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August 2012 Archives

The Securities and Exchange Commission Awards Whistleblower

The SEC Whistleblower Program (the “Program”), which became a final rule on August 12, 2011, provides incentives and protection to whistleblowers who provide the SEC with original information about violations of the federal securities laws. Under the Program, an “eligible whistleblower” is entitled to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC or other regulatory and law enforcement authorities.In accordance with Section 21F-2 of the Securities Exchange Act of 1934, an eligible whistleblower is defined as a person who “voluntarily” provides the SEC with “original information” about a possible violation of the federal securities laws that has occurred, is ongoing or is about to occur. To benefit from the Program, the information must lead to a successful SEC action resulting in an order of monetary sanctions exceeding $1million.The first payout from the Program to a whistleblower was ordered on May 18, 2012. The award recipient, who does not want to be identified, will receive 30 percent of the amount collected in an SEC enforcement action which helped the SEC stop a multi-million dollar fraud. The recipient will receive nearly $50,000 for their assistance.While any submission to the SEC can be submitted anonymously, you must have an attorney represent you in connection with your submission, along with other requirements, as stated in Rule 21F-7. Whether you seek anonymity or not, the SEC will strive to protect your identity to the fullest extent possible, subject to some limitations. In addition to incentives, the Program provides protection to whistleblowers in case any employer retaliates against them for reporting information to the SEC.Before submitting a whistle blowing tip, it is imperative to consult with counsel to vet all potential impacts and considerations. For further information on the Program, please visit the SEC's FAQ or contact Andrew Deddeh at (619) 298-2880 or [email protected].

CFTC Publishes FAQs on Compliance Obligations for CPOs and CTAs

This week the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) published a set of Frequently Asked Questions (FAQs) addressing compliance obligations for Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs). The FAQs address a number of concerns raised by market participants since CFTC’s adoption of new regulations pursuant to Dodd-Frank. The issues addressed in the FAQs include clarification on what entities must register under the new rules, specific compliance dates, and the process for transitioning from the eliminated exemption under Rule 4.13(a)(4). Of note:-          The FAQs specifically provide that CPOs of fund-of-funds may continue to rely on Appendix A to Part 4, which was eliminated by in the final rules that were published in March and had provided fund-of-funds with guidance for reliance on the limited trading exemption under Rule 4.13(a)(3). CFTC watchers have reported that a replacement for Appendix A is likely to be released this year, but the new FAQ makes clear that fund-of-funds may still rely on Appendix A to determine if they meet the limited trading exemption until that occurs.-          The DSIO guidance clarifies that CPOs that claimed relief from registration under Rule 4.13(a)(4) (the eliminated “sophisticated investor” exemption that was tied into the Section 3(c)(7) qualified purchaser exclusion under the Investment Company Act of 1940) prior to April 24, 2012 must register or claim exemption under the limited trading exemption by December 31, 2012.-          CPOs transitioning from the 4.13(a)(4) to the exemption under 4.13(a)(3) must submit a written request to the National Future Association (NFA) to withdraw the exemption. Once that withdraw is finalized, the CPO may file the exemption electronically. The CPO also must provide notice to its participants of its change in exemption status.For further information about CFTC regulatory compliance, or any other securities law concern, please contact Sarah Weber at [email protected] or (619)298-2880.

ERISA Rule 404a-5 Disclosure Deadline on the Horizon

ERISA Rule 404a-5 was enacted in order to provide greater transparency to investors in 401(k) type pension plans. The rule was adopted two years ago, but the August 30, 2012 deadline for plan administrators to issue the required disclosures is just around the corner.  As reported earlier this year, the August 30th deadline gives plan sponsors 60 days from the July 1, 2012 deadline for service providers to provide specific disclosures related to their costs and expenses to plan sponsors. The Rule requires plan administrators to provide plan participants with certain plan-related and investment-related information, including: -          General plan information about the structure and mechanics of the plan, such as how to give investment instructions, the plan's investment options, and any arrangements that enable participants to select investments beyond those designated. -          An explanation of any fees and expenses for general plan administrative services that are charged or deducted from all individual accounts and any fees and expenses that may be charged or deducted from individual accounts based on actions taken by the individual. -          Required investment-related information includes performance data and benchmark information, as well as fees and expenses associated with the investments, such as operating expenses and shareholder fees, and any restrictions on the ability to purchase or withdraw from an investment. The plan-related information must be provided to participants before they can direct their first investment and then annually thereafter. In addition, participants must receive at least quarterly statements showing the dollar amount of plan-related fees and expenses that were actually charged or deducted from the account, as well as a description of the services for which the charge or deduction was made. Although investments advisers completed their required disclosures under Rule 408b-2 to plan sponsors, plans will undoubtedly be turning to their service providers for help with their required disclosures. For assistance addressing plan questions about the required disclosures or any other compliance concern please contact Sarah Weber at [email protected] or (619)298-2880.

BD Corner: New Suitability Rule Takes Effect

FINRA recently published Regulatory Notice 12-25 to provide broker-dealers with additional guidance on the SRO’s new suitability rule, which took effect on July 9th.  The new suitability standards under Rule 2111 were approved by the SEC in November, 2010. They were initially scheduled to take effect on October 7, 2011, but the deadline was extended in response to requests from the industry for more implementation time. The recent release responds to requests from FINRA member firms for additional direction on issues they identified during the implementation process. The release also provides useful information concerning the implementation of a risk-based approach to documentation of suitability compliance and the scope of appropriate information gathering from clients.The new suitability Rule makes absolutely clear that a broker-dealer’s suitability obligations include firmly understanding both the customer and the products recommended to customers. The Rule codifies and clarifies the three main suitability obligations of broker-dealers and their registered representatives, previously discussed only in case law:
  1. Reasonable-basis suitability –brokers must perform reasonable diligence to understand the nature of the recommended security, including its potential risks and rewards and whether it would be a suitable investment for any investor.
  2. Customer-specific suitability – this obligation looks to the customer’s investment profile. The broker must have a reasonable basis to believe that the recommended security is suitable for the particular customer.
  3. Quantitative suitability – requires a broker who has actual, or de facto, control of a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and/or unsuitable for the customer.
The Rule also sets forth an expanded list of customer-specific factors that must be obtained and analyzed by firms as part of their suitability inquiry, including age, investment experience, time horizon, liquidity needs and risk tolerance.For additional information concerning the new suitability rule please contact Sarah Weber at [email protected] or (619)298-2880.
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