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9'12'13 WORKING STORY BOARD.docx

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1 RULE NEWS FINRA

FINRA BOARD OF GOVERNORS:RULEMAKING ITEMS FOR DISCUSSION AT THESEPTEMBER MEETING

The FINRA Board of Governors will consider the followingrulemaking items at its September 2013 meeting. After theSeptember 19 meeting, FINRA will notify firms via emailabout the Board's actions on these items and anticipated nextsteps, if any.

Alternative Display Facility (Adf). The Boardwill consider several proposed amendments to the rulesgoverning the ADF, including changes in connection with themigration of the ADF to a new technology platform, requirements for new participants to the ADF, and order reportingprocedures.

Alternative Trading System (ATS) Aggregate Volume Data Fee . The Board will consider proposed fees to be

applied to the receipt by professionals of ATS aggregate volume data published by FINRA.

DISCLOSURES RELATED TO RECRUITMENT PRACTICES AND ACCOUNT TRANSFERS. The Board will consider anupdated proposal to require disclosure of compensation a registered representative receives in connection with changing firmsand other important considerations for a customer deciding whether to follow the representative to the new firm.

EQUITY TRADE REPORTING. The Board will consider proposed amendments to the FINRA trade reporting rules inconnection with the migration of FINRA equity trade reporting facilities to a new technology platform.

2 BEHIND THE NEWS FINRA

FINRA AUGUST 2013 MONTHLY RECAPSeptember 11, 2013

Revisit the latest FINRA Notices, compliance resources and news from August 2013.

PODCAST: August 2013 Monthly Recap (10 min. 30 sec.)

3A WHOS NEWS SEC

NEW SEC DIRECTORS FOR BOSTON AND SAN FRANCISO REGIONAL OFFICES.

SEC NAMES JINA L. CHOI AS DIRECTOR OF SAN FRANCISCO REGIONAL OFFICE

SEC PRESS RELEASE 13-177Washington D.C., Sept. 11, 2013

The Securities and Exchange Commission today announced the appointment of Jina L. Choi as director of the San FranciscoRegional Office, where she will oversee enforcement and examinations in Northern California and the Pacific Northwest.

Ms. Choi joined the SEC staff in 2000 and became a branch chief in 2005 before being promoted to assistant director in 2010. Inaddition to managing cases in the San Francisco office, Ms. Choi has helped lead investigations in the nationwide Market AbuseUnit that focuses on insider trading and other complex manipulation schemes.


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The San Francisco office has a rich history of robust enforcement activity and is staffed by immensely talented people dedicatedto the SECs mission, said Andrew J. Ceresney, Co-Director of the SECs Division of Enforcement. Jina has shown greatdistinction, judgment, and tenacity in working to protect investors since joining the enforcement staff more than a decade ago.She will be an outstanding leader of the office, and we are delighted to have her join our leadership team.

Andrew J. Bowden,Director of the SECs Office of Compliance Inspections and Examinations, said, Jinas focus andenergy have enabled her to establish a great reputation and rapport with the exam team. We are thrilled that she has

agreed to lead the San Francisco office.

Ms. Choi said, I am honored and delighted to have been selected to serve as the head of the San Francisco office. I knowfirsthand the exceptional talent and dedication of the San Francisco staff and look forward to leading our offices efforts toprotect investors and ensure fair and orderly markets.

Ms. Choi supervised investigations that resulted in enforcement actions against a Latvian trader and several firms for a massiveonline account intrusion scheme involving the manipulation of prices of more than 100 NYSE and Nasdaq securities, a formerUBS financial adviser for misappropriating funds from clients, and an international insider trading scheme involving repeatedleaks of confidential deal information to family members in the United Kingdom.

In addition to her extensive SEC experience, Ms. Choi has served as an Assistant U.S. Attorney in the Northern District of Texas,where she worked in the cybercrime/anti-terrorism and general crimes sections. Ms. Choi also served as a trial attorney in theCivil Rights Division at the U.S. Department of Justice. She began her legal career as a law clerk to the Honorable Robert P.Patterson, Jr. in the U.S. District Court for the Southern District of New York.

Ms. Choi earned her bachelors degree from Oberlin College and her J.D. from Yale Law School.

3B WHOS NEWS SEC

SEC NAMES PAUL LEVENSON AS DIRECTOR OF BOSTON REGIONAL OFFICESEC PRESS RELEASE 13-179

Washington D.C., Sept. 12, 2013

The Securities and Exchange Commission today announced that Paul Levenson has been named director of the Boston RegionalOffice, where he will oversee enforcement and examinations in the New England region.

Mr. Levenson joins the SEC from the U.S. Attorneys Office for the District of Massachusetts, where he is an Assistant U.S.Attorney and Chief of the Economic Crimes Unit that is responsible for investigations and prosecutions of financial crimes. Mr.Levenson has successfully coordinated many criminal investigations with the SECs Division of Enforcement during his tenure i nthe U.S. Attorneys Office. He will begin working atthe SEC in late October.

Paul has served with great distinction as a supervisor and prosecutor of securities and other white collar cases, said Geor ge S.Canellos, Co-Director of the SECs Division of Enforcement. We are thrilled that he will be bringing his formidable legal skills,vast experience, and judgment to the SEC as leader of our Boston Regional Office.

Andrew J. Bowden, Director of the SECs Office of Compliance Inspections and Examinations, said, Paul has beenworking energetically and effectively to protect investors for the last 23 years. He also is an excellent manager. We are excited thathe has decided to continue his work with our dedicated team in Boston.

Mr. Levenson said, I am honored to have been chosen as the regional director of the SECs Boston office. As a federalprosecutor in Massachusetts, I have worked closely with the lawyers and examiners in the Boston office and have beenenormously impressed by their talent, professionalism, and dedication to enforcing the federal securities laws. I look forward toworking with them to carry out the SECs mission of investor protection and fair and orderly markets.


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Mr. Levenson joined the U.S. Attorneys office in 1989 and served in the civil division as well as the Economic Crimes Unit andPublic Corruption Unit. He has led the Economic Crimes Unit since 2007. Mr. Levenson has helped lead the investigation andprosecution of white collar crimes ranging from securities fraud, foreign bribery, tax fraud, insurance fraud, bank fraud, healthcare fraud, official corruption, and embezzlement.

Mr. Levenson previously was a litigation associate at Kaye, Scholer, Fierman, Hays & Handler in Washington D.C. from 1985 to1987. He later worked at Gibson, Dunn & Crutcher in New York before joining the U.S. Attorneys Office in Massachusetts. Hebegan his legal career as a law clerk to the Honorable Stanley A. Weigel of the U.S. District Court for the Northern District ofCalifornia.

Mr. Levenson earned his bachelors degree from Harvard College and his law degree from Harvard Law School.

4 REGULATORS & POLITICIANS SEC SPEECH

CURRENT SEC PRIORITIES REGARDING HEDGE FUND MANAGERSNORM CHAMP, SEC DIRECTOR OF THE DIVISION OF INVESTMENT MANAGEMENTPLI Hedge Fund Management Conference, New York, New York

Sept. 12, 2013

Thank you, Nora, for the kind introduction. Good morning and thank you for inviting me to speak to you today it is a privilegeto open-up this seminar on behalf of such a distinguished panel of seasoned practitioners, some of which are current or formercolleagues. I am certain that you will benefit from their invaluable insight into some of the trends and challenges facing thehedge fund industry. Before proceeding, let me remind you that the views I express are my own and do not necessarily reflectthe views of the Commission, any of the Commissioners, or any of my colleagues on the staff of the Commission.[1]

This is truly an opportune time to examine the regulatory landscape for hedge funds and their advisers many of you areprobably returning from vacations during a summer that witnessed the third anniversary of the enactment of the Dodd-FrankAct and just in time for the effective date of some significant rulemakings relating to a private placement exemption often usedby hedge funds. As you know, the Dodd-Frank Act imposed greater oversight on advisers to hedge funds, while recent changeswere made to the private placement exemptions by the JOBS Act. These changes create both opportunities and challenges for

those advisers managing hedge funds.

For this morning, I will begin with a discussion on what you are likely most interested in the general solicitation and the badactor rules. Afterward, I will focus on our continuing efforts to bebetter informed regulators. In the post-Dodd-Frank era, weare more cognizant regulators not only because of the enhanced data we receive from you regarding the size and operations ofyour industry, but also due to our continuous efforts to improve our ability to use that data and our heightened focus onindustry awareness. After an overview of what we now know about your industry and how we intend to use it, Ill highlightsome regulatory initiatives of interest to the hedge fund industry. However, before I finish this morning, I want to briefly sharesome thoughts on the importance of a robust culture of compliance, which is underscored by the recent Commission actionsagainst hedge fund managers for insider trading.

