On February 6^th the California Department of Corporations announced a 45-day extension of the comment period for its proposed rule aligning California’s exemption for private fund advisers to the federal exemption. Interested parties now have until 5 p.m. March 26, 2012 to provide commentary on the proposed rulemaking.

Many opine the financial crisis was hastened by the financial industry’s use of byzantine and risky securities. FINRA recently released more specific guidance concerning supervision by broker dealers over the sale of complex products: Regulatory Notice 12-03, Complex Products: Heightened Supervision of Complex Products.

Earlier this month, the Managed Fund Association (“MFA”), the largest lobbyist for the alternative investment industry, petitioned the SEC to amend Rule 502(c) of Regulation D to eliminate the prohibition on general solicitation or general advertising with respect to private funds. This longstanding prohibition prevents private funds that are exempt from registration under the safe harbor of Reg D from engaging in “general solicitation” and “general advertising.” The ban, set forth in Rule 502(c), prohibits issuers from offering or selling “securities by any form of general solicitation or general advertising, including, but not limited to…Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio…”

As previously reported by JLG, in June 2011 the SEC adopted new rules implementing amendments to the Investment Advisers Act created by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act increased the statutory threshold for registration by investment advisors with the SEC from $25 million in assets under management (“AUM”) to $100 million.

On January 4^th the Securities and Exchange Commission (“SEC”) issued a cease and desist order against an Illinois man, Anthony Fields, posing as a Registered Investment Adviser (“RIA”) who was using his LinkedIn account to scam investors, “offer[ing] more than $500 billion in fictitious securities through various social media websites.”

On December 1, the SEC announced enforcement actions against three advisory firms and six individuals as part of the Commission’s new initiative whereby the Commission’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny. The enforcement actions allege that the firms and managers engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.

The SEC and FINRA have issued a Risk Alert and a Regulatory Notice on broker-dealer branch inspections, and offered suggestions to help securities industry firms better perform this key supervisory function. The Risk Alert noted that the branch inspection process is a critical component of a comprehensive risk management program and can help protect investors and the interests of a firm. The SEC and FINRA offered the following tips to help perform robust branch inspections:

On October 3, 2011, Rule 13h-1 went into effect which, among other things, requires “large traders” to begin identifying themselves to the SEC on December 1^st by filing Form 13H. Under Rule 13h-1, a “large trader” is defined as a person, including affiliated entities, whose discretionary transactions in NMS securities[1] (a) equal or exceed 2 million shares or $20 million during any calendar day, or (b) 20 million shares or $200 million during any calendar month. A large trader must file a Form 13H with the SEC within 10 days after reaching either one of these thresholds.

Last month, FINRA proposed Rule 5123 which, if adopted by the SEC, would have a huge impact on broker-dealers that offer or sell any security conducted in reliance on an exemption from registration under the Securities Act (i.e., a private placement), or participate in the preparation of a PPM, term sheet or other disclosure document for a private placement.

In September of 2010, the Californialegislature passed AB 1743 to supervise “External Managers” and require “Placement Agents” to register as lobbyists. Generally speaking, “External Managers” are defined as a person or entity who is retained or seeking to be retained by a state public retirement system in California to manage a portfolio of assets for compensation, and a “Placement Agent” is an individual or entity hired or retained by an external manager who acts as a finder, solicitor or marketer to a public retirement system or pension fund in California. Placement agents, therefore, promote external management services to California state pension funds.