MDP ASSOCIATES LLC 1018 N. Cleveland St. Arlington, Virginia 22201 703-524-0937 http://www.pankin.com January 2013 This Brochure provides information about the qualifications and business practices of MDP Associates LLC. If you have any questions about the contents of this Brochure, please contact us at 703-524-0937. The information in this Brochure has not been approved or verified by the United States Securities and Exchange Commission (SEC) or by any state securities authority. MDP Associates LLC is a registered investment adviser. Registration of an Investment Adviser does not imply any level of skill or training. The oral and written communications of an Adviser provide you with information about which you determine to hire or retain an Adviser. Additional information about MDP Associates LLC also is available on the SEC s website at www.adviserinfo.sec.gov or from Virginia s website at www.scc.virginia.gov/srf/bus/ia_regis.aspx. i
Material Changes On July 28, 2010, the United State Securities and Exchange Commission published Amendments to Form ADV which amends the disclosure document that we provide to clients as required by SEC and state rules. The initial Brochure dated February 2011 was a new document prepared according to the SEC s new requirements and rules. As such, this Document is materially different in structure and requires certain new information that our previous brochure (Form ADV, Part II) did not require. In the past we have offered or delivered information about our qualifications and business practices to clients on at least an annual basis. Pursuant to the new rules, we will ensure that you receive a summary of any materials changes to this and subsequent Brochures within 90 days of the close of our fiscal year, which is the calendar year. We may further provide other ongoing disclosure information about material changes as necessary. We will further provide you with a new Brochure as necessary based on changes or new information, at any time, without charge. Currently, our Brochure may be requested by contacting Mark Pankin at 703-524- 0937 or mdp2@pankin.com Additional information about MDP Associates LLC is also available via the SEC s web site www.adviserinfo.sec.gov. The SEC s web site also provides information about any persons affiliated with MDP Associates LLC who are registered, or are required to be registered, as investment adviser representatives of MDP Associates LLC. January 2012 Material Changes: Effective January 1, 2012 the weekly e-mail subscription service is no longer being offered. January 2013 Material Changes: The broker in the Brokerage Practices section (page 8) has changed from brokersxpress to trademonster. The employment history of the supervised person, Ken Hawkins, (page 12) has been updated. ii
Table of Contents Cover Page... i Material Changes...ii Table of Contents... iii Advisory Business...1 Fees and Compensation...2 Performance-Based Fees and Side-By-Side Management...3 Types of Clients...3 Methods of Analysis, Investment Strategies and Risk of Loss...4 Disciplinary Information...6 Other Financial Industry Activities and Affiliations...6 Code of Ethics...7 Brokerage Practices...8 Review of Accounts...8 Client Referrals and Other Compensation...9 Custody...9 Investment Discretion...9 Voting Client Securities... 10 Financial Information... 10 Requirements for State-Registered Advisers... 10 Supplementary Information: Supervised Person... 12 iii
Advisory Business MDP Associates LLC and its sole owner, Mark D. Pankin, have been providing investment advisory services to clients since October 1994. Dr. Pankin, who has a Ph.D. in Mathematics, is the only person who regularly provides services to the clients. In case he is not able to do so, Mr. Kenneth Hawkins, who is not an employee of the firm, but is registered as an investment advisor representative with Virginia, can take over management of client accounts. More information about Dr. Pankin and Mr. Hawkins appears later in this Brochure. As of December 31, 2012, there were $3,082,000 assets under management, all of which were on a discretionary basis, so $0 managed on a non-discretionary basis. MDP Associates manages accounts only on a discretionary basis. That is, we place orders in your accounts without the need to contact you first. In particular, we can determine which securities to buy and sell and the amounts involved in the transactions. Your accounts may hold any or all of the following: common stocks, traditional mutual funds, exchange traded mutual funds, and options to buy or sell stocks or exchange traded funds. The mutual funds may own stocks, bonds, hard assets such as gold or silver and may be concentrated in certain economic sectors. Additional types of investments may be considered in exceptional cases. The methods of analysis used to determine which instruments to place in client portfolios and when to buy and sell them include charting, fundamental, technical, and cyclical. There is an emphasis on quantitative techniques based on historical prices of securities. Information is obtained from several sources: financial newspapers and magazines, annual reports, prospectuses, research