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July 2012 Archives

New User Fee Bill Counters RIA SRO Bill

During the June 6th hearing of the House Financial Services Committee, legislation was introduced by Representative Spencer Bachus (R-Ala.) that would create a new self-regulatory organization for Registered Investment Advisers “(RIA”) (H.R. 4624). During that session Representative Maxine Waters (D-Calif.) stated she was drafting alternative legislation that would allow the SEC to collect fees from advisers to fund the regulator’s examination program. As promised, on July 25th, Rep. Waters introduced the Investment Adviser Examination Improvement Act of 2012. According to the press release for the new legislation, the bill “would provide the [SEC] with the authority to impose and collect user fees on investment advisors for the purpose of increasing the number and frequency of SEC examinations.” Under the proposed law, the SEC would have a mandate to collect fees directly from advisers to cover the costs of additional examinations by the SEC. Under Water’s bill, the amount of the fee assessed to advisory firms would be based on the firm’s assets under management, the number and types of clients, as well as the firm’s risk profile. Importantly, the measure would take funding for the SEC’s oversight of advisers outside the annual congressional budget process and create a stable source of finding for examinations.While both sides acknowledge the current system is insufficient, the competing measures underlie the divide among industry members concerning how to improve oversight of RIAs. Backers of Rep. Bachus’s measure (including FINRA, which is vying to become the SRO under that bill) argue that primary oversight should be shifted out of the SEC. Backers of Rep. Water’s proposal, however, contend that shifting oversight to an SRO doesn’t address the problem. David Tittsworth, executive director of the Investment Adviser Association (which worked with Rep. Waters on the bill) noted: “Investment adviser user fees will be far more effective and efficient in enhancing examinations of advisers than establishing an unnecessary, additional layer of bureaucracy and cost associated with a self-regulatory organization.”  Rep. Water’s release cites a recent study by the Boston Consulting Group finding “that establishing a self-regulatory organization (SRO) would likely cost twice as much as funding an enhanced SEC examination program.”Neither bill is expected to pass in the current congressional session, which ends January 2, 2013. For additional information please contact Sarah Weber at [email protected] or (619)298-2880.

Update: California Private Fund Adviser Exemption Submitted for Final Approval

On July 17, 2012 the California Department of Corporations Commission filed final amendments to Section 260.204.9 of Title 10 of the California Code of Regulations with the state’s Office of Administrative Law (OAL).  As reported here earlier this year, the amended regulation does away with the old private fund adviser exemption and creates a California corollary to the new federal private fund adviser exemption created by Dodd-Frank. Under California Gov. Code §11349.3. The OAL must approve or disapprove the regulation within 30 working days (the old exemption, extended by emergency regulation, remains in effect while the new regulation is under OAL review).For additional information about the new regulations, or any other securities law concern, please contact Sarah Weber at [email protected] or (619)298-2880.

SEC and CFTC Finalize Rules and Interpretations on Key Terms for Regulating Derivatives

This month, the SEC and the Commodity Futures Trading Commission (CFTC) adopted final rules defining what derivative products will be regulated under Title VII of Dodd-Frank. That Title establishes a comprehensive new regulatory framework for swaps and security-based swaps, giving the SEC and the CFTC authority to oversee the over-the-counter derivatives market.The new rules define the terms “swap,” which fall within the purview of the CFTC, and “security-based swap,” falling within the purview of the SEC. The rules and interpretations also provide guidance as to what constitutes a “mixed swap,” which are security based swaps with a commodity component that the SEC and CFTC oversight. Security-based swap agreements are related to securities, but do not come within the security based swap definition, and are regulated by the CFTC but subject to the SEC’s anti-fraud provisions.Under the final joint rulemaking, swaps and security based swaps include:-          Foreign exchange swaps and forwards;-          Foreign currency options (other than foreign currency options traded on a national securities exchange);-          Commodity options; and-          Cross-currency swaps and forward rate agreements.The regulators’ interpretations also clarify that the determination of whether a particular agreement, contract or transaction is a swap, SBS or mixed product is made at the inception of the instrument and that the characterization remains through the life of the instrument (unless the instrument is later amended or modified). Also of note, the definitions create a safe harbor for certain insurance products and exempt some consumer and commercial transactions, such as life, property and casualty insurance.Importantly, the new rules also set in motion the registration requirements for “swap dealers,” who have 60 days to register with the National Future Association after the final definitions are published in the Federal Register.For additional information about the new regulations for derivatives, or any other securities law concern, please contact Sarah Weber at [email protected] or (619)298-2880.

SEC Announces JOBS Act General Solicitation Rulemaking Delay

On June 28, 2012 SEC Chairman Mary Shapiro appeared before a House subcommittee to testify about the agency's implementation of the Jumpstart Our Business Startups Act (JOBS Act). Title II of that legislation requires the SEC to implement ground-shifting rule changes that will permit general solicitation and general advertising under Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933. While removing the general solicitation ban, the legislation does specifically require issuers to take reasonable steps to verify that purchasers of the securities are accredited investors or qualified institutional buyers, as applicable, using methods that will be determined by further SEC rulemaking.  The Act also specifically called for the Commission to make the rule changes within 90 days of the bill's April 5, 2012 enactment. Chairman Shapiro testified that the Commission's staff had "moved aggressively to implement the provisions of the JOBS Act," including: (1) the formation of rule writing teams, (2) establishing e-mail boxes on the Commission's website for comments even in advance of the issuance of proposed rules, and (3) conducting meetings with interested member of the public. In no surprise to followers of the legislation, Shapiro did state however that the 90 day deadline set by the legislation would not be met by the agency:  "the 90 day deadline d[id] not provide a realistic timeframe for the drafting of the new rules [related to general solicitation], the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input." Shapiro did not give any specific dates as to when the proposed rulemaking relating to lifting the general solicitation ban would be issued, stating only "it is my belief that the Commission will be in a position to act on a staff proposal in the very near future." For additional information about the JOBS Act, or any other securities law concern, please contact Sarah Weber at [email protected] or (619)298-2880.

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