Broker-Dealers

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that a swap or security-based swap (collectively, “Swaps”) otherwise subject to mandatory clearing is not required to be cleared if one party to such Swap (1) is not a financial entity, (2) is using such Swap to hedge and or mitigate commercial risks, and (3) notifies the Commodity Futures Trading Commission (the “CFTC”) or Securities and Exchange Commission (the “SEC” and, together with the CFTC, the “Commissions”), as applicable, how it generally meets its financial obligations associated with entering into non-cleared Swaps (such exception, the “End-User Clearing Exception”). 

The Commissions have each proposed new rules to specify requirements [click to continue…]

By: Jospeh J. Basile, Richard I. Ellenbogen, Jeffery E. Tabak, and David E. Wohl

Historically, many advisers to hedge funds and other private funds have relied on an exemption contained in Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which generally exempts from registration any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients, and who does not hold itself out generally to the public as an investment adviser (the “Private Adviser Exemption”).  Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) repeals the Private Adviser Exemption effective as of July 21, 2011, and replaces it with several narrower exemptions, as discussed below.

On June 22, 2011, pursuant to Title IV of the Dodd-Frank Act, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement expanded registration and disclosure requirements for advisers to hedge funds and other private funds under the Advisers Act.  The final rules modify certain provisions the SEC proposed in October and November 2010 and include, among other items, a definition of “venture capital fund” for purposes of the venture capital registration exemption, guidelines for determining an adviser’s eligibility under the $150 million private fund adviser registration exemption, definitions of a number of terms related to the foreign private adviser registration exemption and increased disclosure requirements for advisers to private funds.  In addition, the SEC issued a final rule defining the term “family office” for purposes of the exception from the definition of “investment adviser” mandated by Section 409 of the Dodd-Frank Act.  Finally, the SEC confirmed that it would delay the effective date of the registration requirement for investment advisers required to register with the SEC as a result of Dodd-Frank Act amendments to the Advisers Act until March 30, 2012.

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On November 3, 2010 at 10:00 a.m., the Securities and Exchange Commission (“SEC”) will hold an open meeting to consider how to implement certain rules as required by the Dodd-Frank Act.  Notably, the SEC will consider whether to propose rules that would effectively enhance its enforcement abilities by increasing the incentives and protections available to whistleblowers. Pursuant to Section 922 of Dodd-Frank, whistleblowers may potentially receive financial awards ranging between 10 to 30 percent of the SEC’s recovery in fines or damages, if such a recovery exceeds $1 million.

The subject matter of the Open Meeting will be:

  1. Whether to propose rules and forms to implement Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) entitled “Securities Whistleblower Incentives and Protection.” Section 21F, as added by Section 922 of the Dodd-Frank Act, provides that the SEC shall pay awards, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action.
  2. Whether to propose a new rule under Section 763(g) of the Dodd-Frank Act, Pub. L. No. 111-203, to prohibit fraud, manipulation, and deception in connection with security-based swaps.
  3. Whether to adopt new Rule 15c3-5, Risk Management Controls for Brokers or Dealers with Market Access, under the Exchange Act. The new rule would require brokers or dealers with access to trading directly on an exchange or alternative trading system (“ATS”), including those providing sponsored or direct market access to customers or other persons, to implement risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. Among other things, new Rule 15c3-5 would effectively prohibit broker-dealers from providing “unfiltered” or “naked” sponsored access to any exchange or ATS.

The Working Group will continue to monitor any developments and provide timely coverage at Weil’s Financial Regulatory Reform Center.  Please contact the Working Group if you would like more detailed information about the SEC’s rulemaking process that follows from Dodd-Frank.