It is all about Compliance

I have been saying for a long time, that the SEC is getting serious sending cases to enforcement as it relates to the investment advisers, hence hedge funds and private equity funds.  On November 28, 2011 The Securities and Exchange Commission charged three investment advisers for failing to put in place compliance procedures designed to prevent securities law violations.

Unbelievable

The cases stem from an initiative within the SEC Enforcement Division’s Asset Management Unit to proactively prevent investor harm by working closely with agency examiners to ensure that viable compliance programs are in place at firms. Investment advisers are required by law to adopt and implement written compliance policies and procedures. 

When SEC examiners identify deficiencies in a firm’s compliance program, those deficiencies need to be corrected before they lead to other securities law violations that could harm investors. Investment advisers that essentially ignore SEC examination warnings risk being the subject of SEC enforcement actions.

So in two of the cases — OMNI and Asset Advisors — SEC examiners previously warned the firms about their compliance deficiencies. Why and how these two Firms did not remediate these deficiencies or think that the SEC would not take these infractions to enforcement is mindboggling.   Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, “When SEC examiners identify compliance deficiencies, firms are expected to remediate them. The Commission will take enforcement action against registrants that fail to do so.” 

“Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That simple truth underlies our renewed focus on identifying and charging firms and individuals that fail their legal obligations to maintain adequate compliance programs.”

“The failure to adopt and maintain adequate compliance policies and procedures is a significant violation of the federal securities laws,” said Robert Kaplan, Co-Chief of the SEC Division of Enforcement’s Asset Management Unit. “We will continue to work with our counterparts in the national exam program to identify investment advisers that put their investors at risk by failing to take their compliance obligations seriously.”

FORM PF ON LINE "BEEP"

The SEC finally woke up after a 3 month coma, so I’m back.  As you all probably know, on October 26, 2011, the SEC approved the form PF, changed the rules on the frequency of filing and delayed the filing requirements for certain hedge funds and private equity firms. 

In no way does the change or delay in filing Form PF effect the registration deadline.  The deadline for registering with the SEC or states is still set at March 31, 2012.

Private fund advisers will be divided by size into two broad groups – large advisers and smaller advisers. The amount of information reported and the frequency of reporting depends on the group to which the adviser belongs.

The data collection form that we have adopted will address the dramatic lack of private fund information available to regulators today while easing the burden on private fund managers producing the data,” said SEC Chairman Mary L. Schapiro.

“Large private fund advisers” are:

• Advisers with at least $1.5 billion in assets under management attributable to hedge funds.
• Liquidity fund advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds.
• Advisers with at least $2 billion in assets under management attributable to private equity funds. All other respondents are considered smaller private fund advisers.

Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year, and report only basic information regarding the private funds they advise. This includes limited information regarding size, leverage, investor types and concentration, liquidity, and fund performance.

Large hedge fund advisers must file Form PF to update information regarding the hedge funds they manage within 60 days of the end of each fiscal quarter (instead of 15 days in the rule proposal). These advisers must report on an aggregated basis information regarding exposures by asset class, geographical concentration, and turnover by asset class. In addition, for each managed hedge fund having a net asset value of at least $500 million, these advisers are required to report certain information relating to that fund’s exposures, leverage, risk profile, and liquidity. Large hedge fund advisers are not required to report position-level information.

Large private equity fund advisers must file Form PF annually within 120 days of the end of the fiscal year. They must respond to questions focusing primarily on the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing, and their funds’ investments in financial institutions.

Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012.

However, the following advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012:

• Advisers with at least $5 billion in assets under management attributable to hedge funds.
• Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds.
• Advisers with at least $5 billion in assets under management attributable to private equity funds.

Crickets and Dodd Frank what do they have in common?

Curious?

A cricket will rub its hind legs together and produce a chirping sound at night.  In mass it is almost a soothing sound that will lull you to sleep. (BTW one in your house can drive you mad).  It also is sometimes analogous to dead silence.  Well now I put to you, the incredible stir that the Dodd-Frank Wall Street reform bill had a year ago when a Democratic congress passed it and the president signed it into law.  One year has passed and the I ask you what happened to the teeth of this law. Dead Silence. 

Registration has been delayed rules have been watered down and the SEC has yet to really come out with a game plan for moving forward.  The house of Reps. has shifted and the law is in jeopardy of being repealed in part or whole. So is it no wonder that Hedge Funds, Private Equity firms as well as the derivative trading firms are sitting  back to see what finally happens.

The SEC really dropped the ball on this one.  They were slow with finalizing the rules (which in fact are probably a year from being finalized) and apparently bent to political pressures. So Firms are still  unregulated and the SEC is all talk and no action.  Nothing will happen over the next month and a half with congress on break, elections to think about and the 14.3 trillion dollar deficit to worry about.  So I will be back when there is something to really to discuss.

Thanks

New Swap proposal under Article VII

On June 29, 2011 the Securities and Exchange Commission today voted to propose rules that would impose certain business conduct standards upon security-based swap dealers and major security-based swap participants when those parties engage in security-based swap transactions. The SEC’s proposed rules stem from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“The rules we are proposing would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” said SEC Chairman Mary L. Schapiro. “The standards we propose are intended to establish a framework that protects investors and also promotes efficiency, competition, and capital formation.”

The proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and make certain disclosures, including conflicts of interest and material incentives to potential counterparties.

Proposal

• Verify whether a counterparty is an eligible contract participant and whether it is a special entity.
• Disclose to the counterparty material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest.
• Provide the counterparty with information concerning the daily mark of the security-based swap.
• Provide the counterparty with information regarding the ability to require clearing of the security-based swap.
• Communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
• Establish a supervisory and compliance infrastructure.
• Designate a chief compliance officer that is required to fulfill the described duties and provide an annual compliance report.

The proposed rules also would require security-based swap dealers to:

Make reasonable efforts to obtain information that it needs to determine that the recommendation is in the “best interests” of the special entity.

In addition, the proposed rules would require security-based swap dealers and major security-based swap participants acting as counterparties to special entities to reasonably believe that the counterparty has an independent representative who meets the following requirements:

•     Has sufficient knowledge to evaluate the transaction and risks.
•     Is not subject to a statutory disqualification.
•     Is independent of the security-based swap dealer or major security-based swap participant.
•     Undertakes a duty to act in the best interests of the special entity.
•     Makes appropriate disclosures of material information concerning the security-based swap.
•     Provides written representations to the special entity regarding fair pricing and   appropriateness of the security-based swap.