Weekly RoundUp September 17, 2014

Financial Services Weekly News

Editor's Note

In this Issue: The CFTC provided long-awaited exemptive relief for commodity pool operators that wish to offer their funds in private offerings using general solicitation under Rule 506(c) of the SEC’s Regulation D. The SEC commenced an administrative proceeding against a registered investment adviser and two owners as part of “an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.” The SEC used notice of settled administrative proceedings with 33 individuals and companies to announce an enforcement initiative using quantitative analytics to identify frequent late filers of two types of ownership reports under the Securities Exchange Act of 1934: Form 4 under Section 16 and Schedules 13D and 13G. And more.

Looking Ahead: We are waiting to see final SEC rules in three JOBS Act-related initiatives (the due dates for the last set of comments are in parentheses): further amendments to Regulation D, Form D and Rule 156 (11/4/13), crowdfunding (2/3/14) and Regulation A+ and other rule amendments for small and additional issues exemptions under Section 3(b) of the Securities Act (3/24/14). The crowdfunding amendments in the JOBS Act required the SEC to issue crowdfunding rules within 270 days of the enactment of the Act, April 5, 2012, so the crowdfunding rules are overdue.

Editor's Note
Editor's Note
Editor's Note

This is the first issue of the Goodwin Procter Financial Services Weekly News Roundup. The Roundup provides headlines and brief summaries of developments affecting the financial services industry, with links to primary sources. The developments covered include legislation, rulemaking, the publication of interpretive guidance by regulatory agencies, litigation and enforcement matters and industry news. The Roundup will also provide links to client alerts and other articles by and about Goodwin Procter lawyers. Quick tip: each headline is a link, and links are also imbedded in the summaries.

Regulatory Developments

CFTC Staff Issues Exemptive Letter Providing Relief from Marketing Conditions in Certain  Regulations to Harmonize with JOBS Act Amendments to General Solicitation Prohibitions under SEC Offering Exemptions

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued an exemptive letter that provides relief from marketing‑related conditions in CFTC Regulations 4.7(b) and 4.13(a)(3) for commodity pool operators (CPOs) that manage (1) pools sold in reliance on SEC Rule 506(c) under the Securities Act of 1933 (the “Securities Act”) and (2) pools whose interests are resold in reliance on Rule 144A under the Securities Act.  The exemptive letter harmonizes Regulations 4.7(b) and 4.13(a)(3), which provide exemptive relief from specific compliance obligations in Part 4 of the CFTC regulations and from CPO registration, respectively, with amendments to Rule 506(c) and Rule 144A adopted by the SEC pursuant to the JOBS Act that permit general solicitation.  The exemptive relief is not self-executing; a CPO must file a notice of claim that provides specified information.

CFTC Staff Issues Exemptive Letter to CPOs Expanding the List of Permissible Third-Party Recordkeepers

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued an exemptive letter that allows a commodity pool operator (CPO) to use third-party recordkeepers other than those listed in CFTC Regulations 4.7(b)(4) and 4.23(c).

CFTC Staff Provides Relief from Reporting Requirements for CPOs With Respect to Wholly-Owned Commodity Pool Subsidiaries of Non-Registered Investment Company Commodity Pools

The CFTC’s Division of Swap Dealer and Intermediary Oversight granted no‑action relief that permits a commodity pool operator (CPO) of a commodity pool not registered as an investment company under the Investment Company Act of 1940 (the parent pool) that uses a wholly‑owned subsidiary to trade in commodity interests (trading subsidiary) to file with the National Futures Association: (1) an annual report for the parent pool that contains consolidated financial statements for the parent pool and its trading subsidiary in lieu of a separate annual report for the trading subsidiary pursuant to CFTC Regulation 4.7(b)(3) or 4.22(c), as applicable; and (2) a Form CPO-PQR for the parent pool that contains consolidated Form CPO-PQR data for the parent pool and its trading subsidiary in lieu of a separate Form CPO-PQR for the trading subsidiary pursuant to CFTC Regulation 4.27(c).  The no-action relief is not self-executing; a CPO must file a notice of claim that provides specified information.

CFTC Staff Issues Exemptive Letter to Certain Registered CPOs Regarding Form CPO-PQR Filing Obligation

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued an exemptive letter stating that a commodity pool operator (CPO) registered with the CFTC need not file CFTC Form CPO-PQR if it only operates pools subject to claim for exemption from registration or for which the CPO maintains an exclusion from the definition of CPO. 

SEC Director of Division of Investment Management Discusses Private Fund Adviser Oversight, Use of Conflict Committees by Private Fund Advisers and Alternative Mutual Funds

In a speech delivered at the Practising Law Institute Hedge Fund Management Seminar on September 11, 2014, Norm Champ, Director of the SEC’s Division of Investment Management, provided an overview of the SEC’s inspection and oversight of private fund advisers, and discussed, among other topics, (1) the use by private fund advisers of conflicts committees to approve actions or circumstances in which an adviser is subject to a conflict of interest and (2) the potential challenges a private fund adviser should consider before undertaking management of a registered fund.

Enforcement & Litigation

SEC Charges Adviser with Failing to Properly Disclose Revenue Sharing Arrangement

Following an investigation by its Division of Enforcement, the SEC commenced an administrative proceeding against The Robare Group, Ltd., a registered investment adviser (the Adviser), and Mark L. Robare  and Jack L. Jones Jr., the Adviser’s owners.  The SEC alleges that the Adviser failed to properly disclose to its clients and to the SEC arrangements under which a broker‑dealer made payments to the Adviser based on the amount of client assets invested in mutual funds on the broker-dealer’s platform.  The press release announcing the proceeding notes that the Division of Enforcement’s Asset Management Unit “has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.”

SEC Files Federal District Court Action Against Hedge Fund Adviser, Firm’s Owner and Employee Alleging False Research Expenses, Improper Diversion of Soft Dollars, and Marking the Close

The SEC filed a civil complaint in Minnesota federal district court against Archer Advisers LLC, the firm’s owner Steven R. Markusen and employee Jay C. Cope alleging that the firm’s two hedge funds had been falsely billed for research by the employee that had not in fact been conducted, and that the funds’ soft dollars, generated in part through excessive trading, had been improperly directed to pay for the same purported research by misrepresenting the employee as an independent consultant.  The complaint also alleges that Markusen and Cope sought to manipulate the price of the company that represented the funds’ largest holding by placing multiple buy orders just before the market close on the last trading day of the month at least 28 times, and that Archer Advisers failed to disclose its status as a 10% beneficial owner of that company as required under Section 16 of the Securities Exchange Act of 1934.

SEC Announces Settlements with Insiders and Major Shareholders Over Late Filings of Section 16 and Section 13 Reports with Respect to Public Company Holdings

The SEC announced that it had settled administrative proceedings with 33 individuals and companies as the result of an enforcement initiative that used quantitative analytics to identify repeated late filers of (a) Form 4 under Section 16 of the Securities Exchange Act of 1934 on which corporate officers, directors, and certain beneficial owners of more than 10 percent of a registered class of a public company’s stock must report their transactions in company stock and (b) Schedule 13D and 13G under the Act on which beneficial owners of more than 5 percent of a registered class of a public company’s stock report their holdings or intentions with respect to the company.  The beneficial owner respondents included 12 officers and directors of public companies, five other individual holders, and 10 investment firms.   Six public companies were found to have contributed to filing failures by insiders or failing to report their insiders’ filing delinquencies.   The respondents agreed to pay financial penalties totaling $2.6 million.  An additional individual identified in the enforcement initiative will litigate the charges against him in an administrative proceeding.