The Securities and Exchange Commission (SEC) has finally disciplined eight of its staff members in connection with agency failings relating to the Bernard Madoff Ponzi scheme. Notably, no one was fired, and the stiffest punishment handed out is reported to a 30-day suspension without pay. Other punishments included demotions and pay cuts. Recommendations that at least one of the eight staff members be fired were overturned by the agency’s chairman, Mary Schapiro.

SEC staff ignored repeated warning that Madoff, a widely admired and well known figure, was stealing money from his clients. The SEC’s own internal examination into these crimes, which resulted in a detailed 500 page report, determined that the agency had receive more than sufficient information over the years to warrant a thorough investigation of Madoff and his companies. However, despite three examinations and two investigations of limited focus being conducted, a thorough and competent investigation was never actually performed.

In the end, Madoff confessed to his crimes of his own volition to federal investigators, and caught the SEC off guard in regards to both the existence and the scope of the fraud. Madoff, possible the largest embarrassment that the SEC has faced, is now serving a prison sentence of 150 years.

With protesters still in the streets as part of the Occupy Wall Street protests that have now spread across the country, it is unclear how the SEC’s refusal to sack any of those responsible for oversight and supervisory functions regarding Madoff will be received by Wall Street critics. To the extent that recent attempts to clean up the financial markets’ excess have relied on an increased role for the SEC to play, it is unclear how long it will take the agency to regain its credibility with investors.

The Madoff debacle made clear to the world that the SEC faced numerous systemic shortcomings. The world is still waiting to see how the agency fully addresses and overcomes these challenges.

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On October 26, 2011, the Securities and Exchange Commission (SEC) approved proposed Rule 204(b)-1 under the Investment Advisers Act of 1940, with certain significant amendments to the original proposal issued in January.

The Rule implements Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which mandates that the SEC require reporting by certain private fund advisers to assist the Financial Stability Oversight Commission (FSOC) in assessing systemic risk in the U.S. financial system. The Rule will affect managers of private equity funds, hedge funds, real estate funds and liquidity funds.

Who Is Required to File Form PF?

Under the Rule, any investment adviser required to register with the SEC that advises one or more private funds with at least $150 million in private fund assets under management (Private Fund Adviser) must file Form PF. A “private fund” is defined as an issuer that would be an investment company as defined in Section 3 of the Investment Company of Act of 1940, but for the exemptions provided by section 3(c)(1) or 3(c)(7) of the Act.

The Rule places additional requirements on “Large Private Fund Advisers”, which would include:

• Advisers managing hedge funds with $1.5 billion in assets
• Advisers managing private equity funds that collectively have at least $2 billion in assets

Disclosure Requirements

All Private Fund Advisers would be required to report the following information annually:

• gross and net asset value of each private fund;
• detailed performance data;
• investor concentration;
• notional value of derivative positions;
• total borrowings; and
• monthly and quarterly performance data of each private fund.

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The first thing that strikes you when you read the recent Declaration issued by the OccupyWallStreet protestors, who have assembled over the past two weeks in Zuccotti Park in downtown Manhattan, is how little of it actually relates to Wall Street.

Many of the “demands” that have been inserted in the manifesto drafted by the various organizations behind the protest have no relation to how Wall Street functions, or the issues that have arose since the Credit Crunch lead America into this Great Recession.

Following the age-old agit-prop dictum that no good popular uprising should go to waste, it seems that a variety of other concerns, such as student loans, public employees pensions, animal rights and genetically-modified food, are the principal concerns of many of demonstrators. The complexities and intricacies of Wall Street appear to be largely ignored, except for a few cursory statements about bank bailouts and excessive compensation that have been stapled on to their wish list.

The choice of venue – the financial district in Manhattan – gives the protestors a chance to air other long-standing grievances in a different location. But frustratingly little of what is be said, sung, chanted and painted on signs is actually directed at the way the US and global financial systems currently operate and how they must be improved.

The idea that a generation of students and young workers would remember for the rest of their lives the personal misery and frustration that has arisen in the last four years due to the near-collapse of our financial markets is actually quite encouraging.

As citizens and savers, we each have a responsible to ourselves, our families and our country to have an opinion on the current state of our financial system and its regulation. Even when the details of credit default swaps and high yield bonds lead to fits of sudden-onset narcolepsy!

