Emerald | Journal of Investment Compliance | Table of Contents

DOJ and the SEC issue much-anticipated FCPA guidance

Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to explain the joint guidance on the US Foreign Corrupt Practices Act (FCPA or the Act) published on November 14, 2012 by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC). Design/methodology/approach – The paper explains the principal provisions of the Act covered in the joint guidance, where the joint guidance sheds light, and where it leaves uncertainty. Key issues covered are jurisdiction; corrupt intent, knowledge and willfulness; the “business purpose” test; gifts, travel and entertainment expenses; charitable contributions; definitions of foreign officials and instrumentalities; third parties; facilitating payments; extortion/duress; successor liability; accounting provisions; compliance programs; compliance monitors; and prosecution, resolution and declination decisions. Findings – While it is unprecedented in federal law enforcement that the DOJ and SEC have provided the public with such detailed information on their joint FCPA enforcement approach and priorities, the guidance does not break new ground and generally reaffirms positions the agencies have previously espoused in other contexts. The guidance leaves open some difficult issues facing compliance officers and practitioners. Originality/value – The paper provides expert guidance by experienced financial services lawyers.

FINRA Rule 5123 requires filings for certain private placements sold by broker-dealers

literatinetwork@emeraldinsight.com (Martin R. Miller) — Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The purpose of the article is to inform the various securities market participants about new Rule 5123 of the Financial Industry Regulatory Authority, Inc. (FINRA), its specifics and the requirements it may impose. Design/methodology/approach – The author outlines the requirements of the Rule, exemptions to its application, additional background information and some clarifications based on the FINRA adopting notice. Findings – Rule 5123, which became effective December 3, 2012, requires FINRA member broker-dealer firms that sell an issuer's securities in a private placement, subject to a number of exemptions, either to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the member firm used or to indicate that they did not use any such offering documents. Member firms must make this filing within 15 calendar days of the date of the first sale and file materially amended versions of any documents previously filed. Practical implications – The author hopes the discussion in the article will enable affected market participants, which include US-registered broker-dealers as well as issuers of securities in private placements using the services of FINRA member broker-dealers, to be informed about and to comply with the Rule. Originality/value – The paper provides practical guidance from experienced securities lawyers.

The European Commission adopts AIFMD implementing regulation

literatinetwork@emeraldinsight.com (Peter McGowan) — Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – This article aims to outline in depth the European Commission's adopted implementing rules (the Regulation) for the Directive on Alternative Investment Fund Managers. These new regulations have been eagerly awaited by private equity fund managers and their investors who have been seeking a measure of certainty about how the AIFMD will be transposed into local law. Design/methodology/approach – This piece summarizes some of the key points of the Regulation. Findings – This article addresses the rules in the Regulation concerning: the calculations of assets under management; capital requirements in relation to professional liability risks applicable to alternative investment fund managers; operating conditions for alternative investment fund managers, including liquidity management, organizational requirements and rules on valuation; conditions for delegation; rules on depositaries, including the depositary's tasks and liability; transparency, reporting and disclosure requirements; and rules for cooperation arrangements. Practical implications – The Regulation supplements certain elements of the Directive and contains implementing rules that will have direct effect in EU member states on application without the need for national implementing legislation. By discussing some of the highlights of the Regulation, the article will help fund managers and investors gain a better perspective of the AIFMD, which is useful from both a compliance and business planning standpoint. Originality/value – This piece is of value to those private equity fund managers and investors looking for guidance as to how to digest the Regulation and the implications of these new measures on their respective businesses, as well as the investment marketplace as a whole moving forward.

SEC institutes administrative proceedings against eight registered fund directors for failure to properly oversee asset valuations

literatinetwork@emeraldinsight.com (Bibb Strench, Jeffrey Schellenger) — Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to explain the meaning and impact of the US Securities and Exchange Commission's (SEC) December 10, 2012 enforcement action against former mutual fund directors for failing to properly oversee the valuation of mutual fund portfolio securities. Design/methodology/approach – The paper provides an overview of the obligations of a board of directors with respect to the process used by a mutual fund to fair value portfolio securities that do not have reliable market prices, explains the background, factual circumstances and allegations set forth in the SEC enforcement order and emphasizes certain allegations made by the SEC that should cause mutual fund directors, investment advisers and compliance officers to review and refine certain aspects of the asset valuation policies and governance structure used in their mutual fund complex. Findings – The SEC continues to prioritize mutual fund asset valuation enforcement actions. The SEC is willing and able to enter the board room to bring cases against independent directors, a path it has rarely taken in the past. While the facts underlying this enforcement action were extreme, mutual fund directors, compliance personnel and investment professionals should take immediate steps to review their asset valuation policies and related aspects of their governance structure to ensure that they comply with current rules, regulations, agency interpretations and accounting pronouncements, as well as best practices in the mutual fund industry. Originality/value – The paper provides expert guidance from experienced investment management lawyers.

