Compliance Building

California Regulates Use of Placement Agents

California

California has followed the lead of New York and started regulating the use of placement agents. California’s law requires placement agents to disclose contributions and gifts made to state and local pension and retirement board members, as well as information about the placement agent’s compensation, the services provided, and any lobbying or regulatory registrations.

The California law is based on disclosure. It does not ban the use of placement agents like New York and as proposed by the SEC

The new California law (Assembly Bill No. 1584) went into effect on October 11, 2009 when Schwarzenegger signed the bill into law. The law establishes a disclosure-based regime that requires:

Potential placement agents, prior to acting to solicit a potential state or local public pension or retirement system investment, must disclose campaign contributions and gifts to public pension board members during the prior 24 months.
Placement agents must disclose any subsequent gifts and campaign contributions to pension or retirement board members for as long as they are being paid to solicit investments.
Each state and local public pension system must develop and implement policies requiring disclosure of payments to placement agents by external asset managers by June 30, 2010. The new disclosures must include, at a minimum, the following information:
- the existence of the relationship;
- a résumé for each officer, partner or principal of the placement agent;
- a description of compensation paid to the placement agent;
- a description of services to be performed by the placement agent;
- a statement of whether the placement agent, or its affiliates, is registered with the SEC, the Financial Industry Regulatory Authority or other regulatory body; and
- a statement of whether the placement agent, or its affiliates, is registered as a lobbyist with any state or the federal government.
A state or local public pension or retirement system may not enter into an agreement with any asset manager that does not agree in writing to comply with any such policy.
Any placement agent or external manager that violates any such policy is barred from soliciting new investments from that state or local retirement system for five years from the time of the violation.

References:

Text of California Bill 1584
California Regulates Use of Placement Agents by Barbara Stettner, Charles E. Borden, Adam Hellman, David J. Sandler of O’Melveny & Myers LLP
California passes placement agent disclosure rules
Limits on pension agents in California is now law by Dale Kasler for The Sacramento Bee
New SEC Rule on Political Contributions by Certain Investment Advisers – prior post
New York Comptroller Bans Placement Agents for State Pension Fund– prior post

Defining An Accredited Investor

bull investor

One of the key rules for private investment funds is that their investors generally need to be “accredited investors.” This is the gateway to an exemption from the registration requirement under the federal securities laws.

The exemption is generally targeted so that experienced investors with significant financial resources and their own advisers are in less need of the Securities and Exchange Commission’s regulatory protection. In theory, they can protect themselves better than the SEC could protect them.

Who qualifies as an accredited investor? The answer is spelled out in Rule 501 of Regulation D:

Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity;
Any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act;
Any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act;
Any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958;
Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;
Any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors
Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940
Any charitable organization, corporation, or partnership with assets exceeding $5 million (not formed for the specific purpose of acquiring the securities offered);
Any director, executive officer, or general partner of the company selling the securities;
Any natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
Any natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
Any trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes
Any entity in which all of the equity owners are accredited investors.

In addition to the definition of accredited investor, you also need to understand how accredited investor status relates to the common exemptions from the registration requirements of the federal securities law.

Rule 504 permits allows a business to sell up to $1 million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the investors, regardless of whether they are accredited.

Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors. The disclosure requirements when selling to non-accredited investors are significantly more difficult to meet and are very similar to the disclosures required in a public offering.

Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors. In addition to the disclosure requirements for Rule 505, any non-accredited investors must also meet a “sophistication” standard, either themselves or through a qualified representative. The status of an investor as “sophisticated” is a high standard. Investors who are merely knowledgeable about the particular industry are not necessarily sophisticated. They must have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.

References:

Rule 501 of Regulation D
SEC’s guide to help you understand how to raise capital and comply with the federal securities laws

Canada’s Foreign Corrupt Practices Act

canada

In the United States, the Foreign Corrupt Practices Act has received significant attention due to some recent high-profile prosecutions. Just to the North, there is the Canadian equivalent to the FCPA: the Corruption of Foreign Public Officials Act. It has not yet been a significant concern for most businesses that fall within its jurisdiction.

