Tag: Massachusetts

More on the Massachusetts Regulations on Expert Networks

The Massachusetts Secretary of State issued a new regulation that would affect the ability of investment advisors to use expert networks. This was a direct result of Risk Reward Capital Management being based in Massachusetts. Since the management company was registered as an investment adviser in Massachusetts they are subject to examination and enforcement by the Secretary of the Commonwealth.

The regulation highlights the continuing split between the state-lvel and federal-level of regulation of investment advisers. Dodd-Frank only widened that split by kicking thousands of advisers out of registration with the Securities and Exchange Commission and over to the various states.

Risk Reward Capital Management had just under $25 million under management. Dodd-Frank raised that level.

To clarify its new regulation, Massachusetts issued this policy statement:

The Securities Division has received several questions regarding the applicability of the expert or matching services regulation to investment advisers that are under the authority of the Securities and Exchange Commission. This notice is to restate and clarify information included in the Division’s adopting release for the regulations adopted on August 19, 2011.

The expert or matching services regulation will not be deemed applicable to investment advisers subject to Securities and Exchange Commission authority, consistent with the requirements of Section 203A(b) of the Investment Advisers Act of 1940. The Securities Division retains its authority to take enforcement action against an investment adviser or any person associated with an investment adviser with respect to fraud or deceit, consistent with Section 203A(b)(2) of the Investment.

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Enforcement of the Massachusetts Data Privacy Law

It’s been almost 18 months since the Massachusetts Data Privacy Law went into effect. Belmont Savings Bank has become one of the first charged with violating the law.

Belmont Savings Bank maintained personal information on an unencrypted backup data tape and then lost the tape. According to surveillance footage the tape was likely discarded inadvertently by the overnight clearing crew and sent to the incinerator.

There were several rounds of changes between the first version of 201 CMR 17.00 and the final one. One central element was the requirement that there be written information security plan in place if your company has “personal information” on a Massachusetts resident. Obviously, you need to comply with the plan.

In this case, Belmont Savings Bank has the plan. But they failed to comply with it. The data tape should have been locked-up overnight and not left on a desk.

The Massachusetts’ Attorney General entered into an Assurance of Discontinuance with Belmont Savings Bank. As part of the settlement, the bank has to

  • encryp, to the extent technically feasible, all personal information stored on backup data tapes
  • store backup data tapes containing personal information in a secure location
  • effectively train its workforce on the policies and procedures with respect to maintaining the security of personal information

There is no evidence indicating that any customer’s personal information has been acquired or used by an unauthorized person or used for an unauthorized purpose. The Assurance of Discontinuance states that if actual harm to customers results, the Attorney General’s Office will reopen discussions to determine appropriate restitution.

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Massachusetts and Expert Network Services

At least one of the hedge funds being investigated for its use of expert networks in based in Massachusetts. In an unusual instance of the state regulators acting before Securities and Exchange Commission, the Massachusetts securities regulators are proposing a new regulation to address the use of expert network services. They are proposing a new section under 950 CMR 12.205(9)(c)(16) to the existing list of dishonest and unethical practices:

16. a. To retain consulting services, for compensation that is provided either directly to the consultant or indirectly through a Matching or Expert Network Service, unless the adviser obtains a written certification, signed by the consultant that:

(i) describes all confidentiality restrictions that the consultant has, or reasonably expects to have, regarding Confidential Information; and

(ii) affirmatively states that the consultant will not provide any Confidential Information to the adviser.

b. Notwithstanding section (a) an investment adviser who comes into possession of material Confidential Information through a consultation is precluded from trading any relevant security until such time as the Confidential Information is made public.

c. Definitions. For purposes of this section:

(i) “Confidential Information” means any non-public information, which one is bound by a confidentiality agreement or fiduciary (or similar) duty not to disclose.

(ii) “Matching or Expert Network Service” means a firm that for compensation matches consultants with investment advisers.