materials prepared by others, and historical data about security prices and economic factors such as interest rates. Investments may be held for a very short period, a few days, or longer times such as several weeks or months, and in some cases more than a year. When suitable for the particular client, securities may be purchased on margin or options strategies may be employed. MDP Associates tailors its services to individual client needs. In particular, that means establishing investment guidelines that are consistent with the client s financial situation and objectives and the time until the client anticipates the need to use the proceeds of the investments. An important consideration in the process is determining the client s tolerance for risk and fluctuations in account asset levels. Clients may impose restrictions on specific issues or the general nature of the securities that will be in their accounts. 1
Although there are no such current arrangements, other advisory firms may obtain trading signals from us in return for a percentage of the assets being managed using those signals. Fees and Compensation Fee rates depend on the type of account. The types of accounts are discussed later under Methods of Analysis, Investment Strategies and Risk of Loss: Sector fund accounts (STAR, ART, Select Switching): MDP Associates charges a fee for its services at an annual rate of 2% of the first $250,000 of assets under management, 1.5% of the assets between $250,000.01 and $500,000, 1% of the assets between $500,000.01 and $999,999.99, and negotiable for larger amounts. NDX Trading: The annual fee rate is 1%. Tactical Asset Allocation accounts. The base fee for simple accounts (investments in mutual funds for stocks, bonds, money market and other asset classes that are not traded frequently) is 1% annually. Portions of the accounts managed according to one of the other programs will have fees according to the above specifications. Fees are negotiable for accounts with assets under management of at least $1,000,000. The fee will be payable quarterly in advance. The first payment is assessed and due at the commencement of services and will be assessed pro rata in the event services commence on other than the first market day of the current calendar quarter. Subsequent payments are due and will be assessed on the first day of each calendar quarter based on the value of the account assets under supervision as of the close of business of the previous quarter. All fees will be assessed in compliance with applicable SEC and state rules and regulations. The fees charged other advisory firms for using signals obtained from MDP Associates are negotiable. Lower fees for comparable services may be available from other sources. The mutual funds that MDP Associates utilizes have various fees and may have initial sales charges or loads. These may be separately charged or may be reflected in the funds net asset value (NAV) and are in addition to the MDP Associates management fee. The purchase and sale of mutual funds may require and stock transactions will require payment of commissions, which are in addition to the MDP Associates fee. MDP Associates does not receive any portion of the commissions 2
incurred nor do we get any financial compensation from the custodians of client accounts. MDP Associates has no financial affiliation with any mutual fund or any brokerage firm, and it receives no commissions or other forms of compensation for account transactions from anyone other than the client. The client may choose to have MDP Associates management fees paid directly by the client or be deducted from the client s account and by the custodian holding the client s funds and securities. However, three criteria must be met when payment is made by the custodian: (1) the client provides written authorization permitting fees to be paid directly from the client s account held by the independent custodian; (2) prior to the deduction of the fee MDP Associates sends the client a bill showing the amount of the fee, the value of the client s assets on which the fee was based, and the specific manner in which the fee was calculated; and (3) the custodian agrees to send the client a statement, at least quarterly, indicating all amounts disbursed from the account including the amount of fees paid directly to MDP Associates. MDP Associates does not and will not have custody of client funds or securities. The client may terminate the Agreement without penalty (full refund) within five business days of signature. After the first five days, services will continue until either party terminates the Agreement on ten (10) day written notice, and a pro rata refund of the fees will be made. Performance-Based Fees and Side-By-Side Management MDP Associates does not charge any performance-based fees (fees based on a share of capital gains on or capital appreciation of the assets of a client). All accounts managed for compensation have fees as described in the previous item. Types of Clients MDP Associates provides portfolio management services to individuals, high net worth individuals, pension and profit sharing plans, trusts, estates, and corporations or other types of business entities. The minimum initial amount of assets under discretionary management by MDP Associates in sector fund trading programs is $50,000. The minimum for NDX Trading and Tactical Asset Allocation portfolios is $100,000. (The descriptions of the managed account programs are in the next section.) Account values are allowed to drop below the minimum due to payment of loads on mutual funds or market 3
