Exam Alert: SEC adopts definitions for security-based swap rules
Under the Dodd-Frank Act, the SEC and CFTC (Commodity Futures Trading Commission) regulate the OTC swaps market. On April 18, 2012, the SEC adopted rules that provide definitions for terms used in the law, specifying who will be subject to regulation.
The rules provide two categories of persons subject to SEC registration: "security-based swap dealers" and "major security-based swap participants." In essence, a security-based dealer is a person that regularly trades security-based swaps for their own account. A de minimis exemption exists for dealers who traded up to $3 billion worth of credit default swaps over the past year and up to $150 million worth of other security-based swaps. Note that there is a different de minimis threshold of $25 million for security-based swaps involving "special entities," including certain government agencies.
A major security-based swap participant is a person who maintains a "substantial position" in any of the major security-based swap categories, or whose outstanding security-based swaps create "substantial counterparty exposure." Note that hedging positions are not counted towards the "substantial position" threshold if the person is not a "highly leveraged financial entity," meaning a financial entity with a ratio of liabilities to equity in excess of 12-to-1. Two tests are provided for determining "substantial position," and two thresholds are provided for "substantial counterparty exposure." The specifics of these tests and thresholds may be found in the SEC release, along with background information, a plan to phase-in the de minimis rule, a safe harbor to avoid being considered a major participant, and other details.
The rule will become effective 60 days after publication in the Federal Register, though the deadline for registration will be given in SEC's final rules for registration of dealers and major participants.
Source: SEC Release 2012-67
This exam alert applies to the Series 62, Series 79, Series 99, Series 65, and Series 66.
Exam Alert: SEC requires private fund advisers to file Form PF
A new SEC rule requires investment advisers with at least $150 million in private fund assets under management to periodically file Form PF. Large private fund advisers are required to file more frequently and to provide more detailed information than small private fund advisers. Most private advisers must begin filing December 15, 2012. Private advisers with $5 billion or more in private fund assets must begin filing June 15, 2012.
Source: SEC Release 2011-226
This alert applies to the Series 65, 66, 24, 62, and 82.
Exam Alert: SEC gives guidance on cyber attack threat disclosure
On October 13, 2011, the Securities and Exchange Commission issued new guidelines that clarify the application of existing disclosure rules. Specifically, the SEC has identified cyber attack incidents, along with the risk of cyber attacks, as material information that must be disclosed to investors.
Source: CF Disclosure Guidance: Topic No. 2
Further reading: "SEC tells companies to disclose cyber attacks"
This alert applies to the Series 24, 26, 55, 6, 62, 63, 65, 66, 79, 82, 99, and 7.
Exam Alert: Private fund advisers may be required to file with FINRA
The SEC and the CFTC have together proposed a rule that would require private fund advisers to file Form PF periodically. On October 6, 2011, the SEC announced that if Form PF is adopted, private advisers will file the form with FINRA's IARD. The filing fees for Form PF would be $150 for quarterly filings and $150 for annual filings.
Source: Federal Register Volume 76, Number 194
This alert applies to the Series 65, Series 66, Series 24, Series 62, and Series 82.
Exam Alert: Large traders must identify themselves to the SEC
The SEC has adopted rules that require "large traders" to register with the Commission and receive unique identification numbers. The traders must then provide their broker-dealers with their ID numbers when they make trades, and the broker-dealers must record the ID numbers as part of their recordkeeping and transaction reporting requirements. A "large trader" is a "person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month." Relevant to the Series 79, 62, 55, 7, 26, and Series 24 exams.
Source: SEC Release 2011-154
Further Reading: Analysis by the Securities Technology Monitor
Exam Alert: SEC proposes rule to change standards for “qualified clients”
The SEC has proposed a rule to increase the dollar amount thresholds for "qualified clients" (clients that may be charged performance-based fees by an investment adviser). The current rule requires a qualified client to have $750,000 in assets under management or $1.5 million in net worth. Under the proposed rule, these thresholds will be increased to $1 million in assets under management and $2 million in net worth. This revision is required to occur by July 21, 2011. Relevant to sections 4.3.3 of the Series 24 exam, as well as the Series 63, Series 65 and Series 66 exams.
Exam Alert: SEC proposes amendment requiring broker-dealers to search for missing securityholders
On March 18, 2011, the SEC proposed an amendment to Rule 17Ad-17, which currently requires transfer agents to look for missing holders of securities. The amendment would extend this obligation to broker-dealers. Two database searches are required: the first one must occur three to twelve months after the securityholder becomes lost, and the second one must take place six to twelve months after the first search.
Exam Alert: SEC to nationalize exam program
According to the Wall Street Journal, the SEC is putting the finishing touches on a new uniform manual for its examiners. The WSJ states that the SEC expects that the new manual will nationalize the agency's examination program, allowing for uniform processes and procedures across all regional offices. The SEC intends to distribute the manual to examiners in 30 to 60 days and to the public in 30 to 90 days (as of 2/8/11), according to the WSJ.
http://online.wsj.com/article/SB10001424052748704364004576132231587877342.html