Journal of Investment Compliance

A. Nathan, Daniel; J. Greismann, Libby

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-07-2014-0029

Purpose– To alert broker-dealers to the SEC’s plans to examine their cybersecurity practices, and offer advice on compliance. Design/methodology/approach– Reviews the SEC’s proposed cybersecurity framework and provides suggestions for broker-dealers to address and respond to these proposals. Findings– The SEC is still focused on gaining more information about the state of the cybersecurity industry in the broker-dealer context. Practical implications– Broker-Dealers should review the framework and prepare to be flexible and responsive to changing guidelines that may emerge. Originality/value– Breaks down the SEC guidelines in plain English and analyses the import of these guidelines. Offers practical advice for compliance.

B. House, Bryan; L. Johnston, Pam; Worcester, Courtney

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-08-2014-0031

Purpose– To explain a recent enforcement action by the USA Securities and Exchange Commission (SEC) whereby the SEC brought its first enforcement action for retaliation against a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Design/methodology/approach– Explains the SEC’s recent enforcement action under Dodd-Frank, highlighting the efforts that a company undertook with respect to continuing to employ a whistleblower after potentially fraudulent activity was reported and discusses practical problems faced by such companies when trying to simultaneously investigate potential wrong-doing without being seen as retaliating against a whistleblower. Findings– Through this enforcement action, the SEC has demonstrated a willingness to bring cases to enforce Dodd-Frank’s anti-retaliation provisions even though Dodd-Frank does not expressly grant it such enforcement authority. Practical implications– Companies must have a strong culture of compliance and a strong policy encouraging whistleblowers to report concerns internally if at all possible. Once the whistleblower has reported to the SEC, a company will need to maintain the status quo with respect to the whistleblower. Originality/value– Practical guidance from attorneys with experience with the SEC and whistleblower actions.

Pugliese, Domenick; Rosella, Michael; Hearth, David

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0040

Purpose– To explain a guidance update recently issued by the USA Securities and Exchange Commission (SEC) Division of Investment Management that furthers the SEC’s goal of clear and concise, user-friendly disclosure by focusing on certain specified requirements of Form N-1A and the rules under the Securities Act of 1933. Design/methodology/approach– Discusses five areas where the SEC staff had been providing significant numbers of comments related to mutual fund disclosure after the adoption of the amendments to Form N-1A in 2009 by summarizing the applicable instructions of Form N1-A and/or rule and the SEC staff’s observations with respect to such instruction or rule. Findings– Funds should ensure that during their next annual update they review their prospectus disclosure in light of this guidance update and make necessary changes so that the disclosure is clear and concise and not overly technical. Originality/value– A concise summary of the SEC’s guidance update from experienced investment management lawyers.

F. Kerr, Richard

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0044

Purpose– To alert participants in the mutual fund industry to regulatory developments in the alternative mutual fund space as articulated by the SEC’s Director of the Division of Investment Management. Design/methodology/approach– Reviews the Director’s discussion of the SEC’s concerns related to Valuation, Liquidity, Leverage and Disclosure resulting from the proliferation of alternative mutual funds. Additionally, summarizes the Director’s comments regarding Board oversight of alternative mutual funds. Findings– While the Director’s speech does not establish any new law or regulation, it is a practical summary of the SEC’s expectations for mutual fund complexes when implementing and operating mutual funds with alternative investment strategies that have historically been the province of private funds. Originality/value– Practical explanation from experienced financial institutions lawyers.

