Tag: New York

Proposed Regulation of “Finders” in New York

The New York Attorney General has been keeping busy. Yesterday it was a lawsuit against the National Rifle Association. There are the previous lawsuits against the Trump Foundation and the Trump Organization. I missed the April announcement of proposed changes to some of the securities regulations in New York.

One caught my eye and caught the eye of Goodwin Procter lawyers Peter W. LaVigne, Nicholas J. Losurdo, and Jana Steenholdt. New York is stepping into the gray area of regulating finders.

Finders are not quite brokers and not quite investment advisers. They don’t give financial advice. They just have a big rolodex and want it to generate some revenue.

As pointed out by the Goodwin lawyers, the classic case is in the Paul Anka No-action letter. (Yes, the crooner.) He ended up connected with ownership syndicate trying to finance the newly formed Ottawa Senators hockey team. Anka was from Ottawa and was rooting for his home team, but didn’t want to do so for free. He would hand over his rolodex but wanted a cut of the money coming in. Anka also had good lawyers and they asked the Securities and Exchange Commission to bless the arrangement.

Mr. Anka did not:

  • participate in any negotiations between the Senators and any potential investors,
  • make any recommendations to them regarding an investment in the Senators,
  • participate in any advertisement, endorsement, or general solicitation for the investment,
  • participate, in the preparation of any materials relating to the sale or purchase of the investment
  • distribute the materials to any potential investor,
  • perform any independent analysis of the sale,
  • engage in any “due diligence” activities,
  • assist in or provide financing for the investment,
  • provide any advice relating to the valuation of or the financial advisability of such an investment.

He simply let the hockey club contact the people in his rolodex.

New York is interested in finders who did a bit more than Mr. Anka. The proposed definition of a “Solicitor”:

a person who as part of a regular business, engages in the business of providing investment advice to the limited extent that such person receives compensation for introducing a prospective investor or investors to an investment adviser or federally covered investment adviser…

Solicitors are subject to the same registration and examination requirements as investment advisers, and principals and representatives of solicitors are subject to the same registration and examination requirements as investment adviser representatives…

Mr. Anka probably falls outside that definition. He wasn’t in the regular business of making introductions. It may hit many organizations that are in that business.

Sources:

New York’s Proposed Anti-Money Laundering Regulations Could Send CCOs to Jail

To start with the obvious, helping terrorists and drug kingpins with their finances is bad. The US regulatory machine has been clamping down tighter on financial institutions who engage in this bad behavior. As the bad acts continue, the regulators keep tightening the regulatory requirements. The latest tightening of the screws comes from New York.

laundering dollar bills money

Governor Andrew M. Cuomo announced that New York is proposing a new anti-terrorism and anti-money laundering regulation that includes a requirement modeled on Sarbanes-Oxley that the chief compliance officer certify that their institutions has sufficient systems in place to detect, weed out, and prevent illicit transactions. That potentially opens the certifying officer to criminal charges if the certification is incorrect or false.

It’s hard to argue against anti-money laundering regulatory requirements. The regulator’s stock response is “Then you are in favor of financing terrorists.” Nobody is in favor of that. A few greedy financial executives have gone bad and that causes the rest to endure increasing scrutiny.

The key question is who is going to get caught up in these proposed regulations.

§504.3 Transaction Monitoring and Filtering Program Requirements.
(a) Each Regulated Institution shall maintain a Transaction Monitoring Program…

§ 504.2 Definitions.
(e)“Regulated Institutions” means all Bank Regulated Institutions and all Nonbank Regulated Institutions.

(b) “Bank Regulated Institutions” means all banks, trust companies, private bankers, savings banks, and savings and loan associations chartered pursuant to the New York Banking Law (the “Banking Law”) and all branches and agencies of foreign banking corporations licensed pursuant to the Banking Law to conduct banking operations in New York.

(d) “Nonbank Regulated Institutions” shall mean all check cashers and money transmitters licensed pursuant to the Banking Law.

That moves the regulatory requirements into an area I’m no longer familiar with. New York banking law licensing and charters is outside my scope of knowledge.

The regulations go on to require the Chief Compliance Officer or functional equivalent to file an annual certification.