GENERAL SOLICITATION AND BAD ACTORS. Over the summer, the Commission adopted two significantCongressionally-mandated changes to Rule 506 of Regulation Dthe private placement exemption that many hedge funds rely

on to offer their interests in the U.S. Before addressing some specific aspects of these rules, it may be helpful to quickly revisithow we got here. As most of you know, the JOBS Act mandated that the Commission lift the ban on general solicitation andgeneral advertising to, among other things, provide new ways for companies to raise capital. We are committed to taking stepsto pursue additional investor safeguards if and where such measures become necessary once the ban on general solicitation islifted.[2] In other words, as we fulfill our mission to facilitate capital formation, we remain focused on strong investorprotections. Therefore, in connection with the changes to Rule 506, the Commission proposed additional amendments intendedto enhance the Commissions ability to evaluate the development of market practices in Rule 506 offerings and address certainconcerns raised by commenters related to the types of investors that would be attracted by general solicitation.[3]


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LIFTING THE BAN ON GENERAL SOLICITATION. The first change to Rule 506 eliminates the prohibition on generalsolicitation and general advertising for certain offerings, including hedge fund offerings, provided that the conditions of the newrule are met.[4] Once the removal of the ban goes effective in the next few weeks, hedge fund issuers will be able to use anumber of previously unavailable solicitation and advertising methods when seeking potential investors. However, with thesenew marketing opportunities also comes greater responsibility.

The final rule permits issuers to use general solicitation and general advertising to offer their securities if, among other things,issuers take reasonable steps to verify accredited investor status, and all purchasers of the securities are accredited inv estorsmeaning that, at the time of the sale of the securities, they fall within one of the categories of persons who are accreditedinvestors, or the issuer reasonably believes that they do. Determination of the reasonableness of the steps taken to verify thatan investor is accredited is by an objective assessment by an issuer, and in response to comments, the final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors.

With general solicitation and general advertising soon to be an option, I want to reiterate the Commissions reminder from theadopting release that advisers to private funds are subject to an anti-fraud rule that prohibits fraudulent and misleading conductwith respect to fund investors, including making untrue statements of material fact to those investors.[5] In the adoptingrelease, the Commission also noted that investment advisers that have implemented appropriate policies and proceduresregarding the nature and content of private fund sales literature are less likely to use materially misleading advertising

materials, or otherwise violate federal securities law.[6] Accordingly, advisers should carefully review their policies andprocedures to determine whether they are reasonably designed to prevent the use of fraudulent or misleading advertisementsand update those policies where necessary, particularly if the hedge funds intend to engage in general solicitation activity.Hedge fund sponsors intending to rely on the new rule should also consider whether their current practices for verifyingaccredited investor status meet the requirements of the new rule.

Simultaneously with the adoption of these amendments, the Commission also issued a proposal designed to enable theCommission to evaluate how general solicitation impacts investors in the private placement market. The proposed measuresinclude, among other things, expanding the information that issuers must include on Form D, requiring issuers to file the Form Dbefore a general solicitation begins and when an offering is completed, and putting in place a more effective mechanism forenforcing compliance with Form D filing requirements.

Given that private funds raise a significant amount of capital in Rule 506 offerings, the proposal contains several amendments

specific to private funds. For example, private fund issuers would be required to include a legend in any written generalsolicitation materials disclosing that the securities being offered are not subject to the protections of the Investment CompanyAct of 1940. With respect to written general solicitation materials containing performance data, additional disclosure would berequired to explain the limitations on the usefulness of such data and provide context to understand the data presented.

The Commission also proposed to extend guidance contained in Rule 156 under the Securities Act of 1933, currently applicableto registered funds, on when information in sales literature could be fraudulent or misleading for purposes of the federalsecurities laws. This guidance would apply to all private funds whether or not they are engaged in general solicitation activities.In the proposing release, the Commission expressed its view that private funds should now begin considering the principlesunderlying existing guidance.

Furthermore, the Commission requested comment on additional manner and content restrictions on private fund solicitationmaterials. In particular, we are interested in hearing your thoughts on content restrictions on performance advertising

generally, and content standards specific to certain types of performance advertising, such as model or hypotheticalperformance. We also are interested in your views on whether private funds should be subject to standardized performancereporting and if so, what reporting standards should apply.

In order to assist the Commissions efforts to assess developments in the Rule 506(c) market, an inter-Divisional group has beencreated within the Commission to review the new market and the practices that develop. Staff from the Division of InvestmentManagement will play a key role in this initiative, and will work closely with staff from the Division of Corporation Finance, theDivision of Economic and Risk Analysis (DERA), formerly the Division of Risk, Strategy and Financial Innovation, the Divisionof Trading and Markets, the Office of Compliance Inspections and Examinations, (OCIE), and the Division of Enforcement. As


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part of the work plan, staff will, among other things, evaluate the range of accredited investor verification practices used byissuers and other participants in these offerings, and endeavor to identify trends in this market, including in regard topotentially fraudulent behavior. Commission staff will also develop risk characteristics regarding the types of issuers andmarket participants that conduct or participate in offerings involving general solicitation and general advertising and the typesof investors targeted in these offerings.

In addition, Ive instructed Division of Investment Management rulemaking and risk and examination staff to pay particularattention to the use of performance claims in the marketing of private fund interests. In particular, this review will endeavor toidentify potentially fraudulent behavior and to assess compliance with the federal securities laws, including appropriateInvestment Advisers Act provisions. I encourage you to provide us information about what you are seeing develop in regards togeneral solicitation by private funds, particularly advertisements that appear to raise concerns.

Separately, the Commission has also begun a review of the definition of accredited investor as it relates to natural persons. TheCommission also requested comment on the definition of accredited investor in its recent proposing release. Your input into allthese regulatory initiatives is important. With the comment period for the proposals regarding the Rule 506(c) market about toclose, we strongly encourage you to submit comments if you have not done so already.

THE BAD ACTOR AMENDMENT. Under the second adopted amendment, commonly referred to as the bad actoramendment, an issuer cannot rely on the Rule 506 exemption from registration if the issuer or any other person covered by the

rule is disqualified by a triggering event, which includes certain criminal convictions, certain SEC cease-and-desist orders andcourt injunctions and restraining orders.[7] In addition to issuers such as hedge funds, other potential bad actorsunder therule could include a hedge funds general partner or managing member, its investment adviser and principals, significantshareholders holding voting interests, affiliated issuers and any placement agent or other compensated solicitor.

The final rule provides an exception from disqualification for issuers that can show they did not know and, in the exercise ofreasonable care, could not have known that a covered person with a disqualifying event participated in the offering. Given theserious consequences of a bad actor finding, hedge fund advisers should take care when hiring employees and screeninginvestors, and conduct appropriate due diligence when retaining third party solicitors. Also, it is important to note that whiledisqualification applies only for triggering events that occur after the effective date of the rule, matters that existed before theeffective date of the rule that would otherwise be disqualifying are required to be disclosed to investors.

I understand that the staff has received some interpretative questions with respect to the application of these rules, especially to

private funds and their advisers. Right now, the staff is in listening and information collection-mode, and is evaluating the needfor guidance.

WHAT WE NOW KNOW ABOUT THE INDUSTRY. As I alluded to earlier, as a result of registration and reportingreforms introduced by, or tangential to, Dodd-Frank, we now have a more complete picture of the hedge fund universe,including insight into (for starters) the number of advisers and funds, the different types of funds, the strategies that theyemploy, and the makeup of their investor base. Now, it is critical to the execution of our mission that we are able to translatebeing better informed regulators into being more effective regulators.

Today, the Commissions registrant population consists of over 10,825 advisers, with 2,572 of these advising at least one hed gefund.[8] Overall, advisers of hedge funds account for over $4.6 trillion in cumulative regulatory assets. In addition to hedgefund advisers registered with the Commission, we also have exempt reporting advisers, or ERAs, who are those advisers that areexempt from registering with the Commission, but are subject to limited reporting about their businesses and their private fund

clients. The Commission has approximately 2,400 ERAs, with 767 advisers or 32% of these managing hedge funds accountingfor over $819 billion in regulatory assets.

This improved information is the result of upgrades to Form ADV and the arrival of Form PF. In 2011, the Commission adoptedamendments to Form ADV requiring significant additional information with respect to, among other things, the identity of hedgefund clients, amount of gross assets, names of service providers to these hedge funds, and the number and types of hedge fundinvestors.[9] Also in 2011 the Commission adopted new Form PF jointly with the Commodity Futures Trading Commission.Form PF requires advisers to report the use of leverage, counterparty credit risk exposure, and trading practices for each hedgeand other private fund managed by the adviser.[10] In the summer of 2012, the Commission began to receive the first set of


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Form PF filings from the largest advisers of hedge funds and other private funds, and received a complete set of initial filingsfrom all reporting advisers earlier this year.

