Recently, the Federal Trade Commission for the first time in nearly thirty years issued updated guidelines governing the use of testimonials and endorsements in advertisements. The FTC’s new Guideline “incorporates several changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, which address endorsements by consumers, experts, organizations, and celebrities, as well as the disclosure of important connections between advertisers and endorsers.” See, FTC Press Release, October 5, 2009. These Guidelines, last updated in 1980, now include specific guidance on posting by bloggers and other online social networking platforms.
Gone from these new Guidelines is the “safe harbor” provision of a “results not typical” disclaimer or “disclaimers of typicality” in advertisements. Now, advertisers in claims of typicality must be more explicit and make clear what results would generally be expected.
For the first time, the Guidelines recognize the new world of online media and its new ways of reaching people through advertising. The Guidelines add new examples of their application to advertisers and endorsers in blogs. “Bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. Likewise, if a company refers in an advertisement to findings of a research organization that conducted research sponsored by the company the advertisement must disclose the connection between the advertiser and the research organization.” FTC Press Release, October 10, 2009.
There is no exception to these Guidelines for professional services. So, if your firm takes advantage of online blogs or network resources to advertise, you should consider reviewing your policies on advertising and social media networking in light of these new FTC Guidelines.
Friday, January 22, 2010
Friday, January 15, 2010
U.S. DEPARTMENT OF LABOR ADOPTS FINAL SAFE HARBOR REGULATION FOR EMPLOYEE CONTRIBUTIONS TO SMALL PLANS
On January 14, 2010, the U.S. Department of Labor (“DOL”) adopted a final regulation to clarify the safe harbor period during which amounts that an employer has received from employees or withheld from wages for contribution to certain employee benefit plans will not constitute ``plan assets'' for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”). The new regulation aims to resolve an ongoing uncertainty by sponsors and fiduciaries of small welfare and pension plans as to when participant contributions will be treated as contributed in a timely manner to such plans.
As set forth in the new final regulation, the DOL, in 1996, published amendments to 53 FR 17628, which modified the outside limit beyond which participant contributions to an employee pension plan become plan assets. Since that time, the outer limit for participant contributions to a pension plan has been the 15th business day of the month following the month in which participant contributions are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages). In addition, the general rule has been that amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets.
The 1996 amendments created uncertainty among employers and plan advisers as to exactly when they must forward participant contributions to the plan in order to avoid the requirements associated with holding plan assets. Accordingly, on February 29, 2008, the DOL proposed a safe harbor with the goal of providing more clarity over the foregoing participant contributions concerns. The DOL ultimately received 28 comments to its proposal, which can be found here.
In response to the public comments, the DOL issued its recent final regulation, which is nearly identical to the 2008 proposal. The final safe harbor rule, and specifically Section 2510.3-102(a)(2), provides that participant contributions to an employee benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule (the earliest date on which such contributions can reasonably be segregated from the employer's general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages).
Click here for a complete copy of the DOL’s final safe harbor rule.
As set forth in the new final regulation, the DOL, in 1996, published amendments to 53 FR 17628, which modified the outside limit beyond which participant contributions to an employee pension plan become plan assets. Since that time, the outer limit for participant contributions to a pension plan has been the 15th business day of the month following the month in which participant contributions are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages). In addition, the general rule has been that amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets.
The 1996 amendments created uncertainty among employers and plan advisers as to exactly when they must forward participant contributions to the plan in order to avoid the requirements associated with holding plan assets. Accordingly, on February 29, 2008, the DOL proposed a safe harbor with the goal of providing more clarity over the foregoing participant contributions concerns. The DOL ultimately received 28 comments to its proposal, which can be found here.
In response to the public comments, the DOL issued its recent final regulation, which is nearly identical to the 2008 proposal. The final safe harbor rule, and specifically Section 2510.3-102(a)(2), provides that participant contributions to an employee benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule (the earliest date on which such contributions can reasonably be segregated from the employer's general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages).
Click here for a complete copy of the DOL’s final safe harbor rule.
Thursday, January 14, 2010
SEC SEEKS TO ENCOURAGE ASSISTANCE WITH INVESTIGATIONS AND ENFORCEMENT
On January 13, 2010, the SEC announced initiatives it is putting in place to encourage individuals and companies to assist in the agency's investigations and enforcement actions. The developments announced are the latest in the most significant reorganization of the Enforcement Division in more than 30 years.
The SEC approved the following measures:
The SEC approved the following measures:
First, the Division of Enforcement will have tools to encourage individuals and companies to report violations. These tools include:
Cooperation Agreements — the Enforcement Division will agree to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
Deferred Prosecution Agreements — the Commission will agree to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.
Non-prosecution Agreements — only in limited circumstances the Commission will agree not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.
Second, witness immunity requests to the Justice Department have been made more efficient for witnesses who have the capacity to assist in its investigations and related enforcement actions.
