Hedge Fund Marketers: Beware The Dodd-Frank Act!

Unregistered hedge fund marketers, that is. Important distinction (for now).

Let me explain.

Hedge funds (i.e., IA firms) that use third parties (finders/consultants/solicitors/placement agents) for introductions to potential investors may face a new limitation. In June, SEC adopted the 'pay to play rule' which, among other things, "Prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions." (See SEC news release.)

What this means is that IA firms/hedge funds cannot pay an unregistered entity for introductions to public pension plans. The entity has to be an SEC-registered investment adviser or a registered broker-dealer. So you FINRA member BD's out there are in a stronger position when competing with unregistered finders (you know who those guys are...the ones not reading this blog). These unregistered types will now have to, under temporary Rule 15Ba2-6T of the Securities Exchange Act of 1934, register as "municipal advisors" by October 1, 2010. See SEC's links about Form MA-T. (And don't ask me why they decided to spell 'advisors' with an 'o' this time...?)


Back to you, the FINRA member firm who offers investments in hedge funds, sometimes to public pension funds: What changes? Nothing yet, as far as I can tell. But be on the lookout for new rules from FINRA about this sales activity. Not sure how much misery they'll inflict on you, but somehow I think it will be mildly annoying at very least. Stay tuned.

SIPA Amended by Dodd-Frank Act. But Not Really.

On my son's 16th birthday, this announcement was made about changes to the Securities Investor Protection Act (SIPA, enforced by SIPC). One of the changes is described as follows:

Sounds clear to me.

"Dodd-Frank Act Section 929V amends the minimum assessment amount for SIPC member firms. The highest amount that SIPC can impose as a minimum assessment has been changed from $150 per annum to 0.02 percent of the gross revenues from the securities business of the SIPC member. (15 U.S.C. §78ddd(d)(1)(C))."

But. If you dig around in SIPC's member site and go to "News for Members," you'll stumble on this July 23, 2010 Notice about the minimum assessment changes. Here's what SIPC says about the Dodd-Frank amendment cited above:

(I can't figure out this out. .02 percent is smaller than .25 percent, so the D-F Act doesn't conflict with SIPC's current assessment rate, so why did SIPC have to put out the 'disregard' notice? Probably because everyone is still tee-oh'ed that they have to pay this new assessment and SIPC assumed everyone would start paying the new minimum (.02 percent) instead of the published rate (.25 percent). If that's the case, then SIPC thinks people actually read this stuff! In the summer, no less! [Birthday] hats off to SIPC for having that kind of faith in compliance personnel.

Well, anyway, here's a change that might really be a change:

"UNTIL FURTHER NOTICE, FOR MEMBERS WHOSE FISCAL YEAR ENDS ON OR AFTER JULY 31, 2010, PLEASE DISREGARD ANY REFERENCE TO A MINIMUM ASSESSMENT. THE SIPC ASSESSMENT WILL CONTINUE TO BE ONE FOURTH (1/4) OF ONE (1) PERCENT (.0025) PER ANNUM OF NET OPERATING REVENUES FROM THE SECURITIES BUSINESS, WITHOUT REGARD TO ANY MINIMUM ASSESSMENT."

Thus paraphrased by the late, great Gilda Radner as "Never mind."*

'In addition, for your information, the definition under the Securities Investor Protection Act of "gross revenues from the securities business" has been changed. Gross revenues now also includes "... revenues earned by a broker or dealer in connection with a transaction in the portfolio margining account of a customer carried as securities accounts pursuant to a portfolio margining program approved by the [Securities and Exchange] Commission." (15 U.S.C. §78lll(9)).'

*Bonus points to those who remember the character played by Gilda when offering this phrase weekly on SNL.

Miss EMMA Says, "Disclose It!"

Just a reminder to teach your Reps about disclosing 'material information' to customers (except institutional buyers--sophisticated muni market participants) when selling munis. Even if not recommended. The EMMA portal is the place to find most such information. And here is a link to FINRA's news release on the subject--don't forget to search for "material events" in my blog to be treated to some other useful information...like a reminder that this rule applies to 529 sales.

FINRA provided in the news release a 'checklist' for Reps to use as a means of documenting their notification efforts (necessary! always document!). It's pretty lengthy and for some reason I don't envision Reps reading it. But if they did, they would surely be enlightened: it's full of instructions and explanations and ultimatums and guilt trips (jk). You may want to put your brilliant word processing staffers to work on this in order to create a more user-friendly checklist (send it to me and I'll send you my thanks and maybe chocolates!).

Also, MSRB's Fact Sheet is a very lovely tool for educating your muni customers. I hope they don't mind me passing it along.