By Yin Wilczek

The Securities and Exchange Commission Oct. 26 unanimously adopted a rule that will require hedge and other private fund advisers to report information—scaled to the size and types of funds—that will be used by the Financial Stability Oversight Council to assess systemic risk.

The final rule—a joint rulemaking by the SEC and the Commodity Futures Trading Commission—was substantially modified from a proposal issued in January (43 SRLR 198, 1/31/11) to ease the requirements for industry. The changes include higher reporting thresholds, less reporting detail, less frequent reports, and extension of compliance deadlines.

The CFTC is expected to consider adoption of the rule within the next week. The SEC will not post its adopting release or new Form PF—the form on which the systemic risk data is reported—unless and until the CFTC approves the rule.

Coordination, Consultation

In her opening remarks, SEC Chairman Mary Schapiro said the new rule and Form PF—for “private funds”—was the result of consultations with FSOC and international regulators, and input from industry participants. As a result, Form PF “will address the dramatic lack of private fund information available to regulators today while easing the burden on private fund managers producing the data, so that the same data collection approaches and protocols apply cross-border where appropriate,” she said.

The requirements for hedge and other private fund advisers to report systemic risk data and to register with the SEC were both mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Confidential Data

In recommending that the commission adopt the systemic risk reporting rule, Eileen Rominger, director of the SEC’s Division of Investment Management, stressed that the information provided will be kept confidential—a concern that many participants voiced. “Division staff is focused on helping design controls and systems for the use and handling of Form PF data in a manner that respects the sensitivity of this data, and is consistent with the enhanced protections established in the Dodd-Frank act,” she said.

Rominger added that two factors also should help reduce the sensitivity of the reported information. First, Form PF does not require the reporting of position-level data, she said. Second, most of the filing deadlines have been significantly extended…

cforms contact form by delicious:days

A sharply divided Securities and Exchange Commission June 22 voted 3-2 to adopt new rules and amendments to register hedge fund and private fund advisers, and to impose reporting requirements for funds exempt from registration.

In dissent, Commissioners Kathleen Casey and Troy Paredes argued that the new requirements would blur the distinction between registered advisers and so-called “exempt reporting advisers.” That could mean added compliance burdens and costs for the venture capital fund industry which Congress specifically exempted from registration requirements, they said.

At the same meeting, the SEC unanimously voted to adopt rules to implement registration exemptions for venture capital fund advisers; advisers to private funds with less than $150 million in assets under management in the United States; and certain foreign advisers that do not have a place of business within the United States.

The SEC also unanimously voted to adopt a new rule that defines “family offices” that are exempt from 1940 Investment Advisers Act requirements [see related report in this issue].

Reform Act

Section 410 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to adopt rules to require mid-sized advisers that manage between $25 million to $100 million in assets to withdraw from SEC registration and to register with one or more states under state law. Currently, advisers with under $25 million in assets must register with a state regulator while those with over $30 million must register with the SEC. Advisers with assets of between $25 million and $30 million may opt to register with states or with the SEC.

In addition, the reform act’s Section 403 requires the SEC to issue rules requiring advisers to hedge and private equity funds with more than $150 million in assets to register with the SEC. Although Section 408 directs the SEC to exempt advisers that solely advise private funds and that manage less than $150 million from registration requirements, the provision nonetheless authorizes the commission to require such advisers to maintain records and provide reports that it deems necessary to protect investors.

The SEC issued a rule proposal that would implement the Title IV provisions in November (42 SRLR 2198, 11/22/10).

More Data to Public

At the June 22 open meeting, SEC Chairman Mary Schapiro said the new rules will fill a key regulatory gap by allowing the SEC and investors insight into the formerly opaque world of hedge and private equity funds. “In developing our registration rules and reporting requirements, we sought to obtain from all of these advisers a meaningful collection of data that would aid investors and assist our regulatory and examination efforts—without requiring any disclosure that could inadvertently harm the interests of private fund investors,” she said.

Robert Plaze, associate director of the SEC’s Division of Investment Management, told the commissioners during the open meeting that adoption of the new rules would complete the bulk of the SEC’s rulemaking responsibilities under Title IV.

