Archive for January 5, 2012

Qualified Advisers Must Register with the Municipal Securities Rulemaking Board

January 30, 2012 James Hardaway Jr. Compliance, Final Regulations, Hedge Funds, Proposed Regulations

The Municipal Securities Rulemaking Board has operated under a Congressional mandate with oversight by the Securities and Exchange Commission since 1975.

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Amended Rule 15B(c)(1) of the Exchange Act states a municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor, and no municipal advisor may engage in any act, practice, or course of business which is not consistent with a municipal advisor’s fiduciary duty or that is in contravention of any rule of the MSRB.  Accordingly, the SEC directed the MSRB to issue rules for municipal advisors that “prescribe means reasonably designed to prevent acts, practices, and courses of business as are not consistent with a municipal advisor’s fiduciary duty to its clients.  As a result, in February 2011 the MSRB issued proposed Rule G-36.

It would require a municipal advisor to make clear, written disclosure of all material conflicts of interest, such as those that might impair its ability to satisfy the duty of loyalty, and to receive the written informed consent of officials of the municipal entity with the authority to bind the municipal entity by contract with the municipal advisor.  Such disclosure must be made before the municipal advisor may provide municipal advisory services to the municipal entity or, in the case of conflicts arising after the municipal advisory relationship has commenced, before the municipal advisor my continue to provide such  services.  In addition, a municipal advisor may not undertake an engagement if certain unmanageable conflicts exists.  Including; (i) kickbacks and certain fee-splitting arrangements with the providers of investments or services to municipal entities, (ii) payments by municipal advisors made for the purpose of obtaining or retaining municipal advisory business other than reasonable fees paid to a municipal advisor for solicitation activities regulated by the MSRB, and (iii) acting as a principal in matters concerning the municipal advisory engagement (except when Internal Revenue Service competitive bidding guidelines for establishing fair market value are satisfied).  The notice also provides that, in certain cases, the compensation received by a municipal advisor may be so disproportionate to the nature of the municipal advisory services performed that it is inconsistent with the Rule G-36 duty of loyalty and represents an unmanageable conflict, (iv) the notice provides that the Rule G-36 duty of care requires that a municipal advisor act competently and provide advice to the municipal entity after inquiry into reasonably feasible alternatives to the financings or products proposed (unless the engagement is of a limited nature).  To date, this proposed rule has not been finalized.

Brokers, dealers, municipal securities dealers (collectively, municipal securities dealers) and municipal advisors must register with the MSRB before engaging in municipal securities and advisory activities.  The terms broker, dealer, municipal securities dealer and municipal advisor are defined in the Securities Exchange Act of 1934 in sections 3(a)(4), 3(a)(5), 3(a)(30) and section 15B(e)(4), respectively.  To register with the MSRB, all municipal securities dealers and municipal advisors must have an SEC registration number.  Nonbank, municipal securities dealers also must have a FINRA registration number.  MSRB Rules A-12 and A-14 requires them to pay an initial fee of $100 and an annual fee of $500, respectively.  MSRB Rule G-40 requires registered municipal securities dealers and municipal advisors to appoint a primary contact to serve as the official contact person for purposes of electronic mail communications and to provide periodic updates to the MSRB.  In the case of municipal securities dealers, the primary contact must be either a Series 53-registered municipal securities principal or a Series 51-registered municipal fund securities limited principal.  Currently there are no requirements for municipal advisor primary contacts.  Upon completion of its Rule A-12 submissions, the MSRB assigns a registration number.  Each broker, dealer, municipal securities dealer, or municipal advisor shall review and, if necessary, update its information and submit such information electronically to the MSRB within 17 business days after the end of each calendar year.   Each broker, dealer, municipal securities dealer, or municipal advisor shall promptly comply with any request by the appropriate regulatory agency for required information, but in any event not later than 15 days following any such request, or such longer period that may be agreed to by the appropriate regulatory agency.  For municipal advisors, the categories of municipal advisors are derived from Form MA-T.  Although, MSRB does not allow solicitation payment to non-affiliated persons of municipal broker dealers and principals, it does allow solicitation for municipal advisors.

