went into effect on October 1, 2017, which will apply to both registered investment advisers (“RIAs”) and exempt reporting advisers. Among other technical amendments, the new Form ADV requires investment advisers to provide detailed information with regard to their separately managed accounts (“SMAs”), including aggregate level reporting of asset types across an adviser’s SMAs and reporting of custodian information under certain circumstances. Investment advisers that utilize borrowing or derivatives on behalf of SMAs will also need to report the regulatory assets under management (“RAUM”) attributable to various levels of gross notional exposure and corresponding borrowings and derivatives exposure. The SEC noted that advisers may not need to report this SMA information until its annual amendment.

The SEC concurrently adopted an amendment to the books and records rule (Rule 204-2 under the Investment Advisers Act of 1940, as amended (“Advisers Act”)), requiring RIAs to keep records of documentation necessary to demonstrate the performance or rate of return calculation distributed to any person as well as all written performance-related communications received or sent by the RIA. Advisers who have questions on any changes to the new Form ADV should contact their compliance groups.

SEC Provides Observations from Cybersecurity Examinations. On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published observations from its “Cybersecurity 2 Initiative” where 75 SEC registered broker-dealers (“BDs”), RIAs and investment funds were examined to assess cybersecurity preparedness. OCIE observed that all BDs and funds, and nearly all RIAs, maintained cybersecurity-related policies and procedures addressing protection of client information. OCIE also noted an increase in cybersecurity preparedness since the “Cybersecurity 1 Initiative” conducted in 2014.

However, key findings from the examinations include:

  • policies and procedures were inadequate and lacking specificity in employee guidance;
  • failure by financial firms to adhere to or enforce their policies and procedures; and
  • Regulation S-P-related issues, including failure to address security vulnerabilities or install other operational safeguards to protect client nonpublic personal information.

OCIE will continue its examination of financial firms’ cybersecurity compliance systems and we will be on the lookout for further guidance in this growing area of concern.

SEC Risk Alert Discusses Most Frequent Advertising Rule Compliance Issues. On September 14, 2017, OCIE published a risk alert based on its recent examination of 70 RIAs related to Rule 206(4)-1 under the Advisers Act (the “Advertising Rule”). The Advertising Rule generally prohibits RIAs from distributing advertisements or other communications that contain untrue, false or misleading statements. The most common Advertising Rule deficiencies observed include: (i) misleading performance results, caused by lack of sufficient disclosures, (ii) misleading one-on-one presentations, (iii) misleading claims of compliance with voluntary performance standards, (iv) cherry-picked profitable stock selections, (v) misleading selection of recommendations, and (vi) failure to implement compliance policies and procedures designed to prevent non-compliant advertising practices. OCIE encourages RIAs to consider their advertising activities within the purview of the Advertising Rule and its prohibitions.

SEC Action Against Hedge Fund Adviser.  On August 21, 2017, the SEC reached a settlement with a hedge fund adviser for failing to establish, maintain, and enforce a compliance system to prevent the misuse of material, nonpublic information (“MNPI”). The settlement comes after the adviser’s analysts were charged with insider trading of MNPI relating to government plans to cut Medicare reimbursement rates. The SEC alleged that analysts received tips from a third-party political intelligence analyst who had a source within the Centers for Medicare and Medicaid Services, and that the adviser then used those tips to generate trading profits. The $4.6 million settlement included a penalty of $3.9 million and a disgorgement of compensation.

CFTC Matters:

CFTC Grants SEF and DCO Registration to LedgerX.  The CFTC granted LedgerX registration status as both a swap execution facility (“SEF”) and a derivative clearing organization (“DCO”). Now that the exchange is live, LedgerX is the first CFTC-approved exchange to facilitate and clear options on digital assets. Previously, the CFTC granted SEF registration to TeraExchange, which offers forwards and swaps on Bitcoin. LedgerX plans to initially offer physically-settled and day-ahead swaps on Bitcoin to U.S.-based eligible contract participants (“ECPs”) and has a fully-collateralized clearing model where customers must post collateral to cover maximum potential losses prior to trading.