The new rules and amendments make changes in four substantive areas. First, the new rules require hedge and private equity fund advisers to provide in their registration forms—Form ADV—information about each private fund they manage, including the size and ownership of the fund, and the services provided to the fund. In addition, the advisers have to identify five categories of “gatekeepers” that perform important roles in the fund business: auditors, prime brokers, custodians, administrators, and marketers.

The newly registered entities also have to provide additional information, including the types of clients they advise, and business practices that could present significant conflicts of interest, including soft dollar arrangements, and use of affiliated brokers.

The SEC estimates that there will be about 750 newly registered hedge fund and private equity fund advisers. These advisers have to register with the SEC by March 30, 2012…

cforms contact form by delicious:days

An investment adviser that is a legally separate entity from the mutual fund that files an allegedly misleading prospectus cannot be held primarily liable in a private action under Securities and Exchange Commission Rule 10b-5 for “mak[ing]” a false statement, even if the adviser took part in drafting the challenged statement, the U.S. Supreme Court held by a 5–4 vote June 13 (Janus Capital Group Inc. v. First Derivative Traders, U.S., No. 09-525, 6/13/11).

In a decision that adhered to a narrow view of primary liability in a private 10b-5 suit, Justice Clarence Thomas wrote for the court, “For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Here, that entity was the mutual fund; there were no allegations that the adviser “in fact filed the prospectuses and falsely attributed them” to the mutual fund, he said.

Thomas asserted that the ruling “follows from” Central Bank of Denver N.A. v. First Interstate Bank of Denver N.A., 511 U.S. 164 (1994), which held that “Rule 10b-5′s private right of action does not include suits against aiders and abettors.” The ruling “also accords with the narrow scope that we must give the implied private right of action” under Rule 10b-5, he added.

Attorneys for the defendants and a supporting amicus told BNA June 13 that the ruling is the “logical culmination” in a trilogy of cases beginning with Central Bank and ending here, and it “should be the third strike” for plaintiffs’ lawyers who have sought to expand the scope of Rule 10b-5 liability.

The author of a brief supporting the plaintiffs told BNA the court’s ruling could provide some bad actors a “road map” for committing fraud while insulating the perpetrators from liability.

Misleading Prospectus Alleged

In this case, investors in Janus Capital Group Inc. (JCG), creator of the Janus Investment Fund (the fund), alleged that the fund’s prospectus gave the “misleading impression” that JCG and its wholly owned subsidiary, Janus Capital Management LLC (JCM), the fund’s investment adviser and administrator, would take steps to curb “market timing” by investors in the fund. “Market timing” is a trading strategy that exploits time delay in mutual funds’ daily valuation, which usually occurs at the close of major U.S. markets. It is not illegal, but can harm other investors in the fund.

In a separate proceeding, the New York attorney general sued JCG and JCM, alleging that they entered into secret agreements to allow market timing in several funds run by JCM. When those charges became public, the fund lost value, and the stock price of JCG—which derived a significant part of its income from JCM’s management fees—dropped 25 percent.

The plaintiff JCG investors alleged that JCG and JCM “materially misled the investing public” and that class members had relied on the integrity of JCG’s market price. They sought damages against both entities under Section 10(b) of the 1934 Securities Exchange Act and Rule 10b-5, and against JCG as a “controlling person” under Section 20(a) of the 1934 Act for the acts of JCM.

The district court dismissed for failure to state a claim. The U.S. Court of Appeals for the Fourth Circuit reversed (41 SRLR 918, 5/18/09), finding that “JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents” (emphasis by the appeals court). It found the investor reliance element of Rule 10b-5 met with respect to JCM, because investors would infer that it had played a role in preparing or approving the prospectuses, but not with respect to JCG, which could be held liable only as a controlling person of JCM.