HOW WE CAN USE THE NEW INFORMATION. While the primary aim of Form PF was to create a source of data forthe Financial Stability Oversight Council (FSOC) to use in assessing systemic risk,[11] the Commission, consistent withstatutory authority, is using the information to support its own regulatory programs, including examinations, investigations and

investor protection efforts relating to private fund advisers. Through a coordinated effort of staff across the Commission, wehave identified a number of uses of the information.

For example, last year the Division of Investment Management created its Risk and Examinations Office (REO). REO is a multi-disciplinary office staffed with analysts with strong quantitative backgrounds, along with examiners, lawyers and accountants.REO intends to conduct rigorous quantitative and qualitative financial analysis of the investment management industry,strategically important investment advisers and funds. REO, in collaboration with the DERA, is using Form PF data to developrisk-monitoring analytics, as well as to provide internal periodic reports regarding the private fund industry and particularmarket segments.

Division staff also will use Form PF data to inform policy and rulemaking with regard to private funds, and we intend to useaggregated, non-proprietary data in our consultative work with other securities regulators on issues of mutual interest.Similarly, other divisions are beginning to utilize this data to advance their missions. For example, the Commissions Asset

Management Unit of the Division of Enforcement is working with DERA to develop analytic tools to integrate Form PF data intoresearch and due diligence related to investigative work and other enforcement matters. Also, the OCIE anticipates using theinformation collected on Form PF for, among other things, conducting pre-examination research and due diligence.

That said, I know that the hedge fund industry has raised concerns about the confidentiality of Form PF data. However, I canreassure you that the Commission takes the protection of the confidentiality of this information very seriously. To comply withenhanced confidentiality provisions established under the Dodd-Frank Act with respect to Form PF, Commission staff hasdeveloped a secure filing environment for Form PF to protect the information when and after it is filed. In addition, we haveestablished an inter-Divisional steering committee to address internal data use and create a comprehensive policy on access toand use of Form PF data.

Our experience with Form PF data is in its early stages and the utility of the data collection will develop as the collectiveexperience with the information evolves. Of critical importance to expanding the utility of the data is our confidence in the

information provided by filers. Division staff is proactively trying to improve data quality by, for example, issuing FAQs oninterpretive issues that commonly arise from filers in fact, we most recently updated our FAQs last month.[12] During thisprocess, the staff has benefited immensely from the open and continuous dialogue with you, and we want to continue thatpractice.

INDUSTRY OUTREACH. As a complement to the data that we receive, we are working to improve our awareness ofthe industry through a hands-on outreach initiative. While data is important for providing census information, identifyingaberrational performance and systemic trends, it does not give you a sense of a firms culture and approach to compliance. Inorder to get a first-hand view of advisers systems, controls and culture, REO staff, OCIE leadership and I have met with seniormanagement of many larger, strategically important advisers many of which have an institutional line of business throughwhich they manage private funds. Also, our colleagues in OCIE have begun their presence exam initiative, which is part of anoutreach to engage directly with newly registered advisers to private funds.[13] This initiative is focused on five key areas ofrisk: marketing, portfolio management, conflicts of interest, safety of client assets and valuation. OCIE is still in the engagement

phase of this initiative and expects to report back to the industry at the conclusion of the program. During a panel later thismorning, I believe my colleague from OCIE will be sharing with you some of the preliminary findings and observations from thatinitiative.

We hope to continue directly interacting with you and your colleagues, and by working together better ensure that the industryoperates in the best interests of clients and fund investors.

OTHER REGULATORY INITIATIVES. After several years of diligent work, I am happy to report that the Dodd-Frankmandated rulemaking directly related to investment advisers is complete. While there are outstanding proposals on the Volcker


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Rule and incentive compensation, each of which may impact investment advisers that charge performance fees and/or acceptinvestments from or are owned by banks or bank sponsored funds, the Division will attempt to turn some of its attention toother regulatory initiatives regarding advisers to hedge and other private funds.

As I have previously announced, one of our longer term initiatives is a review of the rules that apply to private fund advisers.Although the principles-based Advisers Act regime has largely stood the test of time, despite being applied to an increasingly

diverse set of adviser business models, the staff is evaluating whether Advisers Act rules require modernization to reflect thecurrent business and operations of private fund advisers. This initiative has been spurred, at least in part, by the inquiries andfeedback that we receive from industry stakeholders, especially from new registrants, and your input helps inform ourassessment. As such, please continue to bring your issues and challenges to our attention.

As one might expect, a review of the Advisers Act regime is no small task and the process, along with any potential rulemaking,will take time to run its course to ensure that we get it right. That being said, the Division has and will actively considerproviding guidance where appropriate. For example, with respect to the Advisers Act custody rule, we are open to public inputon issues and concerns regarding implementation of the rule. Just last month the Divisions staff issued guidance regarding theapplication of the custody rule to private stock certificates, which rightly focused on investor protections provided by fundaudits.[14] Although we understand that this guidance may not end our work in regard to the custody rule, it does represent asignificant step forward and is an example of our efforts to clarify the application of the rules, while at the same time promotingrobust investor protection.

COMPLIANCE INSIDER TRADING. Earlier, I touched upon our outreach initiative designed to get a sense of anadvisers culture of compliance. While our experience thus far generally confirms that most investment advisers attempt to dothe right thing in fulfilling their regulatory compliance obligations, the recent highly-publicized string of insider trading cases inthe hedge fund industry highlights the need for improvement. During one of todays panels, you will hear about good practicesto improve controls on the misuse of material non-public information, so I will keep my remarks high-level.

To borrow a recent quote from Harvey Pitt, a former Ch airman of the Commission, [w]hen it comes to compliance, you have tolive, eat, breathe and drink it.[15] This observation is particularly fitting with respect to the prevention of insider trading. Asyou know, the Advisers Act requires advisers to establish, maintain and enforce written policies and procedures reasonablydesigned to prevent misuse of insider information.[16] In addition, Advisers Act provisions require, among other things, theadoption of a written code of ethics that sets forth standards of business conduct and that requires compliance with federalsecurities laws. However, the prosecution of alleged insider trading continues to be an area of active enforcement by the

Commission. Indeed, the prevalence of insider trading negatively impacts investor confidence.[17]

In light of these cases, advisers should revisit their compliance policies and procedures and assess whether they effectivelyprovide a comprehensive framework for the identification and prevention of the misuse of non-public information. In addition,advisers should provide continuous training and guidance to ensure that employees know what to door, more importantly,what to refrain from doingwhen they come into possession of inside information.

CONCLUSION. I appreciate the opportunity to share my thoughts on these issues of interest to investment advisersand the larger hedge fund community. The Division works to protect investors, promote informed decision making, andfacilitate appropriate innovation in investment products and services through regulating the asset management industry.Thank you for your time this morning.

5 REGULATORS & POLITICIANS SEC SPEECH

REMARKS AT SOCIETY OF CORPORATE SECRETARIES & GOVERNANCE PROFESSIONALSSEC COMMISSIONER DANIEL GALLAGHER67th National Conference, Seattle, WashingtonJuly 11, 2013


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Thank you Bob [Lamm] for your very kind introduction. I am delighted to be able to participate in this conference and toaddress so many of the governance professionals who are on the front lines dealing with the myriad of mandates set forth infederal and state laws and regulations. In addition to engaging with shareholders, drafting disclosure documents, and dealingwith the everyday fire drills that occur at your companies, you and your teams ensure that board members and managementhave the appropriate knowledge and resources to properly discharge their duties. This is a full days work, which is why somany of you often end up doing board minutes at night. While much of the work you do may sometimes seem thankless, the

importance of your work is certainly not lost on me or, I hope, on your CEOs and boards.

On that note, I need to provide the standard disclaimer that my remarks today are my own and do not necessarily reflect theviews of the Commission or my fellow Commissioners.

Before I begin, I would like to take a moment to acknowledge my colleagues Elisse Walter and Troy Paredes, who are

nearing the end of their tenure as Commissioners. Elisse and Troy joined the Commission within a month of one anotherduring the turbulent summer of 2008, right around the time I became the deputy director of trading and markets, and havesince then devoted themselves to furthering the SECs mission during a particularly difficult time. They have done yeomanswork and they will both be missed.

