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March 2013 Archives

Legal Risk Management Tip for the Month – Commodity Investments for Advisors and Investment Companies

Jacko Law Group, PC (JLG) is very proud to present our new Legal Risk Management Tip for the month of March, authored by JLG’s recent addition to the legal team, Charles H. Field, Esq. Mr. Field has over 26 years of experience working with business leaders and senior executives on matters affecting investment advisors (IAs), broker-dealers (BDs) and private funds. His extensive knowledge of this field lends itself to our March Legal Tip, where Mr. Field details the intricacies, definitions, exemptions and impacts of commodity investments.

To Be Reviewed or Not To Be Reviewed: The SEC Provides Guidance on Filing Requirements for Certain Electronic Communications

Last week, the Securities and Exchange Commission ("SEC") published additional guidance on social media filings, in order to clarify the obligations that mutual funds and other investment companies have in seeking review of materials posted on their social media websites.  This was done partly to increase transparency of federal securities laws and regulations, and partly as a response to claims by the Financial Industry Regulatory Authority ("FINRA") (the body responsible for reviewing those advertisements required to be submitted by mutual funds and other investment companies) that several "unnecessary" submittals have occurred due to firms being overly-cautious. Certain communications posted by mutual funds and other investment companies are required to be submitted to FINRA prior to their use in order to ensure that the content is not misleading to an investor.  This applies not only to printed materials, but also to those communications posted on interactive websites.  The SEC's "guidance update" focuses on the kinds of interactive content the SEC believes would and would not be subject to a requirement to file with FINRA, while giving some "real life" examples.  Obviously, whether a communication need be filed ultimately depends on the content, context, and presentation of the communication.  Some of the content the SEC cited as examples of communications generally NOT needing to be filed include:

SEC Reinforces the Importance of the Custody Rule for Investment Advisers

Recently, the Securities and Exchange Commission (“SEC”) issued a Risk Alert (the “Alert”) concerning rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Rule”), commonly referred to as “The Custody Rule” for investment advisers.  The Alert was issued as a response to recent examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) who found significant deficiencies in this area in nearly one-third of firms that were examined.  The following items were provided by OCIE as some of the more common deficiencies discovered:
  1. Failure [of the adviser] to recognize that they have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services;
  2. Failure to satisfy the Rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client;
  3. Failure to meet the Rule’s surprise examination requirements; and
  4. In instances where the adviser oversees an audited pooled investment vehicle, the examinations found some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.
The alert goes on to state that these deficiencies have resulted in enforcement actions ranging from remedial measures (such as requiring the adviser to draft, amend, or enhance written compliance procedures, policies or processes), to referrals made to the SEC’s Division of Enforcement with the recommendation for more serious sanctions.This area will continue to be a focus of SEC examinations according to OCIE Director Carlo V. di Florio.  As such, it is critical that advisers understand and follow these regulations when they maintain custody of client funds.  For further information about this, or other related topics, please contact us at [email protected] or (619) 298-2880. 

U.S. Supreme Court Ruling Defines Statute of Limitations "Start Time"

The U.S. Supreme Court (the “Court”) last week unanimously reversed a 2nd U.S. Circuit Court of Appeals decision, effectively mandating the Securities and Exchange Commission (“SEC”) to file complaints seeking civil penalties for securities fraud within five years of the alleged incident, not five years after the alleged incident is discovered.

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