Archive for April 9, 2012

SEC Approves FINRA Changes to Form NMA to Include Information Social Media

On March 12, 2012, the SEC approved the proposed FINRA amendment to the Standardized Membership Application Form (“Form NMA”) applicants must file pursuant to NASD Rule 1013.

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Each applicant for FINRA membership must now complete and electronically file the standardized online Form NMA as part of its new member application.  Also, information requests on specific topics that currently are located throughout the form are group together to help reduce current duplicative information requests in Form NMA.  The new amendments are effective April 12, 2012, (30 days after filing with the SEC).   Standard Group 6 (Communications and Operational Systems) includes information requests regarding an applicant’s communications and operational systems currently in Sections VI (Policies and Procedures) and VII of existing Form NMA (e.g., communications and operational systems descriptions, supervision arrangements of multiple locations, business continuity plan documents).  The standard also incorporates requests for additional information (e.g., information relating to the use of social media sites).

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SEC Amends Performance-Based Fee Calculations for Investment Advisers

The Dodd-Frank Act amended section 205(e) of the Advisers Act and directed the SEC to adjust for inflation, the dollar amount thresholds in rules under the section, rounded to the nearest $100,000.  Separately, the Dodd-Frank Act also required adjusting the net worth standard for an “accredited investor” in rules under the Securities Act of 1933, such as Regulation D, to exclude the value of a person’s primary residence.

On February 15, 2012, the SEC codified an order that adjusts the dollar amount thresholds to account for the effects of inflation for investment adviser performance based fee calculations.  And, rule 205-3 of the Investment Advisers Act was amended to provide that the SEC issue an order every five years in the future adjusting the dollar amount thresholds for inflation.  The rules was also amended to exclude the value of a person’s primary residence and certain associated debt from the test of whether a person has sufficient net worth to be considered a qualified client; and added certain transition provisions to the rule.

Rule 205-3 was amended to revise the dollar amount thresholds that currently apply to investment advisers, to codify the order issued on July 12, 2011.  As amended, paragraph (d) of rule 205-3 provides that the assets-under-management threshold is $1 million and that the net worth threshold is $2 million.  As proposed, new paragraph (e) states that the SEC will issue an order every five years adjusting for inflation the dollar amount thresholds of the assets-under-management and net worth tests of the rule.  Also, the price index on which future inflation adjustments will be based is the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”), which is published by the Department of Commerce.

In addition, the net worth test in the definition of “qualified client” in rule 205-3 was amended to exclude the value of a natural person’s primary residence and certain debt secured by the property.  The amendment of the net worth standard of rule 205-3 differs from the proposed amendment because any increase in the amount of debt secured by the primary residence in 60 days before the advisory contract is entered into would be included as a liability.  The SEC stated that this change will prevent debt that is incurred shortly before entry into an advisory contract from being excluded from the calculation of net worth merely because it is secured by the individual’s home.  As proposed, the amended rule excludes the value of a person’s primary residence and the amount of all debt secured by the property that is no greater than the property’s current market value. This approach should significantly reduce the incentive for persons to induce potential clients to take on incremental debt secured against their homes to facilitate a near-term investment.  Also, the 60-day look-back period is long enough to decrease the likelihood of circumvention of the standard by taking on new debt and waiting for the look-back period to expire; and short enough to accommodate investors who may have increased their mortgage debt in the ordinary course at some point prior to entering into an advisory contract.

A transition clause was added with paragraphs (1) and (2) of rule 205-3(c) so that restrictions on performance fees apply only to new contractual arrangements and do not apply to new investments by clients (including equity owners of “private investment companies”) who met the definition of “qualified client” when they entered into the advisory contract, even if they subsequently do not meet the dollar amount thresholds of the rule.  This clause was added to minimize the disruption of existing contractual relationships that met applicable requirements under the rule at the time the parties entered into them.

At the suggestion of one commenter, the proposed third paragraph of rule 205-3(c), was revised to allow for limited transfers of interests from a qualified client to a person that was not a party to the contract and is not a qualified client at the time of the transfer.  Specifically, a transfer of ownership interest in a private investment company by gift or bequest, or pursuant to an agreement relating to a legal separation or divorce, the beneficial owner of the interest will be considered to be the person who transferred the interest.  However, when those types of transfers occur, the transferee does not make a separate investment decision to enter into an advisory contract with the adviser, but is the recipient, perhaps involuntarily, of the benefits of a pre-existing contractual relationship.  Therefore paragraph (3) of rule 205-3(c) was amended to provide that, if an owner of an interest in a private investment company transfers an interest by gift or bequest, or pursuant to an agreement related to a legal separation or divorce, the transfer will not cause the transferee to “become a party” to the contract and will not cause section 205(a)(1) of the Act to apply to such transferee.  Thus, transfers in these circumstances will not cause the transferee to have to meet the definition of a qualified client under rule 205-3.  A gift transfer, however, would need to be a bona fide gift and could not be used as a means to avoid the protections of section 205 of the Act, for example by transferring an interest in a private fund supposedly as a gift but in reality in exchange for payment.