Id like to say a few additional words about Troy, who has over the course of his five years as a Commissioner been a quietbut formidable intellectual force, applying his intelligence and expertise to the subjects of disclosure reform and

corporate governance, among many others. Troy has, in addition to being a valued colleague, been a great friend to me aswell, and there is no one with whom Id rather have an hour-long midnight conversation about the subtle implications of a singlefootnote buried deep within a thousand-page draft rule release.

The SEC is first and foremost a disclosure agency. As stated on the Commissions website: [t]he laws and rules thatgovern the securities industry in the United States derive from a simple and straightforward concept: all investors, whetherlarge institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and solong as they hold it.[1] The federal corporate disclosure regime was established by Congress and serves as a cornerstone of theCommissions tripartite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capitalformation. The underlying premise of the Commissions disclosure regime is that if investors have the appropriate information,they can make rational and informed investment decisions. This is not to say that the disclosure regime was meant to guaranteethat investors receive all information known to a public company, much less to eliminate all risk from investing in that company.Instead, the point has always been to ensure that they have access to material investment information. One of the

underpinnings of this approach is the expectation that through this disclosure regime, companies and their management benefitfrom the oversight and interaction with the companies owners. President Franklin D. Roosevelt, in a message to Congressencouraging the enactment of the Securities Act, also noted that a mandatory disclosure regime adds to the ancient rule ofcaveat emptor, the further doctrine, let the seller also beware. It puts the burden of telling the whole truth on the selle r. Itshould give impetus to honest dealing in securities and thereby bring back public confidence.[2]

Through issuer disclosure, shareholders are able to make informed decisions and hold boards and management accountable forany misallocation or misuse of their invested funds. If shareholders are displeased, they have the ability to change the behaviorof management and direction of the company by exercising their votes at shareholder meetings or, alternatively, voting withtheir feet, so to speak, by selling their stock. So, given the historical justifications as well as the logic and rationale behind thismandatory disclosure framework, how has the Commission done in ensuring the proper operation of this system?

Arguably, the Commissions disclosure regime has been subject to the classic Washington scourge of regulatory creep, in spite of

the principle that investors should have access to basic facts. The beauty of the disclosure regime as created by Congressalmost 80 years ago was that it did not require government regulators to judge the merits of a company, its board ormanagement structure, or its business practices those judgments were intended to remain in the hands of investors armedwith the knowledge provided by the disclosure of material information. Today, however, some of our disclosure rules are beingused by special interest groups, who do not necessarily have the best interests of all shareholders in mind, to pressure publiccompanies on certain governance and business practices. The Commissions recent disclosure rules regarding conflict mineralsfrom the Congo and extractive resource payments made by oil, gas and mining companies are good examples.


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As many of you probably know, last week, Judge John D. Bates from the D.C. District Court vacated the Commissions a rbitraryand capricious resource extraction rule citing two substantial errors on the part of the Commission: misreading the statute tomandate public disclosure of the reports required to be provided to the Commission and refusing to grant any exemptions to thedisclosure requirement.[3] While the information required by these rules may be germane for humanitarian purposes, onewould be hard pressed to argue that this disclosure is material to investors in evaluating the performance and determining thevalue of a company. In his opinion, Judge Bates wrote, As the Supreme Court has recognized, no legislation pursues its

purposes at all costs.[4] It has been the Commissions responsibility since its establishment to apply its expertise to define theparameters of the disclosure required by congressional mandates. Even when those mandates are unusually prescriptive, it isincumbent upon the Commission to use its exemptive authority to balance the value to investors of new disclosurerequirements against their costs. In promulgating new disclosure requirements, the Commission must be mindful aboutwhether the information in question would be objectively material to investors, and would the benefits of disclosure outweighthe costs, which are ultimately and inevitably passed on to investors.

The vital importance and proven value of our disclosure regime as a whole does not and should not lead to the conclusion thatmore government-mandated disclosure is always better. In a speech earlier this year, Commissioner Paredes expressed aconcern that I share, noting that the expansion of mandatory disclosure requirements may lead to information overload,[5]not just in volume but also in the complexity of presentation. When the Commission-mandated public disclosure documents ofpublic companies run well into the hundreds of pages, we have to question whether such documents are at all understandable,and of any utility, to investors. When disclosure documents start to resemble treatises, the wheat gets lost in the chaff. With too

much information, it often becomes difficult for investors to focus and determine what is useful and what is not. As JusticeThurgood Marshall warned almost 40 years ago, disclosure requirements with unnecessarily low materia lity standards risksimply bur[ying] the shareholders in an avalanche of trivial information a result that is hardly conducive to informed decisionmaking.[6] When investors are inundated with immaterial information, it increases the likelihood that th ey will miss keydisclosures. Even more likely is the possibility that investors, despairing about the voluminous compilations of corporateminutiae contained in company filings, will never even look at disclosure documents. In either case, the result is that investorsare left less informed when making investing decisions than they would be if presented with a document that didnt require amagnifying glass to read and a PhD to understand. The irony that the vast expansion of the Commissions mandatory disclosureregime may help incentivize investors to throw their hands up and simply ignore company filings is not lost on me or, Im sur e,all of you.

Given the importance of this issue, it is critical for the Commission to engage with issuers and shareholders to rethink whetherthe mandatory disclosure rules in their current form are still valuable and whether in some cases it may be better for investors

if there was a lower volume, but an overall higher quality, of disclosure. As Ive noted repeatedly,disclosure is not costless toissuers, and we cannot forget because far too many policy makers do forget that its the shareholders who ultimately bearthe burden of increased costs on issuers. If excessive disclosure negatively impacts investors ability to process the informationwith which they are presented, it fundamentally undermines the utility of the disclosure regime. We need to understand whatinformation investors find useful and beneficial, but we also need to develop a better understanding of the costs of disclosure,especially in light of the tendency to require disclosure on a more and more granular level.

Another unintended consequence of the increase in mandated disclosure is the rise of proxy advisory firms and the increasingwillingness of investment advisers and large institutional investors to rely on such firms in order to ostensibly carry out theirfiduciary duties.

Shareholder voting has undergone a remarkable transformation over the past few decades, with particularly marked changesoccurring over the past 10 years. The rise of institutional shareholders as the majority owners of public company shares as well

as the increased desire of some policy makers to give shareholders greater influence and power in corporate governance has ledto the current dynamic. In todays world, institutional shareholders vote billions of shares each year on thousands of ballotitems for the thousands of companies in which they invest. The quantity and length of the documents that shareholders have toreview in order to make informed voting decisions has steadily increased over the past few years, as has the average number ofitems they are asked to vote on which, by some estimates, increased by roughly 50% from 2003 to 2011.[7]

Given the sheer volume of votes, institutional shareholders, particularly investment advisers, may view their responsibility tovote on proxy matters with more of a compliance mindset than a fiduciary mindset. Sadly, the Commission may have been asignificant enabler of this. In 2003, the SEC adopted a new rule and rule amendments under the Investment Advisers Act of


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1940 addressing an investment adviser's fiduciary obligation to its clients when the adviser has authority to vote its clientsproxies. Pursuant to the rule, an investment adviser that exercises voting authority over its clients proxies is required, amongother things, to adopt policies and procedures reasonably designed to ensure that it votes those proxies in the best interests ofits clients.[8] One concern that the Commission was trying to address in that rulemaking was an investment advisers potentialconflicts of interest when voting a clients securities on matters that affected its own interests. In the adopting release,theCommission noted that an adviser could demonstrate that the vote was not a product of a conflict of interest if it voted client

securities, in accordance with a pre-determined policy, based upon the recommendations of an independent third party.[9] AsIve noted before, this was akin to what the Commission had earlier done with credit rating agencies essentially, mandating theuse of third party opinions. When proxy advisors asked the SEC staff for guidance and clarity with respect to the new rule, theygot their wish in the form of a pair of staff no-action letters effectively blessing the practice of investment advisers simply votingthe recommendations provided by proxy advisers.[10] At the risk of stating the obvious, staff no-action letters are not approvedby the Commission, and do not necessarily represent the view of the Commission or the Commissioners.

It has been argued that these two letters provide investment advisers a potential safe harbor against claims of conflicts ofinterest when they vote their client proxies. In one letter, the SEC staff advised that an investment adviser that votes clientproxies in accordance with a pre-determined policy based on the recommendations of an independent third party will notnecessarily breach its fiduciary duty of loyalty to its clients even though the recommendations may be consistent with theadvisers own interests. In essence, the recommendations of a third party that is in fact independent of an investment advisermay cleanse the vote of the advisers conflict.[11]

I am very concerned that these letters have unduly increased the role of proxy advisory firms in corporate governance. I alsohave grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on andfollow recommendations from proxy advisory firms.

