Correction: NFA and FINRA Do Recognize Other Regulator’s Bans

John Lothian

John Lothian

Executive Chairman

It turns out that the NFA and FINRA do jointly recognize the bans of other regulators already. In the specific case I mentioned, that of Jon Corzine, he would register if necessary with the SEC. Whether the SEC will recognize the ban of another regulator is a question I am still awaiting an answer. There is a loophole that was expanded by Dodd-Frank that allows hedge funds with less than $150 million to not have to register with the SEC.

Tom Sexton of the NFA responded to my inquiry by saying:

With regard to your column last week, you should understand that in NFA’s view there is no loophole.  We have recognized lifetime bans and suspensions from other self-regulatory organizations (e.g. FINRA) as statutory disqualifications from CFTC registration and NFA membership since at least the early 1990s.  For example, if an individual was barred from registration by the SEC or barred from being a FINRA member and applied for CFTC registration and NFA membership, then under current law and policy NFA would institute a statutory disqualification action to bar the individual from CFTC registration and NFA membership.

And a spokesman for FINRA, Ray Pellecchia said:

Actually, FINRA already does recognize sanctions by other regulators. However, that doesn’t apply in the instance you cited, because hedge funds do not register with FINRA. You might want to check with the SEC on whether he’d be required to register there.

My apologies for the inaccuracy of my column.

The question remains as to whether Corzine can find a loophole to start his hedge fund. That loophole is just not with the NFA and FINRA.

Update on May 31:

Sources in the know have share the following passages from the Investment Advisor Act of 1940 as being the applicate regulations. On the question of whether Corzine can operate a hedge fund, he could to so unregistered as long as he had under $150 million in assets under management.

Here is a link to the 1940 act passage, Rule 203(m)-1.

(1) IN GENERAL. — The Commission shall provide an exemp­tion from the registration requirements under this section to any investment adviser of private funds, if each of such in­ vestment adviser acts solely as an adviser to private funds and has assets under management in the United States of less than $150,000,000.

However, if he did apply for registration, then Sections 203(c)(2) and 203(e)(5) of the Advisers Act would apply.

2) Within forty-five days of the date of the filing of such appli­cation (or within such longer period as to which the applicant con­sents) the Commission shall—
(A) by order grant such registration; or
(B) institute proceedings to determine whether registration should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred twenty days of the date of the filing of the application for registration. At the conclusion of such proceedings the Commission, by order, shall grant or deny such registration. The Commission may extend the time for conclusion of such proceedings for up to ninety days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the applicant consents. The Commission shall grant such registration if the Commission finds that the requirements of this section are satisfied and that the applicant is not prohibited from registering as an investment adviser under section 203A. The Commission shall deny such reg­istration if it does not make such a finding or if it finds that if the applicant were so registered, its registration would be subject to suspension or revocation under subsection (e) of this section.
(d) Any provision of this title (other than subsection (a) of this section) which prohibits any act, practice, or course of business if the mails or any means or instrumentality of interstate commerce are used in connection therewith shall also prohibit any such act, practice, or course of business by any investment adviser registered pursuant to this section or any person acting on behalf of such an investment adviser, irrespective of any use of the mails or any means or instrumentality of interstate commerce in connection therewith.

(e) The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any investment adviser if it finds, on the record after notice and oppor­tunity for hearing, that such censure, placing of limitations, suspension, or revocation is in the public interest and that such in­ vestment adviser, or any person associated with such investment adviser, whether prior to or subsequent to becoming so associated—


5) has willfully violated any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, this title, the Commodity Exchange Act, or the rules or regulations under any such statutes or any rule of the Municipal Securities Rulemaking Board, or is unable to comply with any such provision.

Given part 5, Corzine would be in violation of the Commodity Exchange Act, and the SEC should deny him registration. The question remains whether he could get the exemption from registration. New York has some of the most lenient hedge fund registration rules.

According to Capital Fund Law Group, “New York is among the states that offers an exemption for advisors that solely advise private funds and do not hold themselves out as investment advisors. Note that a fund with $25 million under management, whether exempt from state registration or not, must file a short-form ADV as an exempt reporting advisor.”

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