As alleged in In the Matter of Risk Reward Capital Management Corp., RRC Management LLC, RRC BioFund LP, and James Silverman, Docket No. E-2010-057, some investment advisers have paid expert networks and consultants to access confidential information about publicly traded companies.

Massachusetts wants additional measures to ensure that confidential information is not being accessed and traded upon. The proposed regulations do not alter an investment advisers’ existing duty not to trade on insider information. The goal is to provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.

In the end, it seems like it is just a record-keeping exercise to me.

You can review comments or submit a comment on the proposed regulation.  There is a proposed effective date of December 1, 2011.

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Report on Investment Adviser’s Use of Social Media in Massachusetts

Social Media used by Investment Advisers

There is a growing trend in the financial services industry to use social media sites for outreach to existing as well as potential customers. Noticing this trend, the Securities Division of The Office of the Secretary of the Commonwealth surveyed investment advisers registered and doing business within the Commonwealth of Massachusetts. The purpose of the survey is to determine the scope of investment advisers’ use of social media, and what, if any, record retention and supervisory procedures have been implemented or utilized by those advisers. Empirical evidence is good to have.

The Division forwarded the social media survey to 576 investment advisers registered with the Division and located in the Commonwealth and 79% of advisers have responded.

  • 44% of investment advisers used some form of social media
  • Of those not using, 10% expect to use it in the next year
  • A majority of investment advisers using social media fall within the 42-62 age bracket

The Survey also suggests that some advisers do not have policies relating to the retention or supervision of social media content, are not retaining social media content, and do not supervise the use of social media content.

  • 69% of advisers using social media claimed to not have written record retention policies related to the retention of social media content
  • 57% also did not retain all content posted on social media websites maintained (directly or indirectly), by the firm.

It should not come as  surprise that the Division concluded that additional regulatory guidance concerning the use of social media would be appropriate. We have already seen enforcement at the national level for the abuse of social media. I expect the states will be on board soon and including a review of social media as part of their examination and review process.

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Massachusetts Is Looking to Dodd-Frank Investment Advisers and Fund Managers

Just to keep you on your toes if you have less than $150 million under management, states are now filling in the gaps left by Dodd-Frank. If you are under that threshold, you lose the ability to register with SEC and now have to look to at being regulated at the state level.

Massachusetts used to have a very broad exemption if your clients were all “institutional buyers.”

An investing entity whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $50,000.

For a private fund manager, this was a great exemption since their investors would need to be accredited investors. As long they kept capital commitments at a minimum of $50, 000 they could usually take advantage of this exemption.

The Massachusetts Secretary of State has proposed removing this exemption as well as cleaning up other aspects of investment adviser/fund manager regulation to get ready for Dodd-Frank.

The proposal would also create new Massachusetts registration exemptions for advisers whose only clients are “venture capital funds” or funds excluded from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act. As you might expect, the term “venture capital fund” would be defined by reference to the SEC’s definition of the term. The SEC has proposed a draft definition of venture capital fund, but not yet finalized it.

What is abundantly clear is that the SEC has run out of time it trying to meet the July 21, 2011 deadline in Dodd-Frank. It’s time to raise the white flag and move the deadline. Since the SEC has not yet finalized the rules, regulated parties would have no time to understand the rules and get changes in place by July 21. Given that thousands of advisers are being kicked out of SC registration and over to state registration, the states do not have the rules in place to deal with the regulatory changes.

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Massachusetts Brings Charges Against a Hedge Fund

You need to worry about more than just the Securities and Exchange Commission when it comes to private fund fraud. State securities regulators generally have the ability to bring fraud charges. Case in point is the Massachusetts’ Secretary of the Commonwealth bringing charges against Risk Reward Capital Management, RRC Management, the RRC Bio Fund and James A. Silverman.

William F. Galvin’s office moved against the parties because the fund allegedly used the “expert network” firm, Guidepoint Global LLC, to gain inappropriate information about clinical trials for biotech drugs.