It is troubling to think that institutional investors, particularly investment advisers, are treating their responsibility akin to acompliance function carried out through rote reliance on proxy advisory firm advice rather than actively researching theproposals before them and ensuring that their votes further their clients interests. The last thing we should want is forinvestment advisers to adopt a mindset that leads to them blindly casting their votes in line with a proxy advisorsrecommendations, especially given the fact that such recommendations are often not tailored to a funds unique strategy orinvestment goals. As one academic article has argued: [i]f the institutional investors are only using the proxy advisor votingrecommendations to meet their compliance requirement with the lowest cost, these payments will not compensate proxyadvisors for conducting research that is necessary to determine appropriate corporate governance structures for individual

firms. Under this scenario, the resulting recommendations will tend to be based on simple, low cost approaches that ignore thecomplex contextual aspects that are almost certainly instrumental in selecting the corporate governance structure for individualfirms.[12]

So what should the Commission do? I believe that we should replace these two staff no-action letters with Commission-levelguidance. Such guidance should seek to ensure that institutional shareholders are complying with the original intent of the 2003rule and effectively carrying out their fiduciary duties. Commission guidance clarifying to institutional investors that they needto take responsibility for their voting decisions rather than engaging in rote reliance on proxy advisory firm recommendationswould go a long way toward mitigating the concerns arising from the outsized and potentially conflicted role of proxy advisoryfirms.

In addition, as I have stated in the past, I believe that the Commission should fundamentally review the role and regulation ofproxy advisory firms and explore possible reforms, including, but not limited to, requiring them to follow a universal code of

conduct, ensuring that their recommendations are designed to increase shareholder value, increasing the transparency of theirmethods, ensuring that conflicts of interest are dealt with appropriately, and increasing their overall accountability. I am notalone in raising these issues, as evidenced by the work in Europe by ESMA regarding proxy advisors as well as by the recentCongressional hearing hosted by Congressman Scott Garrett discussing many of these topics.[13] To be clear, I realize thatproxy advisors can provide important information to institutional investors and others. However, what European policymakersand our own Congress have highlighted is that changes need to be made so that proxy advisors are subject to oversight andaccountability commensurate with their role.


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Investment advisers are required to provide to their customers a brochure about their employees. If an employee lists aprofessional title, the brochure supplement must include an explanation of the minimum qualifications required for thisprofessional title.You may also learn about financial professional titles online at the Financial Industry regulatory Authoritys(FINRA) website page, understanding Investment Professional Designations available at:http://apps.finra.org/DataDirectory/1/prodesignations.aspx..This website provides information such as:

A description of the education and experience requirements for certain titles; and, Information about the organizations granting certain titles, including information about continuing educa-tion

requirements, public disciplinary or investor complaint processes, if any, and tools to check the status of a financialprofessional.

Like the SEC and state securities regulators (NASAA), FINRA does not grant, approve or endorse any professional designation.Professional organizations also may offer information online about the titles that they grant. In some cases, the grantingorganizations website may allow you to verify that a person has earned a certain title. For example, the website of the CertifiedFinancial Planner Board of Standardshttp://www.cfp.net/allows visitors to search for CFP professionals to verify CFPcertification. Even after checking, it may not be clear to you whether a title represents relevant expertise, a marketing tool, orsomething else. Thats why you should always check the financial professionals background, rather than relying solely on the professionals title.

To do your own online research about a brokers or investment advisers professional qualifications, experience, education, andany disciplinary history, visit:

The SECs Investment Adviser Public Disclosure website at:http://www.adviserinfo.sec.gov,or BrokerCheck, a FINRAwebsite at:http://www.finra.org/ Investors/toolsCalculators/BrokerCheck/.Your states securities regulator canalso provide all of this information to you and help you understand how to interpret the information. to find your statessecurities regulator, go to the NASAA website athttp://www.nasaa.org/about-us/contact-us/contact-your-regulator/.

KEY QUESTIONS YOU SHOULD CONSIDER ASKING A FINANCIAL PROFESSIONAL ABOUT FINANCIAL PROFESSIONALTITLES

GENERAL QUESTIONS

Are you employed by a registered broker-dealer? If yes, use FINRAs BrokerCheck website, available atwww.finra.org/Investors/ToolsCalculators/BrokerCheck, to find out about the financial professionals qualifications,experience, education, and disciplinary history.

Are you employed by a registered investment adviser? If yes, are you registered with a state securities regulator or theSEC? If the financial professional is registered with the SEC, use the SECs Investment Adviser Public Disclosure website,available at www.adviserinfo.sec.gov, to find out about the financial professionals registrations, qualifications,experience, education, and disciplinary history.

Are you or your firm registered with a state securities regulator? If so, contact that regulator to find out where you canfind out about the financial professionals registrations, qualifications, experience, education, and disciplinary history. Alist of state securities regulators is available on the North American Securities Administrators Association website at

http://www.nasaa.org/about-us/contact-us/contact-your-regulator/.

Are you or your firm registered with any other state or federal regulator? If so, contact that regulator to find out aboutthe financial professionals registrations, qualifications, experience, education, and disciplinary history.

QUESTIONS REGARDING SPECIFIC FINANCIAL PROFESSIONAL TITLES

What is the name of the organization that awards the financial professional title?
http://apps.finra.org/DataDirectory/1/prodesignations.aspx.http://apps.finra.org/DataDirectory/1/prodesignations.aspx.http://www.cfp.net/http://www.cfp.net/http://www.cfp.net/http://www.adviserinfo.sec.gov/http://www.adviserinfo.sec.gov/http://www.adviserinfo.sec.gov/http://www.finra.org/%20Investors/toolsCalculators/BrokerCheck/http://www.finra.org/%20Investors/toolsCalculators/BrokerCheck/http://www.finra.org/%20Investors/toolsCalculators/BrokerCheck/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.nasaa.org/about-us/contact-us/contact-your-regulator/http://www.finra.org/%20Investors/toolsCalculators/BrokerCheck/http://www.adviserinfo.sec.gov/http://www.cfp.net/http://apps.finra.org/DataDirectory/1/prodesignations.aspx.


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What are the training, ethical, and other requirements to receive the financial professional title? Did you have to take a course and take a test? Does the financial professional title require a certain level of work or educational experience? To maintain the financial professional title, are you required to attend periodic continuing education courses? Confirm any information the financial professional provides you regarding his or her financial professional title. This

information may be available on the website of the organization that awards the financial professional title, or you mayalso check FINRAs website page UnderstandingInvestment Professional Designations available athttp://apps.finra.org/DataDirectory/1/prodesignations.aspx.

Contact the organization issuing the financial title to confirm that the financial professional is currently authorized touse the title and to determine if they have any disciplinary history.

7 COMPLIANCE RESOURCES SEC

COMPLIANCE OUTREACH PROGRAM - INVESTMENT ADVISORSNEW YORK REGIONAL OFFICESEPTEMBER 13, 2013AGENDA

Registration (9:00 am 9:30 am)Welcome and Opening Remarks (9:30 am 9:45 am)

Ken C. Joseph, Associate Director, New York Regional Office Examination ProgramPanel 1: Newly Registered Advisers (9:45 am 10:45 am)

William J. Delmage, Assistant DirectorLinda A. Heaphy, Exam ManagerNell Spekman, Staff AccountantJoseph P. DiMaria, Assistant DirectorRaymond J. Slezak, Assistant Director

Break (10:45 am 11:00 am)Panel 2: Form PF (11:00 am 11:45 am)

Anthony Fiduccia, Assistant DirectorMarc Wyatt, Senior Specialized Examiner, National Exam ProgramAlpa Patel, Senior Counsel, Division of Investment Management

Panel 3: Recent Developments (11:45 am 12:30 pm)Kathleen Furey, Senior CounselJon Hertzke, Assistant Director, Division of Investment Management, Risk and Examinations OfficeKenneth OConnor, Exam Manager, Division of Investment Management, Risk and Examinations Office Valerie Szczepanik, Assistant Director, Division of Enforcement, AMU

Break (12:30 pm 12:45 pm)

Panel 4: Investment Advisers and Dual Registration (12:45 pm 1:30 pm)Dawn M. Blankenship, Assistant DirectorGeorge DeAngelis, Assistant DirectorJennifer A. Grumbrecht, Assistant DirectorJennifer Klein, Exam Manager

Closing Remarks/Q&A (1:30 pm 1:45 pm)Ken C. Joseph, Associate Director
http://apps.finra.org/DataDirectory/1/prodesignations.aspxhttp://apps.finra.org/DataDirectory/1/prodesignations.aspx


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FUND/ADVISER CHIEF COMPLIANCE OFFICERS

Speaker Bios - Compliance Outreach Program, New York Regional Office, September 13, 2013 Risk Profiling and the Exam Selection Process(September 10, 2013; ) The Division of Investment Managements Risk and Examinations Office Recent Developments Form PF Presentation Examination Process Investment Advisers and Dual Registration 2014 Exam Initiatives/Focus Areas Agenda - Compliance Outreach Program, New York Regional Office, September 13, 2013

8 ON THE MOVE DEALBOOK

MORGENTHALER PARTNERS HANG OUT A SHINGLE WITH $175 MILLION FUNDSeptember 12, 2013, 7:00 am

Three partners at the venture capital firm Morgenthaler Ventures are striking out on their own, with a new fund to make early-stage investments in software companies.