In 2010 MSRB announced that they are adopting adopted a comprehensive set of rules for municipal advisors, as directed by the Dodd-Frank Act.   As the rulemaking process proceeds, municipal providers will have the opportunity to provide input.  Listed below are MSRB rules that currently apply to municipal advisors.

  • Rule A-12: Initial Fee
  • Rule A-14: Annual Fee
  • Rule A-16: Examination Fees
  • Rule D-11: Associated Persons
  • Rule D-13: Municipal Advisory Activities
  • Rule D-14: Appropriate Regulatory Agency
  • Rule G-1:  Separately Identifiable Department or Division of a Bank
  • Rule G-3:  Classification of Principals and Reps and Requirements
  • Rule G-5:  Disciplinary Actions; Remedial Notices
  • Rule G-17: Conduct of Municipal Advisory Activities
  • Rule G-23: Activities of Financial Advisors
  • Rule G-24:  Ue of Ownership Obtained in Fiduciary or Agency Capacity
  • Rule G-27: Supervision
  • Rule G-32: Disclosure in Relation to Private Offerings
  • Rule G-34: CUSIP No., New Issue, and Market Information Requirements
  • Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business
  • Rule G-38:  Solicitation of Municipal Securities Business
  • Rule G-40: Electronic Mail Contacts

The MSRB maintains the Electronic Municipal Market Access system (“EMMA”), a facility for receiving electronic submissions of municipal securities disclosure and other key documents and related information and for making such documents and information available to the public, at no charge at www.emma.msrb.org or by paid subscription.  EMMA replaced the MSRB’s MSIL Facility in 2009, which previously served as the submission venue for official statements and continuing disclosures, and continues to operate in support of certain MSRB internal functions.

The Short-term Obligation Rate Transparency (“SHORT”) System is a facility of the Municipal Securities Rulemaking Board for the collection of information about securities bearing interest at short-term rates.  Such information is made available to the public, at no charge, on the MSRB’s Electronic Municipal Market Access website.  And the Real-time Transaction Reporting System (“RTRS”) is a facility for the collection and dissemination of information about transactions occurring in the municipal securities market.  Most municipal securities transactions effected by brokers and dealers are reported to RTRS and are disseminated within 15 minutes of the time of trade execution.  This data can be queried through the free EMMA website.  Comprehensive data feeds are available through paid subscription.

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SEC Issues Extension for Registration of Municipal Advisers

January 27, 2012 James Hardaway Jr. Compliance, Final Regulations, Hedge Funds, Private Equity, Proposed Regulations

On September 26, 2012, the SEC extended the interim final temporary Rule 15Ba2-6T under the Exchange Act, which permits municipal adviser to temporarily satisfy the Dodd- Frank registration requirements, to September 30, 2013.

Previously, on December 21, 2011, the SEC extended the interim final temporary Rule 15Ba2-6T under the Exchange Act, to September 30, 2012.

Section 15B(a)(2) of the Exchange Act, as amended by Section 975(a)(2) of the Dodd-Frank Act, provides that a municipal adviser must be registered by filing with the SEC an application for registration in such form and containing such information and documents concerning the municipal advisor and any person associated with the municipal advisor as the SEC, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.  Section 15B defines the term “municipal advisor” to mean a person (who is not a municipal entity or an employee of a municipal entity) (1) that provides advice to or on behalf of a municipal entity or obligated person with respect to “municipal financial products” or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or (2) that undertakes a “solicitation” of a municipal entity. The definition specifically includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and advisers that provide municipal advisory services.  This definition specifically excludes underwriters of municipal securities.  “Solicitation of a municipal entity or obligated person” is defined to mean a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser as defined in Section 202 of the Investment Advisers Act of 1940, that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.  However, it should be noted that the MSRB only allows third-party solicitation for investment advisers who have to register as municipal advisers.  MSRB Rule G-38 prohibits third-party solicitation for municipal broker dealers.