“The first year returns for the Fund were poor, losing 16.9% of its value. In early 2008 Silverman began to pay $80,000.00 a year from the Fund’s assets to retain the services of Guidepoint Global LLC, (“Guidepoint”) a so-called “expert network” firm, in an effort to make the hedge fund more profitable. With access to Guidepoint, the Fund began a dramatic resurgence, generating returns of over 55% in 2009 and 52% in 2010. These returns were generated, at least in part, upon Silverman’s receipt of material non-public information he received through Guidepoint consultations.”

The complaint focuses on two public companies for which Silverman received non-public information through Guidepoint consultants: Ariad Pharmaceuticals, Inc. and Questcor Pharmaceuticals Inc.

The complaint lays out in detail how the government sees an “expert network” in operation and how it breaks the law.

The Secretary of the Commonwealth is looking not just at the misuse of the information, but also administrative violations of the Massachusetts’ Uniform Securities Act

The Division’s books and records review of Risk Reward also uncovered a widespread pattern of non-compliance with the Act and the Regulations. The Division uncovered violations of minimum financial requirements, document retention requirements, and a myriad of dishonest and unethical business practices, including improper assessment of performance-based fees. The Division observed a disorderly office appearance during the on-site Examination. In addition to leaving client documents including sensitive financial information laying about on tables, chairs, sofas and floors, the Division discovered that the office doors did not lock, leaving client data vulnerable.

This action was brought pursuant to the enforcement authority under M.G.L. c. 110A §§204 and 407A. You may have notice that the operative agency is the Secretary of the Commonwealth, not the Secretary of State. Massachusetts is a commonwealth, not a state. Not that there is a difference.

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Compliance and Foreclosures in Massachusetts

Why is the foreclosure machinery of our nation’s largest banks grinding to a halt? Failure to follow the legal rules. In other words: Compliance Failure.

The latest comes from my home state of Massachusetts. The state’s highest court rulet that two foreclosures were invalid because they were not properly assigned to the foreclosing party.

The theory of simply trading mortgage notes ran into the reality of real estate law. The foreclosure process and laws are different in every state. There are 23 states that require approval of a court to get a foreclosure order. These have been labeled the “judicial states.” The remaining states do not require court action. In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure.

These homeowners sued because the assignments to the foreclosing lender were missing at the time of foreclosure. The financial institutions finally sorted out the mess and executed the assignments after the foreclosure sale.

We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.

The decision does not seem to extinguish the mortgage debt, it merely invalidates the foreclosure process. There is some doctrine that the mortgage follows the note. That seems to be brushed aside when it comes to the foreclosure process.

I don’t think it’s the lenders who are the ultimately the losers in this case. Now that the assignments are in order, they can go back and re-start the foreclosure process. For sure they are losing money. But it’s not the nuclear effect of having to walk with empty hands.

The group with the problem are the people who bought foreclosed property from lenders. If an assignment is missing, the foreclosure is improper and the lender never obtained good title to the property. That means there was no transfer to the purchaser. If that person did not purchase an owner’s policy of title insurance, they are in trouble. At best, they will have trouble refinancing the home and selling at home. At worst, the original property owner is going to come back for the property.

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Image: Sign Of The Times – Foreclosure by Jeff Turner

Hedge Fund Hotels and Compliance

The Massachusetts Secretary of the Commonwealth has been investigating hedge fund hotels. Start-up hedge fund managers receive reduced-rent office space in return for send their trading business to the landlord.

UBS AG has agreed to pay $100,000 to settle charges that it failed to disclose the relationship. Galvin charged there was a conflict that harmed investors who did not know the hedge funds were receiving beneficial treatment in return for sending the bulk of their business to UBS.

To me it seems more like a disclosure problem with the hedge funds, receiving reduced rent in exchange for the sending business to UBS. The Massachusetts regulator found fault with UBS for failing to enforce a requirement that its hedge fund hotel clients disclose the arrangements to their investors.

That’s a tough one to swallow from a compliance perspective.