The new fund, known as the Canvas Venture Fund, has attracted $175 million, the partners plan to announce on Thursday. It isthe first fund raised by a company they recently formed, the Morgenthaler Technology Investment Company.

For Morgenthaler Ventures, the offshoot represents another step in the evolution of one of Silicon Valleys oldest firms. The three partners Gary Little, Rebecca Lynn and Gary Morgenthaler will remain partners at Morgenthaler Ventures even as theyrun their new fund.

Founded 1968 by David Morgenthaler, who is Garys father, Morgenthaler Ventures has moved from a generalist approach toone of greater specialization. Last year, the firms life sciences group joined with partners from Advanced Technology Venturesto form Lightstone Ventures, which invests in medical device and biotechnology companies.

The move toward becoming a boutique was motivated in part by pressures in the broader venture capital market, Mr. Little said.

The landscape has evolved into the global brand V.C.s that have multiple funds in multiple countries, and then the specialistboutique firms, he said. Its been challenging for those that are in the middle.

Based in Menlo Park, Calif., the Canvas fund plans to make early investments known in the industry as Series A and Series B in software firms serving businesses and other information technology companies. There is a good chance that one of the fir stinvestments will be in the financial technology area, Mr. Little said.

To raise their fund, the Canvas team turned to investors that had previously committed money to the latest MorgenthalerVenture funds. Though the new fund had an initial target size of $150 million, the partners allowed the size to climb to $175million amid strong demand.

At least one investor had concerns about the fund growing that large.

On balance, we would have preferred them not to have done that, said Ashton Newhall, a co-managing general partner atGreenspring Associates, a fund near Baltimore that invested $10 million to $20 million in Canvas. But I think theres a rath ercohesive argument for why, and what theyre planning to do.

Canvas said it planned to take a selective, thoughtful approach to investments by focusing on large stakes ranging from $5million to $15 million. Mr. Little contrasted his strategy with that of other investors that make a lot of smaller investments andthen nurture the ones that do well.
http://www.sec.gov/info/cco/cco-2013-09-13-speaker-bios.htmhttp://www.sec.gov/info/cco/cco-2013-09-13-speaker-bios.htmhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-risk-profiling.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-risk-profiling.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-recent-developments.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-recent-developments.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-form-pf.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-form-pf.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-examination-process.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-examination-process.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-dual-ia-and-dual-registrations.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-dual-ia-and-dual-registrations.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-2014.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-2014.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-agenda.htmhttp://www.sec.gov/info/cco/cco-2013-09-13-agenda.htmhttp://www.sec.gov/info/cco/cco-2013-09-13-agenda.htmhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-2014.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-dual-ia-and-dual-registrations.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-examination-process.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-form-pf.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-recent-developments.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-presentation-risk-profiling.pdfhttp://www.sec.gov/info/cco/cco-2013-09-13-speaker-bios.htm


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In the past, the Morgenthaler name has been behind some big successes in technology, including Apple. Its portfolio alsoincludes Evernote and the Lending Club.

For another investor in the Canvas fund, Industriens Pensions, a private pension fund in Denmark, investments in theMorgenthaler funds have been among its best performers, according to Soren Thinggaard Hansen, the pensions head of private

equity.

When it came to investing in Canvas, the specialized focus was a selling point, said Mr. Hansen, who committed $20 million.

Software and services is quite an attractive area, he said. Thats one of the areas where it actually pays out to be an ea rlymover.

9 WHOS NEWS DEALBOOK

MARK CUBAN INVESTS IN START-UP TO CONNECT COMPANIES TO M.B.A.S September 12, 2013, 6:29 am

CUBAN TAKES TIME OUT FROM HIS BATTLE WITH THE SEC OVER INSIDER TRADING CHARGES.

It started with a cold call: an e-mail in July to the billionaire investor Mark Cuban, asking him for money.

The company seeking the financing, HourlyNerd, had a payment due to its development firm, so it ruled out applying to appearon Shark Tank, the venture capital reality show starring Mr. Cuban, because that would take too long.

To the surprise of Robert D. Biederman, a co-founder of HourlyNerd, Mr. Cuban responded about 15 minutes later. He was in.

After some back and forth with Mr. Cubans lawyers, Mr. Biederman received word that the billionaire would commit $450,000,far more than the companys founders had expected.

My heart kind of stopped, said Mr. Biederman, 27, who was at the gym when he received the news. It was definitely the mostexciting moment of my business career.

Granted, Mr. Biedermans business career is still getting going. He and his co -founders started the company in a class at HarvardBusiness School, where he is in his second year.

The seed financing, which the company plans to announce on Thursday, totals $750,000 and includes investments from AccantoPartners and Connect Ventures. That compares with the $5,000 that the company received initially through a class at Harvard.

In connection with the investment, Robert Doris, the founding partner of Accanto, is joining HourlyNerds board.

Through its online marketplace, HourlyNerd puts companies in touch with M.B.A. students and graduates looking to offerconsulting services part time. The company says it can offer businesses high-quality consultants at a low price, typically $25 to

$75 an hour.

I invested because I saw the value the service offered to many of my portfolio companies, Mr. Cuban said in an e -mail. For anynumber of reasons, its hard for start-ups and early-stage companies to hire great brain power. HourlyNerd allows thesecompanies to bring in affordable expertise and pay for it only as long as yo u need it.

After starting in February, HourlyNerd says it has grown to include more than 300 companies on its platform, with more than900 M.B.A.s from a number of business schools.


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The company whose founders include Peter Maglathlin, Joe Miller and Patrick Petitti grew out of Harvards Field 3 course,which requires students to start a company. It placed second out of 150 companies in a competition at Harvard in May, behind acompany that assists in elderly care.

Harvard Business School recently faced controversy when Jodi Kantor of The New York Times wrote about an experiment ingender equity at the school. The article referred to Section X, a secret society of ultrawealthy students known for decadent

parties.

DealBook couldnt help asking whether Mr. Biederman is a member.

Unfortunately, he said, Im not cool enough.

10 WHAT WENT WRONG DEALBOOK

NEW YORK REGULATOR SEES ABUSE INCREASING UNDER NEW INSURANCE RULESSeptember 11, 2013, 10:03 pm

Several big life insurers are going to have to set aside a total of at least $4 billion because New York regulators believe they have

been manipulating new rules meant to make sure they have adequate reserves to pay out claims.

The development stems from contentions by insurance companies that states regulations are forcing them to hold too muchmoney in reserve. Many of them have engaged in secretive transactions to artificially bolster their balance sheets, often throughshell companies in other states or countries. Regulators, who want to be sure companies have enough real liquid assets to payall claims, have struggled to find a solution that all 50 states can agree on, and decided to test a new framework of rules.

On Friday, New York State plans to drop out of that agreement, according to a letter from Benjamin M. Lawsky, the financialservices superintendent, to his fellow state insurance regulators. In the letter, which was reviewed by The New York Times, Mr.Lawsky said the test, which started in 2012, showed that the new framework did not work and was, in fact, making thegamesmanship and abuses in the industry even worse.

The move appears to be another attempt by Mr. Lawsky to address the much broader potential problem of the life insurance

industrys use of the secretive transactions. He has derided them as financial alchemy because they seem to create surplusassets out of thin air. In June, Mr. Lawsky called on other state insurance regulators to join him in blocking any more of thesetransactions. But other regulators said they wanted instead to keep pursuing a test of the new regulatory framework. The testcovers a narrow segment of the life insurance business, but state regulators, through the National Association of InsuranceCommissioners, are committed to extending the framework to all parts of the life insurance industry over the next few years.

But the new framework is so loose as to be practically illusory, Mr. Lawsky said in his letter. A sample of 16 insurers in the testwere expected to increase their reserves by $10 billion, he said, but instead only $668 million was added. And that was at justfive of the 16 companies; the others did not report any reserve increase at all and in fact seemed inclined to reduce theirreserves by about $4 billion.

