By Bart Mallon, Esq. (www.colefrieman.com)
State Securities Agency Calls PAMM Accounts Securities
Forex investment managers who offer forex separately managed account programs need to be aware of the risks of offering trading programs which use PAMM accounts. PAMM accounts are functionally equivalent to “bunched” or “batched” order master accounts which are common at most futures comission merchants for futures and commodities trading. However, there is the risk that PAMM accounts could be deemed to be “securities” under state securities laws.
In the following securities release, reprinted in full below, the Pennsylvania Securities Commission announced an action against a forex manager who was managing forex accounts for individuals through a PAMM structure. The Commission “ordered the Respondent to stop offering or selling the Program in the Commonwealth of Pennsylvania, in violation of the Pennsylvania Securities Act of 1972, and in particular Section 201 thereof.” Section 201 provides that “It is unlawful for any person to offer or sell any security in this State unless the security is registered under this act, the security or transaction is exempted under section 202 or 203 hereof or the security is a federally covered security.”
In our opinion this action is odd, but forex managers should be aware that states can make such claims and if a state does make such a claim, the manager will either need to comply with the state order or fight the state in court. If the manager does the former then he is essentially forfitting the right to have clients from certain state. If he does the latter, he is potentially looking at a large legal bill with an uncertain outcome.
So, the question is what should managers do to protect themselves if they are using PAMM accounts? The answer is unclear. To be safe, a manager may want to write no-action letters to the state securities commissions where they will have clients. This is likely to be an expensive endeavor, however. Managers may want to weigh the risks of having clients in PAMM accounts who are residents of Pennsylvania – from the release below it seems clear that having Pennsylvania clients brings regulatory risk to the company. Managers should also be aware of their internet presence – it is interesting how the release below emphasizes the promotion of the trading program over the internet.
If you are running a managed forex trading program with PAMM accounts, you should discuss this issue with your legal counsel.
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For Immediate Release: 06/13/2007
Commission Halts Unregistered Activity By Pace Capital Group, LLC, Robert Cavallaro, Shawn May, and Courtney May
Harrisburg, PA, 06/13/2007 — To halt the offer and sale of unregistered securities in Pennsylvania, the Pennsylvania Securities Commission issued a Summary Order to Cease and Desist against Pace Capital Group, LLC (Pace), an entity with an address in Eagleville, Pennsylvania and Robert Cavallaro (Cavallaro), Shawn May (S. May) and Courtney May (C. May) each individuals with addresses in Eaglesville, Pennsylvania and each founding members of Pace.
From in or about May 2007 to the present, Pace maintained a web site at www.pacecapitalgroup.com (Web Site) which contained offering materials (Materials) that solicit investors (Investors) to purchase an investment program (Program).
The Materials state that Pace is in the business of investing and managing Investor’s money in the Foreign Exchange Capital Markets (Forex); that pursuant to the Program, the Investor signs a Managed Account Agreement (MA Agreement) and a Limited Power of Attorney Agreement (LPOA); that pursuant to the MA Agreement, Investors open an investment account with an initial deposit, which is in turn managed by Pace; that Pace provides Investors with a choice of two Forex Currency Trading Systems (Systems); that each System is comprised of pre-existing technically formulated strategies of Forex trading; that each System is managed by an “advisor” for Pace (Advisor); and that pursuant to the LPOA Agreement, Investors assign their investment rights to an Advisor, which allows the Advisor to trade, invest, and manage the investments on the Investor’s behalf.
In or about May 2007, Pace offered for sale the Program to at least one Pennsylvania resident (PA Resident).
In or about May 2007, S. May e-mailed additional information (E-mail) to at least one PA Resident. The E-mail states that Pace will place an Investor’s money into a “PAMM”, i.e., percentage allocation account; that Pace will pool all the Investors’ funds and trade the funds as one investment in order to increase returns; and that Pace’s goal for returns on investments is 3% to 5% a month.
The Commission ordered the Respondent to stop offering or selling the Program in the Commonwealth of Pennsylvania, in violation of the Pennsylvania Securities Act of 1972, and in particular Section 201 thereof.
Any further solicitations or sales made by these respondents in Pennsylvania will constitute violations of the 1972 Act and the Commission’s Orders. Any person who is solicited by or has information about these respondents is asked to immediately notify the Pennsylvania Securities Commission by calling 800-600-0007, or, in Harrisburg: (717) 787-8062, in Pittsburgh: (412) 565-5083 or in Philadelphia: (215) 560-2088.
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Other articles related to forex trading and forex hedge funds:
Bart Mallon, Esq. of Cole-Frieman & Mallon LLPruns the Hedge Fund Law Blog and the Forex Law Blog. He can be reached directly at 415-868-5345.
As an expert in financial regulation and securities law, I've closely followed the developments in the field, and this article by Bart Mallon, Esq., touches upon a crucial aspect of the forex trading industry. My expertise lies in understanding the intricate details of securities laws, particularly as they pertain to forex investment managers and the use of PAMM (Percentage Allocation Management Module) accounts.
The article discusses a case where the Pennsylvania Securities Commission took action against a forex manager for managing forex accounts through a PAMM structure. The Commission ordered the manager to cease offering or selling the program in the Commonwealth of Pennsylvania, citing a violation of the Pennsylvania Securities Act of 1972, specifically Section 201.
To provide a comprehensive understanding, let's break down the key concepts mentioned in the article:
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PAMM Accounts:
- PAMM accounts, or Percentage Allocation Management Module accounts, are investment accounts where a manager manages multiple individual client accounts as a single whole. This structure allows for "bunched" or "batched" order execution, common in futures and commodities trading.
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State Securities Laws:
- The article highlights the regulatory risk posed by state securities laws. In this case, the Pennsylvania Securities Commission invoked Section 201 of the Pennsylvania Securities Act of 1972, making it unlawful to offer or sell any security in the state unless registered, exempted, or classified as a federally covered security.
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Enforcement Action:
- The case presented in the article involves the Pennsylvania Securities Commission issuing a Summary Order to Cease and Desist against Pace Capital Group, LLC, and individuals associated with it. The Commission took action to halt the offer and sale of unregistered securities in Pennsylvania.
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Managed Forex Trading Program:
- The managed forex trading program offered by Pace involved investors signing a Managed Account Agreement and a Limited Power of Attorney Agreement. Investors deposited funds, which were managed by Pace. The program utilized Forex Currency Trading Systems, each managed by an advisor for Pace.
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Internet Presence and Regulatory Risk:
- The article emphasizes the importance of managers being aware of their internet presence, as the release below underscores the promotion of the trading program over the internet. This suggests that online promotional activities could attract regulatory scrutiny.
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Legal Considerations:
- The article concludes with a discussion on the manager's options if faced with regulatory claims, suggesting that managers may need to comply with state orders or engage in legal battles with uncertain outcomes. It also mentions the potential impact on the manager's client base in specific states.
As a financial professional, my advice aligns with the article's recommendation: managers should consult legal counsel to navigate the complex regulatory landscape and mitigate risks associated with offering PAMM accounts, especially in states with stringent securities laws.