Digital Asset Matters:

CBOE Partners with Gemini to Launch Bitcoin Futures Exchange.  On the heels of the CFTC’s LedgerX announcement, the Chicago Board Options Exchange (“CBOE”) announced that it has partnered with Gemini, a digital assets exchange and custodian, to launch the first U.S.-regulated Bitcoin futures exchange. Gemini was founded by the Winklevoss twins, whose proposed “Winklevoss Bitcoin Trust” ETF was rejected by the SEC this past spring. Gemini granted to CBOE an exclusive license to use Gemini’s Bitcoin market data that will allow CBOE to create derivative products, including indices, to trade on a CBOE-created exchange. Although CBOE has not requested approval from the CFTC to form such an exchange, it plans to offer Bitcoin futures by the end of 2017 or early 2018. We will keep managers apprised of ongoing developments.

House Introduces Virtual Currency Tax Act.  In September, The Cryptocurrency Tax Fairness Act of 2017 was introduced in the House of Representatives. The bill was introduced by co-chairs of the Congressional Blockchain Caucus, Jared Polis (D-Co) and David Schweikert (R-Az), and calls for a de minimis exception from gross income for gains related to virtual currency transactions under $600. Such an exception could serve to incentivize small, day-to-day transactions. The bill also calls upon the Treasury Department to issue guidance on whether a gain or loss should be recognized in virtual currency transactions. If approved, the bill will apply to virtual currency transactions beginning January 1, 2018.

SEC Implicates Two ICOs in Alleged Fraud.  On September 29, 2017, the SEC charged a businessman who was allegedly running two fraudulent initial coin offering (“ICO”) schemes by selling unregistered securities in the form of digital tokens that did not exist. The REcoin ICO was marketed as the first token backed by real estate investments and allegedly misrepresented to investors the company’s expertise and the amount of capital raised. The second ICO was marketed similarly but with respect to the diamond industry. In July, the SEC issued an investor alert warning about the risk of ICOs. The SEC is seeking to bar the businessman from participating in any offering of digital securities in the future.

ICOs Banned in China and South Korea. The People’s Bank of China (“PBoC”), China’s central bank and financial regulator, announced an immediate ban of ICOs within China. The announcement sent shockwaves throughout the cryptocurrency industry, highlighted by declines across various token prices. Many see this ban as a temporary stop-gap measure to give PBoC time to develop industry oversight. South Korea’s Financial Services Commission made a similar announcement a few weeks later, stating that all ICO fundraising would be banned and that it would establish tighter anti-money laundering prevention policies for virtual currencies.

Other Items:

Department of Labor (“DOL”) Proposes Amendments to Fiduciary Rule Exemptions. The DOL Fiduciary Rule, discussed in our previous quarterly update, may face further delays before full implementation. Citing a concern that affected parties may incur undue expense in complying with a rule that may be further revised or repealed, the DOL submitted a proposal to the Office of Management and Budget (“OMB”) to extend the transition period from January 1, 2018 to July 1, 2019. The proposal included amendments to a few of the Fiduciary Rule exemptions, including the best interest contract exemption, which permits investment advisers to retail retirement clients to continue their current fee practices. The OMB approved the proposal and the DOL published its proposal on August 31, 2017. Proponents for the amendments point to the SEC’s commitment to work with the DOL to harmonize the Fiduciary Rule with SEC regulations, and that the delay will give the agencies time to develop clear regulations together. Critics claim that the delay will cause more uncertainty in the market during the extended transition period, and that the delay is the first step in an attempt by opponents of the rule to eliminate it completely.

The Cayman Islands Introduce New AML Regulations.  New Cayman Islands AML regulations came into effect on October 2, 2017. The new regulations expand AML/CFT (anti-money laundering/countering the financing of terrorism) obligations to unregulated investment entities and additional financial vehicles, which are seen to align more closely with the Financial Action Task Force (FATF) recommendations and global practice. In a shift to a risk-based approach to AML regulations, there will be two separate due diligence procedures depending on the risk assessment of investors. Certain investors that are deemed to be high-risk, such as politically exposed persons, will have to go through a more extensive verification process, while low-risk investors will be able to submit to a simplified due diligence process. If you have any questions, we recommend that you reach out to your administrator or offshore counsel.

