Investment Management

Posted on Monday, November 27 2017 at 5:46 pm by

Another Shoe Drops: UBS Withdraws from the Broker Protocol

By Paul Foley, John I. Sanders, and Lauren Henderson

Only one month after Morgan Stanley withdrew from the Protocol for Broker Recruiting (the “Protocol”), a second major brokerage firm has announced its intention to withdraw effective December 1st. UBS says it is withdrawing as part of a strategy to focus on retaining its current brokers instead of recruiting brokers from competitors. [i] Still, many observers believe Morgan Stanley’s and UBS’s withdrawals are meant “to stanch the flow of brokers and client assets.”[ii] This flow, of course, has quickened in recent years as advisers have left traditional, large brokerage firms to form independent advisory firms.[iii]

When Morgan Stanley withdrew from the Protocol, many speculated as to whether the Protocol would survive.[iv] Such speculation has only increased as sources have confirmed that Morgan Stanley’s withdrawal was the catalyst for UBS’s departure.[v] We expect more firms are currently considering how to respond to two of the largest brokerage firms withdrawing from the Protocol, and we would not be surprised to see similar announcements before year-end.

If you have questions about the recent withdrawals from the Protocol or general questions about the complexities that arise in establishing an independent advisory firm, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] Lisa Beilfuss, UBS to Pull Out of Pact on Broker Recruiting, WALL ST. J., Nov. 27, 2017, available at https://www.wsj.com/articles/ubs-to-pull-out-of-pact-on-broker-recruiting-1511799020 .

[ii] Id.

[iii] Neil Weinberg, Broker Protocol Reduced to a Sell Game, OnWallSteet, Oct. 18, 2016, available at https://www.onwallstreet.com/news/broker-protocol-reduced-to-a-shell-game.

[iv] Lisa Beilfuss, Morgan Stanley to Exit Accord on Broker Recruiting, WALL ST. J., Oct. 30, 2017, available at https://www.wsj.com/articles/morgan-stanley-to-exit-accord-on-broker-recruiting-1509380038

[v] Beilfuss, supra note 2.

Posted on Friday, November 17 2017 at 8:38 am by

SEC Announces Enforcement Results, Sets New Priorities

By Paul Foley, John I. Sanders, and Lauren Henderson

On November 15, 2017, the SEC announced the results of its enforcement actions for fiscal year 2017 and stated its enforcement priorities for fiscal year 2018.

During fiscal year 2017, the SEC brought 754 enforcement actions, returned $1.07 billion to harmed investors, and obtained judgments and orders totaling $3.789 billion in disgorgement and penalties.[i] Of the 754 enforcement actions, 446 were standalone cases.[ii] Investment advisory issues, securities offerings, and issuer reporting each accounted for 20% of the standalone cases, roughly in line with fiscal year 2016 results.[iii]

In the current fiscal year, the following five core principles will guide the SEC’s enforcement actions:[iv]

  • Focus on Main Street (i.e., unsophisticated) investors
  • Focus on individual accountability (as opposed to organizational accountability)
  • Keep pace with technological change
  • Impose sanctions that most effectively further enforcement goals
  • Assess the allocation of resources

Both the enforcement results for the recently completed fiscal year and the stated priorities for the current fiscal year reflect Chairman Clayton’s oft-articulated dedication to the SEC’s mandates: protect investors, maintain fair and efficient markets, facilitate capital formation.

If you have any questions about the SEC enforcement actions or enforcement priorities, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] SEC, SEC Enforcement Division Issues Report on Priorities and FY 2017 Results (Nov. 15, 2017), available at https://www.sec.gov/news/press-release/2017-210.

[ii] Id.

[iii] Id.

[iv] Id.

Posted on Monday, October 30 2017 at 8:39 am by

Advisers Trading in Europe or Advising E.U. Clients Must Prepare for MiFID II

By Paul Foley, John I. Sanders, and Lauren Henderson

On January 3, 2018, the European Commission’s sweeping reform, the Markets in Financial Instruments Directive II (“MiFID II”), will become effective. MiFID II applies to firms providing investment services or performing investment activities in the European Union (the “E.U.”).[1] E.U. investment advisers, naturally, will be among those effected. However, U.S. investment advisers who transact in European financial markets or offer investment advice to E.U. citizens through separately managed accounts (“SMAs”), pooled products (e.g., hedge funds), or indirectly through sub-advisory arrangements may be effected as follows:

  • Trading Equities and Derivatives: Under MiFID II, equity trading must occur on regulated markets, multilateral trading facilities, systematic internalisers, or equivalent third country venues.[2] Accordingly, over-the-counter trading of European equities may be severely restricted and the cost of trading certain securities may increase substantially. In addition, derivatives are subject to new reporting requirements and national regulators are empowered to set position limits for certain derivatives.[3]
  • Marketing Separately Managed Accounts: Each U.S. investment adviser must review licensing requirements in each jurisdiction where an E.U. client or potential client resides to determine whether the adviser must establish a branch or obtain a license to do business in the jurisdiction.[4]
  • Marketing Pooled Products: U.S. investment advisers that offer alternative investment funds (“AIFs”) will be governed by the Alternative Investment Fund Managers Directive (“AIFMD”) and jurisdiction-specific private placement rules, not MiFID II, when engaging in marketing activities for an AIF.[5] Likewise, U.S. investment advisers offering Undertakings for Collective Investment in Transferable Securities (“UCITSs”) are not directly subject to MiFID II when marketing a UCITS to E.U. clients, but will be indirectly impacted by MiFID II’s investor protection regime.[6]
  • Providing Sub-Advisory Services to E.U. Firms: E.U. firms subject to MiFID II may attempt to delegate compliance obligations to U.S. investment advisers serving as their sub-advisors. Among compliance obligations likely to be passed to the U.S. sub-advisor are those related to transparency and reporting.[7]

We invite you to contact us directly if you have any questions about the application of MiFID II to U.S. investment advisers.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments and Amending Directive 2002/92/EC and Directive 2011/61/EU, 2014 O.J. (L 173) 349, 374.

[2] Id. at 409.

[3] Id. at 440, 444.

[4] Christopher D. Christian & Dick Frase, MiFID II: Key Considerations for US Asset Managers, 23 The Investment Lawyer. 1, 4 (May 2016).

[5] Id. at 5.

[6] Id.

[7] Id. at 4.

Posted on Friday, October 13 2017 at 11:35 am by

Regulation S-K Amendments Promise FAST Relief for Advisers and Funds

By Paul Foley, John I. Sanders, and Lauren Henderson

On October 11, 2017, the SEC issued a Proposed Rule to modernize and simplify disclosure requirements in Regulation S-K.[1] The Proposed Rule, authorized by the Fixing America’s Surface Transportation Act (the “FAST Act”), is intended to reduce the costs and burdens on registrants while still providing investors with disclosures that are user friendly, material, and free of unnecessary repetition.[2]

The Proposed Rule, if adopted, would amend rules and forms used by public companies, investment companies, and investment advisers.[3] The most notable provisions of the Proposed Rule include the following:

  • Eliminating risk factor examples from Item 503(c) of Regulation S-K because the examples do not apply to all registrants and may not actually correspond to the material risks of any particular registrant;[4]
  • Revising requirements related to descriptions of property owned by the registrant in Item 102 of Regulation S-K to emphasize materiality;[5]
  • Eliminating undertakings that are unnecessarily repetitious from securities registration statements;[6]
  • Changing exhibit filing requirements and allowing flexibility in discussing historical periods in the Management’s Discussion and Analysis;[7]
  • Permitting registrants to omit confidential information (e.g., personally identifiable information and material contract exhibits) from Item 601 without submitting a confidential treatment request;[8] and
  • Using hyperlinks in forms to help investors access documents incorporated by reference.[9]

The SEC will accept public comments on the Proposed Rule for sixty days before determining whether to issue a final rule or amend the proposal and seek additional public comment.[10] We are hopeful the Proposed Rule will be well-received by all stakeholders and be finalized relatively quickly.

We invite you to contact us directly if you have any questions about the SEC’s Proposed Rule or Regulation S-K generally.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices.  John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] SEC, SEC Proposes Rules to Implement FAST Act Mandate to Modernize and Simplify Disclosure (Oct. 11, 2017), available at https://www.sec.gov/news/press-release/2017-192.

[2] Id.

[3] Id.

[4] SEC, Proposed Rule: FAST Act Modernization and Simplification of Regulation S-K,

Release No. 33-10425; 34-81851; IA-4791; IC-32858, available at https://www.sec.gov/rules/proposed/2017/33-10425.pdf.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.