Marketing Hedge Funds – Why “Fiduciary” Matters

–  by  Thomas M. White

The Department of Labor (“DOL”) recently adopted a rule expanding the definition of who may be a fiduciary under ERISA.  Significant because ERISA-covered plans control enormous pools of capital and ERISA fiduciaries are prohibited from engaging in self-dealing transactions.  The new rule, which went into effect on June 9, 2017, affects how investments in hedge funds will be marketed to ERISA-covered plans and IRAs.

If a person makes a “recommendation” regarding an investment or investment management and receives a fee from a plan, a plan participant, a fiduciary, an IRA or an owner of an IRA that person will be considered a fiduciary and that definition applies even if the underlying assets are not “plan assets” within the meaning of the DOL’s Plan Asset Regulation.  If this sounds confusing, appreciate there is litigation currently pending regarding whether the DOL’s rule applies to IRAs or their owners.

Probably the most critical determination will be whether a “recommendation” has been made for purposes of this new rule.  A “recommendation” involves the purchase, holding, managing or sale of securities and is “a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”  In fact, a series of communications may result in a “recommendation,” even if each individual communications may not rise to that level.  Although general communications are not, advice based on individual characteristics of a potential investor are likely “recommendations.”

There are a number of regulatory exemptions, such as recommendations made to a “sophisticated” adviser or investor or if an adviser offers advice to an independent plan or IRA fiduciary in an arm’s-length transaction and the adviser reasonably believes the independent fiduciary is a qualified financial institution (e.g., a bank, insurance company or a broker-dealer) or if the recipient of the information manages at least $50 million in assets regardless of whether those assets are plan assets.

Why does all this matter.  Make a presentation covering the general features of a specific hedge fund to a meeting room packed with potential investors and investment advisers.  After the formal presentation concludes, an audience member comes over to the presenter, describes himself as an IRA owner and his particular circumstances – a discussion ensues.  If the speaker isn’t careful about what is said, and a fee may be earned by the hedge fund it may be a problem.  There are other examples too numerous to describe here.

To minimize the likelihood they will be considered fiduciaries under the new rule, hedge funds should determine if they want to market to IRAs, small plans and individuals who have investment discretion over the investments in their profit sharing and 401(k) accounts.  Marketing materials should be reviewed to determine if they need to be modified to avoid a problem.  Even subscription agreements should make it clear the potential investor is not a small plan or an IRA unless it is being advised by an investment professional who fits under the exemption. Marketing professionals should be trained as to what they may and may not say and written reports describing conversations and communications with potential investors should be retained.

If you want to read more about the potential application of this new rule you can read the entire Rimon Client Alert or contact Tom White directly.  Mr. White specializes in the full scope of human resources management, such as Employee Benefits and Executive Compensation, Healthcare, and Employment Law.

US Treasury Regulation Changes Could Impact Foreign Owned Single Member LLCs

Melinda Fellner Bramwit, Partner, Rimon, P.C.

Changes to US Treasury Regulations Under Section 6038 of the Internal Revenue Code could affect filings for single member LLCs owned by non-US individuals or entities.

Many non-resident individuals and non-resident entities maintain title to real estate and other assets in single member limited liability companies incorporated under state law in the United States, for a variety of reasons.  Under Federal tax law, such an entity is disregarded for tax purposes unless the owner elects otherwise.  From a corporate perspective, these limited liability companies can be used to harness assets in an entity separate from the owner, providing a layer of corporate protection and perhaps anonymity for the ultimate owner.  These entities are also reasonably simple to form and maintain.

Changes to U.S. Treasury Regulations effective December 13, 2016, throw a wrinkle into the use of this malleable entity in some circumstances, which can be managed with some planning.

These changes require that a non-resident owning 100% of a United States limited liability company (“LLC”) file a Form 5472, an information return, when certain transactions occur between certain parties (“related” parties) and the LLC.

The following example from the regulations illustrates a scenario where this filing would be triggered:

In year 1, F, a foreign corporation forms and contributes assets to US-LLC, a U.S. limited liability company that is a disregarded entity for US Federal tax purposes.  In year 2, F contributes funds to US-LLC, and in year 3, US-LLC makes a payment to F.

Under the modified regulations, F’s payment to US-LLC as well as US-LLC’s payment back to F are both reportable transactions for which a Form 5472 would be required with respect to US-LLC.

This is a simple, yet common situation which triggers the filing requirement. It is important to note that this requirement is applicable to tax years of entities beginning on or after January 1, 2017 and ending on or after December 13, 2017 (Note: This is not a typo. The date is the 13th, not the 31st).  As such, there is a window of opportunity for tax planning to avoid the requirement of this form and if you want to know more or need help, don’t hesitate to contact me, Melinda Fellner Bramwit, a partner here at Rimon, P.C.