fluctuations after the account is opened. If the client withdraws funds below the minimum in effect at the time the account was opened, MDP Associates may terminate discretionary management services. If, at its option, MDP Associates does not terminate services, its management fee may be based on the minimum in effect when the client commenced services, which will result in the fee being a higher percentage of the assets under management than is stated above. At its discretion, MDP Associates may accept new accounts that are below the minimums stated above. In such cases, the management fee will be based on the stated minimums until the account value exceeds that level. For example, 2% of $50,000, which is $1,000 per year, would be the fee for such a sector fund trading account. Until the minimum is reached, the fee will be a higher percentage of the assets under management than is stated above. For the purpose of meeting the stated minimum or receiving the lower fee rates above the breakpoints listed previously, accounts of parties living at the same address and accounts of parents and children, whether or not they live at the same address, may be combined. The fee for accounts of such parties will be based on the sum of the assets in the accounts under management. Methods of Analysis, Investment Strategies and Risk of Loss Investing in securities involves risk of loss that clients should be prepared to bear. The descriptions of the managed account programs have details about the particular risks of the trading methods employed. MDP Associates offers the following managed account programs: Sector Trading Adverse to Risk (STAR) trades Rydex sector mutual funds Aggressive Rydex Trading (ART) trades Rydex sector mutual funds Select Switching Program trades Fidelity Selects mutual funds NDX Trading Program trades mutual funds linked to the Nasdaq 100 Index Tactical Asset Allocation manages a broad portfolio by moving holdings among various asset classes, typically a few times a year STAR, ART, and the Select Switching Program investment management services exchange clients funds among sector-specific mutual funds offered by Rydex and Fidelity Investments. Normally, the funds are Rydex sector funds or Fidelity Select Portfolios, but other Rydex or Fidelity funds may be used if deemed appropriate. Purchases and sales are based on research Dr. Pankin of MDP Associates has done to determine potentially profitable methods for trading among Fidelity and Rydex mutual funds. The objectives of the ART and the Select Switching programs are achieving profits at a substantially higher level than broad market measures such as the S&P 500 index with risk levels about the same as buying and holding that index. 4
The objective of STAR is earning returns at least that of the S&P 500 with substantially less risk than that of the index. In addition to the normal risks of investments in equity (stocks and mutual funds that own stocks) securities, trading sector funds entails additional risks. Since such funds are not diversified across a broad segment of economic sectors, they tend to be more volatile than diversified mutual funds. The higher volatility may result in better gains when the trading methods are working well, but they may also result in larger losses when things do not go right. Trading among the Rydex sector funds is frequent at times with some trades lasting only a few days. If done in an account subject to income taxes, profits would be subject to taxation at the individual s highest marginal rate. Additionally, the frequent trading in a taxable account would result in a large number of entries and greatly increased complexity when executing the IRS Schedule D income tax form. Consequently, these managed account programs are suitable for trading only in retirement type and other accounts that are not subject to immediate taxation. The NDX Trading Program trades mutual funds and exchange traded funds related to the Nasdaq 100 index, which has the ticker symbol NDX. Such funds objectives are returns that are a multiple of the daily percent change in the index. The multiples of the various funds are 1 (match the index), 2, 3, -1 (move the exact opposite of the index), -2 and -3. Trades between funds, which may involve a money market fund, will be made following formulas based on research by Dr. Pankin and others. The goal of the NDX trading program is to produce profits at a higher level than the Nasdaq 100 index return with less risk than buying and holding that index. The Nasdaq 100 index is not considered to be diversified in its current composition. It is heavily weighted with firms in the high technology (computers, software, networking, and related services) sectors. As such it is