September 2013 Archives | Securities Law & Corporate Counsel Blog
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September 2013 Archives

New Filing Requirement for Commodity Trading Advisors

The National Futures Association (“NFA”) announced its new quarterly filing requirement for commodity trading advisors (“CTAs”). The form is called NFA Form PR, and it requires CTAs to report to the NFA such information as general contact information, trading programs and information regarding pool assets directed by the CTA.Since the U.S. Commodity Futures Trading Commission (“CFTC”) adopted Regulation 4.27 in 2012, CTAs have been required to file a Form PR annually following the end of each calendar year, but just recently the new NFA Form PR replaced the previous CTA-PR form.  The information contained within the new Form PR includes the previous CFTC annual Form PR, along with some additional questions relating to certain trading programs being offered by the CTA, and the related monthly rates of return and the assets under management for those trading programs. This new filing requirement will become effective at the end of this calendar quarter, September 30, 2013.  At that time, all CTAs (regardless of whether they are currently active) that are registered with the CFTC and members of the NFA will be required to file the new Form PR by November 14, 2013.  The new Form PR will need to be submitted through the NFA's EasyFile System.   You can read more about the NFA’s notice, here.For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

“Harmonization Rules” Provide Relief For Dually Registered Operators

Recently, the Commodity Futures Trading Commission (“CFTC”) adopted final rules (the “Harmonization Rules”) amending the compliance requirements for operators of investment companies (“RICs”) registered with the Securities and Exchange Commissions (“SEC”), who are also subject to registration as commodity pool operators (“CPOs”) with the CFTC.    These rule changes follow the CFTC’s adoption in 2012 of amendments to CFTC Regulation 4.5 that require operators of RICs to either limit their use of commodity interests (such as speculative trading in futures, commodity options, swaps and other commodity interests) to statutorily defined “de minimis” amounts, or register as a CPO with the CFTC.  The result of the 2012 rule change was that several such operators were subject to registration with both regulatory bodies, each of whom have their own rules governing compliance matters.  As such, the goal of these Harmonization Rules is to harmonize the compliance requirements between the SEC and the CFTC for operators subject to dual registration.  The Harmonization Rules basically state that the CFTC will (subject to notice filing with the CFTC and other specified conditions) accept compliance with the disclosure, reporting and recordkeeping regimes administered by the SEC as “substituted” compliance for substantially all of Part 4 of the CFTC’s regulations.  Some of the more notable “substituted” compliance matters include:
  • Delivery of disclosure documents to each prospective participant in any pool that a CPO operates;
  • Distribution of account statements to each participant in any pool that a CPO operates;
  • Provision information that must appear in a CPO’s disclosure documents, including performance disclosures; and
  • The use, amendment and filing of disclosure documents.
Additionally, the Harmonization Rules provide relief for all CPOs and Commodity Trading Advisors (“CTAs”) (not just those who are dually registered) in allowing CPOs and CTAs  to utilize a third-party service provider to maintain their books and records - so long as the CPOs and/or CTAs file a notice with the CFTC and the records remain readily accessible. While the Harmonization Rules will certainly be a relief for dually registered operators, it is important to bear in mind that failure to adhere to SEC regulations will be considered a violation by not only the SEC, but the CFTC as well.  As such, it is vital that operators in this position understand and strictly adhere with all relevant regulations, and ensure that their firms remain compliant.For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

Anti-Money Laundering Regulations for IAs

The stability of our financial economy can be deeply affected by the act of money laundering.  Anti-Money Laundering (“AML”) programs for financial institutions are governed by various laws, including the Bank Secrecy Act of 1970 (“BSA”), the Money Laundering Control Act of 1986, and also the USA PATRIOT Act (“USAPA”).  Currently, investment advisers (“IAs”) are not expressly included within the definition of “financial institutions” under the BSA or USAPA, and as such, are not subject to the affirmative AML requirements of those regulations (however IAs still must adhere to the Office of Foreign Assets Control (“OFAC”) regulations requiring IAs to block the accounts of specified countries, entities and individuals).  Due to the great focus being placed on money laundering by the US government, the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has resurrected its efforts to implement affirmative AML regulations on IAs similar to those currently in place for other financial institutions. FinCEN’s first proposed affirmative AML regulations for IAs in 2003.  However, these proposed regulations were withdrawn in 2008 due to a lack of any further regulatory action on behalf of FinCEN.  In 2011, FinCEN announced its intention to revisit the 2003 proposal requiring AML programs for IAs.  This past February, FinCEN again reiterated this intention and announced it is working with the Securities and Exchange Commission (“SEC”) on new rules that would impose an AML program and suspicious activity reporting (“SAR”) requirements in IAs (see the Proposed Rule here). While there are still several steps that need to be taken prior to such regulation taking effect, it seems as though it is only a matter of time before IAs will be required to have AML programs in place.  As such, for those IAs who have yet to develop their own AML policies, it would be prudent to begin formulating policies and procedures following the examples set by other financial institutions currently requiring such policies.If you would like to read more on this topic, and for tips on preparing an AML program, click here.For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

Recent SEC Matter Exemplifies Importance of Proper CCO Supervision

The role of the Chief Compliance Officer ("CCO") is to ensure that a firm complies with its outside regulatory requirements and internal policies.  This requires the CCO to administer, test and supervise the policies and procedures (P&Ps) of a firm that are reasonably designed to prevent violation of Federal Securities Laws.  CCOs are often the first to be blamed when violations occur, and there have been several documented instances that illustrate how a CCO's failure to properly supervise can lead to sanctions by the Securities and Exchange Commission ("SEC") (for such an example please see JLG's blog posting dated August 8, 2013).  More recently, however, the SEC sanctioned  former portfolio manager Carl Johns ("Mr. Johns") at Boulder Investment Advisers ("BIA"), a Colorado-based investment adviser, for forging documents and misleading the firm's CCO (who was not named in the SEC's Release) in order to conceal his failure to report personal trades, thus violating Rule 38a-1(c) of the Investment Company Act.  This violation was discovered by the CCO herself, thanks to BIA's well-drafted P&Ps and to the CCO's admirable supervision of those P&Ps.