Professionalism and investment advisers

literatinetwork@emeraldinsight.com (Aegis J. Frumento, Stephanie Korenman) — Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to introduce the concept of professionalism into the current discussion of the proper scope of regulation of investment advisers. Design/methodology/approach – The authors reviewed the scholarly literature on what constitutes a profession, the debates over the two bills introduced in Congress in 2012 concerning investment adviser regulation, and some of the studies that led up to those bills. Findings – The authors concluded that professionalism could apply to some investment advisers, particularly financial planners, and that the development of such a profession should be encouraged. However, they found that such a profession would threaten the economic interests of broker-dealers and their registered representatives, whose routine use of such titles as “financial advisor” or “investment consultant” has led to consumer confusion over the different roles of brokers and advisers. Therefore broker-dealer interests favor more intense regulation of investment advisers by an SRO such as FINRA, presuming that would impair the development of a true profession of investment advisers. Practical implications – This paper aims to ensure that the development of a true profession of investment advisers and/or financial planners is openly and fully debated if and when consideration of investment adviser regulation is reintroduced. Originality/value – The role that professionalism can and should play in investment adviser regulation has not been previously discussed, even though broker-dealer registered representatives routinely use confusingly professional-sounding titles to compete against independent investment advisers.

CFTC sets the clock ticking for mandatory clearing of interest rate and credit default swaps

literatinetwork@emeraldinsight.com (Evan M. Koster, David Cohn, Daniel Meade) — Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to explain the rule recently published by the US Commodity Futures Trading Commission that establishes a timetable for the mandatory clearing of interest rate and credit default swaps through a clearinghouse. Design/methodology/approach – The paper discusses the structure of cleared trades in swaps, the classes of interest rate and credit default swaps that are subject to mandatory clearing under the CFTC's new rule and the affirmative and negative specifications for each class, the phased approach adopted by the CFTC for the mandatory clearing compliance schedule, and the end-user and inter-affiliate exemptions from the mandatory clearing requirement. Findings – “Centralized clearing,” a process in which bilaterally negotiated trades of derivatives have to be given up to a centralized clearinghouse, is a cornerstone of the new global regulatory system for derivatives. Its proponents argue that centralized clearing will help to mitigate systemic risk by helping counterparties identify and net positions. The paper outlines the clearing rules in the USA for interest rate and credit default swaps. Originality/value – The paper provides expert guidance from experienced financial services lawyers.

CFTC approves final rule requiring recording of oral communications

Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – This paper aims to address amendments to the Commodity Futures Trading Commission (CFTC) recordkeeping rules that will require certain market participants to maintain records of all oral communications leading to the execution of a “commodity interest” transaction that are communicated by telephone, voicemail or mobile device. The paper also seeks to address the CFTC's revised rules expanding the current recordkeeping requirements to include written communications related to swap transactions. Design/methodology/approach – The paper reviews the revised rules, adopting release and industry commentary and explains how the requirements of CFTC Regulations 1.31 and 1.35 will be applied to futures commission merchants (FCMs), certain introducing brokers (IBs), certain members of a designated contract market (DCM) or swap execution facility (SEF), and retail forex dealers (RFEDs). Findings – FCMs, certain IBs, certain members of a DCM or SEF, and RFEDs must comply with the oral communications recordkeeping requirements no later than December 21, 2013. FCMs, IBs, all members of a DCM or SEF, and RFEDs must comply with the CFTC's revised recordkeeping rules for written communications no later than February 19, 2013. Practical implications – All FCMs, IBs, members of a DCM or SEF, and RFEDs impacted by the rule should prepare to maintain records of all covered written and oral communications. If it is technologically or economically impractical for a market participant to comply with the requirement to record all oral communications that lead to a commodity interest transaction by the compliance date, the participant should request an alternative compliance schedule. Originality/value – This paper provides practical guidance from experienced financial services lawyers.

Exemptions and no-action relief help funds navigate year-end CFTC registration requirements

Fri, 26 Apr 2013 00:00:00 +0100

Abstract

Purpose – The alert endeavors to clarify the current state of play regarding the registration requirements for commodity pool operators (CPOs) and to discuss certain exemptions from registration and no-action relief that may be applicable to sponsors of private funds. Design/methodology/approach – The authors' approach is focused on the practical steps a fund sponsor may need to take to claim an exemption from the CPO registration requirements. The authors obtained the research from publicly available CFTC sources. Findings – Although many private equity funds may be exempt from the CPO registration requirements, many of the CFTC's exemptions are not self-executing and necessitate ongoing action by the fund sponsor. Practical implications – Before entering into any swaps, a sponsor of a private fund should consider whether the swap transaction will impact any exemptive relief currently claimed by the sponsor and whether any further CFTC action is required as a result of such transaction. Originality/value – The article should provide a roadmap of the possible exemptions from CPO registration for sponsors of private funds.

Editor column

literatinetwork@emeraldinsight.com (Henry A. Davis) — Fri, 26 Apr 2013 00:00:00 +0100

2012 Awards for Excellence

Fri, 26 Apr 2013 00:00:00 +0100