May 2011

 Section 205(a)(1) of the Investment Advisers Act generally prohibits an investment adviser from collecting performance based compensation that is based on a share of capital gains on, or capital appreciation of, a client’s funds or assets under management. The Securities and Exchange Commission (“SEC”) adopted Rule 205-3 to provide exceptions to this prohibition if the client’s assets under management exceeded a certain threshold (the “assets-under-management test”) or if the adviser reasonably believe the client had a certain minimum net worth  (the “net worth test”). Currently, the asset-under-management test and net worth test thresholds are $750,000 and $1.5 million, respectively.

The Dodd-Frank Act (the “Act”), which was signed into law on July 21, 2010, amended Section 205(e) to require the SEC to adjust the dollar amount tests included in the rules issued pursuant to Section 205(e) for inflation by July 21, 2011 and every five years thereafter. Furthermore, the Act required the net worth test dollar amount to exclude the value of a person’s primary personal residence.

On May 10, 2011, the SEC issued a proposed amendment to increase the dollar amounts for the assets-under-management test and net worth test under Rule 205-3 to $1 million and $2 million respectively. These thresholds will be indexed for inflation every five years thereafter. Furthermore, the net worth test will be amended to exclude the value of the investor’s primary personal residence.

To view the SEC’s proposed amendment click here.

Pursuant to Section 417 of the Dodd-Frank Act, the SEC’s Division of Risk, Strategy and Financial Innovation is undertaking two current studies involving short selling. The first study focuses on the state of short selling on national securities exchanges and in the over-the-counter markets. 

The SEC is seeking comments to complete its second study involving the examination of the feasibility, benefits, and costs of real-time reporting of short positions either to the public or solely to the SEC and FINRA and conducting a voluntary pilot program in which public companies will agree to have all trades of their shares designated as ‘‘short’’, ‘‘market maker short’’, ‘‘buy’’, ‘‘buy-to-cover’’, or ‘‘long’’, and reported in real time. 

While short selling is used to benefit from a stock’s expected price decline, to provide liquidity, or to hedge risks, the SEC is seeking input on the existing uses of short selling and the adequacy of the available information regarding short sales. Short selling accounts for almost half of U.S. equities volume, the SEC said, based on data provided by exchanges for June 2010.

The comments are requested over a 45-day period as the agency is preparing its report to Congress mandated by the Dodd-Frank Act, with a deadline of July 21.

To view the request for public comments, click here.

To view comments submitted to date, click here.

To submit your own comment to the SEC, click here.