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Snow and Ice in August

It’s August, but here in Massachusetts we need to start thinking about snow and ice. Not because of climate change, but because of the Supreme Judicial Court. They just issued a ruling that changes the standard of liability for snow and ice hazards.

The standard in the Massachusetts had been that a property owner could not be held liable for injuries on the property arising from a natural accumulation of snow and ice. The law was based on old standards for different duties of care owed by a property owner to tenants, licensees, and trespassers. That was further tied to the question of whether the injury was caused by a defect existing on the property (First year of law school and bar exam flashback.)

The “Massachusetts Rule” was that “the law does not regard the natural accumulation of snow and ice as an actionable property defect, if it regards such weather conditions as a defect at all.” That particular statement came from a case where the homeowner had been away, leaving his driveway unshoveled and covered in snow. The injured person walked across the unshoveled driveway, fell down, was injured, and sued the property owner. She apparently left empty-handed.

The result of the Massachusetts was that most wintery slip and fall cases hinged on whether the snow and ice was a natural or unnatural accumulation of snow and ice. If it was natural, the landlord escaped liability and could get the case dismissed at summary judgment without a trial.

I should point out my bias. I have a sidewalk in front of my house (that I dutifully shovel). My employer owns commercial property in Massachusetts.

In Papadopoulos v. Target Corp., the Supreme Judicial Court announced that the state has abandoned the Massachusetts Rule and “discarded the distinction between natural and unnatural accumulations of snow and ice, which had constituted an exception to the general rule of premises liability that a property owner owes a duty to all lawful visitors to use reasonable care to maintain its property in a reasonably safe condition in view of all the circumstances.”

The new standard:

We now will apply to hazards arising from snow and ice the same obligation that a property owner owes to lawful visitors as to all other hazards: a duty to act as a reasonable person under all of the circumstances including the likelihood of injury to others, the probable seriousness of such injuries, and the burden of reducing or avoiding the risk. … If a property owner knows or reasonably should know of a dangerous condition on its property, whether arising from an accumulation of snow or ice, or rust on a railing, or a discarded banana peel, the property owner owes a duty to lawful visitors to make reasonable efforts to protect lawful visitors against the danger.

That means the jury will have to determine what snow and ice removal efforts are reasonable in light of the expense they impose on the landowner and the probability and seriousness of the foreseeable harm to others.

I think the end result is going to be more lawsuits filed against property owners. We can take Mr. Papadopoulos as an example. He had lost his case in summary judgment. Now he gets to go back to court and try again to get some money for his injuries.

Coming back to compliance, this is a rule where you act to avoid getting sued. Many communities have a local ordinance that makes the failure to clear sidewalks subject to a fine. I think most homeowners clear their sidewalks because its the neighborly thing to do. (Of course others, begrudgingly clear their sidewalks. You can get a good sense about them by seeing if they clear their driveway first or their sidewalk first.)

The goal is get property owners to clear their sidewalks and driveways so that people don’t fall down and hurt themselves. It seems there are several different ways to encourage this behavior. I could go a little deeper, but it’s still summer and I’m not ready to give more thought to snow and ice.

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Image is Austin shoveling snow by oddharmonic.

April 15 is Tax Day, Except for Flooding

With the recent flooding in Eastern Massachusetts, several counties were declared federal disaster areas. The bonus is that you have an automatic extension for filing your taxes.

If you live in Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk or Worcester County in Massachusetts, you have until May 11 to file your income taxes. that applies for both Federal and Massachusetts filings.

Massachusetts is not alone. These parts of the country were also granted extensions:

  • New Jersey: Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties
  • Rhode Island: Bristol, Kent, Newport, Providence and Washington counties
  • West Virginia: Fayette, Greenbrier, Kanawha, Mercer and Raleigh counties

The automatic extension applies regardless of whether you were underwater or high and dry.

Good news for me. I suffered no damage, but can still procrastinate in finishing my taxes.
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  • TIR 10-7: Extension of Time for Certain Tax Filings and Payments for Taxpayers Affected by March 2010 Severe Storms and Flooding