U.S. Court of Appeals for the Second Circuit Clarifies Insider Trading Case.  In August 2017, in a long-awaited opinion, the Second Circuit upheld a former portfolio manager’s 2014 conviction for insider trading in U.S. v. Martoma, in reaction to the US Supreme Court’s intervening ruling in Salman v. United States, which we discussed in a previous update.  The Martoma Court rejected much of its earlier decision in U.S v. Newman by holding its previous requirement that there be a “meaningfully close personal relationship” between tipper and tippee was “no longer good law”.  Instead, the Martoma Court created a new standard requiring the government to prove that the tipper expected the tippee to trade on the information and the tip “resembled trading by the insider followed by a gift of the profits”.  By eliminating Newman’s “close personal relationship” requirement, the Martoma ruling has made it easier for the government to prosecute and win insider trading cases, however, it’s likely this area of law will continue to evolve.

“Group” Theory of Liability Expanded by U.S. District Court.  Continuing a trend of expanding the “group” theory of liability, the Northern District of California’s recent ruling in Sand v. Biotechnology Value Fund, L.P. may have far-reaching ramifications for managers of multiple funds. The defendants in the ongoing Sand case include a general partner and its two hedge funds (the “group funds”). The Court held that the group funds’ aggregate collective ownership of the subject security was directly relevant to the issue of beneficial ownership because the group funds shared the same general partner. Section 16 of the Securities and Exchange Act of 1934, as amended, requires corporate insiders and beneficial owners of 10% or more of a registered security to file statements with the SEC disclosing their ownership interest. Under the Sand Court’s theory of group liability, each of the group funds would be subject to the Section 16 reporting requirements if the group collectively owned 10% or more of the security, even if an individual group fund owned less than 10%, and each group fund could also be directly liable for any Section 16 violations. Given this evolution of Section 16 liability, managers of multiple funds that hold positions in the same security should carefully monitor beneficial ownership and evaluate whether a reporting obligation may exist for their funds.

SIPC and FINRA Adopt Streamlined Reporting Process.  Effective September 1, 2017, investment advisory firms who are members of both the Securities Investor Protection Corporation (“SIPC”) and the Financial Industry Regulatory Authority (“FINRA”) only need to file one annual report to both agencies through FINRA’s reporting portal. This will ease the reporting burden, as well as cut down on compliance costs for firms.

FCA Makes Final Policy Statement on MiFID II. The Financial Conduct Authority (“FCA”), which regulates the financial services industry in the UK, has published its final policy statement regarding the Markets in Financial Instruments Directive II (“MiFID II”). Effective January 1, 2018, MiFID II most notably introduces the requirement for UK BDs to “unbundle” investment research from trading commissions, requiring discrete pricing for each of the services rendered. This requirement is in contrast to the “soft dollar” safe harbor currently available in the U.S. and may have implications for U.S.-based investment advisers who engage UK BDs, as the new requirement could affect pricing of services.

Cayman and BVI Update Beneficial Ownership Regimes.  Amendments to the Cayman Islands beneficial ownership laws went into effect on July 1, 2017, which require certain entities, including exempted funds, to take reasonable steps to identify their beneficial owners (generally persons holding more than 25% interests in an entity). Of interest to fund managers, the amendments exempt from its scope: funds that are regulated by Cayman Islands Monetary Authority (“CIMA”), that employ a Cayman regulated administrator, or funds that are managed by an adviser regulated in an approved jurisdiction, such as a state or SEC RIA.  The British Virgin Islands (the “BVI”) also implemented amendments to its beneficial ownership regime effective July 1, 2017, which now requires registered agents of non-exempt BVI companies, such as unregulated private funds, to input beneficial ownership information into a platform called the BOSS (Beneficial Ownership Secure Search) System. The BOSS System is accessible only to select regulators and fulfills BVI commitments to the United Kingdom under the UK Exchange of Notes agreement.