The rule amendments will be effective on May 22, 2012.  In addition, in order to minimize the disruption of contractual relationships that met applicable requirements at the time the parties entered into them, the SEC stated they will not object if advisers rely or relied upon the amended transition provisions of rule 205-3(c) before that date.

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The National Labor Relations Board (“NLRB”) Position on Social Media Policies

Congress enacted the National Labor Relations Act (“NLRA”) in 1935 to protect the rights of employees and employers, to encourage collective bargaining, and to curtail certain private sector labor and management practices, which can harm the general welfare of workers, businesses and the U.S. economy.

In October 2010, the General Counsel of the NLRB issued an Advice Memorandum to a Regional Director of the NLRB regarding a case in Connecticut.  The General Counsel of the Board is appointed by the President, by and with the advice and consent of the Senate, for a term of four years.  The General Counsel of the Board exercises general supervision over all attorneys employed by the Board (other than administrative law judges and legal assistants to Board members) and over the officers and employees in the regional offices. And have final authority, on behalf of the Board, in respect of the investigation of charges and issuance of complaints under section 10 [section 160 of this title], and in respect of the prosecution of such complaints before the Board, and shall have such other duties as the Board may prescribe or as may be provided by law.

The two major tenets of the NLRA are Sections 7 and 8 listed as follows: Sec. 7. Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 8(a)(3) [section 158(a)(3) of this title].  Sec. 8.  (a) [Unfair labor practices by employer] It shall be an unfair labor practice for an employer to, in relevant part: (1) to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7 [section 157 of this title].

The General Counsel opined on an employee discharge case at American Medical Response of Connecticut.  The relevant complaint involved the “Blogging and Internet Posting Policy” listed as follows:  The AMR employee handbook also contains a section entitled “Blogging and Internet Posting Policy.”  The provisions below have been alleged as unlawful: (i) Employees are prohibited from posting pictures of themselves in any media, including but not limited to the Internet, which depicts the Company in any way, including but not limited to a Company uniform, corporate logo or an ambulance, unless the employee receives written approval from the EMSC Vice President of Corporate Communications in advance of the posting;  (ii) Employees are prohibited from making disparaging, discriminatory or defamatory comments when discussing the Company or the employee’s superiors, co-workers and/or competitors.

The General Counsel concluded that the Employer violated Section 8(a)(1) of the Act by maintaining its blogging and Internet posting and standards-of-conduct policies, as well its policy of limiting employee solicitation to certain bulletin boards because they either explicitly prohibit Section 7 activity or employees would reasonably construe them as prohibiting Section 7 activity.  Further, he concluded that the Employer’s prohibition of all solicitation over its e-mail system did not violate Section 8(a)(1).

He continued that an employer violates Section 8(a)(1) of the Act through the maintenance of a work rule if that rule would “reasonably tend to chill employees in the exercise of their Section 7 rights.”  The Board has developed a two-step inquiry to determine if a work rule would have such an effect. First, as a rule it is unlawful if it explicitly restricts Section 7 activities.  If the rule does not explicitly restrict protected activities, it will violate the Act only upon a showing that: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.  The first challenged bullet of the Blogging and Internet policy states that “[e]mployees are prohibited from posting pictures of themselves in any media . . . which depicts the Company in any way, including but not limited to a Company uniform, corporate logo, or an ambulance.”  We conclude that this language restricts the Section 7 rights of employees in violation of Section 8(a) (1) because it would prohibit an employee from engaging in protected activity; for example, an employee would be prohibited from posting a picture of employees carrying a picket sign depicting the Company’s name, or wearing a t-shirt portraying the company’s logo in connection with a protest involving the terms and conditions of employment.

In Summary, social media policies should be structured similar to e-mail policies.  If employees are using the company system then the company prohibition policy is allowed, and the company is responsible for all contents.  For employee-owned communication systems, the company is not liable for its contents, because to restrict this type of communication is a violation of federal labor laws.

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