The term “municipal advisory services” as used herein means advice with respect to municipal financial products, the issuance of municipal securities, and the solicitation of a municipal entity.  A registered investment adviser or an associated person of a registered investment adviser must register with the SEC as a municipal advisor if the adviser or associated person of an adviser provides any municipal advisory services other than investment advice within the meaning of the Investment Advisers Act.  A commodity trading advisor or an associated person of a commodity trading advisor must register with the SEC as a municipal advisor if the commodity trading advisor or an associated person of a commodity trading advisor provides any municipal advisory services that are not advice related to swaps.  The writes notes that the definition of associated municipal adviser professional is derived from the definition of “associated municipal finance professional” as set forth in MSRB Rule G-37.

Form MA-T requires a municipal advisor to indicate the purpose for which it is submitting the form (i.e., initial application for, or amendment or withdrawal of temporary registration), provide certain basic identifying and contact information concerning its business, indicate the nature of its municipal advisory activities, and supply information about its disciplinary history and the disciplinary history of its associated municipal advisor professionals.  Disclosure is also required concerning any orders entered against the municipal advisor or any associated municipal advisor professional by any federal or state regulatory agency other than the SEC and Commodity Futures Trading Commission (“CFTC”) or by any foreign financial regulatory authority, within the last ten years.  However, the writer noted that on the actual Form MA-T the term “ten years” was not listed.  With respect to actions taken by self-regulatory organizations there is no time limit placed on disclosure.   Section 975 of the Dodd-Frank Act amended section 15B of the Exchange Act directs the SEC, by order, to censure, place limitations on the activities, functions, or operations, suspend for a period not exceeding twelve months, or revoke the registration of any municipal advisor, if it finds that such municipal advisor has committed or omitted any act, or is subject to an order or finding, found in paragraphs (A), (D), (E), (H) or (G) of paragraph of section 15(b) of the Exchange Act; has been convicted of any offense specified Section 15(b)(4)(B) of the Exchange Act within ten years of the commencement of the proceedings under section 15(c)(4); or is enjoined from any action, conduct, or practice specified in Section 15(b)(4)(C) of the Exchange Act.  The municipal advisor should promptly amend Sections 1 or 3 of Form MA-T if the information previously filed becomes inaccurate in any way and whenever a municipal advisor wishes to withdraw from registration.  Item 2 called Municipal Advisory Activities lists eight advisory activities.  Subpart Item 2 lists advice concerning the investment of the proceeds of municipal securities.  Registered investment advisers are not required to register on MA-T if provide only this advisory service.  Subpart Item 3 lists advice concerning guaranteed investment strategies.  This relates to advice on bond proceeds deposited into guaranteed investment contracts (“GICs”).  Subpart Item 4 lists recommendation of and/or brokerage of municipal escrow investments (registered investment advisers making only these recommendations are excluded from MA-T registration).  Subpart Item 5 list advice concerning the use of municipal derivatives (e.g. swaps).  If commodity trading advisor, then do not have to register on From MA-T.  Item 3, called Disciplinary Information must be promptly amended if there are any changes.  Dodd-Frank amended Section 15B(c)(2) of the Exchange Act and requires the SEC to censure; place limitations on the activities, functions, or operations; suspend for a period not exceeding twelve months; or revoke the registration of any person registered through Form MA-T, for the violations listed in Section 15(c)(4) of the Exchange Act pertaining to brokers or dealers.

In the September 1, 2010, release of the temporary rule, the SEC requested comments concerning whether to include persons whose disciplinary history is not sufficiently relevant to a municipal advisor’s activities to warrant disclosure. In addition, the SEC solicited specific suggestions as to how the disclosure regarding associated persons whose actions are covered by Item 3 of Form MA-T might be improved for purposes of a permanent registration program or whether the current limitation to associated municipal advisory professionals is suitable.  As a result the SEC issued in December 2010, a proposal that received many comments.  To date, this proposed rule has not been finalized.