Of course, if you need assistance, you may always contact me, Joe Rosenbaum, or any of the lawyers with whom you routinely work at Rimon Law.

Taking Wagers on Sports Betting & Online Gambling

– Joe Rosenbaum

The Professional and Amateur Sports Protection Act of 1992 prohibits most states from authorizing sports betting (the law grandfathered a few states, such as Nevada) and New Jersey has been fighting to convince the Federal government to allow the State to legalize and license sports betting.  The latest attempt to circumvent the Act was the repeal of New Jersey’s own sports betting prohibitions at racetracks and casinos.  That effort was derailed by a series of court decisions, culminating in a 9-3 en banc decision of the Third Circuit Court of Appeals, which then led to the State of New Jersey petitioning the Supreme Court of the United States.

Last month, the Supreme Court refused to deny New Jersey’s challenge to the Federal ban (see, Christopher J. Christie, Governor of New Jersey, et al, Petitioners v. National Collegiate Athletic Association, et al; and New Jersey Thoroughbred Horsemen’s Association, Inc., Petitioner v. National Collegiate Athletic Association, et al) and left the door open to grant certiorari in the case if the Office of the Solicitor General (which is part of the U.S. Department of Justice) argues the case raises serious issues and questions of Federal law. They could, if they so choose, seek to revisit the long-standing position of the DOJ holding sports betting illegal.  To some extent, with the new administration of President Trump in place, many see this as an opportunity to do just that, since many of you may remember that as owner of casinos in Atlantic City, New Jersey, then businessman Donald Trump was a proponent of the legalization of sports betting.

Clearly, as States look to generate other sources of tax revenue, many view this as an opportunity to increase revenues and regulate an activity that has long been associated with organized crime. Indeed, the American Gaming Association estimated well over $4 billion in bets were placed on the Super Bowl last Sunday, virtually all of it, illegally. President Trump has consistently said he is in favor of eliminating or reducing legislation and regulation that restricts what States may or may not do and that encumber businesses needlessly beyond necessary Federal oversight. This may well fit right into that category, although there have been no comments as yet from the Administration.

Former Alabama Senator Jeff Sessions, just confirmed last night as Attorney General of the United States, has voiced opposition to any expansion of online gambling in the past, although when questioned during Senate hearings, did indicate he was willing to take another look at how and to what extent online gaming is being enforced by the Federal government.  There is also the possibility that in deciding to allow sports betting and an expansion of online gaming generally, the Federal government may choose to adopt some form of federally regulated or licensed betting and gambling scheme. While the path ahead is far from certain and opposition remains, some things do seem clear: attitudes are changing, the present administration is not averse to controversial new ideas, is favorably disposed to the elimination of any unnecessary Federal regulation that stands in the way of creating jobs and stimulating the economy and, notably, is likely to welcome finding an opportunity to enable States to find ways to increase tax revenue – and taxing so-called ‘sin’ industries may not be such an objectionable idea.

Stay tuned and, of course, if you have any questions, want further information or need help, don’t hesitate to contact me, Joe Rosenbaum, or any of the attorneys you regularly work with at Rimon.

A Brief History of the U.S. Income Tax

Although income taxes were imposed for a brief time during the Civil War and again in the 1890s, it was not until 1913, upon passage of the 16th Amendment to the Constitution of the United States, that federal income tax became a permanent fixture for U.S. citizens and residents. Since Congress then was invested with Constitutional authority, they acted quickly to legally formalize taxes imposed on the income of individuals and corporations.

If you are a U.S. citizen or resident (indeed, if you reside anywhere income taxes are collected), consider what it takes to comply and make the necessary filings today.

Now take a look at the form that individuals were required by the Internal Revenue Service to file in 1913, the year permanent taxation started: 1913 Form 1040.

Do we really need to say anything more? Happy April 15!!

If you need advice or guidance about income taxes, in the United States or anywhere, please don’t contact me, Joe Rosenbaum.

Operation Full Disclosure – The FTC Targets Advertising

Earlier today, the Federal Trade Commission issued a press release indicating that after a review of many national television and print advertisements, warning letters have been sent to a number of companies – including some of the largest advertisers in the United States – noting that they had failed to make adequate disclosures in at least some of their advertising. The initiative, entitled Operation Full Disclosure, is intended to enforce regulations that prohibit advertising that misleads consumers.