However, such direct informed critique is missing from these demonstrations.

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The SEC this week announced the formation of the Advisory Committee on Small and Emerging Companies, which is being established to focus on interests and priorities of small businesses and smaller public companies.

The purpose of the committee will be to provide a reliable mechanism by which the SEC can receive information and advice from the small business community relating to (i) privately held small businesses and (ii) publicly traded companies with market capitalizations of less than $250 million.

The SEC’s mission includes both facilitate capital formation while at the same time protecting investors. In that regard, the new advisory committee will consult with the SEC on issues such as (i) capital raising through private placements and public securities offerings, (ii) trading in the securities of small and emerging companies, and (iii) public reporting requirements of such companies. The committee will also provide the SEC with advice in connection with how best to reduce the regulatory burdens on small businesses in raising capital in a manner consistent with investor protection.

Unsurprisingly, the initial composition of the advisory committee includes a selection of lawyers, bankers, fund managers, venture capitalists and senior business executives.

The SEC is also in the process of re-establishing an Investor Advisory Committee, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This would replace an earlier Investor Advisory Committee that the SEC had set up in June 2009 under the Federal Advisory Committee Act.

Given all of the criticism that the SEC has received over the past two years, including allegations that it was unnecessarily out of touch with developments in the markets, hopefully the establishment of these new committees will enable the agency to improve information flows.

If not, then these committees will only serve as additional bureaucratic window dressing at a time when the SEC must re-establish its credibility with American voters and savers.

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This week, the Securities and Exchange Commission (SEC) sought public comment on a wide range of issues raised by the use of derivatives by mutual funds and other investment companies regulated under the Investment Company Act of 1940 (1940 Act), in light of the significant changes that the derivatives markets have undergone in recent years.

The SEC issued a so-called “concept release” to pose its ideas to the public in order to get their views. The concept release is a continuation of the SEC’s ongoing review of mutual funds’ use of derivatives.

Investment companies regulated under the 1940 Act such as mutual funds, ETFs, and closed-end funds play a significant role in the U.S. economy and world financial markets. Subject to the various safeguards contained in the 1940 Act, funds are permitted to invest in derivatives. Derivatives are financial instruments whose value is derived from another underlying product, such as futures, certain options, options on futures, and swaps.

When the 1940 Act was originally enacted, it did not contemplate funds investing in derivatives as they may do today. In March 2010, the SEC announced it had initiated a review of the use of derivatives by funds to determine what additional protection might be necessary under the 1940 Act.

The concept release asks for information on how different types of funds use various types of derivatives as well as the benefits, risks and costs of using derivatives. Additionally, it asks for comment on several specific issues under the 1940 Act implicated by funds’ use of derivatives, such as:

• Restrictions on Leverage – The 1940 Act restricts the manner in which funds may incur indebtedness and may leverage their portfolios. The concept release asks how to measure the amount of leverage that a fund incurs when it invests in a derivative.

• Fund Portfolio Diversification – The 1940 Act does not require the portfolios of funds to be diversified, but does require them to disclose in their registration statements whether they are diversified or not. The concept release asks how a fund should value a derivative to determine the percentage of the fund’s assets that’s invested in a particular company for diversification purposes.

• Fund Investments in Certain Securities-Related Issuers – The 1940 Act generally prohibits funds from acquiring any security issued by, or any other interest in, the business of a broker, dealer, underwriter or investment adviser. The concept release asks how investing in a derivative issued by a broker-dealer may be different from, or similar to, investing in the broker-dealer’s stock or bond.

• Fund Portfolio Concentration – The 1940 Act does not prohibit funds from concentrating their investments in a particular industry, but does require funds to disclose their industry concentration policies in their registration statements. The concept release asks how funds determine the industry or industries to which they may be exposed through a derivative investment.

• Valuation of Fund Assets – The 1940 Act specifies how funds must determine the value of their assets. The concept release asks whether the SEC should issue guidance on how funds should value derivatives in their portfolios.

The public has 60 days from the date of publication in the Federal Register to respond. Any comments received will be used to help determine whether regulatory initiatives or guidance is needed that would continue to protect investors and fulfill the purposes underlying the 1940 Act.

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