Third, the Commission has formalized the way in which it will evaluate whether, how much, and in what manner to credit cooperation by individuals to ensure that potential cooperation arrangements maximize the Commission's law enforcement interests.
This announcement, along with the information the SEC will make available regarding these topics in the coming months, is intended to provide guidance and encouragement to those third parties who have knowledge which will lead to and assist with actions taken by the Enforcement Division. A copy of the SEC's press release disclosing this information can be found here.
Tuesday, December 22, 2009
THE SEC IMPOSES ANOTHER ROUND OF SAFEGUARDS FOR INVESTORS
On December 16, 2009, the SEC adopted rules to enhance the custody controls for investment advisers in an effort to provide greater protections for investors in situations where there is a heightened potential for fraud. Investors are particularly susceptible to fraud when they turn over control of their assets to their investment advisers.
Investment advisers generally do not maintain custody of their clients’ assets, but instead such assets are maintained by a third-party custodian. This arrangement helps minimize the potential for misappropriation of the clients' assets. However, the more control an adviser has over its clients' assets, the greater the risk of misuse of those assets.
One of the main situations in which there is an inherent potential for misuse of client assets is when an adviser serves as the custodian of its clients’ assets. This type of arrangement does not allow for an independent, third-party custodian to serve as a safeguard against any potentially self-serving actions by the adviser. To enhance investor protection, the new rules adopted by the SEC provide that advisers in this situation will be subject to a “surprise exam” at least once every year to verify client assets. In addition, these advisers will have to undergo an annual review of the controls they have in place regarding custody. SEC Chairman Mary L. Shapiro is confident in the potential effect of the new rules, stating her belief that “the new rules will encourage the use of fully independent custodians,” thus minimizing the potential for fraud on investors.
Another situation in which the potential for fraud is heightened is when an investment adviser does not maintain physical control over its clients’ assets, but still has authority over the assets (i.e., when an adviser serves as trustee to a trust, has a power of attorney, or has the ability to write checks on a client’s account). Under this arrangement, the only way to supervise the adviser is for the clients to closely monitor their accounts and try to identify any abnormalities. As a safeguard for investors in this situation, the new rules will again provide for an annual surprise exam to verify client assets. As Chairman Shapiro acknowledged, “[w]hen an adviser takes on the privilege and responsibility of having unfettered access to a client’s money…there is…the need to have an auditor’s ‘second set of eyes’ confirm that those assets exist.”
Recognizing that the new rules may be particularly burdensome for small investment advisory firms, the SEC is conducting a one-year study to discern the impact of the surprise exams on small firms to determine whether modifications to the new rules will be necessary.
Investment advisers generally do not maintain custody of their clients’ assets, but instead such assets are maintained by a third-party custodian. This arrangement helps minimize the potential for misappropriation of the clients' assets. However, the more control an adviser has over its clients' assets, the greater the risk of misuse of those assets.
One of the main situations in which there is an inherent potential for misuse of client assets is when an adviser serves as the custodian of its clients’ assets. This type of arrangement does not allow for an independent, third-party custodian to serve as a safeguard against any potentially self-serving actions by the adviser. To enhance investor protection, the new rules adopted by the SEC provide that advisers in this situation will be subject to a “surprise exam” at least once every year to verify client assets. In addition, these advisers will have to undergo an annual review of the controls they have in place regarding custody. SEC Chairman Mary L. Shapiro is confident in the potential effect of the new rules, stating her belief that “the new rules will encourage the use of fully independent custodians,” thus minimizing the potential for fraud on investors.
Another situation in which the potential for fraud is heightened is when an investment adviser does not maintain physical control over its clients’ assets, but still has authority over the assets (i.e., when an adviser serves as trustee to a trust, has a power of attorney, or has the ability to write checks on a client’s account). Under this arrangement, the only way to supervise the adviser is for the clients to closely monitor their accounts and try to identify any abnormalities. As a safeguard for investors in this situation, the new rules will again provide for an annual surprise exam to verify client assets. As Chairman Shapiro acknowledged, “[w]hen an adviser takes on the privilege and responsibility of having unfettered access to a client’s money…there is…the need to have an auditor’s ‘second set of eyes’ confirm that those assets exist.”
Recognizing that the new rules may be particularly burdensome for small investment advisory firms, the SEC is conducting a one-year study to discern the impact of the surprise exams on small firms to determine whether modifications to the new rules will be necessary.
Monday, December 21, 2009
SEC FILES MOTION TO DISMISS IN SUIT BROUGHT BY MADOFF INVESTORS
In October we commented on the lawsuit brought in the United States District Court for the Southern District of New York by Phyllis Molchatsky and Stephen Schneider against the SEC for failure to detect Bernard L. Madoff’s Ponzi scheme. Last week the SEC filed its motion to dismiss, and as expected the SEC argued that the lawsuit brought by the two plaintiffs is barred by the discretionary functions exception to the Federal Tort Claims Act.