This cannot possibly be the compromise that we as insurance regulators had in mind, he told the other commissioners in hisletter.

Starting on Friday, New York will revert to its previous way of calculating reserves, at least for the type of lifeinsurance being tested, requiring insurers that offer it to add a total of $4 billion to their reserves. Known as universal life withsecondary guarantees, the insurance offers both death benefits and a cash value to policyholders. Because its design is highlyflexible, it has for years been subject to questions about the amount of reserves that should back it. Leading companies that sellsuch insurance include Lincoln National, Genworth, Principal, John Hancock, U.S. Life and Sun Life. When asked about NewYorks move, company officials said they could not comment because they still knew little about it.


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It was not clear what portion of the $4 billion each company would have to come up with, or how much time they would have.The total amount could ultimately be higher if regulators in other states decide to join Mr. Lawsky. People briefed on hisdecision said they did not expect any of the affected insurers to stop doing business in New York State but said they might startcharging more for this type of policy in the future.

Mr. Lawsky also said he wanted the other insurance regulators to reconsider their commitment to adopting the new framework

in its entirety, given its performance on the current test. Adopting it at this point represents a potent cocktail that putspolicyholders and taxpayers at significant risk, he said.

Companies have been arguing for years that state insurance regulations are too formulaic, forcing them to hold far morereserves than necessary. The proposed new framework, known as principle-based reserving, would free insurance actuariesfrom having to follow statutory requirements in their calculations, allowing them instead to use their own data andassumptions.

While regulators grappled with the reserve question and one another, a wave of transactions washed through the life insuranceindustry, sweeping billions of dollars worth of business offshore, where reserve requirements are different. The transaction s,known as captive reinsurance, often involve the creation of subsidiaries, known as captives, that then sell reinsurance to theirparent companies, which removes billions of dollars of policy obligations from the parents books.

In recent years, some states have been promoting themselves as good places to set up captives, promising insurers an offshore-style regulatory environment without the need to go offshore.

The transactions allow insurers to do other things with their money besides locking it up to pay future claims. But as they havebecome widespread, concerns have grown that insurers are lowballing their reserves and adding a large amount of hiddenleverage to the life insurance industry.

In August, Moodys Investors Service estimated that captive reinsurance had artificially bolstered life insurers balance she ets by$324 billion. The estimate covered a much wider sector than the one being monitored by New York State and includedtransactions conducted throughout the life insurance industry, as well as long-term care and disability insurance. Its findingsuggests that as much as 85 percent of the sectors aggregate capital and surplus is being enhanced by reinsurance throughaffiliated companies. Moodys noted that the transactions did vary, and that not all of them caused hidden capital shortfalls .Some insurers do not engage in them at all.

The National Association of Insurance Commissioners has reacted to Mr. Lawskys June proposal with concern, saying heappeared to be giving the federal government reasons to step into the realm of insurance regulation, something the statesgenerally oppose. The Dodd-Frank financial overhaul law created a body called the Federal Insurance Office within the TreasuryDepartment, which has been studying state insurance regulation and is supposed to report on how current practices could beimproved. Its report is more than a year overdue, but at an association meeting in late August, some officials said the report wasimminent.

11 WHOS NEWS DEALBOOK

AFTER GOLDMAN AND A BOOK, GREG SMITH EMERGES TO AID REGULATORS

September 11, 2013, 3:12 pm

Greg Smith created a headache for Goldman Sachs last year when he resigned from the firm through a harshly worded Op-Edarticle in the pages of The New York Times.

Now it appears that Mr. Smith is back on Wall Streets case. But this time, hes helping regulators draft rules intended torein in risky trading.


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Mr. Smith met with officials at the Securities and Exchange Commission in August to talk about the Volcker Rule, a

regulation stemming from the Dodd-Frank financial overhaul that would limit banks ability to trade for their own

accounts. The meeting was first reported Tuesday evening by Politico.

Armed with a five-point agenda, Mr. Smith advised the regulators not to trust Wall Streets claim that the Volcker Rule wouldcause liquidity to dry up, according to an S.E.C. memo. He also emphasized the importance of regulating certain arcane financial

products where the vast majority of money gets made in the trading business.

Mr. Smiths agenda touched on some of the central debates surrounding the regulation, like the difference between marketmaking when a bank facilitates trading by customers and proprietary trading, or trading that puts the banks own capitalat risk.

But it also suggested a possible second act for Mr. Smith, who wrote a book last year after his Times essay made him briefly thetalk of Wall Street. Mr. Smith gave media interviews after the publication of the book Why I Left Goldman Sachs: A WallStreet Story discussing what he saw as a culture of greed with little regard for clients.

Word of his meeting with the S.E.C. caused an online stir on Wednesday.

Matt Levine, a former Goldman employee who writes for Bloomberg View, had this comment: Who better to tell youhow to write the Volcker Rule than a disgruntled former midlevel derivatives salesman? Lots of people, probably!

Former Goldman Sachs Ping-Pong Star Is Keeping Busy, read the headline on Mr. Levines post, a nod to Mr. Smiths tabletennis prowess.

The news also lit up Twitter, where the wise cracks were plentiful:

Ohgoodlord, Greg Smith back to semi-relevance: Former Goldman Sachs Ping-Pong Star Is Keeping Busyhttp://t.co/vi4JGzeb70 via @BloombergView

Tobin Harshaw (@tobinharshaw) 11 Sep 13

SEC starving for info on mrkt practices @TonyFratto: @cate_long Weird to me that theyd meet with Greg Smith onVolcker. @counterparties

Cate Long (@cate_long) 11 Sep 13

And just when you think Greg Smiths 15 minutes are over, the former Goldman employee meets with the SEChttp://t.co/LwTNp88tLG $GS

Katy Finneran (@KatyFinneran) 11 Sep 13

SEC should probably just hire Greg Smith. Probably dont have to worry about the revolving door with his past.http://t.co/6ZUtQiWdpj

Nick (@9Joe9) 11 Sep 13

12 BIG BANKS BLOOMBERG

JPMORGAN REMOVES LENDING BARRIERS IN BOOMING U.S. MARKETSBy Prashant Gopal, Heather Perlberg and Dakin Campbell - Sep 11, 2013

JPMorgan Chase & Co. (JPM), the nations largest bank by assets, is easing mortgage lending standards in housing markets hardhit by the crash where prices are surging.


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The bank lowered some down payment requirements in Florida, Nevada, Arizona and Michigan because they will no longer beconsidered distressed states, it informed smaller lenders it buys loans from in July. The second-largest U.S. mortgage lenderalso loosened underwriting requirements for a refinancing program for Federal Housing Administration borrowers.

As the economy rebounds and home values climb at about the fastest pace since 2006, lenders including the largest, Wells Fargo& Co. (WFC), JPMorgan, Bank of America Corp. (BAC), and mortgage insurers are easing the tightest credit conditions in two

decades, lifting restrictions put in place after the worst real estate bust since the Great Depression. Banks are being forced tocompete harder for customers after a spike in borrowing costs from near-record lows slowed refinancing by more than 70percent and curbed what had been record profits.

Historically, you make underwriting as tough aspossible when people are lined up at the door and when the lines go away, youstart loosening underwriting to get people back, said Guy Cecala, publisher of Inside Mortgage Finance.

FED SURVEY. More than 10 percent of banks reported they loosened standards on prime or low-risk residentialloans in recent months, according to the Federal Reserves July survey of senior loan officers. The average FICO score for cl osedloans fell to 737 in July, the lowest level since at least August 2011, according to data compiled by Pleasanton, California-basedEllie Mae. Borrowers loan-to-value and debt-to-income ratios also increased from May, signaling lenders are willing to acceptmore risk to maintain volume.

Wells Fargo (WAC), which originated about 1 in 4 U.S. home loans in the first half of the year, has relaxed certain creditstandards and is requiring borrowers to put up less equity to buy high-priced homes.

The San Francisco-based bank began, on July 13, to offer nonconforming loans with a loan-to-value ratio of 85 percent, up from80 percent, according to Tom Goyda, a bank spokesman. That means borrowers have to come up with less equity to getfinancing. The terms on the loans, which are too large for purchase by Fannie Mae (FNMA) and Freddie Mac, apply for new homepurchases and refinancing, and dont require mortgage insurance, Goyda said in an e -mail.

TOTAL PICTURE. Getting approved for a home loan hinges on a borrowers total financial picture, Goyda said inan e-mailed statement. We arealways evaluating our credit standards in light of market conditions and trends.

Goyda declined to provide further details on where Wells Fargo has eased underwriting restrictions.