The FTC’s targets in this operation are disclosures in fine print, those that were hard to read – even though they contained important information for the consumer. The letters warned advertisers they need to make sure disclosures are clear and conspicuous, and reminded advertisers the disclosures should be close to the claims that are being made. They must not be obscure or disguised with font sizes or colors that make it difficult to read, and on television, they should appear for a long-enough period of time and in a manner that will allow them to actually be read and understood. Consumers should not have to search for them!

Included within each of the FTC letters was a request that each of the advertisers respond back to the FTC with specific actions they individually intended to take regarding their particular advertising, in order to remedy any deficiencies.

You can read the full FTC Press Release and, as always, if you have questions, need help, want guidance, or want to know how best to ensure your advertising and marketing is in compliance with legal and regulatory requirements, just contact me, Joe Rosenbaum, any lawyer in our Advertising, Technology & Media law practice group, or the lawyer with whom you regularly work at Rimon.

Bond Meets Bond Street: Mannequins are Watching You Shop

An Italian company, Almax S.p.A., is selling a mannequin (price tag about $5,000) in a development that is being closely watched – literally – by retailers, consumers and, of course, regulators and privacy gurus. The new product, marketed as the EyeSee Mannequin, contains a camera embedded in the mannequins eyes, and according to the company’s website: “This product will do much more; it would make it possible to ‘observe’ who is attracted by your windows and reveal important details about your customers: age range; gender; race; number of people and time spent.”

In Europe and the United States, the mannequins are making sporadic appearances – perhaps in showrooms and even in street-side display windows, gathering data as people saunter by the store gazing into the windows. According to reports, Almax may also be testing auditory capabilities that would allow a mannequin to not only see, but to hear what customers are saying as well. Hey, did you just call that mannequin a dummy?

 


(Image from Almax Website)

 

The EyeSee Mannequin has a camera placed as an “eye” that includes facial recognition technology that records information about passersby, such as their gender and race, and the software guesstimates the approximate age of each person scanned by the camera. Typically, cameras can be used in retail stores for security, but in many jurisdictions the shop owners are required to post signs alerting consumers browsing the aisles that they are subject to being recorded. Now, the EyeSee Mannequin gives retailers the ability to collect and store information for marketing purposes – a commercial purpose that may put the technology squarely under a microscope (these vision puns really must stop), since it collects personal data about individuals without their consent. That said, the current product is only supposed to record information, not any actual photographs or image scans, but . . . it could, couldn’t it?

Need to know more about the legal implications of technology in advertising and marketing? Concerned about your rights (and wrongs) in deploying surveillance equipment and gathering data and information about customers and consumers? Are you up-to-date on the latest privacy and compliance requirements? Not sure? Need to see these issues more clearly? OK, don’t be a dummy (I mean mannequin) and consult your lawyer. Don’t hesitate to contact me, Joseph I. Rosenbaum, or the Rimon lawyer with whom you regularly work. We would be happy to see you, hear you and help you.

Social Media Risks and Rewards

On February 18, 2010, the International Law Office (ILO) published an article authored by Gregor Pryor and Sachin Premnath in the London office of Rimon, and Joe Rosenbaum in New York. It discusses the benefits and pitfalls of social media, and raises issues and concerns applicable to global companies—not just those on either side of the pond!

The article was derived from one published in Legal Week, and you can download your own PDF copy of “Commercial risks and rewards of the social media phenomenon” right here.

FINRA Issues Guidance in New Social Media Websites Notice

In November, Legal Bytes reported (Regulators Poised to Give Financial Institutions a Slap in the Facebook) that Richard Ketchum, Chief Executive of the Financial Industry Regulatory Authority (FINRA), acknowledged Wall Street is eager to use social media to interact with customers. In the course of his remarks at a recent meeting of the Securities Industry and Financial Markets Association (SIFMA), he noted, “We continue to witness the advent of technologies that will challenge your ability to ensure compliance with regulatory requirements,” and “Social networking is one such innovation.

Now, supplementing existing FINRA Rules, FINRA has released a notice concerning online media rules (you can download and read a copy of the notice below) whose key components include requirements that securities firms:

  • Must develop policies and require its employees to comply with the new regulatory requirements
  • Must retain records of communications (a compliance requirement of the Securities Exchange Act of 1934) when social media is used to communicate
  • Must ensure that recommendations made through social media are suitable to all investors to whom the recommendation is made (e.g., by limiting or filtering access based on investor/consumer qualifications)

FINRA’s notice takes the position that securities firms must adapt existing rules to social media and essentially mirror the 2003 FINRA definition of “public appearance.” This definition noted that chat room postings were no different than if a firm representative was in a room making statements to a room filled with investors. FINRA’s current notice indicates that information posted or content placed online (static information) is subject to these same rules and must be approved by a firm principal – presumably, even information about individuals in the firm that may be part of an individual’s profile on the firm’s website or in social media platforms. But online interactions that are occurring on the fly (e.g., in real time), while subject to supervisory requirements (e.g., they must be supervised, perhaps even monitored), do not require such approvals.

