Our previous post discussed how a family office registered as an investment adviser (RIA) under the Investment Advisers Act of 1940 (Advisers Act) might underestimate the scope of its custody of family assets for purposes of Rule 206(4)‑2. The problem is that the rule’s definition of custody extends to all funds and securities an RIA has the power to withdraw, even those not held for investment. This post considers how a family office with sufficient personnel to independently staff its RIA can limit the scope of funds and securities subject to Rule 206(4)‑2. Continue Reading
The staff of the Division of Investment Management (IM) recently issued a flurry of interpretive guidance regarding when advisers are deemed to have custody of their clients’ funds and securities. The guidance covers transfers among a client’s custodial accounts, standing letters of instruction to a custodian, and inadvertent custody under the client’s custodial agreement. The guidance does not affect family offices exempted from the Investment Advisers Act of 1940 (Advisers Act) by Rule 202(a)(11)(G)‑1. The guidance also does not address issues commonly faced by family offices that must register under the Advisers Act.
Yesterday, the SEC announced a number of political contribution-related settlements with investment advisers, both registered and exempt. As background, Rule 206(4)-5 under the Investment Advisers Act of 1940 limits the size of political contributions that certain personnel of an investment adviser may make to state and local officials, among other things. Specifically, limits apply to contributions to officials or candidates (such as a Governor or State Treasurer) who can influence the investment decisions of public institutional investors (such as state employee pension plans) that are clients of the adviser or invest in the adviser’s funds. If the relevant contribution threshold is breached, an adviser is prohibited from accepting compensation from the specific public investor for a two-year period. A quick summary of the settlements appears in the table below. Continue Reading
In the first part of this post, I explained how trading odd lot MBS can create the same valuation issue as trading PIPEs. I also touched on some important differences between MBS and PIPEs. In this part, I’ll examine why these differences may make the valuation of odd lot MBS more problematic than the valuation of PIPEs. The Order is significant for investment advisers as well as investment companies, insofar as the SEC asserted that PIMCO’s valuation procedures violated Rule 206(4)-7. Continue Reading
The SEC’s recent settlement (the “Order”) with Pacific Investment Management Company (“PIMCO”) reflects a new twist on an old issue: buying securities at bargain prices and then marking them up when calculating NAVs. The SEC first addressed this issue in 1969 in the context of what we now refer to as “PIPEs.” The first part of this post examines the similarities and differences between PIPEs and the mortgage-backed securities (“MBS”) addressed in the Order. The second part explains why “odd lot” MBS may be more problematic than PIPES. Continue Reading
Apparently lost in the news of the impending departure of SEC Chair Mary Jo White is her recent suggestion to expand liability of corporate executives. In a speech on November 18, 2016, Chair White suggested a potential change in federal securities law that would hold executives accountable even if they are not involved in the misconduct and did not know about it. Given recent signals from the new administration in Washington, we believe this potential expansion of liability is unlikely to occur.
In a previous post, I noted that recent changes to Rule 2a-7 hit tax exempt money market funds hard, with the loss of half of their pre-reform assets. There are reasons to think these funds will recover, however. Foremost, prior to the post-election surge in interest rates, tax exempt funds were out-yielding every other type of money market fund. According Crane Data, tax exempt funds (which are nearly all retail) out-yielded both institutional and retail prime funds, to say nothing of government funds. These are pre-tax yields; on an after-tax basis, tax exempt funds offer very competitive yields.
Speaking at a compliance workshop sponsored by the Investment Adviser Association held in Atlanta on November 10, 2016, Bill Royer, Associate Director of the SEC examination program in the Atlanta Regional Office of the SEC laid out the priorities that he expected the SEC’s Office of Compliance Inspections and Examination (OCIE) to focus on in the coming year. Continue Reading
In June 2013, SEC Chair Mary Jo White announced a new SEC policy requiring admissions as part of settlements in certain types of cases. The criteria for admission cases, as stated by Chair White and an SEC staff memo, included the following factors:
- A large number of investors have been harmed or the conduct was otherwise egregious
- The conduct posed a significant risk to the market
- Admissions would aid investors in deciding whether to deal with a particular party in the future
- Disclosing the facts would send an important message to the market
- Intentional misconduct
- Obstruction of an investigation
In practice, the SEC has rarely required defendants to make admissions in settlements.
Some banks are hard at work applying distributed ledger technology to trading syndicated loan transactions. Their system would make it easier than ever to invest in syndicated bank loans. At some point, the combination of widespread holdings and a major default could force a reassessment of whether syndicated loans traded over the new system are “securities” for purposes of the Securities Act of 1933 (the “1933 Act”) and Securities Exchange Act of 1934 (the “1934 Act”). To prevent this eventuality, the designers may want to limit who can trade over the new system. Continue Reading