MSRB to Hold Compliance Outreach Program. In a cross-agency announcement, the SEC is partnering with the Municipal Securities Rulemaking Board (“MSRB”) and FINRA to sponsor the 2017 Compliance Outreach Program for Municipal Advisors, a day-long compliance forum to allow industry professionals to discuss compliance practices with regulators and to promote a more effective compliance structure for municipal advisors. The program will be held on November 8, 2017, from 9am to 4pm ET, in the SEC’s Atlanta Regional Office and will be streamed live on the SEC website. The agenda for this event can be located here, and any advisors who are interested in attending can register here.

Compliance Calendar. As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

Deadline – Filing

  • October 1, 2017 – Revised Form ADV 1A goes into effect for all advisers
  • October 16, 2017 – Quarterly Form PF due for large liquidity fund advisers (if applicable).
  • November 14, 2017 – Form PR filings for registered Commodity Trading Advisors (“CTAs”) that must file for Q3 within 45 days of the end of Q3 2017.
  • November 29, 2017 – Form PF filings for Large Hedge Fund Advisers with December 31 fiscal year-ends filing for Q3 2017.
  • November 29, 2017 – Registered Commodity Pool Operators (“CPOs”) must submit a pool quarterly report (“PQR”).
  • December 31, 2017 – Cayman funds regulated by CIMA that intend to de-register (i.e. wind down or continue as an exempted fund) should do so before this date in order to avoid 2018 CIMA fees.
  • Periodic – Fund managers should perform “Bad Actor” certifications annually.
  • Periodic – Amendment due on or before anniversary date of prior Form D filing(s), or for material changes.
  • Periodic – CPO/CTA Annual Questionnaires must be submitted annually, and promptly upon material information changes.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Mr. Mallon can be reached directly at 415-868-5345.

Hedge Fund Bits and Pieces for March 17, 2017

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Happy Friday. This week’s updates below.

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Bitcoin ETF Rejected by SEC – an application to establish an ETF which would be based on a basket of Bitcoins was rejected by the SEC on March 10. The Winklevoss brothers, noted Bitcoin investorss, were the sponsors of the vehicle which was to be called the Winklevoss Bitcoin Trust. In rejecting the proposal, the SEC stated that the Bitcoin markets are unregulated and that the exchange the ETF would be traded on (Bats BZX Exchange) would not be able to enter into “surveillance-sharing” agreements that would be able combat fraudulent or manipulative acts and practices in the Bitcoin market. We expect that there will be future ETF proposals submitted to the SEC and that as the cryptocurrency industry (and specifically the exchanges hosting Bitcoin exchange) becomes more developed, a Bitcoin ETF will at some time be approved for trading. The SEC release can be found here.

Bitcoin Hedge Funds Article – we recently wrote about Bitcoin/ AltCurrency / Cryptocurrency hedge funds.  We believe that this is a burgeoning asset class and we will begin to see more private fund products launched in this space in the coming months.

FINRA Proposal to Scrap Series 7 – last week FINRA filed a proposed rule change with the SEC that would eliminate the Series 7 exam in favor of a more “streamlined” representative-level qualification exam that would include a general knowledge exam and specialized knowledge exam. We have strong thoughts about FINRA’s use of their time to create a new regulatory structure for exams when there has been no specific mandate for this update (no one is asking for this and we don’t know what problem this complete revamp is solving). We also (personally) believe that FINRA could better spend its time focused on matters that its member firms are asking to be addressed. While we are all for streamlining at Federal Agencies and self-regulatory organizations, we believe that streamlining should be reasonable and should serve a purpose – I am not sure if there was a purpose to this, but I also have not read through the entire 619 page FINRA submission to the SEC.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP and focuses his legal practice on the investment management industry. He can be reached directly at 415-868-5345.

