The August 15 deadline for investment advisers to make Form 13F filings to report equity security securities holdings of their managed accounts is approaching.  Form 13F must be filed within 45 days of the end of a calendar quarter.

As required by Section 13(f) of the Securities Exchange Act of 1934, and rule 13f-1, Institutional investment managers ( which includes investment advisers)  must file Form 13F with the SEC if they exercise investment discretion for accounts holding Section 13(f) securities.  Section 13(f) securities are defined in the rules as securities having an aggregate fair market vaule of at least $100 million on the last trading day of any month of any calendar year. 

What types of securities are Section 13F securities? The SEC has said that “[s]ection 13(f) securities generally include equity securities that trade on an exchange (including the Nasdaq National Market System), certain equity options and warrants, shares of closed-end investment companies, and certain convertible debt securities.  The shares of open-end investment companies (i.e., mutual funds) are not Section 13(f) securities.”  Advisers can find Section 13(f) securities on the Official List of Section 13(f) Securities.  An updated list of 13(f) securities is published on a quarterly basis.

Advisers can also find valuable information about the filing’s requirements in the Frequently Asked Questions About Form 13F.   

Hedge Funds Should Heed SEC’s Latest Investor Bulletin

Add a few recent SEC actions against hedge funds that include a hedge fund manager running a $37 million Ponzi scheme; a former director in a compensation scheme that netted hundreds of thousands of dollars in undisclosed income; co-founders of a Chicago-area investment firm misleading investors and supervisory failures resulting in penalties of more than $1 million; a private fund manager and his investment advisory firm taking more than $17 million in losses in a Ponzi-like scheme.

And now add to that two even more recent cases: a hedge fund manager over the course of several years invest the majority of a fund’s assets in a private business owned by the manager’s affiliated company; and a manager who used his hedge fund as a ruse to misappropriate over $550,000 from a retired schoolteacher, and you get the math of why SEC hedge fund oversight will continue to intensify.  Given many of the enforcement actions in the past two years are the result of  fairly egregous conduct, the SEC Office of Investor Education and Advocacy’s most recent  Investor Bulletin is still  instructive, not simply for investors, but also, for the hedge funds who serve them.

The bulletin warns investors about continued hedge fund-related misconduct in the markets while mentioning these cases as examples of why investors need to take precaution before making hedge fund investments.  While there’s nothing surprising about precautions and recommendations that include

  •  a need for investors to understand a hedge fund’s investment strategy and its use of leverage and speculative techniques before making the investment;
  • a need for investors to evaluate a hedge fund manager’s potential conflicts of interest and take other steps to research those managing the fund;

the bulletin highlights the need for registered advisers to hedge funds to pay particular attention to conflicts of interest when making investment decisions, particularly when determining how investment opportunities are allocated.  Advisers also have to be wary about engaging in principal transactions when managing hedge funds — for example, engaging in rebalancing or other types of cross trades.  Among others, they should concern themselves with the valuations assigned to particular securities, and calculations of  all fees and other income sources. 

For hedge fund advisers, these bulletins, whose primary aim is educating the investing public, are another way to take a deeper look for potential conflicts that may lead to violations and to understand the emphasis SEC examiners and regulators will place on such conflicts.

SEC Chairman Mary Schapiro: “[A]n unprecedented ability to effectively oversee the markets we regulate”

That was one of  the pronouncements coming this week from SEC commissioners when the Securities and Exchange Commission approved a new rule  requiring national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail.  The aim is to increase, significantly, regulators’ ability to monitor and analyze trading activity.

While exchanges use their own separate audit trail system to track information relating to orders in their respective markets,  currently no single database of comprehensive and readily accessible data regarding orders and executions exists for regulators to monitor.  Now, the exchanges and FINRA must jointly submit a comprehensive plan detailing how they would develop, implement, and maintain a consolidated audit trail that would “collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.”

The new rule will become effective 60 days after its publication in the Federal Register.  Self Regulatory Organizations are required to submit the NMS plan to the Commission within 270 days of the rule’s publication in the Federal Register.

Client Records, You Can’t Always Take Them with You When you Go

Despite the SEC’s adoption of Regulation S-P back in 2000, some reps still mistakenly believe that client accounts belong to them and that they are free to take them, including any information about the client, when they depart one firm for another.  And whether by bringing  improper recruiting practices or misuse of client information enforcement cases, FINRA and the SEC keep reminding reps and their firms that this is not the case.

Under Regulation S-P, any information given by consumers or customers to broker-dealers to obtain a product or service is generally considered to be nonpublic financial information.  The regulation mandates that financial firms safeguard customer confidential information and prevent its release to unaffiliated third parties without the customer’s authorization.

In a recent case, the SEC announced that it sustained FINRA’s sanctioning of a former Banc of America Investment Services, Inc. (“BAIS”) rep fining him $10,000 and suspended him from FINRA membership for ten business days for having downloaded confidential nonpublic information about  approximately 36,000 customers and providing that information to a competing firm that he joined.  In rejecting the rep’s claim that the FINRA sanctions for his violations were excessive or oppressive, the SEC found that FINRA’s fine and sanction were not excessive or oppressive, and that the rep’s conduct was unethical, and violated NASD Conduct Rule 2110.  (Rel. 34-66113; File No. 3-14195).

The essential facts leading to the SEC’s decision were that FINRA found that the rep breached his duty of confidentiality when he “surreptitiously” downloaded BAIS’s customers’ confidential nonpublic information, including account numbers and net worth figures, and transmitted that information to his future branch manager at a competitor firm.

Quoting Regulation S-P, the SEC found that the rep’s conduct prevented BAIS from giving its customers proper notice and an opportunity to opt out of the disclosures, as required by Regulation S-P.  The SEC held that the rep’s violation caused his new employer to improperly receive BAIS’s customers’ “nonpublic personal information.”


The SEC Citigroup Settlement Saga May Mean Longer Investigations

As a follow up to our post of December 15, where we asked whether settling enforcement actions might become harder after Judge Jed Rakoff rejected the recent settlement between the SEC and Citigroup, one thing is clear, it will certainly be harder for the SEC to settle cases before federal judges like Rakoff who may be troubled by settlements in which a defendant is allowed to neither admit nor deny liability when accused of securities fraud.

The Washingon Post story on Judge Rakoff’s order accusing the SEC of misleading him and the federal appeals court, by among other things, failing to give him notice of the SEC’s emergency request to the appeals court to stop the judge from rejecting the Citigroup settlement, may have gotten for the SEC the opposite kind of attention it wanted when it first announced what it thought was a great settlement.  If Rakoff turns out to be right, this new and unwanted attention may come from federal judges who may begin to question more thoroughly both the SEC’s motives and tactics in settling such cases.  For the SEC, this could mean having to conduct longer investigations with an eye toward expecting to have a long trial, or, alternatively, foregoing court actions and opting for administrative actions.  In the future, to avoid federal judges questioning such settlements, the SEC may decide its easier to take the latter route.