In the motion, the SEC notes that the discretionary functions exception "provides that the United States may not be held liable based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused." The motion notes that the Supreme Court has prescribed a two-part test for the discretionary functions exception. First, the challenged conduct must involve an element of judgment or choice. Second, the conduct must involve considerations of public policy.
With regard to the first element, the SEC's motion alleges that "[u]nder the 1934 Securities Exchange Act, the SEC has complete discretion in deciding whether, and to what extent, it should investigate suspected violations of the securities laws." Moreover, the SEC argues that it "enjoys similar discretion in its examinations of brokers, dealers, and investment advisors." With regard to the second element, the SEC argues that "[t]he challenged conduct here—for example, whether to refer a complaint to a particular investigative team, to obtain evidence from one source or another, or to assign significance to a specific fact—are all decisions that are susceptible to policy analysis."
As we noted in our previous post regarding this case, defeating the SEC's argument that this exception applies will be an uphill battle for the plaintiffs. However, given what is at stake - not just for the two plaintiffs but also for the system at large due to the precedent which will be set - we can expect this case to be hard fought at every turn. We will continue to monitor the case as it progresses.
A copy of the AmLaw Litigation Daily article discussing and linking to a copy of the SEC's motion to dismiss can be found here.
In the motion, the SEC notes that the discretionary functions exception "provides that the United States may not be held liable based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused." The motion notes that the Supreme Court has prescribed a two-part test for the discretionary functions exception. First, the challenged conduct must involve an element of judgment or choice. Second, the conduct must involve considerations of public policy.
With regard to the first element, the SEC's motion alleges that "[u]nder the 1934 Securities Exchange Act, the SEC has complete discretion in deciding whether, and to what extent, it should investigate suspected violations of the securities laws." Moreover, the SEC argues that it "enjoys similar discretion in its examinations of brokers, dealers, and investment advisors." With regard to the second element, the SEC argues that "[t]he challenged conduct here—for example, whether to refer a complaint to a particular investigative team, to obtain evidence from one source or another, or to assign significance to a specific fact—are all decisions that are susceptible to policy analysis."
As we noted in our previous post regarding this case, defeating the SEC's argument that this exception applies will be an uphill battle for the plaintiffs. However, given what is at stake - not just for the two plaintiffs but also for the system at large due to the precedent which will be set - we can expect this case to be hard fought at every turn. We will continue to monitor the case as it progresses.
A copy of the AmLaw Litigation Daily article discussing and linking to a copy of the SEC's motion to dismiss can be found here.
Wednesday, December 16, 2009
FINRA’S AMENDED ARBITRATION CODE
In February 2009, new changes to the Financial Industry Regulatory Authority’s (FINRA) Code of Arbitration Procedure became effective. These changes came in response to a study commenced in 2004 finding the “number of motions to dismiss in customer cases” began to increase. Also, FINRA received feedback that prehearing motions were “routinely and repetitively” being filed, which delayed hearings, increased customer costs, and intimidated customers. Despite that most of these motions to dismiss were denied, FINRA was still concerned that if motions to dismiss were not regulated, it would effectively limit access to arbitration. The new rule changes are set forth below.
Under the changes, motions to dismiss arbitration claims were severed from the general rule for motions and given separate provisions. Now, motions to dismiss fall under Rule 12504 (customer) and Rule 13504 (intra-industry) instead of Rule 12503 and Rule 13503. Further, new Rules 12206 and 13206 were written regarding eligibility of claims. However, the definition of a motion to dismiss remains the same.
Rules 12504 and 13504 change some of the filing requirements and the requirements for deciding the motion. These requirements are as follows:
Requirements for Filing
The motion must be in writing
The answer must be filed before a motion to dismiss
The motion must be filed separately from the answer
The filing date must be at least 60 days prior to the hearing, responses
within 45 days
After denial, parties may not re-file a motion to dismiss unless special
permission to do so
Requirements for Deciding the Motion
The full panel must decide the motion
There must be a hearing, unless parties waive the hearing
The non-moving party must sign a settlement and release barring claims OR
the moving party must not be associated with the account, security, or
conduct at issue
The claim must not be eligible for arbitration because it does not meet the
six-year eligibility requirement where the motion is filed under 12206 or
13206 (i.e. the panel cannot act on the motion to dismiss on grounds for
ineligibility until the panel determines that the claim is in fact
ineligible)
Hybrid claims, if decided ineligible, cannot be ruled on other grounds
Denial must be unanimous and explained in writing
FINRA has also modified the panel’s powers and parties’ filing times in regards to motions to dismiss arbitration claims in the new rules 12206 and 13206.