But that is likely to change.

The CFPOA was passed in 1999, in ratification of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

3.(1) Every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official.

(a) as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or

(b) to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

Canada has jurisdiction over the bribery of foreign public officials when the offense is committed in whole or in part in its territory. To be subject to the jurisdiction of Canadian courts, a significant portion of the activities constituting the offense must take place in Canada.

References:

Text of Corruption of Foreign Public Officials Act
A Guide to the Corruption of Foreign Officials Act from the Canadian Department of Justice
Canada’s Corruption of Foreign Public Officials Act: What You Need to Know and Why by Mark Morrison, Paul Schabas & Tony Wong of Blake, Cassels & Graydon LLP
Canadian Law on Corruption of Foreign Public Officials by A. Timothy Martin

Happy Columbus Day

columbus day

I decided to take the day off for Columbus Day. School is closed and the office is closed.

Although, I posted this picture. So I guess I did something related to compliance.

Calendars and Household Compliance

household calendar small — View of our household calendar

It is hard to keep track of who is doing what with a busy family. You can’t show up on time and do what you are supposed to do if you don’t where you are supposed be.

My work calendar runs on an Exchange / Outlook platform, as does The Wife’s calendar. Now that The Son and The Daughter are getting their own activities, it is getting harder and harder to figure out who is supposed to be where.

The Wife and I could just copy each other for all of the events. But then our calendars would be mucked up with events that one of us is going to, but not the other. It’s also easy to lose track of the kids’ events.

We decided to use the Google Calendar application. It allows us to have separate calendars for me, The Wife, The Son and The Daughter. We even set up a separate calendar for family and friend birthdays.

The Google Calendar allows us to use a different color for each person so we can easily distinguish who belongs to a particular event. That’s a great visual clue and makes the mess of events easier to sort through.

On the settings for the calendar, you can assign different permissions: (1) make changes to events, (2) see all event details or (3) see only fee/busy. Even an unruly teenager should be able to be convinced into sharing their calendar if their parents couldn’t see the details.

When an event intrudes into the work day, we invite the work email to the event. Google Calendar plays nice with the Exchange/Outlook platform so the invitations from Google Calendar appear as calendar events at work and vice-versa. I try to keep the non-working hours events out of my office calendar.

By using separate Google calendars, each person can control their own calendar, while at the same time sharing the events with the whole family. It’s little or no extra effort and makes household management much easier.

Since the Google Calendar is web-based, I can use it at work and view the calendars on my blackberry or iPhone.

This post was based on a previous post from my old blog, KM Space: Calendars and Household Knowledge Management.

Compliance Bits and Pieces

Here is this weeks collection of stuff I found interesting, but didn’t blog about:

To Combat Overseas Bribery, Authorities Make It Personal
Dionne Searcy for The Wall Street Journal

“To really achieve the kind of deterrent effect we’re shooting for, you have to prosecute individuals,” Mark Mendelsohn, deputy chief of the Justice Department’s criminal division, says in an interview.

Cuomo announced two guilty pleas in the ongoing Pay to Play investigation
New York State Attorney General

Raymond Harding, the former chair of the Liberal Party, and Saul Meyer, a founding partner of a Dallas-based firm that advises public pension systems across the nation, both pled guilty to felony securities fraud charges for their involvement in pay-to-play kickback schemes at the New York State Office of the Comptroller and the CRF. “These guilty pleas vividly depict the depth and breadth of corruption involving the New York State pension fund,” said Attorney General Cuomo. “In one case, we see New York’s state pension fund looted to reward a political boss with hundreds of thousands of dollars in improper payments. In the other, we see a pension fund adviser – the outside “gatekeeper” who is supposed to safeguard the integrity of the pension fund process – recommending deals based on pressure from pension officials and politically-connected people.