The proposal clarified many of the definitions put forth in the temporary rule, and added to definition of municipal adviser, any attorney who engaged in municipal advisory activities.  The term “natural person municipal adviser” was introduced to require employees of municipal advisers and sole proprietors to file Form MA-I.  Proposed new Form MA would add to old Form MA-T, required reporting for municipal advisers succeeding other advisers.  In addition, the number of advisory activities increased from eight to eleven.  Form MA new Items would include reporting of:  other business activities; participation or interest in municipal advisory client transactions; and advisory control persons.  New Form MA-W and MA-NR was proposed for withdrawal of registration, and registration of non-U.S. residents, respectively.  Finally, municipal advisers would be required to maintain book and records pursuant to federal regulations.

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SEC Divisions Issues Examination Risk Alert for Investment Advisers Use of Social Media

January 17, 2012 James Hardaway Jr. Compliance, Hedge Funds, Private Equity

On January 4, 2012, the SEC Division of Investment Management, OCIE, and the Division of Enforcement’s Asset Management Unit issued its first exam risk alert for the year. The letter discusses ways for advisers to design and implement procedures to prevent securities laws violations, if they use, or permit the use, of various types of social media.

Advisers are increasing the use of social media to reach existing and potential clients and making investment recommendations.   When mutual funds purchases are suggested, it could trigger Rule 482 of the Securities Exchange Act of 1933 and Section 24(b) of the Investment Company Act of 1940 for advertisements, and filing of advertisements with the SEC.

Compliance programs should include review of the effectiveness of procedures as required by Advisers CCO Rule.  In addition, examiners will review procedures for preventing violations of the antifraud and recordkeeping laws.

The letter listed observations and suggestions from recent evaluations of advisers using social media for compliance with securities laws.

It was noted that many firms did not specify what advertisements or electronic communications procedures applied to social media; what type(s) of social media were permitted; or soliciting on social media.  Similar to FINRA, the Divisions suggested a risk-based approach specific to the firm, and a list of factors for advisers to activate with their compliance programs for the firm, the investment adviser representative, or solicitor use of social media.  Social media usage, content, functionality, and information security guidelines and standards were listed, along with compliance monitoring, preapproval and annual certifications.

Firms can use lexicon-based programs for monitoring, or sampling and spot checking as necessary based on firm resources and risk factors.

There were various types of third party interfacing on social media websites, and it was suggested that policies and procedures are written and activities reviewed.

The Divisions interpreted that a third party statement could be a testimony, which is prohibited by rule 206(4)1(a)(1) of the Advisers Act, if the “like” button or feature on the adviser website, is an explicit or implicit statement of a client’s experience with the adviser.

It was reiterated that for record keeping purposes they will not differentiate social media with e-mails, etc., and advisers who communicate through social must adhere to rule 204-2.  Records should be made available for inspection and retained in an easily accessible place for not less than five years.

Volume of communications and communications channels were emphasized as the focus of retention policies.  And, compliance programs should address the following factors relating to recording keeping and productions requirement of social media communications:

  • Determining, among other things, (1) whether each social media communication used is a required record, and, if so, (2) the applicable retention period, and (3) the accessibility of the records.
  • Maintaining social media communications in electronic or paper format (e.g., screen print or .pdf of social media page, if practicable).
  • Conducting employee training programs to educate advisory personnel about recordkeeping provisions.
  • Arranging and indexing social media communications that are required records and kept in an electronic format to promote easy location, access and retrieval of a particular record.
  • Periodic test checking (using key word searches or otherwise) to ascertain whether employees are complying with the compliance policies and procedures (e.g., whether employees are improperly destroying required records).
  • Using third parties to keep records consistent with the recordkeeping requirements.

It was noted that while some of these factors reflect existing regulatory requirements, the adequacy of a compliance program can be determined only with reference to the profile of the firm, and the specific facts and circumstances.

