Housekeeping

CFTC

Expedited No-Action Relief for CPO Delegation

On May 12, 2014, the CFTC issued registration no-action relief on an expedited basis for CPOs who delegate certain activities to a registered CPO.  Under this streamlined approach, the delegating CPO must represent in its request letter that it satisfies the applicable criteria.  Such criteria includes, in part, representations that the delegating CPO: (1) has delegated to the designated CPO all of its investment management authority with respect to the commodity pool via a legally binding document, (2) does not participate in the solicitation of participants for the commodity pool, (3) does not manage any property of the commodity pool, (4) is not subject to a statutory disqualification, and (5) has delegated to the designated CPO the maintenance of the commodity pool’s books and records.  The delegating and designated CPOs must agree to be jointly and severally liable for any violation of the Commodity Exchange Act or the CFTC’s regulations.  The CFTC will also continue to evaluate requests for CPO registration no-action relief from persons who are not able to use this streamlined approach.

Delayed Oral Recordkeeping Requirements for Certain CTAs

On April 25, 2014, the CFTC issued time-limited no-action relief delaying until December 31, 2014 application of the oral recordkeeping requirements set forth in CFTC Regulation 1.35(a) for CTAs that are members of swap execution facilities (“SEFs”) or designated contract markets (“DCMs”) in connection with the execution of swap transactions.  The CFTC did not extend such relief to other industry participants or to the written recordkeeping requirements.

Large Traders: Revised and New Ownership and Control Reports

The CFTC’s final rules on Ownership and Control Reports and Forms 102, 40 and 71 are meant to provide the CFTC with enhanced visibility of large traders’ positions and trading in futures and swaps markets.  Effective August 15, 2014, subject firms must report required information via the new and amended forms, namely Form 102A (an updated form), Form 102B (a new form for “volume threshold accounts”), Form 102S (an updated form), Form 71 (a new form for “volume threshold accounts” that are omnibus accounts) and Form 40/40S (an updated form).  

NFA

CPO/CTA Capital Requirements and Customer Protections

The period has now closed for comments to NFA’s concept of imposing a capital requirement on CPO and CTA Members, as well as several other customer protection measures.  The concept contemplates independent third-parties being responsible for authorizing the disbursement of pooled funds and preparing or verifying Members’ net asset values, monthly/quarterly reporting and performance results.  It also calls for customer funds to be reported to NFA.

SEC

Cybersecurity Initiative

On April 15, 2014, the SEC issued a risk alert concerning the Office of Compliance Inspections and Examination’s (“OCIE”) new initiative designed to assess cybersecurity preparedness in the securities industry and obtain information about the industry’s current experiences with cyber threats.  The OCIE intends to examine more than 50 registered investments advisers and broker-dealers.  The OCIE’s examinations will focus primarily upon: (1) the entity’s cybersecurity governance, (2) identification and assessment of cybersecurity risks, (3) protection of networks and information, (4) risks associated with remote customer access and funds transfer requests, (5) risks associated with vendors and other third parties, (6) detection of unauthorized activity and (7) experiences with certain cybersecurity threats.  Appendix A of the risk alert provides a sample list of requests for information the OCIE may use in conducting examinations to help firms assess their level of preparedness.

Testimonial Rule and Social Media

In March 2014, the SEC issued guidance concerning the testimonial rule and social media use by investment advisers.  Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 prohibits the use of advertisements containing testimonials, yet failed to define the term “testimonial.”  Subject to certain limitations, the guidance allows investment advisers and investment advisory representatives to publish testimonials from an independent social media site on their own social media site or website.  Most of the guidance is in a question and answer format.  Under the guidance, the independent social media site must provide content that is independent of the adviser or representative and there can be no material connection between this independent social media site and the adviser or representative that would call into question that party’s independence.

FINRA

New Supervision Rules

The SEC has approved FINRA’s new consolidated supervision rules that will become effective December 1, 2014.  The new FINRA Rules 3110 (supervision) and 3120 (supervisory control system) replace NASD Rules 3010 and 3012, as well as the corresponding NYSE rules.  The new FINRA Rules 3150 (holding of customer mail) and 3170 (tape recording of registered persons by certain firms) replace NASD Rules 3110(i) and 3010(b)(2).  Clarifications and changes are included within each newly revised rule.

INTERNATIONAL

FATCA Compliance Required

Full compliance with the Foreign Account Tax Compliance Act (“FATCA”) will become effective December 31, 2014.  FATCA is a U.S. statute that requires U.S. persons, including individuals who live outside the U.S., to report their financial accounts held outside of the U.S., and requires foreign financial institutions to report to the IRS about their U.S. clients.  Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations and to recoup federal tax revenues.  Foreign funds should analyze their potential reporting status and obligations under FATCA.  In addition, foreign funds should review their subscription documents, operating agreements, offering memorandum, vendor agreements and loan documentation to determine if these materials are FATCA compliant.  

Please do not hesitate to contact me if you have any questions concerning the above updates.