T. Renz, Hartmut; Kalisch, Ingrid; Pfister, Sandra; Axford, Stuart; M. Williams, Jr., George

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0043

Purpose– To explain the practices that ESMA (European Securities and Markets Authority) recommends for investment firms and national competent authorities to implement when it comes to structured retail products (SRPs), in order to ensure sound product governance arrangements and the consistency of supervisory practices needed for adequate investor protection across the European Union. Design/methodology/approach– Lists the ESMA guidelines for the general organization of product governance arrangements, breaks down the aspects manufacturers should consider in the making of their SRPs, highlights the need to understand the target market, explains the appropriate structure of the distributor’s and manufacturer’s distribution strategy, details how manufacturers establish a SRP’s value, recommends how investment firms deal with SRPs on the secondary market, and explains how manufacturers review the performance of their SRPs. Findings– The competent authorities are still focusing on improving and enforcing investor protection. This ESMA opinion is just one example of how product governance structures and arrangements should be developed and implemented by everyone involved. It will be important to attend carefully to what MiFID 2 (Markets in Financial Instruments Directive 2) product governance requirements bring regarding investor protection in addition to the described ESMA opinion, which is based on MiFID 1. Originality/value– Practical guidance from experienced finance lawyers.

Penhall, Winston; Hatfield, Jacqui

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0038

Purpose– The article sets out the practical implications of the EU Alternative Investment Fund Managers Directive for USA managers with a focus on the marketing provisions of AIFMD. Design/methodology/approach– This article summarises key marketing issues for USA managers. Findings– The article addresses in particular the means by which USA fund managers who are not regulated in the EU can access EU investors including passive marketing. Practical implications– AIFMD grants EU member states latitude when implementing their local private placement regime. Some EU member states have not yet implemented AIFMD while others have imposed conditions that are so onerous that in practical terms they equate to the negation of private placement as an option. Originality/value– The article is of value to USA fund managers who are not regulated in the EU because it provides insight into the practicalities of navigating the minefield that is AIFMD.

Prorokowski, Lukas

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-07-2014-0025

Purpose – This paper aims to investigate whether enhanced requirements result in the depositories exiting the business. Furthermore, this paper attempts to analyse prospective changes to the operating structures caused by the Alternative Investment Fund Managers Directive (AIFMD). Most importantly, this paper discusses the processes to evaluate and manage counterparty risk relating to prime brokers. AIFMD makes fundamental changes to the depository liability and managing counterparty risk by making a depository bank liable for any losses to investor assets, even those held within third-party custodians appointed by the depository. Depositories will also need to calculate the probability of default of their sub-custodians and use complex credit models to calculate any capital requirements under the fourth Capital Requirements Directive (CRD IV). Design/methodology/approach – This paper is based on an insightful secondary analysis of the AIFMD with practical implications drawn for depository banks. The analysis of this topical research has been broken down into the following sections: assessing and managing counterparty risk of prime brokers; insurance against defaults of prime brokers; and regulatory-driven challenges and changes to depository banks. Findings – The post-Lehman banking industry has realised that counterparty risk cannot be ignored. This has triggered heated debates among regulators and practitioners whereby any depository bank should clearly separate the assets of its clients from the depository assets and its own assets. This paper argues that the custodian services will witness consolidation with the big players remaining and small custodians forced to leave the business in light of the enhanced liabilities under the AIFMD. In addition to this, this paper has stressed that assessing counterparty risk should be supported by an insightful analysis of the culture of a prime broker; its legal, structural and regulatory safeguards; and quality of assets. Moreover, managing risks associated with prime brokers entails significant costs to depositories. Thus, depository banks are advised to factor these costs into their pricing models. Originality/value – Given the magnitude of recent regulatory initiatives and complex challenges faced by depositories, an important question arises whether depository banks would exit the business in light of the regulatory-induced liabilities. This paper addresses the aforementioned question and provides practical implications into managing emerging risks by depository banks. At this point, the majority of depositories are in a process of developing in-house solutions for managing risks related to prime brokers, and hence would benefit from practical insights into these processes that are provided in this paper.