‘Ultimate Control’ Key

The Supreme Court reversed as to JCM, thus obviating any “controlling person” liability of JCG (the only form of liability that the investors continued to pursue against JCG). Rule 10b-5 makes it unlawful for “any person, directly or indirectly … [t]o make any untrue statement of a material fact” in connection with the purchase or sale of securities. “To be liable, therefore, JCM must have ‘made’ the material misrepresentations in the prospectuses,” the court said. “We hold that it did not.”…

cforms contact form by delicious:days

By Lois Herzeca, Gibson, Dunn & Crutcher, New York

Social media has become a key component of corporate communications strategies. These internet sites allow for the creation and exchange of user generated content, and encompass a vast array of social networks, blogs, microblogs, photo and video sharing sites, news aggregation sites and reference sites. Social media sites may have both ‘static’ content (such as profiles and banner ads), which once posted do not change, and ‘interactive’ content which involves real time communications. Since social media is generally low cost, instantaneous and widely accessible, many companies have determined that social media is a vital way to connect with customers, employees and shareholders. Currently, a majority of the Fortune 500 companies have either a Twitter or a Facebook account. Since social media, by definition, involves the dissemination of information, it is not surprising that corporate deployment of social media raises potential compliance issues under the federal securities laws and has become the focus of regulators.

Regulation D

Under the Securities Act of 1933, offers and sales of securities must either be registered or qualify for an exemption from registration. Regulation D provides an exemption for issuers in offerings meeting the general conditions set forth in Rule 502. Specifically, Rule 502(c) prohibits an issuer or any person acting on the issuer’s behalf from offering or selling “securities by any form of general solicitation or general advertising” including: any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. It is reasonable to conclude that social media would be included in the category ‘similar media’, but it is not so clear what types of conduct on social media would constitute a general solicitation. The Securities and Exchange Commission’s (SEC) historical view is that whether a communication is a general solicitation depends on whether the relationship between the parties communicating predated the securities offering and whether a sale of securities was intended by the communication. This becomes an interesting analysis in the context of Facebook ‘friends’ and Linkedin ‘connections’, where relationships are more fluid and the purpose of communications more ambiguous. Companies that are in the process of conducting private placements need to be especially vigilant about avoiding social media usage that arguably constitutes a general solicitation.

Regulation FD

Regulation FD prohibits an issuer, or a person acting on its behalf, from selectively disclosing material nonpublic information. If material nonpublic information is selectively disclosed to certain individuals or entities, the issuer must make “public disclosure” of that information. Information may be publicly disclosed by either filing or furnishing a Form 8-K or by disseminating the information through “another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” In 2008, the SEC issued guidance as to when content on a company’s website is considered “public” for purposes of Regulation FD. The three elements to consider in determining whether content posted on a company website will be considered “public” for purposes of Regulation FD are (i) whether a company website is a recognized channel of distribution; (ii) whether information posted on a company website is accessible and therefore disseminates information to the marketplace in general; and (iii) whether information is posted for a reasonable enough period for the marketplace to react…

cforms contact form by delicious:days

The Securities and Exchange Commission Jan. 25 unanimously proposed to require certain private fund advisers to report information that ultimately would be shared with the Financial Stability Oversight Council to monitor systemic risk.

The proposal was one of three that the five-member panel considered during a public meeting. The other measures would implement provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act related to the definition of “accredited investor” and the right of shareholders at public companies to approve executive compensation and severance packages.

Meanwhile, the adviser proposal would implement Sections 404 and 406 of Dodd-Frank. Together, the provisions direct the SEC and the Commodity Futures Trading Commission to collect data from private fund advisers so as to inform the FSOC about systemic risk in the industry.

cforms contact form by delicious:days

Instead, the 112th Congress is shaping up as one in…

cforms contact form by delicious:days

The U.S. Supreme Court Dec. 7 heard oral argument in a case that is testing the boundaries of primary versus secondary liability under the federal securities laws’ cornerstone antifraud provision while also…

cforms contact form by delicious:days

For decades, the Securities and Exchange Commission’s Enforcement Division allocated few of its limited resources to the world of funds and advisers. The ’40 Act was left to the regulatory lawyers while, apart from the combined state-federal campaign against market timing and late trading a few years ago, the…

cforms contact form by delicious:days

BOSTON—The Securities and Exchange Commission and state regulators in Connecticut filed suits Oct. 25 charging hedge fund investment manager Stephen M. Hicks and his investment advisory…

cforms contact form by delicious:days