normally more volatile than broader measures of market performance such as the S&P 500 index. Leveraged funds with an objective of twice the daily percentage change of the NDX may be owned at times. Such funds have greater volatility than unleveraged ones. Additionally, the effects of compounding the daily changes can result in smaller gains or greater losses than twice the percent change of the index over the period a leveraged fund is owned. The particular risks in this program are similar to those for sector fund trading and are due to the greater volatility and sometimes frequent trading. Accounts managed using Tactical Asset Allocation have target allocations for various asset classes based on clients individual financial positions, objectives, time frames, and risk tolerance levels. The asset classes in the portfolio can range from quite simple (stocks, bonds, cash, normally owned via mutual funds) to quite varied by also including mutual funds that own precious metals, real estate investments, overseas instruments, and other types of investments including other MDP Associates managed accounts services. This service employs mathematical models to determine when each asset class should be owned with the main objective of 5
reducing overall risk levels to levels that will enable clients to stay with their investment plans and achieve their financial objectives. MDP Associates may also offer other investment management services that involve buying and selling common stocks, options on common stocks or market indices, or mutual funds of fund companies other than Fidelity and Rydex. All client portfolios are managed on a discretionary basis, and each portfolio is managed individually. The client appoints MDP Associates with discretionary authority to buy, sell, and exchange mutual funds, stocks, or options on behalf of the client s account(s) with Fidelity, Rydex, another mutual fund company, or another broker. In no event shall MDP Associates have custody of clients cash or securities. Clients are welcome to call during normal business hours to discuss the client s account, financial situation, or investment ideas. Clients will receive transaction statements from Fidelity, Rydex, another mutual fund company, or their broker. MDP Associates provides quarterly reviews and reports. The client will have a direct and beneficial interest in his or her securities, rather than an interest in a pool of mutual funds or other securities. MDP Associates makes no promises, representations, warranties, or guarantees that any of the services rendered will meet their objectives or result in a profit to clients. These services may result in losses to clients. Disciplinary Information Registered investment advisers are required to disclose all material facts regarding any legal or disciplinary events that would be material to your evaluation of MDP Associates or the integrity of MDP Associates LLC s management. MDP Associates has no information applicable to this Item. Other Financial Industry Activities and Affiliations MDP Associates is not affiliated with any financial firm. Dr. Pankin as an individual provides consulting services to a former employer in regard to the firm s 401(k) and its officers retirement plan investments. He is compensated by the company for these services based on an hourly fee. There is no other form of compensation. There is no potential conflict of interest between these activities and his activities with MDP Associates LLC. Dr. Pankin is a trustee of the Wegener Investment Trust, which operates a mutual fund, the Wegener Adaptive Growth Fund, which is registered with the SEC for sale to the general public. His compensation, which is received in shares of the fund, is 6
based on the amount of assets in the fund. However, there is no conflict of interest because MDP Associates managed accounts, by its policy, will not own shares of the Wegener fund. Moreover the fund is not appropriate for any of the investment strategies discussed above. The two outside activities described above take about 60 hours of his time a year spread over several weeks. No more than eight hours are spent on these efforts in any week. Code of Ethics MDP Associates is a one-person operation registered with Virginia. It is committed to high standards of business conduct, which includes adherence to all applicable rules and regulations, in conjunction with its fiduciary duty to clients. A copy of the formal code of ethics is available upon request. Participation or Interest in Client Transactions and Personal Trading Dr. Pankin, Mr. Hawkins, or members of their families may buy, sell, and exchange mutual funds, stocks, exchange traded funds, or options that MDP Associates recommends to discretionary clients. Transactions on the same side as those for clients (i.e. both buy or both sell) will be entered so that Pankin and Hawkins transactions execute no earlier than client transactions. In the case of mutual funds, usually all transactions will be entered for execution at the same time and price, which is set by the mutual fund company. In the unusual event that Pankin or Hawkins transactions are on the opposite side of the clients, which may be caused by portfolio balancing, the orders will be placed so that the Pankin and Hawkins transactions execute no later than client transactions. It is possible that MDP Associates may recommend that new clients purchase mutual funds or other securities that Dr. Pankin, Mr. Hawkins, or members of their families already own. However, the decisions as to which mutual fund(s) or securities to purchase are made according to predetermined formulas. Thus, there is no conflict of interest in the determination of which fund(s) or securities to recommend to discretionary clients. All rules and regulations of the Investment Advisors Act of 1940 will be enforced. 7