Rendon, Veronica; Freedman, John; Reinhardt, Adam

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0041

Purpose– To explain the Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. and its implications for private class action litigation under the federal securities laws. Design/methodology/approach– Explains the background on the Halliburton decision, including the prior case history and key precedents, analyzes the key reasoning and holdings of the decision, and discusses the implications of the decision and how it will impact private class actions brought under the securities laws. Findings– While there was considerable pontification in the bar that the Halliburton case might provide a vehicle to curtail many class actions brought under the securities laws, the Halliburton decision left prior law and practice largely intact, but provides defendants in such cases a tool to challenge viability of lawsuits in certain circumstances. Originality/value– Practical guidance from experienced securities litigators.

Healy, Terence; J. Greer, Amy; Z. Herbst, Daniel

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0039

Purpose– To explain the impact of a recent decision by the USA Court of Appeals for the Second Circuit on the SEC’s “neither admit nor deny” practice on SEC enforcement matters after the practice was called into question by a federal district court judge. Design/methodology/approach– Explains the background on the practice of no-admission, the challenge by Judge Rakoff to the practice, and the ruling of the Second Circuit and its practical approach on enforcement matters. Findings– The ruling should resolve much of the uncertainty that has surrounded court approval of SEC settlements since Judge Rakoff’s decision to question the practice of no-admit or deny settlements. However, recent comments from SEC Chair Mary Jo White and Senior Enforcement Staff suggest that the SEC may continue to seek admissions in certain cases. Originality/value– Practical guidance from experienced securities and financial services lawyers.

M. Garry, Kristen; Gelencsér, Etienne; M. O’Pray, Eileen; King, Naomi; B. Tate, Jeffrey

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0042

Purpose– To summarize the principal aspects of USA tax legislation commonly known as the “Foreign Account Tax Compliance Act” (“FATCA”) that may be relevant to non-USA investment funds. Design/methodology/approach– Reviews the potential application of FATCA to non-USA investment funds in a question-and-answer format and summarizes the key FATCA compliance obligations that may apply to such funds. Findings– FATCA presents a number of compliance and operational challenges for non-USA investment funds. Such funds should be aware of their status under FATCA and resulting compliance responsibilities to ensure that they are compliant with FATCA and thus not subject to USA withholding tax. Originality/value– Practical guidance from experienced tax and investment funds lawyers that summarizes a complex body of law in a concise format.

F. Kerr, Richard

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-09-2014-0045

Purpose– To review FINRA enforcement action taken against a broker-dealer over failure to waive mutual fund sales charges for certain eligible customers and failure to establish, maintain, and enforce a supervisory system and written procedures reasonably designed to ensure eligible accounts received sales charge waivers as set forth in the mutual funds’ prospectuses. Design/methodology/approach– Reviews and summarizes FINRA’s finding’s regarding the broker-dealer’s failure to apply applicable mutual fund sales charge waivers, deficiencies in the broker-dealer’s supervisory system and written procedures resulting in the failure, resulting violations of FINRA rules, the broker-dealer’s remedial efforts, and the sanctions imposed. Findings– This settlement provides an important reminder for FINRA member broker-dealers of the need to ensure that eligible investors receive applicable sales charger waivers or are placed in the appropriate share class, and to establish, maintain, and enforce a supervisory system and written procedures reasonably designed to ensure eligible accounts received sales charge waivers as set forth in the mutual funds’ prospectuses. Originality/value– Practical explanation from experienced financial institutions lawyers.

Gottschalk, Petter

2014 Journal of Investment Compliance

doi: 10.1108/JOIC-04-2014-0014

Purpose – The purpose of this paper is to present results from an exploratory study of private investigations by fraud examiners in Norway. The activity of private investigations by fraud examiners is a business of lawyers, auditors and other professionals who investigate suspicions of financial crime by white-collar criminals. Design/methodology/approach – This article presents results from an empirical study of investigation reports. Findings – The available sample consists of 21 reports produced mostly by auditing firms such as PwC. Suspicion of financial crime led to police investigation, public prosecution and jail sentence in two cases. Originality/value – Empirical studies of private investigations are rare.