Cuomo announces legislation to reform state pension fund
New York State Attorney General

Bipartisan Legislation Will Establish Board of Trustees to Manage State Pension Fund, Ban Placement Agents and Create Enforcement Mechanisms to Ensure Compliance

Private Equity LPs Seek to Impose “Best Practices” on Sponsor Community
Geoffrey Parnass for Private Equity Law Review

The Institutional Limited Partners Association, a trade association that represents 220 institutional investors in private equity funds, recently published a set of Private Equity Principles, designed to guide future dealings between its members and the private equity sponsor community. The Association’s members include public and corporate pension funds, endowments, foundations, family offices and insurance companies with more than $1 trillion in private equity funds under management. The publication of the Principles is the first time that a group of influential limited partners has collectively published a set of core requirements for private equity fund documents.

Social Networking Policies – What Does Your Law Firm Have To Say?
Greg Lambert for 3 Geeks and a Law Blog

According to the Society of Corporate Compliance and Ethics survey on what companies are doing with social networking compliance, there are over 50% of companies that either do not have a social networking policy for their employees to follow, or do not know if they do. After running across a couple of law firm client alerts on this very topic, I thought I’d take a quick look and build an ad hoc bibliography on what attorneys at major law firms are saying lately on this topic.

FINRA Is Thinking About Changing Its Communications Rules

finra_logo

Financial Industry Regulatory Authority (FINRA) posted a regulatory notice on proposed new rules governing member communications with the public: Regulatory Notice 09-55.

The new rules would replace current NASD Rules 2210 and 2211, the Interpretive Materials that follow NASD Rule 2210, and portions of Incorporated NYSE Rule 472.

The proposal would replace the existing six categories of communication with three new communications categories and revises certain approval, filing and content requirements. These changes make the rules easier, but seem to make it harder for FINRA members to participate in social media. I am surprised that FINRA did not try to squarely address the use of the popular internet and web 2.0 tools.

Communications Categories

Currently NASD Rule 2210 divides communication into six separate categories:

advertisement
sales literature
correspondence
institutional sales material
independently prepared reprint
public appearance.

The principal approval, filing and content standards apply differently to each category.

FINRA is proposing to consolidate those six categories into the following three:

institutional communication, which would include communications that fall under the current definition of “institutional sales material,”
retail communication, which would include any written communication that is distributed or made available to more than 25 retail investors
correspondence, which would include any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors

Communications that currently qualify as advertisements and sales literature generally would fall in the proposed retail communication.

Approval Requirements

The proposed rule changes would require an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA.

Filing Requirements for New Firms.

FINRA rules currently require a firm that has previously not filed advertisements with FINRA to file its initial advertisement with FINRA at least 10 business days prior to use, and continue the practice for one year after the initial filing. The proposed rule would require filing of all retail communications (the new category), rather than just advertisements. The proposal would have the one-year filing requirement beginning on the effective date a firm becomes registered with FINRA, rather than on the date an advertisement is first filed with FINRA.

Pre-Use Filing Requirement.

The proposal would expand the current pre-use filing requirements so that communications concerning any registered investment company that includes self-created rankings, and retail communications that include bond mutual fund volatility ratings would have to be filed with FINRA at least 10 business days prior to first use and withheld from use until changes specified by FINRA staff have been made. The proposal would expand the filing requirements for materials relating to closed-end investment companies to include retail communications distributed after the fund’s initial public offering.

Press Releases

The proposal eliminates a current filing exclusion for press releases that are made available only to members of the media. Most firms post press releases on their Web sites, making them available to the general public.

Content Standards

The Proposal reorganizes, but largely incorporates, the current content standards applicable to communications with the public. Content standards that currently apply to advertisements and sales literature generally would apply to retail communications.