JPMorgan removed a minimum 640 credit score requirement for the FHAs s treamlined refinancing program in May, enablingmore borrowers to get new home loans at lower interest rates, according to spokeswoman Amy Bonitatibus.

Banks are trying to lure more borrowers as mortgage applications plunged last week to a five-year low. Refinancing droppedmore than 20 percent, the lowest since June 2009. The industry benefitted from record profit margins last year, whenrefinancing accounted for 76 percent of last years $1.75 trillion in loan originations.

JPMorgan Chief Executive Officer Jamie Dimon told investors in July that rising interest rates could trigger a dramaticreduction in the banks mortgage profits after mortgage fees and related revenue at the bank dropped 20 percent to $1.82billion in the second quarter, compared with $2.27 billion a year earlier.

ELIMINATING JOBS. An increase in lending for home purchases wont be enough to replace a drop in refinancings,JPMorgan Chief Financial Officer Marianne Lake said in a presentation at an investor conference this week. The banks pretax-

profit margins and income on mortgage lending will be slightly negative in the third and fourth quarters as the firm takes timeto adjust its fixed costs. The firm is eliminating as many as 19,000 jobs in its mortgage and community-banking divisionsthrough 2014 as Dimon trims expenses, JPMorgan said in February.

We continuously review our lending standards to help families buy homes they can afford over the long term, Bonitatibus sai dWe have responded to improvements in the hous ing market by removing some additional requirements we put in place inhard-hit markets during the crisis.


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Bank of America has been easing underwriting standards in markets it designated as soft in certain parts of the country as thehousing market improves, said Kris Yamamoto, a company spokeswoman.

LOOSENED CREDIT. Since Federal Reserve Chairman Ben S. Bernanke indicated the central bank may slow itspurchases of government and mortgage bonds, the average rate on 30-year home loans has risen more than 1.2 percentagepoints after hitting a low of 3.35 percent in May, according to Freddie Mac data.

Loosened mortgage credit would offset some of the impact of rising rates, which make homeownership more expensive, saidJed Kolko, chief economist at San Francisco-based property-listings service Trulia Inc. Because rates are rising, demand forrefinancing has plummeted and some banks have suggested that would open up capacity for home-purchase lending.

The U.S. homeownership rate fell to 65 percent this year, its lowest level since 1995, according to Census Bureau data, as fewerpeople were able to qualify for a mortgage. Banks are starting to ease credit with home prices across the country rising 12.1percent in June from a year earlier, according to the S&P/Case-Shiller index of 20 cities.

CASH BUYERS. Prices in some of the hardest-hit markets have rebounded faster. Las Vegas gained 24.9 percent,Phoenix showed a 19.8 percent increase, Detroit rose 16.4 percent Miami-area values were up 14.8 percent.

Private-equity firms such as Blackstone Group LP building rental businesses and other cash buyers have helped lift house prices

in cities showing some of the biggest gains. Their mass purchases have made it more difficult for borrowers seeking mortgagefinancing, as they compete for a shrinking supply of properties.

In Florida, lenders including JPMorgan and mortgage insurers this year removed many of the additional requirements that hadhelped to push the share of cash buyers above 45 percent in the second quarter, said Rob Nunziata, co-Chief Executive Officer ofFBC Mortgage LLC.

FLORIDA DOWN PAYMENTS. JPMorgan decreased the minimum downpayment on mortgages made in Florida forprimary residences to 5 percent from 10 percent and down to 10 percent from 20 percent for second homes, according toBonitatibus.

Those restrictions have handcuffed Florida buyers, Nunziata said, also referring to mortgage insurers and banks. When youhad restrictions telling buyers they had to put down an extra 5 to 15 percent in some cases, that eliminated a lot of potential

buyers from qualifying.

Mortgage insurers that restricted coverage during the housing crisis, including MGIC Investment Corp. (MTG) and GenworthFinancial Inc. (GNW), have eased underwriting guidelines this year as the market improves.

During the crash, borrowers in California, Florida, Nevada and Arizona needed a credit score of at least 700 and could have amaximum loan-to-value ratio of 90 percent to qualify for mortgage insurance with MGIC, said Sal Miosi, vice president ofmarketing at the Milwaukee-based firm.

ADDED COMPLEXITY. Last month, the third-largest U.S. mortgage insurer limited rules so borrowers whose loansqualify for purchase by Fannie Mae or Freddie Mac with credit scores of at least 620 and a loan-to-value ratio up to 97 percentcan get insurance coverage, according to Miosi.

Additional restrictions werent contributing to the credit quality, they were just adding to complexity, he said.

Genworth Financial Inc., the fourth-largest mortgage insurer in the country, broadened credit guidelines in the first quarter of2013 and reduced pricing, Rohit Gupta, chief executive officer of the companys U.S. mortgage insurance business, said in an e-mailed statement.

Banks are still taking a cautious credit posture, according to David H. Stevens, CEO of the Mortgage Bankers Association.


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Youre starting from a very narrow market, so any expansion wouldnt go near the reckless lending practices of the early2000s, he said. Were in the most conservative overall credit environment for housing finance that weve seen in almost threedecades.

RISKY LENDING. A decrease in access for interest-only loans and those with terms longer than 30 years led to a slidein a Mortgage Bankers Association measure of loan availability last month.

Those types of loans are less attractive to banks as planned rules created by the Consumer Financial Protection Bureau to curbabusive or risky lending kick in next year.

Credit has been loosening faster for the wealthiest Americans, since bigger loans are mostly put on bank balance sheets insteadof packaged into securities that get sold to investors. Applications for jumbo mortgages of at least $729,000 increased 59percent in the first four months from a year earlier. Loans of less than $150,000, fell by 2.1 percent, according to the MBA.

President Barack Obamas administration has been pushing to expand homeownership opportunities as families rebuildingfrom the recession face some of the tightest underwriting standards. The president last month introduced new housing reformstargeted at middle-class communities.

Borrowers with foreclosures or bankruptcies resulting from a job or income loss can now finance a home purchase with an FHA

mortgage as long as they demonstrate 12 months of timely payments, complete housing counseling and otherwise qualify. TheFHA, a government mortgage insurer, previously required a three-year wait.

More than 7 million houses have been sold for a loss or lost to foreclosure since 2007, according to RealtyTrac.

The reaction post-bust was a bit extreme but were returning to more prudent underwriting standards, said Erin Lantz,director of mortgages at Seattle-based Zillow Inc.

13 WHAT WENT WRONG BLOOMBERG

RBS SUED BY WESTLB BAD BANK OVER CPDO DEAL THAT LOST $42 MILLION

By Kit Chellel - Sep 12, 2013

Royal Bank of Scotland Group Plc was sued by the successors of WestLB AG for allegedly misleading the failed German lender ina 2007 derivatives investment that lost more than 60 percent of its value.

WestLB lost 31.7 million euros ($42 million) on a 50 million-euro deal linked to constant proportion debt obligations created byRBSs ABN Amro unit, Erste Abwicklungsanstalt and Portigon AG, the two entities that control the remnants of the bank, said incourt documents filed Sept. 6 in London.

The triple A-rated instruments were considerably riskier than advertised, while ratings companies assessed them using faultymodels provided by ABN, according to the claim. Portigon is helping EAA sell Dusseldorf, Germany- based WestLBs holdings andwind up its operations.

CPDOs, leveraged vehicles that comprised default insurance linked to company indexes, lost almost all their value after the 2008collapse of Lehman Brothers Holdings Inc. caused the price of underlying credit-default swaps to fall. Banks have been sued overa variety of products that faltered after the crisis, ranging from interest-rate swaps to mortgage-backed securities.

Twelve Australian towns lost more than 90 percent of what they invested in ABN Amros Rembrandt notes, and won A$20million ($18.5 million) in damages after suing ABN and McGraw Hill Financial Inc. (MHFI)s Standard & Poors for misleadingthem.


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The notes, and the rating assigned to them, were an ABN creation and ultimate liability for the wholesale failure of the notesrests with ABN and RBS, Sean Upson, a lawyer for EAA and Portigon, said in an e-mailed statement.

CEASED OPERATIONS. WestLBs push into international investment banking ended when the European Unionordered it to cease operations last year as a condition for 17 billion euros in aid.

EAA is a state-backed entity winding down and selling WestLBs assets. Portigon is a service and po rtfolio management providerto EAA and other parties.

CPDOs valued at more than $4 billion were sold by banks from 2006 through 2007, according to data compiled by CreditSightsInc.

RBS bought Amsterdam-based ABN Amro Holding NV for 72 billion euros in 2007. Sarah Small, a spokeswoman for the bank,declined to comment on the suit.

The case is: Erste Abwicklun

Hank Brink Pg-23

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