You can read or download the FINRA Regulatory Notice 10-06 (Social Media Web Sites) [PDF] here.

As mentioned in the Legal Bytes November post, SEC disclosure rules apply to Tweets, blog postings, wall postings and other communication platforms provided by social media sites, and other regulatory agencies are seeking to address the use of social media sites by the entities they regulate (e.g., the FCC, the New York State Insurance Department). So if any of this is of interest and if you need to know more or need help, please contact me, Joseph I. Rosenbaum, or the Rimon attorney with whom you regularly work. We are happy to help.

Update:  Rimon lawyers Christopher P. Bennet, Amy J. Greer, Jacob Thride and Kevin Xu have prepared a Client Alert on the subject which you can read by going to: FINRA Issues Notice for Financial Firms Using Social Media.

Investigating Online & Interactive Advertising

The U.S. Congress appears determined to investigate online advertising. Early this month, the House Energy and Commerce Committee issued a letter to more than 30 companies, and what began as an inquiry into how Internet service providers use network data to target advertising, has morphed into a fishing expedition into all kinds of interactive advertising. Most notably, and despite urging by the FTC to allow self-regulation to take hold, the Committee does not differentiate between personally identifiable information and non-identifying, anonymous data used for traffic metrics, ad insertion and other common advertising purposes. Lumping different kinds of information together could needlessly undermine marketing as it has been practiced for decades. The “tailoring” of advertising, in the Committee’s words, based on consumers’ behavior and media consumption patterns, has been at the heart of marketing for as long as marketing has been around.

More disturbing are presumptions that “privacy” rights are being violated by any and all forms of behavioral or targeted marketing. Advocacy groups opposed to commercial communication seek to promote an implicit, yet fundamental redefinition of personal privacy—i.e., anything that derives from peoples’ activities, no matter how distanced or anonymous. Taken to logical conclusion, any academic, commercial or journalistic observation of consumer activity could fall under regulatory restrictions under such a framework. Not surprisingly, the FTC—with its long history of regulation of advertising practices—has argued before Congress that self-regulation is likely to be an effective means of protecting consumers’ real privacy interests. According to testimony by FTC Consumer Protection Bureau Director Lydia Parnes before the Senate Committee on Commerce, Science, and Transportation this July, the FTC is “cautiously optimistic that the privacy concerns raised by behavioral advertising can be addressed by industry self-regulation.” Nevertheless, in the letter released this month and in three previous inquiries over the past few months, both the House and the Senate seem to be searching for a rationale to regulate. Stay tuned.

To Collect or Not To Collect, That’s the Dilemma?

This article was contributed by Adam Snukal, Esq.

Surfed the web lately? Seen a banner promoting a product, service or trip to Ireland you priced yesterday? Serendipity? Luck? Cookies? Yes, it’s those tiny files placed on your computer when you visit a website. Advertisers can now parse through cookies on your computer when you visit certain websites and instantaneously serve up advertisements based on your historical online behavior—“behavioral marketing.” For some, this is a great convenience. For others, like New York State Assemblyman Richard Brodsky, this is invasive and should be stopped unless the consumer has given consent.

Assemblyman Brodsky sees the acquisition of Doubleclick by Google as a step backward for consumers since the combined company could tap into a reservoir of consumer behavior and search data on an individual basis. So he introduced a bill aimed at restricting Internet behavioral marketing—The Third Party Internet Advertising Consumers’ Bill of Rights Act of 2008—that would prohibit advertisers from collecting and using sensitive, personally identifiable information from users online; require websites to clearly and conspicuously disclose behavioral policies and practices; give consumers the right to opt-out of profiling practices; prevent their online behavior from being collected and used to deliver targeted advertisements; and police how advertisers are permitted to merge and synthesize such information with other data (e.g., merging personally identifiable information collected offline with information collected online). Opponents—some of the largest interactive advertising and media companies—have voiced their opposition in a letter to Assemblyman Brodsky, noting, “Time after time, state laws that have attempted to impose this sort of broad Internet regulation have been struck down by the courts, doing nothing more than making taxpayers bear the expense both of defending the lawsuit and paying the successful plaintiffs’ attorneys fees.”

Continue reading “To Collect or Not To Collect, That’s the Dilemma?”