Public Appearances

Public appearances would have to meet the general “fair and balanced” standards and the standards applicable to recommendations
if the public appearance included a recommendation of a security. If you recommend securities in public appearances generally you would be subject to the same disclosure requirements under proposed FINRA Rule 2210(f) as research analysts that recommend securities in public appearances pursuant to NASD Rule 2711(h). The proposal requires firms to establish appropriate written policies and procedures to supervise public appearances, andmakes clear that scripts, slides, handouts or other written and electronicmaterials used in connection with public appearances are considered communications with the public for purposes of proposed FINRA Rule 2210.

The comment period for the proposed rules ends November 20.

References:

Draft SEC Strategic Plan for 2010-2015

sec-seal

The Securities and Exchange Commission is seeking comment on its draft Strategic Plan. The document includes drafts of the SEC’s mission, vision, values, strategic goals, major initiatives, and performance metrics for fiscal years 2010 through 2015.

Draft SEC Strategic Plan for 2010-2015

Here is the new vision: The SEC strives to promote a market environment that is worthy of the public’s trust and characterized by transparency and integrity.

Here are the Strategic Goals and Outcomes:

Strategic Goal 1: Foster and enforce compliance with the federal securities laws

Outcome 1.1: The SEC fosters compliance with the federal securities laws.

Outcome 1.2: The SEC promptly detects violations of the federal securities laws.

Outcome 1.3: The SEC prosecutes violations of federal securities laws and holds violators accountable.

Strategic Goal 2: Establish an effective regulatory environment

Outcome 2.1: The SEC establishes and maintains a regulatory environment that promotes high quality disclosure, financial reporting, and governance, and that prevents abusive practices by registrants, financial intermediaries, and other market participants.

Outcome 2.2: The U.S. capital markets operate in a fair, efficient, transparent, and competitive manner, fostering capital formation and useful innovation.

Outcome 2.3: The SEC adopts and administers rules and regulations that enable market participants to understand clearly their obligations under the securities laws.

Strategic Goal 3: Facilitate access to the information investors need to make
informed investment decisions

Outcome 3.1: Investors have access to high-quality disclosure materials that are useful to investment decision making.

Outcome 3.2: Agency rulemaking and investor education programs are informed by an understanding of the wide range of investor needs.

Strategic Goal 4: Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital

Outcome 4.1: The SEC maintains a work environment that attracts, engages, and retains a technically proficient and diverse workforce that can excel and meet the dynamic challenges of market oversight.

Outcome 4.2: The SEC retains a diverse team of world-class leaders who provide motivation and strategic direction to the SEC workforce.

Outcome 4.3: Information within and available to the SEC becomes a Commission-wide shared resource, appropriately protected, that enables a collaborative and knowledge-based working environment.

Outcome 4.4: Resource decisions and operations reflect sound financial and risk management principles.

The CFO’s and CCO’s Role in Fundraising

Yesterday, I attended the PERE Real Estate CFOs Forum. These are my notes from this session:

Moderator: Steve Felix, Head of Client Relations-Real Estate, Aviva Investors
Ira Bergstein, Principal & CFO, Palisades Financial, LLC
Jack Foster, Head of Real Estate, Franklin Templeton Real Estate Advisors
Asha Richards, Vice President & General Counsel for the Private Equity Funds Group, Brookfield Asset Management Inc.

What is the compliance officer’s role in fund-raising?

Number one is creating a system and process for creating consistent marketing materials and messages to investors. Process and consistency are key. You need to push on the distribution team to be consistent.

What’s changed in fund-raising?

There is a lot of focus on track records and how the firms have dealt with the issues over the last 12 months. There is an increased focus on real estate and investors are paying closer attention to the real estate investments. Part of this is the personal nature of real estate. People inevitably compare their house and the residential real estate markets to the commercial real estate markets.

What’s changed about what investors and potential investors are looking for?

Investors are looking for information to be delivered faster. Investors are looking for projections of distributions, even if they are speculative. Investors are looking for more standardization in the reports.