[T]he undersigned hereby certifies that they have reviewed, or caused to be reviewed, the Transaction Monitoring Program and the Watch List Filtering Program (the “Programs”) of (name of Regulated Institution) as of ___________ (date of the Certification) for the year ended________(year for which certification is provided) and hereby certifies that the Transaction Monitoring and Filtering Program complies with all the requirements of Section 504.3.

This is most likely not applicable to most fund managers not associated with licensed banks. We still need to keep an eye on FinCEN who is working on a new anti-money laundering requirement for registered investment advisers.

Sources:

Laundering Dollar Bills is by TaxRebate.org.UK
CC BY

What do Wyoming, New York, and Minnesota Have in Common?



They don’t examine investment advisers.

Wyoming has long been on this list because it does not have a law regulating investment advisers. In Item 2 of Form ADV there was a box to check if your principal office and place of business was Wyoming. That kept you in SEC registration.

The importance of whether a state does exams affects mid-sized advisors. Dodd-Frank allows mid-sized advisors to stay with SEC registration instead of state registration if their home state doesn’t do exams.

At last week’s SEC Open Meeting on the new investment adviser act rules, Bob Plaze, associate director of the SEC’s Division of Investment Management, revealed that New York did not respond in writing to the SEC’s question about investment adviser examinations. The SEC took the position that a non-response was a statement that the state doesn’t examine investment advisers.

Minnesota responded that they don’t conduct exams.

This means mid-sized advisers in Wyoming, New York, and Minnesota won’t have to switch to state supervision if they have between $25 million and $100 million in assets under management.



New York City Enacts New Rules for Its Pension Fund Investments

New York City Comptroller John C. Liu announced sweeping changes in the way New York City pension funds make investment decisions. Following the lead of New York state and several other states, New York City is changing how it deals with gifts, campaign contributions and placement agents.

Ban on Campaign Contributions

  • Comptroller Liu declines any campaign contributions from investment managers and their agents doing business with, or seeking to do business with, the New York City pension systems.

Requirements for Fund Managers

  • Zero-tolerance gift prohibition – fund managers must certify that they have not given any gifts to any employees of the Comptroller’s Office, nor to any employees or trustees of the New York City pension systems;
  • Minimizing contact – fund managers must disclose all contact with employees of the Comptroller’s Office regarding new investments as well as all contact with pension trustees and other individuals involved in the investment decision-making process;
  • Disclosure of placement agents – fund managers must disclose all fees and terms relating to any firm retained to provide marketing or placement services, and that any such fees are fully paid by the fund manager;
  • Agreement for recourse – fund managers must agree that the pension system(s) may terminate or rescind a contract or commitment for investment and recoup all management and performance fees for violation of these requirements.

Restrictions on Placement Agents

  • Expand current ban on private equity placement agents to include placement agents and third-party marketers for all types of funds, where such agents and marketers are exclusively providing “finder” or introduction services;
  • Ease current ban on private equity placement agents to allow use of placement agents who provide legitimate value-added services such as due diligence and similar professional services on behalf of prospective investors;
  • Require such agents and marketers to demonstrate the ability to raise capital outside NYC by establishing that they raised $500 million in at least two of the past three years from entities other than the NYC pension systems;
  • Require full description of value-added services provided as well as resumes of key professionals and employees who contact individuals involved in decision-making process regarding a proposed investment;
  • Require registration with either the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

New York City is separating itself from New York State by not completely banning the use of placement agents. Unfortunately, the Comptroller has not publish a copy of these new rules on his website.

Disclosure: My company has historically used placement agents as part of its fundraising.

Sources:

Image is by Julius Schorzman under Creative Commons in Wikimedia: Boroughs Labels New York City Map.

Compliance Bits and Pieces

Here is this weeks collection of stuff I found interesting, but didn’t blog about:

To Combat Overseas Bribery, Authorities Make It Personal
Dionne Searcy for The Wall Street Journal

“To really achieve the kind of deterrent effect we’re shooting for, you have to prosecute individuals,” Mark Mendelsohn, deputy chief of the Justice Department’s criminal division, says in an interview.

