In this Legal Alert, we wanted to update you regarding a number of new developments in the investment management industry that have occurred within the last month. As discussed below, the Securities and Exchange Commission (SEC) has taken several steps to strengthen its ability and resources to oversee and enforce securities laws against hedge funds and their managers, many of which are not registered as “investment advisers” with the SEC. In a separate matter, the SEC approved the merger of the operations of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE). This approval represents the culmination of years of efforts by the leaders of these self-regulatory organizations to combine their organizations and operations. Finally, we wanted to alert you to the SEC’s recent adoption of new proxy rules that will effect the methods and manner of proxy solicitation by investment companies and other public companies.
New Hedge Fund Focused Rule. On August 3, 2007, the SEC adopted new rule Rule 206(4)-8 under the Investment Advisers Act of 1940, under which the SEC reasserted its authority to bring enforcement actions against any investment adviser who defrauds an investor or prospective investor in a registered mutual fund or non-registered private hedge fund. The new rule was adopted in response to the 2006 decision in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006), which had struck down Rule 203(b)(3)-2 under the Advisers Act (generally requiring registration of certain hedge fund managers) and raised questions about the SEC’s enforcement authority over unregistered investment advisers. Under the new rule, both registered and unregistered investment advisers to “pooled investment vehicles” are prohibited from: (i) making false or misleading statements to investors or prospective investors in those “pooled investment vehicles”; or (ii) otherwise defrauding those investors or prospective investors. Pooled investment vehicles under the new rule include hedge funds, private equity funds, venture capital funds, and other types of privately offered pools that invest in securities, as well as registered investment companies. The new rule becomes effective September 10, 2007.
New Enforcement Unit Focused on Hedge Funds. In connection with the SEC’s recent adoption of Rule 206(4)-8, the SEC has taken further steps to strengthen its oversight of the hedge fund industry. On July 31, 2007, during testimony before the Senate Banking, Housing and Urban Affairs Committee, SEC Chairman Christopher Cox announced the creation of a new hedge fund-focused unit within its Division of Enforcement to coordinate and enhance its efforts to combat insider trading. While no details were given regarding the staffing or projects that may be given to the new unit, Mr. Cox noted that the unit will work in cooperation with other federal law enforcement agencies and self-regulatory organizations to carry out its mandate. The new unit further emphasizes the SEC’s focus on hedge funds. We expect increased scrutiny of hedge funds during exams of registered investment advisers, and more reviews and investigations of unregistered advisers and their funds as the new unit establishes itself.
For several years the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) have been exploring the possibility of a combined self-regulatory organization, with a goal of, among other things, streamlining operations and compliance matters for their members. In late July, the SEC announced its approval of the creation of a new self-regulatory organization from the consolidation of the NASD and NYSE member regulation operations. The new entity is entitled the Financial Industry Regulatory Authority ("FINRA"). As the NASD and the NYSE have always done, FINRA will operate under SEC supervision. FINRA will be responsible for management of the professional training, testing and licensing of registered representatives; arbitration and mediations of broker-dealer disputes; and oversight and regulation of the National Association of Securities Dealers Automated Quotation System (NASDAQ), the American Stock Exchange (AMEX), and the International Securities Exchange (ISE). NYSE Regulation, Inc. will continue to regulate trading on the NYSE, and individual exchanges will continue to regulate their own listed companies.
Mary Schapiro, NASD Chairman and CEO, will serve as CEO of FINRA, which will be supervised by a 23-person Board of Governors during a three-year transition period. During this time, FINRA will face a number of challenges as it seeks to effectively integrate the operations, rules and systems of the NASD and NYSE. Among other things, the SEC has indicated that it hopes that FINRA will harmonize some of the duplicative provisions appearing in the NASD and NYSE rules during the first two years of FINRA's existence.
Amendments to Proxy Rules
On July 26, 2007, the SEC announced the adoption of amendments to the proxy rules under the Securities Exchange Act of 1934 requiring issuers and other soliciting persons to make proxy materials available to shareholders on the Internet and to notify shareholders of the Internet availability of the materials. Specifically, the new rules require that:
If the issuer or other soliciting person chooses to furnish paper copies of the proxy materials along with the notice, then the issuer must: (1) make proxy materials available to shareholders on the Internet; and (2) notify shareholders that proxy materials are available on the Internet.
If paper copies of the proxy materials are not provided with the notice, then the issuer must also ensure that: (1) paper or e-mail copies of the proxy materials are made available to shareholders upon request, free of charge; (2) shareholders are able to make a permanent election to receive paper or email copies of proxy materials in connection with future proxy solicitations; (3) the notice to shareholders is sent 40 or more calendar days in advance of the date of the shareholder meeting; and (4) shareholders have a means to execute their proxies as of the time the notice is first sent.
The compliance date of the new proxy rules depends on the type of issuer. Registered Investment Companies may rely on the new proxy rules beginning January 1, 2008 and must comply with the rules starting January 1, 2009.
We use our Legal Alerts to help you stay abreast of new regulatory developments and changes in the investment management industry. As always, please feel free to contact us if you have any questions about any of the new rules or regulatory changes covered in this Legal Alert, or any other matter.