SEC Study on Enhancing IA Examinations

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Recommendations for Enhancing IA Exams

Under Section 914 of the Dodd-Frank Act, the SEC was required to conduct a study with respect to the need for enhanced examination and enforcement resources for investment advisers.  SEC staff recently released the study which is designed to provide Congress with recommendations with respect to the findings of the study.  In general, the study found that the SEC is not currently properly equipped to appropriately handle IA examinations because of capacity issues.  The study presents a number of statistics which show that IA registrations have greatly increased while the funding for the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has been subject to cutbacks in staff.

To strengthen the IA examination process, the SEC staff recommended that Congress take one of three different courses of action:

  1. Impose user fees on SEC-registered investment advisers
  2. Authorize one or more SROs to examine SEC-registered investment advisers
  3. Authorize FINRA to examine dual registrants (firms registered as both IAs and BDs)

SEC Recommendations

The Study provides three different options that Congress should consider with respect to the issue of instituting the most appropriate infrastructure for IA examinations.  These options and some of the positive and negative implications are discussed below.

1.  User Fees

Congress could authorize the SEC to implement user fees for registration.  These fees would go directly to the OCIE and pay for the IA examination program.

Discussion items:

  • would provide scalable resources (i.e. resources would increase or decrease in proportion to the number of registered investment advisor firms) – these resources would not be subject to the Congressional appropriations process
  • may be less expensive than instituting a new SRO regime and would utilize the existing OCIE staff expertise and knowledge
  • avoid all of the issues which would exist with establishing an SRO structure (inefficiencies, authority, membership, governance, and funding issues)
  • supported by some parts of the IA industry

2.  Delegation to SRO or SROs

Congress could authorize the SEC to delegate examination responsibilities to FINRA or another self regulatory organization(s).

Below are some of the points both for and against delegation to an SRO or multiple SROs:

  • scalable resources (i.e. funded by membership fees)
  • additional rulemaking – IA firms would be subject to laws (Investment Advisers Act of 1940), regulations (SEC Rules) and member (SRO) rules
  • SEC would need to oversee the SRO and subject the SRO to periodic audit/examination
  • an SRO would provide for more examination of IAs – for example, FINRA and NFA have examined more BDs and CPOs/CTAs than the SEC has examined IAs
  • many logistical issues involved with instituting any SRO and/or allowing FINRA to take over these responsibilities
  • multiple SROs (for different types of IAs) would likely create even more logistical issues
  • unclear how the SRO structure would work with state registered IAs
  • potential conflict of interest if the SRO (FINRA) was the same for the buy side and the sell side

3.  Authorize FINRA to examine dual IA-BD registrants

Congress could expand FINRA’s jurisdiction to oversee those firms which are registered as both an IA and as a BD.

  • only marginally helpful – only 5% of IAs are also registerd as BDs and many of these firms are the largest broker-dealer firms
  • gets rid of inefficiency by having two examinations – one from FINRA on the BD side and one from the OCIE on the IA side
  • risk of different interpretation of provisions of the Investment Advisers Act

Conclusion

This study simply states the obvious – the SEC does not have the resources it needs to adequately do its job.  It seems like the major conclusion has already been reached – IA firms are going to need to pay for their oversight because Congress will not pay for it.  The only question is whether managers will be making payments to the SEC (first option) or to FINRA or other SRO(s) (second two options).  Whatever Congress ultimately decides, it is likely that managers will be facing more fees in the future.

The full text can be found here: Study on Enhancing Investment Adviser Examinations

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Bart Mallon is an attorney focused on the investment management industry and provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Series 79 Training Materials | Series 79 Study Guide

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Information on Study Materials and Classes for Series 79 Exam

One of the inquires I receive most often about the Series 79 exam involves study materials.  As of right now I have not heard of any groups who have produced a study guide or other materials for this exam.  I know that both Kaplan and STC are working on producing exam study guides and other materials.  STC in particular has been moving forward very quickly with their materials.  The information below was prepared by Gary Fox of the Securities Training Corporation. and outlines the products which they will be introducing over the next couple of months.  We will continue to publish information on Series 79 products as they are released.

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FINRA began administering the Examination on Monday, November 2. As with all other FINRA Examinations, there is little or no guidance as to how topics are being tested other than the outline.

