Editor’s letter

Citation

Davis, H. (2014), "Editor’s letter", Journal of Investment Compliance, Vol. 15 No. 3. https://doi.org/10.1108/JOIC-09-2014-0037

Editor’s letter

Article Type: Editor’s letter From: Journal of Investment Compliance, Volume 15, Issue 3

Mark Fitterman and Ignacio Sandoval note that part of the USA Securities and Exchange Commission’s (SEC’s) first volley in addressing the market structure issues surrounding electronic trading may be seeking to require high-frequency traders to register as dealers, followed by imposing market-maker-type obligations and requiring membership in FINRA. However, if the SEC goes ahead with such a proposal it will have to have to justify the costs associated with requiring high-frequency traders to register against the expected benefits and it will face some interpretive challenges related to the dealer-trader distinction and cross-border high frequency trading.

Bruce Newman, Elizabeth Mitchell, Stephanie Nicolas, Andre Owens and Ashley Bashur provide an overview of recent developments relating to the SEC’s Market Access Rule, Rule 15c3-5, promulgated under the Securities Exchange Act of 1934, providing a brief overview of the rule’s requirements and discussing the SEC’s first enforcement actions for alleged violations of the rule, which include a settlement with Knight Capital Americas, LLC and administrative cease-and-desist proceedings instituted against Wedbush Securities, Inc. The SEC adopted Rule 15c3-5 in part to address the risks associated with high-frequency and other algorithmic trading. “Market access” is defined in the rule as access to trading in securities on an exchange or alternative trading system (ATS) as a result of being a member of the exchange or a subscriber to the ATS. The rule requires broker-dealers with or providing access to trading on an exchange or ATS to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the associated risks. Knight Capital was charged with violating the rule by failing to have controls reasonably designed to prevent sending erroneous orders to the market. Wedbush was charged with not having a system of risk management controls and supervisory procedures to ensure that the customers to which it provided market access were complying with all regulatory requirements.

Jacob Ghanty, Justin Cornelius, Matthew Baker and Chris Ormond note that one of the original aims of the Alternative Investment Fund Managers Directive (AIFMD) was to harmonize the management and marketing of alternative investment funds (AIFs) in the European Economic Area so that a uniform set of rules will eventually apply to all those marketing AIFs and raising capital in the EEA. This presents some benefits: more consistency throughout the industry, potential cost savings by streamlining business models and, in due course, a level playing field for fund raising in the EEA. However, in the meantime, the laws and regulations relating to marketing are particularly complicated, with a wide range of different requirements that may apply depending on who you are and where you are marketing. The authors provide a series of questions and answers explore some of the principal issues to be aware of when raising a fund in the EEA. AIFMD is the key focus, but they also examine other financial regulation in the UK that may apply alongside AIFMD, as well as cross-border implications of any marketing initiatives. They have included a table to help the reader understand how the AIFMD marketing regime may apply to each particular circumstance.

Richard Parrino and Kevin Greenslade review recent SEC guidance that clarifies how participants in regulated securities offerings, business combinations, proxy contests, and tender offers may transmit required cautionary statements and legends to the securities marketplace via social media technology platforms whose space limitations preclude display of the full text of the required statements. The staff’s new guidance permits issuers and other parties to comply with the communications rules by using in their social media transmissions an active hyperlink that connects to the text of the required statements, thereby dispelling the legal uncertainty about the hyperlinking approach that has discouraged parties from using some social media outlets to disseminate information about their transactions. The authors note that the staff’s conditions place important limitations on the use of hyperlinks, especially in connection with the use of popular social media platforms such as LinkedIn, Facebook, and others that do not impose a cap on the number of characters or amount of text that may be included in a communication, and fail to address the permissibility of other approaches to overcoming the space limitations of some platforms.

Jackson Galloway and Nicole Griffin review an SEC enforcement action taken against an investment adviser over failure to grant advisory fee breakpoint discounts based on the aggregation of related accounts requested by clients and related deficiencies in the adviser’s administration of the account aggregation feature. They advise that this settlement provides an important reminder for registered investment advisers of the need to fully address deficiencies identified in SEC examinations and of the attention paid by SEC inspection staff to client fees as a core examination area.

Norman Goldberger, John Grugan, Christine O’Neil and Tesia Stanley note that the SEC recently announced its first-ever investment adviser pay-to-play action. Political corruption in the municipal market has been a focus of the SEC for several years and is likely to continue to be a top priority. Investment advisers should ensure they have sufficient policies and procedures in place to avoid a two-year ban on business with a state or local government as the result of a political contribution. The authors provide a checklist of items policies and procedures should cover.

Michael Caccese, Douglas Charton and Pamela Grossetti explain an administrative law judge (ALJ) decision, along with a censure, fine, and industry disbarment, against an investment adviser for misleading advertising and false claims of compliance with Global Investment Performance Standards (GIPS). The decision is particularly significant because the ALJ issued such severe sanctions based solely on false claims of GIPS compliance notwithstanding the fact that all reported performance returns were accurate and no investors relied on or were harmed by the false claims of compliance. The case should serve to put firms on notice that persistent noncompliance with the GIPS standards can have serious consequences and that all marketing materials should be subject to effective review and approval policies and procedures prior to distribution or publication to ensure compliance with the GIPS standards.

Walid Khuri, Robert McLaughlin, David Mitchell and David Selden provide an overview of a new, streamlined process from the Division of Swap Dealer and Intermediary Oversight (DSIO) of the USA Commodity Futures Trading Commission (CFTC) by which a commodity pool operator (CPO) may request expedited no-action relief for failure to register under Section 4m(1) of the Commodity Exchange Act if such CPO has designed another registered CPO to serve as the CPO of the commodity pool. By providing an alternative, streamlined process for requesting no-action relief from CPO registration in the context of delegation arrangements in certain circumstances, the CFTC staff is attempting to facilitate obtaining such relief, particularly since relief may be sought on behalf of multiple commodity pools by means of a single request.

Scott Anderson explains the revised USA Municipal Securities Rulemaking Board’s (MSRB’s) revised Rule G-30, which governs municipal bond dealers’ fair-pricing obligations, which include the obligation to exercise “diligence” in assessing a municipal security’s market value and reasonableness of compensation and the distinction between fair security pricing and reasonable dealer compensation. The supplementary material to the new rule sets forth a list of factors to be used in determining whether a customer’s price is “fair and reasonable” and a variety of factors that can affect the determination of whether a commission or service charge is fair and reasonable. In distinguishing “reasonable compensation” from “fair pricing”, the supplementary material notes that a dealer could restrict its profit on a transaction to a reasonable level (reasonable compensation) and still violate the rule if the dealer fails to adequately assess the market value of the security and, as a result, pays a price well above the market value.

Henry Davis