Editor’s letter

Citation

Davis, H. (2014), "Editor’s letter", Journal of Investment Compliance, Vol. 15 No. 2. https://doi.org/10.1108/JOIC-05-2014-0024

Editor’s letter

Article Type: Editor’s letter From: Journal of Investment Compliance, Volume 15, Issue 2

In this issue we cover a range of issues relevant to investment-oriented financial service organizations including current USA Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and Municipal Securities Rulemaking Board (MRSB) regulatory priorities, new regulatory definitions and rules concerning “Municipal Advisors” and “M&A Brokers,” investment-adviser due diligence concerning alternative investments, broker-dealer cybersecurity, the international spread of shareholder activism, post-financial-crisis retail-investor-protection regulations, and financial-advisor liability in mergers and acquisitions.

In our first article, Randall Fons and Tiffany Rowe summarize the 2014 annual “SEC Speaks” conference, the Commission’s most informative conference of the year. During the two-day conference, held this year on February 21 and 22, the Chair and each Commissioner, as well as the most senior staff members of each division of the SEC, provided their thoughts and insights into the most pressing issues currently being considered by the Commission. A highlight of the conference was the discussion of the enforcement program, its successes, failures, initiatives and priorities. This year, with new management in place, the staff had no difficulty announcing that change is in the works. From new enforcement priorities to changes in long-lived enforcement policies, and from a new task force to the resurrection of long-forgotten statutes, the Enforcement Division made clear that “past performance is not necessarily indicative of future results”.

Next David Bannard and Reed Groethe explain the new Municipal Advisor Rule that will take effect in July 2014, which regulates persons and firms that provide advice to municipal issuers and obligated parties regarding municipal financial products or the issuance of municipal securities or that engage in certain solicitation of municipalities or obligors on behalf of third parties. They explain that in light of a number of high profile municipal bankruptcies, including those of the City of Detroit and Jefferson County, Alabama, Congress included a requirement in the Dodd-Frank Act that persons and firms providing advice to municipal issuers and obligors regarding the issuance of municipal securities and municipal financial products or that solicit such persons for the benefit of others must be regulated by the SEC and the MSRB. In addition, the ability of other market participants to provide advice on such subjects was significantly constrained, with the goal of protecting municipal issuers and obligors from embarking on financing or investments that were not in their best interests and holding those providing such advice to a standard of care in favor of their clients.

In our third article, by Russell Sacks, Thomas Donegan, and Charles Gittleman, and our fourth, by Henry Kahn, Robert Welp and Richard Parrino, we have two perspectives on the SEC’s January 2014 no-action letter permitting persons who qualify as “M&A Brokers” to facilitate the sale of private companies without registering with the SEC as broker-dealers, subject to another restrictions. Messrs. Sacks, Donegan, and Gittleman also explain counterpart regulations in the UK Mr. Sacks explains that the relief granted by SEC Staff earlier this year is the latest and most important development in a process that has been ongoing for two decades, seeking to give regulatory relief to securities brokers who operate advisory and private placement businesses. In general, while SEC Staff and Commissioners have always been receptive to the idea of relief, there has not until now been significant progress towards lightening the regulatory burden of securities brokers who are engaged in agency, advisory businesses. While the relief did not address so-called “private placement” brokers who place less than a control stake, the relief is nonetheless important for its substance and for its direction. Mr. Parrino notes that the new no-action letter was eagerly awaited by many private equity funds and other unregistered intermediaries that earn substantial fee income from advising on private M&A transactions. Earlier guidance by the SEC staff on the types of M&A services that brokers could render and how they could be paid without triggering broker-dealer registration under the federal statute had left many questions unanswered. The resulting legal uncertainty had discouraged participation in transactions that now may be pursued without risk of triggering an obligation to register with the SEC.

Next John Walsh discusses a Risk Alert in which the SEC’s Office of Compliance Inspections and Examinations (OCIE) makes observations concerning investment advisers’ due diligence practices for alternative investments and identifies a substantial number of warning indicators that could lead an investment adviser to conduct additional due diligence, request an underlying alternative investment manager such as a hedge fund manager to make appropriate changes, or reject or veto the alternative investment. The Risk Alert cites exemplary compliance practices and others that cause concern, providing a useful benchmark for advisers to consider. While the scope of the Risk Alert is limited to a specialized sector of the adviser community, advisers making discretionary investments on alternative products managed by other advisers, it provides interesting insight into the overall thinking of the SEC staff concerning due diligence and compliance.

David Petron, Michael Wolk and Edward McNicholas discuss several recent developments that bear on cybersecurity issues confronting broker-dealers. Their article discusses general cybersecurity trends and suggests ways broker-dealers can use recent developments to prepare for regulatory scrutiny of their cybersecurity preparedness. They note that both the SEC and FINRA have cybersecurity on their 2014 examination priority lists and both have imposed significant sanctions against firms when they have found inadequate cybersecurity policies and procedures.

Abigail Pickering Bomba, Steven Epstein, Philip Richter, David Shine, John Sorkin and Gail Weinstein show how shareholder activism, a phenomenon well documented in North America and Europe, is now spreading to other regions of the world, citing a recent development involving a USA hedge fund with a minority share in one Latin American bank pursuing a merger with another Latin American bank. Ms. Weinstein comments that shareholder activism is probably the most important M&A development of recent years. While there is a robust debate about whether activists enhance value for shareholders, or harm companies with an orientation that focuses on their own short-term returns, there is no doubt that the prevalence and success of activists continues to increase. The Cartica Capital challenge to the CorpBanca – Itau Latin American bank deal is a rare example of the spread of activism beyond the USA, Canada and Europe. This month, Cartica followed up the public letter described in the article with a lawsuit in NY Federal District Court, seeking to halt the deal. The Cartica challenge appears to be an early development in the spread of shareholder activism globally, despite significant structural challenges to activism in other countries.

Thomas Jesch, Hartmut Renz, Stephen Culhane, Simon Firth, David Sausen, Willys Schneider and George Williams alert readers to recent developments with respect to the UCITS V Directive governing investment fund products that, subject to compliance with EU and national law, may be distributed in Europe to retail investors. Like the recent Alternative Investment Fund Manager Directive (the AIFM Directive) in Europe and the Dodd-Frank Act in the USA, the new UCITS V directive represents a continuing post-downturn effort to enhance investor protections and increase the accountability of fund managers. The regulation can be viewed as part of the material increase in investment management regulation that has taken place in the USA and Europe in recent years. The UCITS V Directive, and its focus on manager remuneration practices, represents an attempt to more closely align manager/client interests and an effort to reduce moral hazard associated with performance-based compensation. As with the AIFM Directive, the UCITS V Directive can be regarded as having disproportionate extraterritorial impact and, in particular, to serve as a deterrent to non-resident investment managers. The compliance costs for investment managers based in the USA (the world’s largest investment management market), may be particularly onerous and designed in part to deter non-resident investment managers from distributing and managing European retail fund products.

Finally Gregory Gooding, William Regner, Maeve O’Connor, and Gary Kubek observe that several recent Delaware court decisions appear to increase the risk of post-closing damages litigation in public company acquisitions. In their article they discuss one of those decisions that will be of interest to financial advisors, in re Rural Metro Corp. In that case, the Delaware court held RBC Capital Markets liable for damages for aiding and abetting the breach of fiduciary duties of care by the board of directors of Rural/Metro, despite the fact that Delaware law and the company’s charter exculpated the directors themselves from any such liability. The authors provide recommendations on steps target financial advisors can take to limit their exposure to aiding and abetting claims of the type raised in Rural/Metro.

Henry Davis