Cuomo announced two guilty pleas in the ongoing Pay to Play investigation
New York State Attorney General

Raymond Harding, the former chair of the Liberal Party, and Saul Meyer, a founding partner of a Dallas-based firm that advises public pension systems across the nation, both pled guilty to felony securities fraud charges for their involvement in pay-to-play kickback schemes at the New York State Office of the Comptroller and the CRF. “These guilty pleas vividly depict the depth and breadth of corruption involving the New York State pension fund,” said Attorney General Cuomo. “In one case, we see New York’s state pension fund looted to reward a political boss with hundreds of thousands of dollars in improper payments. In the other, we see a pension fund adviser – the outside “gatekeeper” who is supposed to safeguard the integrity of the pension fund process – recommending deals based on pressure from pension officials and politically-connected people.

Cuomo announces legislation to reform state pension fund
New York State Attorney General

Bipartisan Legislation Will Establish Board of Trustees to Manage State Pension Fund, Ban Placement Agents and Create Enforcement Mechanisms to Ensure Compliance

Private Equity LPs Seek to Impose “Best Practices” on Sponsor Community
Geoffrey Parnass for Private Equity Law Review

The Institutional Limited Partners Association, a trade association that represents 220 institutional investors in private equity funds, recently published a set of Private Equity Principles, designed to guide future dealings between its members and the private equity sponsor community. The Association’s members include public and corporate pension funds, endowments, foundations, family offices and insurance companies with more than $1 trillion in private equity funds under management. The publication of the Principles is the first time that a group of influential limited partners has collectively published a set of core requirements for private equity fund documents.

Social Networking Policies – What Does Your Law Firm Have To Say?
Greg Lambert for 3 Geeks and a Law Blog

According to the Society of Corporate Compliance and Ethics survey on what companies are doing with social networking compliance, there are over 50% of companies that either do not have a social networking policy for their employees to follow, or do not know if they do. After running across a couple of law firm client alerts on this very topic, I thought I’d take a quick look and build an ad hoc bibliography on what attorneys at major law firms are saying lately on this topic.

Corporate Compliance Scam Continues. . .

. . But some of the perpetrators may have been caught.

California

California businesses have recent reports.  The scam seems to have been operating in California for years.

Colorado

There are reports of the scam in Colorado: State Corporate Compliance fraud. The Secretary of State is also getting complaints about the Colorado Compliance Recorder: Updated Notice Regarding “Annual Minutes” Solicitations

Indiana

Indiana issued a warning that several businesses have reported receiving a deceptive letter that would appear to come from an official government source. The letter solicits an annual fee of $125 or $150 and claims it will be used for record keeping and processing of a company’s annual minutes. It gives the appearance of coming from a legitimate government agency and cites fictitious state law. Scam Alert for Businesses in Indiana. But the Secretary of State has filed a complaint to try to stop the scam.

Montana

Montana has issued a warning, although the Secretary of State has not received any complaints and is not aware of any Montana businesses being affected: Business Scam Alert (.pdf) (I am not sure that I agree that the scam is “potentially dangerous.”)

New York

In the Empire State, it looks like the scam has spread to condominiums and cooperatives: Scam or Useful Service? The Corporate Records Compliance Office Speaks

Texas

It looks like the scam has been operating in Texas for a few years, masquerading as a state agency.  They may have caught the person behind some of it: Californian Charged With Unlawfully Profiting From Fake State Document Scheme.

Others

Previously, I noted that the scam was found in Florida, Georgia, Illinois,  Massachusetts, and Ohio.

Catching the Bad Guys

Its not clear if the scams in each state are perpetrated by the same group. The Indiana Secretary of State filed a complaint against Aaron V. Williams of Las Vegas, Lisa Diane Brown of California and several companies affiliated with them. (Of course these people have merely charged and are not necessarily guilty.)

UPDATE:

The Texas Attorney General filed suit against other parties, but the suit was dismissed.

References:

You’re a Victim of a Ponzi Scheme, But What About Your State Taxes?

IRS_Logo

You missed the warning signs and got suckered into a Ponzi scheme. The IRS offered some tax relief for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. The IRS clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

But what about state taxes?

California: On March 25, 2009, the California Franchise Tax Board announced that the federal guidance (Revenue Ruling 2009-9 and Revenue Procedure 2009-20) regarding the treatment of Madoff-related or other Ponzi scheme losses would be generally applicable for California purposes.