STC’s Series 79 Training Manual and Practice Examinations will be available in December. The Manual will be in printed format, the Practice Examinations will be available in online format.  We will be offering live and virtual training classes starting in January, which will give you the opportunity to complete your reading before classes begin. We strongly recommend attending the class, particularly if you have no prior experience with FINRA Examinations.

We would also like to remind you of the opt-in provisions FINRA offers with the Series 79. If you hold any one of the following registrations-Series 7, 17, 24, 37, 38, or 62, you do not need to sit for the Series 79, provided you file the appropriate opt-in forms with FINRA. You have until May 2 to take advantage of the opt-in provision. We offer training for all registrations.

If you do not hold any of these registrations, and do not want to wait until December for our training program, you could take any one of the previously mentioned examinations, opt-in to the new FINRA registration category, and bypass the need to sit for Series 79. As a reminder, STC does not offer guidance as to which registrations may be appropriate for your firm. Please contact your compliance department or legal counsel for proper registration and the procedure for opting in.

You can sign up for updates regarding our Series 79 Training Program and get more information about all of our programs and your options by visiting www.stcusa.com.

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Other related hedge fund law articles include:

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

Series 79 Opt In Period Begins

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Investment Banking Representative Exam Goes Live

Today marks the first day that current Series 7 licensed representatives of BDs who engage in “investment banking activities” can opt in to the Series 79 license.  Current Series 7’s will need to talk with their compliance department who will be able to complete a Form U4 update for the rep.  According to a FINRA representative I talked with last week, the opt in process will be very easy – essentially the compliance person for the BD will go into the CRD system, check the Series 79 box for the appropriate BD reps and then submit the revised U4 to FINRA.

Reps who engage in investment banking activities should make sure that they have opted in before May 3, 2010 or they will be required to take the exam which is 5 hours long (175 multiple choice questions).

Series 79 Articles

  • Regulatory Notice 09-41 – this article reprint’s FINRA’s notice to members.  Notice includes: background and discussion on exam, discussion of the opt in period, information on the training program exception, information on requirement for principals, outline of content, registration procedures, effective date and FAQs.
  • Series 79 Content Outline – FINRA’s content outline for the new exam.  Provides an overview of the major categories and sub-categories which will be tested.
  • Series 79 Questions and Answers – in this article we address some of the questions which have been posed to us regarding the new investment banking exam.

Other related hedge fund law articles include:

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

IARD Fee Waiver for 2010

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The press release below from NASAA, the representative body of the state securities administrators, announces an IARD (Investment Adviser Registration Depository) fee waiver for next year.  The fee waiver will cover both the IARD fees for registering investment advisory firms as well as the fees for individuals.  Previously firms had to pay an IARD fee to use the IARD system.  Now, firms which are registering as investment advisors for the first time (as well as firms filing investment adviser renewals) will not need to pay any IARD fees.  However, firms will still need to pay any applicable state fees.

Chief compliance officers of investment advisory firms should begin getting ready for the IA renewal process which begins in earnest in the beginning to middle of next month.  Keep checking in for more information on investment adviser registration and compliance.

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October 13, 2009

NASAA Announces IARD System Fee Waiver

WASHINGTON (October 13, 2009) – The North American Securities Administrators Association (NASAA) today announced it will waive the initial set-up and annual system fees paid by investment adviser firms (IAs) and investment representatives (IARs) to maintain the Investment Adviser Registration Depository (IARD) system.

Denise Voigt Crawford, NASAA President and Texas Securities Commissioner, said, “The IARD system promotes effective and efficient investor protection through readily accessible disclosure of important information to the public while at the same time offering a consistent and streamlined registration process for investment advisers and their representatives. Given the current economic climate, we are pleased that the IARD system’s continued success will allow us to maintain the system fee waivers put in place in 2005 for investment adviser firms and also to fully waive for a second year the system fees paid by investment adviser representatives.”

NASAA’s Board of Directors approved the system fee waiver and will continue to monitor the system’s revenues to determine whether future fee adjustments are warranted.

