August 2006 Archives
Fiduciary Duty Provisions Affecting Financial Services Providers:
The Pension Protection Act of 2006 (H.R. 4) (PPA), which the President signed into law today, provides a number of changes and exemptions to the fiduciary duty provisions under the Employee Retirement Income Security Act of 1974 (ERISA) and the prohibited transaction rules under both ERISA and the Internal Revenue Code of 1986, as amended (the Code) that directly affect how financial services providers will interact with plans subject to ERISA fiduciary provisions and tax-qualified retirement and savings accounts, including new rules on participant-level investment advice, general and specific relief on prohibited transaction issues, changes in the ERISA bond requirements and liberalization of the plan asset rules which impact hedge funds and other alternative pension investments. This LawFlash, the second in our series on the PPA, addresses those important revisions to the law in this area.
NASD and NYSE Issue Joint Release on Section 311 of the Patriot Act
On August 14, 2006, NASD and NYSE issued a joint release reminding member organizations that, effective August 14, 2006, the Financial Crimes Enforcement Network (FinCEN) has imposed a special measure pursuant to Section 311 of the USA PATRIOT Act against the Latvian bank, VEF Banka, and its subsidiaries, including Veiksmes lizings. A comparable special measure was imposed against the Commercial Bank of Syria and its subsidiaries, including Syrian Lebanese Commercial Bank effective April 14, 2006. FinCEN imposed special measures against these entities and their subsidiaries (the Specified Banks) based on findings that they are financial institutions of primary money laundering concern. As a result of the special measures imposed against the Specified Banks, NASD and NYSE member organizations, as well as other “covered financial institutions,” are (1) prohibited from facilitating the direct use of correspondent accounts by the Specified Banks and (2) required to undertake due diligence to prevent the indirect use of correspondent accounts by the Specified Banks.
SEC Staff Issues Guidance on Registration of Hedge Fund Advisers
On August 10, 2006, the SEC’s Division of Investment Management (Staff) issued a letter on the effects of the decision of the U.S. Court of Appeals for the D.C. Circuit in Goldstein v. SEC. In vacating the SEC’s rule requiring registration of certain hedge fund advisers, Rule 203(b)(3)-2 under the Investment Advisers Act of 1940 (Advisers Act), the Goldstein decision referred to the entire SEC Release that accompanied the adoption of the rule. As a result, the D.C. Circuit appears to have vacated the entire rulemaking, which included rule amendments in addition to the registration requirement itself.
SEC Staff Issues Guidance on Investment Adviser Registration
On August 7, 2006, the SEC staff told an adviser that it was prohibited from registering under the Investment Advisers Act, despite past staff positions suggesting the adviser was required to register. The letter, issued to Credit Agricole Asset Management Alternative Investments, Inc. (CAAMAI), illustrates how advisers can be caught between past staff guidance on the one hand, and the statutory and Form ADV changes brought about by the National Securities Markets Improvement Act of 1996 (NSMIA) on the other.
SEC Issues Letter to NYSE Regulation, Inc. Regarding Statutory Disqualifications: No-Action Letter and Interpretive Guidance
On August 1, 2006, the SEC’s Division of Market Regulation (Staff) issued a letter to NYSE Regulation, Inc. (NYSE) providing interpretive guidance and no-action relief on the filing of statutory disqualification notices. Section 6(c)(2) of the Exchange Act and Rule 19h-1 thereunder generally require NYSE to file a notice with the SEC regarding any person subject to a statutory disqualification that NYSE proposes to admit to or continue in membership or association with a member organization. Rule 19h-1 provides exceptions to the notice filing requirements in certain circumstances.
NASD and NYSE Issue Joint Interpretive Guidance on Fixed Income Research
On July 31, 2006, NASD and NYSE issued joint interpretive guidance on fixed income research. In particular, NASD and NYSE described the results of their review of compliance with the Bond Market Association’s "Guiding Principles" on fixed-income research, which were issued in May 2004. The guidance followed a December 2005 joint report by NASD and NYSE on the effectiveness of their research analyst conflicts of interest rules, which apply only to equity research reports. In the December 2005 report, NASD and NYSE indicated that they would monitor member firms’ compliance with the Guiding Principles to determine the necessity of adopting definitive rules relating to fixed-income research.