Marshall McLuhan coined the expression “the medium is the message” but when it comes to communications by registered representatives of securities broker-dealers the reality is that the “message is the message.” Recently FINRA suspended a registered representative for one year and fined her $10,000 for misrepresentative and unbalanced messages that she posted on her Twitter account. That Twitter was used instead of less “cutting edge” forms of communication such as email, blogs, printed advertisements, brochures, and the like is of no import. Intentional and material misrepresentations, regardless of how they are communicated, will not be tolerated by FINRA. Registered representatives who fail to abide by that rule should remember that the medium is not the message when they are opening up a certified letter from FINRA alerting them to an investigation of their communications.
On June 22, the SEC adopted new rules implementing parts of Title IV of the Dodd-Frank Act which imposes regulation of hedge funds and private equity firms. The Act created a new sub-category of “mid-sized advisors”: those firms that have assets under management between $25 million and $100 million. The goal of this sub-category was to shift regulatory oversight of mid-sized advisors from the SEC to state authorities. Accordingly the new rules allow mid-sized advisors to avoid registration with the SEC if they are registered with their respective state securities authority and are subject to examination as an investment advisor by that authority.
Significantly, the new rules state that investment advisors based in New York State are not subject to regular examination by New York regulators. Thus, any private fund otherwise subject to the new registration regime which is based in New York that manages between $25 million and $100 million in assets must register with the SEC and will be subject to its examination and oversight. Many of the SEC rules become effective July 21, 2011; the registration requirement for private fund managers has been delayed until March 30, 2012.
If you would like to know more about this posting, please contact Abe Mastbaum of Barton Barton & Plotkin LLP for additional information.
The Second Circuit Court of Appeals, in a 2-1 decision entered on June 28, 2011 affirming the district court’s earlier reversal of the bankruptcy court in the Enron bankruptcy case, determined that the “safe harbor” provision of section 546(e) of the Bankruptcy Code (which provides an exemption for “settlement payments” from preference and fraudulent transfer actions) insulated sellers of Enron Corporation’s commercial paper from a lawsuit seeking to recoup Enron’s pre-bankruptcy redemption of such securities. In Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., __ F.3d __, 2011 WL 2536101 (2d Cir. June 28, 2011) the Second Circuit has seemingly scored a victory for investors who, among others, sell the commercial paper of distressed or insolvent companies in the secondary market and, in this case, the defendant noteholders will not as a result of the Second Circuit’s decision have to return payments they received from their stockbrokers from Enron’s redemption.
In what the Second Circuit characterized as “an issue of first impression in the court of appeals,” it held that section 546(e) “which shields ‘settlement payments’ from avoidance actions in bankruptcy, extends to Enron’s payments to redeem its commerical paper prior to maturity.” As such, the Court determined that the Enron litigation trust’s preference and fraudulent transfer action against certain of the former noteholders of Enron commercial paper, and the institutions who initially received Enron’s redemption payments, had to be dismissed.
The Second Circuit disagreed with Enron, as well as the bankruptcy court, on their point that “redemption payments are not settlement payments” allegedly because, among other things, they retired debt and were “not [used] to acquire title to the commercial paper.” Instead, the Second Circuit emphasized that the Bankruptcy Code does not impose a “purchase or sale” requirement for purposes of falling within the safe harbor provision of section 546. Therefore, the Court determined that the redemption payments at issue “completed a transaction in securities” and were, as a result, “settlement payments.” Most notably, the Second Circuit appears to have adopted the view of other circuits that the definition of “settlement payments” protected by the safe harbor provision is “extremely broad,” or, as the district court first determined, include ”any transfer that concludes or consummates a securities tansaction,” thereby furthering an essential basis for the safe harbor as a means of “minimiz[ing] the displacement caused in the commodities and securities market in the event of a major bankruptcy affecting those industries.”
The dissent in the Enron decision picked up on the majority’s broad definition of “settlement payments” and cautioned that the breadth of that definition ”threatens routine avoidance proceedings in bankruptcy courts.”
If you would like to know more about this posting, please contact Eric Sleeper of Barton Barton & Plotkin, LLP for additional information.
On June 14, 2011, Representative David Schweikert introduced legislation in the House to lessen the pressure on growing companies to go public. The Private Company Flexibility and Growth Act would amend the Securities Exchange Act of 1934 by changing the shareholder limit that triggers mandatory public financial disclosures. The legislation would raise the shareholder limit from 500 to 1,000 and also exempt both accredited investors and employees from inclusion in calculating the number of shareholders.
This proposed legislation would allow companies (especially high-tech firms) to compensate an expanding employee base with stock and seek cash from venture capital firms without hitting the shareholder cap as easily as under the current rules. The legislation is touted as a way to support growing companies by granting them more options to raise capital while avoiding a potentially premature IPO. But critics view the legislation as a way to allow companies to remain out of the sight of government regulators and out of reach of ordinary investors.
Representative Schweikert believes it is possible for the legislation to be passed into law by the end of the year.
If you would like to know more about this posting, please contact Roger E. Barton of Barton Barton & Plotkin LLP for additional information.
In July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank) into law. Dodd-Frank was passed as a response to the financial crisis of the late 2000s. The new legislation represents the most significant change to financial regulation in the United States since the 1930s, and will undoubtedly impact the US financial services industry.
Essentially, The Dodd-Frank Act changes the landscape of the investment adviser community and consequently, many of the smaller to mid-sized investment advisers will be subject to broader regulatory oversight.
Dodd-Frank raises the assets under management (“AUM”) threshold from $25 to $100 million for registration with the SEC. Therefore, any investment adviser with at least $100 million in AUM will be required to register with the SEC. Those investment advisers with AUM in excess of $25 million but less than $100 million will be exempt from federal registration if they are required to register with their state of primary business and are subject to examination by such state’s securities regulator.
Dodd-Frank also creates a new registration exemption for any investment adviser who solely advises private funds with less than $150 million in AUM in the United States. Notwithstanding this exemption from registration, such investment advisers will still be subject to certain reporting requirements.
Dodd-Frank also requires the SEC to set out new information reporting rules designed to identify the build-up of systemic risk. This data is likely to include the value and type of assets under management, counterparty credit risks, the use of leverage, valuation policies and practices, trading practices and positions and the use of side pockets. However, these rules are yet to be defined and could vary depending on the type and size of funds under management.
If you would like to know more about this posting, please contact Abe Mastbaum of Barton Barton & Plotkin LLP for additional information.