Brokerage Practices MDP Associates suggests the brokers or other custodians to be used for client accounts. However, upon mutual agreement, a client may have one or more accounts at a broker or other custodian of the client s choosing. Whatever the choice, the client must agree and execute the forms necessary to establish the account(s). MDP Associates does not determine the commission rates paid. In most cases, clients in the Select Switching Program will have brokerage accounts with trademonster, a brokerage firm that supports investment advisors and their clients. Although trademonsterprovides support services without charge to MDP Associates, these are not based on the amount of trading activity, and it receives no monetary compensation from trademonster. Select Switching clients may also have an account, brokerage or mutual fund, with Fidelity. Clients in Tactical Asset Allocation will have brokerage accounts with trademonster, or another broker mutually agreed upon by the client and MDP Associates. The commissions charged by trademonster for stock and mutual fund transactions may be higher than those charged by other so-called discount brokers, but the commissions should be considerably less than those charged by full service brokers. The primary reasons for using trademonsteris its range of support and communication services that enable quick and timely transmission of orders to buy and sell stocks and mutual funds at reasonable cost to MDP Associates and its clients. Given the incentive of the advantages described above, the choice of trademonsterdid not involve any attempt to determine whether or not it routinely provides the most favorable execution in its accounts. Clients in the STAR, ART, and NDX Trading Programs will usually have accounts directly with Rydex or ProFunds. There are no loads, commissions, or transaction costs with either company, but there may be minor occasional costs such as IRA maintenance or termination fees. Purchases and sales of securities are done individually in each client account and are not aggregated into a single transaction. The ability to aggregate is not available to MDP Associates with any of the custodians it uses. Review of Accounts A quarterly review is performed to monitor client holdings and to prepare billing statements. Mutual fund and other securities holdings are monitored weekly or more frequently if necessary by Dr. Pankin or his backup to determine when to buy, 8
sell, or exchange. Normally, Dr. Pankin makes all such investment decisions, but there may be times when his backup, Mr. Hawkins, will perform this function by following instructions provided to him. Clients receive standard account statements and confirmation reports from mutual fund companies or brokers. MDP Associates sends clients a performance report quarterly showing the portfolio holdings and returns. Clients also receive quarterly invoices that include account values. At year end, clients receive a listing of capital gains and losses and other pertinent tax information from one of more of mutual fund companies, their brokers, or, upon request, MDP Associates. Client Referrals and Other Compensation Although none are currently in place, pending or planned, in the future MDP Associates may enter into solicitation arrangements in which others are compensated for referring clients to MDP Associates. Such compensation consists of sharing the MDP Associates management fee. The cost to the client is the same whether or not anyone is compensated for soliciting the account. A separate written disclosure of the solicitation agreement will be furnished by the solicitor(s) to the client at the time of solicitation. This disclosure contains details about the compensation arrangement. Custody MDP Associates may have indirect custody of client accounts because, with a client s permission, its management fee will be deducted directly from that client s account(s). Clients will receive at least quarterly statements from the broker dealer, mutual fund company, or other qualified custodian that holds and maintains client s investment assets. MDP Associates urges you to carefully review such statements and compare such official custodial records to the account statements that we may provide to you. Our statements may vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities. Investment Discretion MDP Associates receives discretionary authority from the client at the outset of an advisory relationship to select the types and amounts of the specific securities to be 9