The panel may decide eligibility on a motion to dismiss prior to the end of
the case
Moving parties must file their eligibility motions at 90 days prior to the
hearing, responses in 45 days
The panel can issue sanctions where the motion to dismiss for eligibility
was brought in bad faith
These changes are consistent with FINRA’s previous policy statements disfavoring motions to dismiss, promoting efficiency, and recognizing parties’ rights to a hearing on the merits.
Under the changes, motions to dismiss arbitration claims were severed from the general rule for motions and given separate provisions. Now, motions to dismiss fall under Rule 12504 (customer) and Rule 13504 (intra-industry) instead of Rule 12503 and Rule 13503. Further, new Rules 12206 and 13206 were written regarding eligibility of claims. However, the definition of a motion to dismiss remains the same.
Rules 12504 and 13504 change some of the filing requirements and the requirements for deciding the motion. These requirements are as follows:
Requirements for Filing
The motion must be in writing
The answer must be filed before a motion to dismiss
The motion must be filed separately from the answer
The filing date must be at least 60 days prior to the hearing, responses
within 45 days
After denial, parties may not re-file a motion to dismiss unless special
permission to do so
Requirements for Deciding the Motion
The full panel must decide the motion
There must be a hearing, unless parties waive the hearing
The non-moving party must sign a settlement and release barring claims OR
the moving party must not be associated with the account, security, or
conduct at issue
The claim must not be eligible for arbitration because it does not meet the
six-year eligibility requirement where the motion is filed under 12206 or
13206 (i.e. the panel cannot act on the motion to dismiss on grounds for
ineligibility until the panel determines that the claim is in fact
ineligible)
Hybrid claims, if decided ineligible, cannot be ruled on other grounds
Denial must be unanimous and explained in writing
FINRA has also modified the panel’s powers and parties’ filing times in regards to motions to dismiss arbitration claims in the new rules 12206 and 13206.
The panel may decide eligibility on a motion to dismiss prior to the end of
the case
Moving parties must file their eligibility motions at 90 days prior to the
hearing, responses in 45 days
The panel can issue sanctions where the motion to dismiss for eligibility
was brought in bad faith
These changes are consistent with FINRA’s previous policy statements disfavoring motions to dismiss, promoting efficiency, and recognizing parties’ rights to a hearing on the merits.
Sunday, December 13, 2009
HOUSE PASSES HISTORIC FINANCIAL REGULATORY REFORM BILL
On Friday, December 11, 2009, the House of Representatives passed the Wall Street Reform and Consumer Protection Act. This is a comprehensive piece of legislation aimed at responding to the worst economic crisis since the Great Depression. This legislation seeks to address the many causes that led to the crisis, including predatory lending and unregulated derivatives.
Among the many reforms included in the Act are the creation of two new federal agencies. The Consumer Financial Protection Agency (CFPA) is an independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services. The Financial Stability Council will be made of of regulators that will identify financial firms so large, interconnected, or risky that their collapse would put the entire financial system at risk. This Council would have the power to break up these financial companies even when healthy if it is believed they pose a risk to the financial system.
The Act also focuses on various areas which are aimed at minimizing systematic risk. Although not a comprehensive list, the Act:
For more information, the House Committee on Financial Services issued a press release which can be found here. A Wall Street Journal article addressing the Act can be found here.
Among the many reforms included in the Act are the creation of two new federal agencies. The Consumer Financial Protection Agency (CFPA) is an independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services. The Financial Stability Council will be made of of regulators that will identify financial firms so large, interconnected, or risky that their collapse would put the entire financial system at risk. This Council would have the power to break up these financial companies even when healthy if it is believed they pose a risk to the financial system.
The Act also focuses on various areas which are aimed at minimizing systematic risk. Although not a comprehensive list, the Act:
- Establishes an orderly process for shutting down large, failing financial institutions like AIG or Lehman Brothers in a way that ends bailouts and prevents adverse effects spreading to the rest of the financial system.
- Enables regulators to ban inappropriate or imprudently risky compensation practices, and requires financial firms to disclose incentive-based compensation structures.
- Strengthens the SEC's powers so that it can better protect investors and regulate the nation's securities markets.
- Regulates the $600 trillion over-the-counter (OTC) derivatives marketplace by requiring all standardized swap transactions between dealers and "major swap participants" to be cleared and traded on an exchange or electronic platform. A "major swap participant" is defined as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposre to others that it requires monitoring.
- Incorporates the tough mortgage reform and anti-predatory lending bill the House passed earlier this year. This legislation outlaws many of the industry practices that led to the subprime lending boom.
- Requires registration of hedge funds by forcing all advisers to private pools of capital to register with the SEC. These advisers will be subject to systematic risk regulation by the Financial Stability regulator.
For more information, the House Committee on Financial Services issued a press release which can be found here. A Wall Street Journal article addressing the Act can be found here.
Subscribe to:
Posts (Atom)