Editor column

Citation

Davis, H.A. (2013), "Editor column", Journal of Investment Compliance, Vol. 14 No. 1. https://doi.org/10.1108/joic.2013.31314aaa.001

Editor column

Article Type: Editor column From: Journal of Investment Compliance, Volume 14, Issue 1

This eight articles in this issue cover a broad range of current topics relevant to regulations and compliance for broker-dealers, investment bankers, investment advisers, hedge funds, and mutual funds.

Aegis Frumento and Stephanie Korenman start with an article that looks at definitions of a “profession,” considers the current role of investment advisers in light of those definitions, outlines two recent legislative proposals for regulation of investment advisers, and discusses how the direction of future regulation could affect the ability of the investment advisory business to function as a true profession as opposed to a more sales-and-transactions-oriented business. They do not think stock brokers who also describe themselves as investment advisers display the attributes of a profession, but in contrast they see fee-only financial planners with the Certified Financial Planner® designation evolving into the status of a true profession. The authors believe that the micro-regulation under FINRA that governs stockbrokers, if adopted for investment advisers and financial planners, would stifle the growth of financial planning as a profession.

Next Peter McGowan explains the European Commission’s implementing rules for the Directive on Alternative Investment Fund Managers, which he points out have been eagerly awaited by private equity fund managers and their investors seeking a measure of certainty on rules relating to matters such as valuation, capital requirements, liquidity management, and disclosure. Among their many provisions, the rules say the permanent compliance and internal audit functions should be separate and independent from other functions in order to be able to fulfill their tasks, which Mr McGowan notes may require some internal reorganization by AIFMs. The features and reasons for choosing a model adopted to value the assets of an AIF must be explained and justified in the AIF’s policies and procedures. In the interest of transparency and full disclosure, AIFMs must immediately notify investors when they activate gates or side pockets or decide to suspend redemptions.

Roger Witten, Kimberly Parker, and Jay Holtmeier provide their observations on key issues discussed in the long-awaited joint guidance on the US Foreign Corrupt Practices Act from the US Department of Justice and the US Securities and Exchange Commission. While the guide helps compliance officers and practitioners with a plain-language understanding of the Act, the authors cite numerous difficult issues it leaves open in various categories including gifts, travel and entertainment expenses; the definition of a “foreign official” or “instrumentality of a foreign government”; the role of third parties; and facilitating payments. The Guide explains that the DOJ and the SEC have no formulaic requirements regarding compliance programs but instead seek to employ a common-sense and pragmatic approach to evaluating such programs on the basis of whether they are well designed, are being applied in good faith, and work effectively.

Bibb Strench and Jeffrey Schellenger explain the meaning and impact of a December 2012 SEC enforcement action against former mutual fund directors for failing to properly oversee the valuation of mutual fund portfolio securities, and in the process provide an overview of the obligations of a board of directors with respect to the process used by a mutual fund to fair-value portfolio securities that do not have reliable market prices. The authors believe the SEC enforcement action provides valuable insight for mutual fund directors and compliance professionals into the SEC’s current view of appropriate valuation procedures and proper governance of the process used to fair-value securities. They recommend that fund complexes review valuation procedures and the current role of directors in the valuation process in light of this and other significant SEC enforcement cases in this area.

Recent changes to the Commodity Exchange Act, together with expansive interpretation by the Commodity Futures Trading Commission of the newly added statutory definition of a “commodity pool,” have caused many fund sponsors to consider whether they must register with the CFTC as commodity pool operators for the first time. At the end of 2012, the CFTC issued guidance and provided interpretive relief on certain exclusions from the CPO registration requirements, and the United States Treasury Department made a determination to exempt certain foreign exchange transactions from the Act; however, this relief was provided in a piecemeal fashion. Kerry Burke, Julian Hammar, Lisa Koff, Loretta Shaw-Lorello, Amanda Weiss, and Kristian Wiggert endeavor to synthesize the possible relief from the CPO registration requirements that may be available to a fund sponsor and to explain any steps necessary to take advantage of the relief. One of the key takeaways is that fund sponsors must consider how any future swap transactions may affect any exemption currently being used by the sponsor and whether any further CFTC-related action is required.

Evan Koster, Daniel Meade, and David Cohn explain the rule recently published by the U.S. CFTC that establishes a timetable for the mandatory clearing of interest rate and credit default swaps through a clearinghouse. “Centralized clearing,” a process in which bilaterally negotiated trades of derivatives have to be given up to a centralized clearinghouse, is a cornerstone of the new global regulatory system for derivatives. Its proponents argue that centralized clearing will help to mitigate systemic risk by helping counterparties identify and net positions.

Kenneth Rosenzweig, Kevin Foley and Blake Brockway explain the CFTC’s revised recordkeeping rules, which require certain market participants to record oral communications and to maintain written records related to swap transactions. They expect that many futures commission merchants, certain introducing brokers, certain members of a designated contract market or swap execution facility, and retail foreign exchange dealers will need to commit a significant amount of time and resources in order to fulfill the requirement to maintain recordings of oral communications for a period of one year in a form and manner that is identifiable and searchable by transaction. The authors also identify certain market participants that are not required to record oral communications, including floor traders, commodity pool operators, and members of a designated contract market or swap execution facility that are not registered or required to be registered with the CFTC in any capacity.

Finally, Martin Miller explains a FINRA rule requiring member broker-dealer firms that sell an issuer’s securities in a private placement, subject to a number of exemptions, either to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the member firm used or to indicate that they did not use any such offering documents. Mr. Miller notes that this is a new requirement for FINRA members, and FINRA members in the private placement business are often smaller firms with less of a compliance staff and may be more likely to miss a new regulatory item. Additionally, FINRA members and the private placement issuer community should be aware of the fact that they can, because of the exemptions available in the rule, avoid making these filings if they limit the type of investor to which they sell the offering.

Henry A. Davis