Connecticut: On April 9, 2009, the Connecticut Department of Revenue Services released Connecticut Announcement No. 2009(7), which describes the effect for Connecticut income tax purposes of the reporting of Madoff-related or other Ponzi scheme losses under the Revenue Procedure 2009-20 safe harbor and under Revenue Ruling 2009-9. In general, Connecticut does not allow federal itemized deductions for Connecticut income tax purposes. Thus, any theft loss deduction claimed by a taxpayer under the Revenue Procedure 2009-20 safe harbor will not affect a taxpayer’s 2008 Connecticut income tax liability. However, if the amount of a taxpayer’s theft loss deduction allowed under Revenue Ruling 2009-9 or Revenue Procedure 2009-20 creates an NOL, then the taxpayer must file amended Connecticut income tax return(s) for the year(s) to which such NOL may be carried back for federal income tax purposes.

Massachusetts: On March 20, 2009, Massachusetts issued: “Notice—Individual Investors; Investments in Criminally Fraudulent Ponzi-type Schemes and Reporting of Fictitious Investment Income.” Massachusetts did not adopt the Revenue Procedure 2009-20 safe harbor in the case of individual investors since Massachusetts tax law does not recognize the theft loss deduction provided under federal tax law.

New Jersey: On April 2, 2009, the New Jersey Division of Taxation had issued guidance on the treatment of Madoff-related
or other Ponzi scheme losses for New Jersey gross income tax purposes. Under this guidance, taxpayers are allowed a theft
loss deduction for New Jersey gross income tax purposes in an amount equal to the original investment plus the income
reported in prior years minus distributions received in prior years. New Jersey does not allow NOL carrybacks or carry
forwards.

New York: On May 29, 2009, the New York State Department of Taxation and Finance issued guidance TSB-M-09(7)I (.pdf) on the
reporting of Madoff-related or other Ponzi scheme losses. In general, New York State will recognize the Revenue Procedure
2009-20 safe harbor.

For more information, Seyfarth Shaw put together some information: Some States Have “Weighed In” on Tax Treatment of Madoff-Related and Other Ponzi Scheme Losses (.pdf)

New Rules of the Game under the New York Public Pension Fund Reform Code of Conduct

Cleary Gottlieb put together a useful Alert Memo on The New Rules of the Game under the New York Public Pension Fund Reform Code of Conduct (.pdf) They outline the key provisions of the Reform Code and suggest action steps for investment firms that do business (or seek to do business) with New York Public Pension Funds and may become subject to its requirements or similar requirements.

The principles reflected in the Reform Code are likely to extend beyond the agreement with Carlyle, whether other industry participants voluntarily agree to abide by them or they are incorporated into new federal and/or state legislation or regulations. The Attorney General’s office has indicated that it expects the Reform Code to establish a generally applicable framework for relationships between Public Pension Funds and investment firms going forward; at a minimum, it appears likely that firms seeking to do business with New York Public Pension Funds will be asked to be bound by the Reform Code. Attorney General Cuomo has described the Reform Code as representing the “new rules of the game” and praised Carlyle for “leading the industry toward critical change of the public pension investment system.”

New York Public Pension Fund Reform Code of Conduct

120px-nystatemap2

In a widely publicized story, The Carlyle Group has agreed to adopt New York Attorney General Andrew Cuomo’s Public Pension Fund Reform Code of Conduct. It is the first money manager to adopt Cuomo’s new “code of reform” for the municipal-pension market. (Carlyle executives will not be subject to any criminal liability under the settlement with the NYAG.)

It is not clear how the ban on placement agents will interact with the SEC limitations on general solicitation under Rule 502. Many private investment funds use a broker/dealer as an intermediary with potential investors (including public pension funds) to comply with the SEC rule. It seems like the ban on placement agents could hurt the ability of smaller funds and newer funds to obtain investments from public pension funds. If a private investment fund seeking investors has no existing relationship with the public pension fund, then contacting the public pension fund directly could be considered part of a general solicitation in violation of SEC rules. The placement agent, if a licensed broker/dealer, can help establish the relationship to avoid a general solicitation.

References:

Image is from Wikimedia commons under Creative Commons License: NYStateMap2.PNG.

N.Y. Comptroller Bans Placement Agents for State Pension Fund

State Comptroller Thomas P. DiNapoli today announced he has banned the involvement of placement agents, paid intermediaries and registered lobbyists in investments with the New York State Common Retirement Fund (CRF). The ban includes entities “compensated on a flat fee, a contingent fee or any other basis.”

See: