In 2012, states expanded their oversight of registered investment advisers (“RIAs”) from those with $25 million in assets, to those with $100 million or less. Prior to 2012, the Securities and Exchange Commission (“SEC”) had been responsible for overseeing these RIAs.

In April 2013, the SEC and the CFTC jointly issued their final rules and guidelines for entities regulated by each of the respective agencies under Regulation S-ID – Identity Theft Red Flags Rules (the “Rule” or “Regulation S-ID”). The new regulation became effective on May 20, 2013 and requires all affected firms to have policies and procedures in place by November 20, 2013. Regulation S-ID requires that all “financial institutions” (as that term is defined in the Rule) develop policies and procedures to prevent, identify and mitigate identify theft.

In April 2010, the State of Maryland became the first U.S. state to pass “Benefit Corporation” legislation, thus permitting the formation of a new type of corporate entity structure in that state. Since that time, several other states – including California, New York and Delaware – have either passed or are considering similar legislation. Benefit corporations share many of the traits of traditional for-profit corporations. However, while the main goal of traditional for-profit corporations is to maximize financial returns for their investors, benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making, in tandem with maximizing financial returns for investors. This blog will discuss the purpose, transparency and accountability of Benefit Corporations.

The National Futures Association (“NFA”) announced its new quarterly filing requirement for commodity trading advisors (“CTAs”). The form is called NFA Form PR, and it requires CTAs to report to the NFA such information as general contact information, trading programs and information regarding pool assets directed by the CTA.

Recently, the Commodity Futures Trading Commission (“CFTC”) adopted final rules (the “Harmonization Rules”) amending the compliance requirements for operators of investment companies (“RICs”) registered with the Securities and Exchange Commissions (“SEC”), who are also subject to registration as commodity pool operators (“CPOs”) with the CFTC. These rule changes follow the CFTC’s adoption in 2012 of amendments to CFTC Regulation 4.5 that require operators of RICs to either limit their use of commodity interests (such as speculative trading in futures, commodity options, swaps and other commodity interests) to statutorily defined “de minimis” amounts, or register as a CPO with the CFTC. The result of the 2012 rule change was that several such operators were subject to registration with both regulatory bodies, each of whom have their own rules governing compliance matters. As such, the goal of these Harmonization Rules is to harmonize the compliance requirements between the SEC and the CFTC for operators subject to dual registration. The Harmonization Rules basically state that the CFTC will (subject to notice filing with the CFTC and other specified conditions) accept compliance with the disclosure, reporting and recordkeeping regimes administered by the SEC as “substituted” compliance for substantially all of Part 4 of the CFTC’s regulations. Some of the more notable “substituted” compliance matters include:

The stability of our financial economy can be deeply affected by the act of money laundering. Anti-Money Laundering (“AML”) programs for financial institutions are governed by various laws, including the Bank Secrecy Act of 1970 (“BSA”), the Money Laundering Control Act of 1986, and also the USA PATRIOT Act (“USAPA”). Currently, investment advisers (“IAs”) are not expressly included within the definition of “financial institutions” under the BSA or USAPA, and as such, are not subject to the affirmative AML requirements of those regulations (however IAs still must adhere to the Office of Foreign Assets Control (“OFAC”) regulations requiring IAs to block the accounts of specified countries, entities and individuals). Due to the great focus being placed on money laundering by the US government, the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has resurrected its efforts to implement affirmative AML regulations on IAs similar to those currently in place for other financial institutions.

The role of the Chief Compliance Officer (“CCO”) is to ensure that a firm complies with its outside regulatory requirements and internal policies. This requires the CCO to administer, test and supervise the policies and procedures (P&Ps) of a firm that are reasonably designed to prevent violation of Federal Securities Laws. CCOs are often the first to be blamed when violations occur, and there have been several documented instances that illustrate how a CCO’s failure to properly supervise can lead to sanctions by the Securities and Exchange Commission (“SEC”) (for such an example please see JLG’s blog posting dated August 8, 2013). More recently, however, the SEC sanctioned former portfolio manager Carl Johns (“Mr. Johns”) at Boulder Investment Advisers (“BIA”), a Colorado-based investment adviser, for forging documents and misleading the firm’s CCO (who was not named in the SEC’s Release) in order to conceal his failure to report personal trades, thus violating Rule 38a-1(c) of the Investment Company Act. This violation was discovered by the CCO herself, thanks to BIA’s well-drafted P&Ps and to the CCO’s admirable supervision of those P&Ps.

Slow progress has been made in the past three years on instituting “critical” parts of the Dodd-Frank Act, according to recent comments by the Obama Administration. President Obama voiced his frustrations with the slow progress of financial overhaul regulations on Monday in a closed-door meeting with federal regulators and lawmakers. He particularly emphasized the need to avoid another financial collapse like 2008, when the market crashed, in part, from risky mortgage lending that created the “housing bubble” in 2006 and 2007.

Recently, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative Cease-and-Desist Proceedings against Ronald S. Rollins (“Rollins”) of Plainfield, New Jersey (Rel. 34-70058). Rollins is the former Chief Compliance Officer (“CCO”) of Comprehensive Capital Management, Inc. (“CCM”), a registered investment adviser firm. Some of the violations referred to in the Order include: Rollins’ failure to reasonably supervise, aiding and abetting, and failure to comply with CCM’s custody policy. For purposes of this blog posting, only the last violation will be discussed in greater detail.