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Integral Financial, PC: Innovative and Cost Effective Social Media Tracking and Compliance Services

January 5, 2012 James Hardaway Jr. Compliance, Hedge Funds, Private Equity

System Overview: Our Social Media Monitoring Services provide broker dealer and investment advisers with the in-depth metrics and lexicon-based tracking systems needed to monitor organizational mentions and topics of interest on the World Wide Web via websites, blogs, vlogs, microblogs, podcasts, forums, wikis, social media platforms, and online publications (“social media websites”).  Organizations receive relevant and comprehensive analysis of online spaces and mainstream media outlets that enables them to track and monitor specific industry terms and trends.  Our specialist is one of the few selected this past year to complete the required training to design and operate the patented internet-based social media tracking program.

The Advance Package will be customized to fit the risk-based compliance and reporting principals applied to your firm’s business model.

For broker dealers and advisers, we will work expeditiously with the person(s) responsible to review the different types of correspondence, and review the reviewer’s
communications.   We will document and retain, on our Microsoft Sharepoint
system, the supervisory evidence of review of social media website communications, including third-party posts links, and data feeds, for compliance with the communications content rules, as prescribed by Rule 3010 and the SEC.

For broker dealers, we will utilize our secure Sharepoint System to monitor for customer complaints and acknowledge receipt of complaints as required by NYSE Rule 401A.  Also, manage the FINRA prior-approval process for advertisements of mutual funds and variable annuity products clients.   With these advertisements, we will document and retain principal and/or FINRA prior approvals of the “static content” on the firm’s social media websites.

Rule 2210 considers “interactive electronic communications” on social media websites as public appearances.  We will assist the firm’s compliance department in developing procedures for monitoring and training associates on these communications, including recommendations of specific investment products.  These communications can trigger the suitability rules; and recommendations made for investment company products, can
trigger Rule 482 of the Securities Exchange Act of 1933 and Section 24(b) of the Investment Company Act of 1940.

The Basic Package:

The Basic Package includes the following:

  • Monitoring up to 5 Featured Topics (or more as set by the organization)
  • Generating 1 Monthly Social Media Analytics Report, that includes details of the measurements and metrics of the 5 Featured Topics identified by the organization with an overview of the client’s social media standing across a variety of online platforms.

The Advanced Package:

The Advanced Package includes the following:

  • Monitoring up to 10 Featured Topics (or more as set by the organization)
  • Generating 2 Monthly Reports: The Social Media Analytics Report that includes details of the measurements and metrics of the 10 Featured Topics identified by the organization with an overview of the client’s social media standing across a variety of online platforms. And the Sentiment Analysis Report that explains how the social media analytics metrics are being perceived in the new media space, specifically detailing if a particular featured topic viewed as positive, negative, or neutral by the online audience.
  •  A Dedicated Social Media Monitoring Specialist that is available to provide additional support and answer questions about reports, in addition to providing guidance in formulating strategies for targeting specific social media areas and topics, and excluding any searches on trailers or disclaimers.

The Social Media Monitoring Industry Appraisal Report:

The Social Media Monitoring Industry Appraisal Report includes the following:

  • A “snapshot’ of 1 Featured Topic (or more as set by the organization) over a specified period of time not to exceed more than 24 months.
  • A Comprehensive Social Media Summary Report based on the featured topic highlighting the following areas: 1).  Social Media Analytics including the measurements and metrics of the Featured Topic with a real-time overview of the client’s social media standing across a variety of online platforms; 2).  Data Filtering and Segmentation providing drilled down analytics into several layers of detailed information filtered by media type, geographic region, language, or other specified criteria;  3). Sentiment Analysis that explains how the social media analytics metrics are being perceived in the new media space, specifically detailing if a particular featured topic is viewed as positive, negative, or neutral by the online audience.
  • A Dedicated Social Media Monitoring Specialist to ensure the Appraisal Report meets the client’s needs and is available to answer questions after delivery. Delivery of the Report within 4 Business Days with data available in XML, PDF and HTML formats.
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