bought of sold. Normally this is done by clients executing a limited power of attorney when opening an account with a broker or mutual fund company or when giving MDP Associates authorization to manage an existing account. In all cases, however, such discretion is to be exercised in a manner consistent with the stated investment objectives for the particular client account. When selecting securities and determining amounts, MDP Associates observes the investment policies, limitations and restrictions specified by the clients for which it advises. Voting Client Securities MDP Associates does not have any authority to and does not vote proxies on behalf of advisory clients. Accounts with custodians are in the client s name, and the custodian will send them proxy materials. Clients retain the responsibility for receiving and voting proxies for any and all securities maintained in client portfolios. At the request of clients, MDP Associates may provide advice to clients regarding the clients voting of proxies. Financial Information Registered investment advisers are required in this item to provide you with certain financial information or disclosures about their financial condition. MDP Associates has no financial commitment that impairs its ability to meet contractual and fiduciary commitments to clients, and has not been the subject of a bankruptcy proceeding. Requirements for State-Registered Advisers MDP Associates is registered with the state of Virginia where its only office is located. At times it has been and in the future it may be registered with other states, which depends on how many clients are located in any one state. We are able to accept clients from anywhere in the U.S. A. Indentify each of your principal executive officers and management persons, and describe their formal education and business background. MDP Associates has only one such person: Dr. Mark Pankin, who was born in 1945. He earned a B.A. in Mathematics from Wayne State University in Detroit, Michigan and M.Sc. and Ph.D. degrees from the University of Illinois, Chicago. He has been a self-employed consultant and investment advisor since September 1991. Previously, he was an analyst and manager at Mathtech, Inc. from August 1981 to September 1991. 10
B. Other business activities. See the section Other Financial Industry Activities and Affiliations C. Performance-based fees. MDP Associates does not charge these. D. Arbitration awards paid, disciplinary actions against. There have been none. E. Relationships with issuers of securities. None 11
Supplementary Information: Supervised Person Kenneth L. Hawkins MDP ASSOCIATES LLC 1018 N. Cleveland St. Arlington, Virginia 22201 703-524-0937 http://www.pankin.com January 2013 This brochure supplement provides information about Kenneth L. Hawkins that supplements the MDP Associates LLC brochure. You should have received a copy of that brochure. Please contact Mark Pankin at the above address or phone number if you did not receive MDP Associates brochure or if you have any questions about the contents of this supplement. Additional information about Kenneth L. Hawkins is available on the SEC s website at www.adviserinfo.sec.gov. In addition to Dr. Pankin, whose information is presented on prior pages, MDP Associates has one other so-called supervised person. That is Mr. Ken Hawkins who is not an employee of MDP Associates, but is a registered investment advisor representative with the state(s) MDP Associates is registered with. Educational Background and Business Information. Kenneth L. Hawkins was born in 1953 and earned a B.A. from the University of South Florida, which is in Tampa, and an M.B.A. from George Mason University in Fairfax, Virginia. From August 1986 to July 2006 he was an analyst and contracts administrator for Mathtech, Inc. From August 2006 to May 2011, he worked as Contracts Manager for Bowhead Technology Services. From June, 2011 to April, 2012, he worked for Vangent, Inc. In May, 2012, Mr. Hawkins returned to Mathtech as Director of Contracts. At Mathtech his work supplies all of his earned income and occupies all of his normal working time. His activities for and income from MDP Associates are minimal and sporadic.. Disciplinary Information. None 12
Other business activities. Mr. Hawkins is not actively engaged in any other investment related business. Additional Compensation. None Supervision. If he thinks he will not or may not be able to execute a possible transaction in client accounts, Dr. Pankin gives Mr. Hawkins specific instructions. These cover what orders Mr. Hawkins may need to place and under what conditions they are to be placed. Dr. Pankin may provide Mr. Hawkins with a spreadsheet that will generate any required orders based on data input by Mr. Hawkins. At a later time, Dr. Pankin will review the actions Mr. Hawkins did or did not take. Requirements for State-Registered Advisors. A. Mr. Hawkins has not been involved in any arbitration proceeding. He has not been involved with any civil, self-regulatory organization, or administrative proceeding. B. Mr. Hawkins has not been the subject of a bankruptcy petition. 13