Monthly Archives: March 2013

Legal Risk Management Tip for the Month – Commodity Investments for Advisors and Investment Companies

Jacko Law Group, PC (JLG) is very proud to present our new Legal Risk Management Tip for the month of March, authored by JLG’s recent addition to the legal team, Charles H. Field, Esq. Mr. Field has over 26 years of experience working with business leaders and senior executives on matters affecting investment advisors (IAs), broker-dealers (BDs) and private funds. His extensive knowledge of this field lends itself to our March Legal Tip, where Mr. Field details the intricacies, definitions, exemptions and impacts of commodity investments.

Commodity interests, Mr. Field explains, have “not always been straight forward.” The Commodity Exchange Act (CEA) first defined a commodity as “any item included on an enumerated list” of a wide variety of “goods,” according to Field. But once the CEA was transferred to The Commodities Futures Trading Commission (CFTC), the definition of a commodity changed. These changing definitions to commodities and their associated financial terminology – particularly “commodity pool operators” (CPOs) and “commodity trading advisors” (CTAs) – were further complicated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which expanded and revised these definitions, in the words of Field, “with the overall effect of capturing ‘trading’ in security futures products and swaps.” In this Legal Tip article, Field updates terms like “commodity pool,” “commodity pool operator” and “commodity trading advisor” with current definitions, and details the registration requirements and the exemptions that apply to CPOs and CTAs, including Rule 4.13 (a)(3), Rule 4.5, Rule 4.14 and Rule 4.7.

JLG’s Legal Risk Management Tips are concise, original articles written by our professional legal staff and posted at the end of each month. They serve as timely, in-depth analyses on the regulations, rules and provisions that impact the legal concerns of businesses. Stay up-to-date each month on the latest in legal and financial news affecting the securities industry with our Newsroom at www.jackolg.com/CM/Custom/News-Room.asp.

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To Be Reviewed or Not To Be Reviewed: The SEC Provides Guidance on Filing Requirements for Certain Electronic Communications

Last week, the Securities and Exchange Commission (“SEC”) published additional guidance on social media filings, in order to clarify the obligations that mutual funds and other investment companies have in seeking review of materials posted on their social media websites.  This was done partly to increase transparency of federal securities laws and regulations, and partly as a response to claims by the Financial Industry Regulatory Authority (“FINRA”) (the body responsible for reviewing those advertisements required to be submitted by mutual funds and other investment companies) that several “unnecessary” submittals have occurred due to firms being overly-cautious.

Certain communications posted by mutual funds and other investment companies are required to be submitted to FINRA prior to their use in order to ensure that the content is not misleading to an investor.  This applies not only to printed materials, but also to those communications posted on interactive websites.  The SEC’s “guidance update” focuses on the kinds of interactive content the SEC believes would and would not be subject to a requirement to file with FINRA, while giving some “real life” examples.  Obviously, whether a communication need be filed ultimately depends on the content, context, and presentation of the communication.  Some of the content the SEC cited as examples of communications generally NOT needing to be filed include:

  • “An incidental mention of a specific investment company or family of funds not related to a discussion of the investment merits of the fund;”
  • “The incidental use of the word “performance” in connection with a discussion of an investment company or family of funds, without specific mention of some or all of the elements of a fund’s return;”
  • “A factual introductory statement forwarding or including a hyperlink to a fund prospectus or to information that is filed pursuant to Section 24(b) or Rule 497;” 
  • “An introductory statement not related to a discussion of the investment merits of a fund that forwards or includes a hyperlink to general financial and investment information such as discussions of basic investment concepts or commentaries on economic, political, or market conditions:” and
  • “A response to an inquiry by a social media user that provides discrete factual information that is not related to a discussion of the investment merits of the fund.”

The SEC then goes on to give certain examples of those communications that generally would be required to be filed with FINRA, including (i) a discussion of fund performance that gives specific mention of a fund’s return, and (ii) a communication that discusses the merits of a fund. 

While the SEC’s update is helpful in screening certain communications, it is not an exhaustive list, and great care should be given as to whether or not postings made on websites require review prior to their use.  For further information about this, or other related topics, please contact us at (619) 298-2880 or at info@jackolg.com.

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SEC Reinforces the Importance of the Custody Rule for Investment Advisers

Recently, the Securities and Exchange Commission (“SEC”) issued a Risk Alert (the “Alert”) concerning rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Rule”), commonly referred to as “The Custody Rule” for investment advisers.  The Alert was issued as a response to recent examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) who found significant deficiencies in this area in nearly one-third of firms that were examined.  The following items were provided by OCIE as some of the more common deficiencies discovered:

  1. Failure [of the adviser] to recognize that they have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services;
  2. Failure to satisfy the Rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client;
  3. Failure to meet the Rule’s surprise examination requirements; and
  4. In instances where the adviser oversees an audited pooled investment vehicle, the examinations found some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.

The alert goes on to state that these deficiencies have resulted in enforcement actions ranging from remedial measures (such as requiring the adviser to draft, amend, or enhance written compliance procedures, policies or processes), to referrals made to the SEC’s Division of Enforcement with the recommendation for more serious sanctions.

This area will continue to be a focus of SEC examinations according to OCIE Director Carlo V. di Florio.  As such, it is critical that advisers understand and follow these regulations when they maintain custody of client funds.  For further information about this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

 

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U.S. Supreme Court Ruling Defines Statute of Limitations “Start Time”

The U.S. Supreme Court (the “Court”) last week unanimously reversed a 2nd U.S. Circuit Court of Appeals decision, effectively mandating the Securities and Exchange Commission (“SEC”) to file complaints seeking civil penalties for securities fraud within five years of the alleged incident, not five years after the alleged incident is discovered.

This ruling stemmed from the case of SEC vs. Marc Gabelli and Bruce Alpert.  In this case, the SEC accused Gabelli, a former portfolio manager at Gabelli Funds LLC, and Bruce Alpert, a former chief operating officer for the firm, of several acts of fraud spanning from 1999 to 2002.  The SEC, however, did not sue until April 2008.  Gabelli and Alpert said this was too late, given that the statute of limitations was five years and the last market-timing trade had taken place in August 2002, nearly six years earlier.  While the district court agreed with Gabelli and Alpert, the Appellate Court disagreed, and ruled in favor of the SEC on the grounds that the statute of limitations begins to run once the SEC discovers the alleged fraud.  The Supreme Court then decided to take up the case to give a ruling on the issue. 

The Court was not persuaded by the SEC’s argument that discovery of such violations is often delayed due to concealment on the part of the violator, and a negative ruling could effectively diminish the agency’s enforcement power, resulting in fewer cases being prosecuted on behalf of harmed investors.  Instead, the Court agreed with attorneys for Gabelli and Alpert, who argued that under the appeals court ruling, the SEC would be able to bring an ancient claim on the mere allegation that it did not discover and could not have discovered the violation earlier.  Furthermore, having no time limit disadvantages the defendants because records may have been discarded and witnesses’ memories faded in the time it would take the SEC to bring a claim.

The Court’s decision subsequently holds the SEC to a higher “discovery” standard when seeking civil penalties for fraud than it does individual fraud victims seeking compensation.  In justifying the decision, Chief Justice John Roberts Jr. wrote “the SEC…is not like an individual victim who relies on apparent injury to learn of a wrong…unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit.”

For further information about this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

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