The IARD system is an Internet-based national database sponsored by NASAA and the SEC and operated by FINRA in its role as a vendor.  IARD provides a single nationwide database for the collection and dissemination of information about individuals and firms in the investment advisory field and offers investment advisers and representatives a single source for filing state and federal registration and notice filings. The system contains the employment and disciplinary histories of more than 25,000 investment adviser firms and nearly 250,000 individual investment adviser representatives. IARD system fees are used for user and system support and for enhancements to the system.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900

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Other related articles on investment advisers:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  Mr. Mallon’s law firm provides registration and compliance services to start up investment advisory firms.  If you are interested in starting your investment adviser, please contact us or call Mr. Mallon directly at 415-868-5345.

Series 79 Exam Available November 2, 2009

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FINRA Announces Date of First Series 79 Exam

The new investment banking exam, the Series 79, will be available for those first new test takers on November 2, 2009 at any of the FINRA testing centers (Pearson and Prometric).  In addition to the test date announcement, FINRA also published a Series 79 Content Outline which seems to be very comprehensive.  We have provided an overview of the exam below and will continue to bring you updated information on this exam.

Also, please note that right now we do not know of any groups who have completed a Series 79 exam study guide, but we have had informal conversations with representatives from both STC and Kaplan – these representatives have stated that they are currently working on developing such a study guide which should be available soon.  We will let you know when these study materials become available.

Series 79 Overview

According to FINRA, the following are the key stats for the Series 79 exam:

  • Questions:  175 multiple choice questions (plus 10 pre-test, non-graded questions)
  • Time:  5 hours testing time
  • Eligibility:  FINRA member firm must sponsor the candidate
  • Application:   Submission of Form U-4 through Web CRD
  • Purpose:  This examination qualifies an individual to advise on or facilitate debt or equity offerings through a private placement or public offering or to advise or facilitate mergers or acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions.

FINRA’s Stated Exam Purpose

The Series 79 Examination is designed to assess the competency of entry-level investment bankers. As a qualification examination, it is intended to safeguard the investing public by seeking to measure the degree to which each candidate possesses the knowledge, skills and abilities needed to perform the major functions of an entry-level investment banker. Candidates should note that the duties and functions of the investment banker must be performed in accordance with just and equitable principles of trade, federal and state laws, and industry regulations. Furthermore, it is the responsibility of the candidate to be aware of changes in current legislation, regulation and policy. A registrant who violates industry regulations is subject to disciplinary action, including censures, fines, suspension, and permanent loss of registration.

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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.

Series 79 Exam Approved

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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.

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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:

  1. 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
  2. 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:

  1. 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.
  2. 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.

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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.

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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.

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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.

Series 79 Exam – Waiting for SEC Approval

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Post courtesy of www.series79exam.com.

SEC to Shed Light on the New Series 79 Exam

Pursuant to a proposal set forth by FINRA in February of this year, it is anticipated that the Series 79 will be introduced as a simplified alternative exam for investment bankers. Prior to the introduction of this new exam, all registered representatives were required by NASD Rule 1032 to take the Series 7 exam. The proposal modified this Rule to condense the exam for those individuals whose activities are limited to investment banking. The primary reason behind the FINRA proposal for a new abridged exam was that the Series 7 exam covers a broad array of functions that do not pertain to the day-to-day activities of an investment banker.

On July 13, 2009 we contacted FINRA to determine what information, if any, has been released on the new Series 79 exam.  According to FINRA, the SEC has approved the proposal set forth by FINRA as of April of this year, but SEC approval on the content of the exam and related fees is still pending. Thus, there is limited information available to prospective exam takers regarding the proposed content of the exam, the timeline for required registration, the release of related study materials and/or course offerings, and related exam fees.  Once the SEC issues its approval, a formal press release will be issued to the public regarding the structure of the exam as well as an expected date as to when the modified NASD Rule 1032(i) will be enforced, thereby establishing the Series 79 as the new license requirement for investment bankers.

All information regarding the Series 79 Exam will be available on this site for prospective exam takers once it is formally approved by the SEC.

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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:

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, please call Mr. Mallon directly at 415-296-8510.