The SEC recently adopted amendments to the broker-dealer Net Capital Rule (Exchange Act Rule 15c3-1), Customer Protection Rule (Rule 15c3-3), Books and Records Rules (Rules 17a-3 and 17a-4), Reporting Rule (Rule 17a-5), and Notification Rule (Rule 17a-11). The adopting releases can be found here and here.
Rules adopted under the Dodd-Frank Act require advisers to private funds with at least $150 million in assets under management to periodically file Form PF with the Commission. Due to the rolling compliance dates the SEC adopted for Form PF, the SEC has only recently received a complete set of initial filings. A July 25, 2013 report to Congress by the staff of the SEC’s Division of Investment Management disclosed that 2,305 advisers are currently filing Form PF with the SEC. Those advisers advise 18,015 funds, broke down as follows: 6,683 hedge funds; 5,928 private equity funds; 2,922 funds categorized as “other private fund types”; 1,121 real estate funds; 966 securitized asset funds; 329 venture capital funds; and 66 liquidity funds. The report can be found here: http://www.sec.gov/news/studies/2013/im-annualreport-072513.pdf.
The SEC’s Enforcement Division recently announced the following three new initiatives:
Implementing a key provision of the JOBS Act of 2012, the SEC voted today to adopt amendments to eliminate the prohibition against general solicitation and general advertising in certain securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act. The amendments will go into effect 60 days after they are published in the Federal Register. The SEC also voted to propose amendments to Regulation D, Form D and Rule 156 under the Securities Act to enhance the Commission’s ability to evaluate changes in the market and to address the development of practices in Rule 506 offerings.
The SEC’s practice for decades has been to allow defendants to settle cases without admitting or denying liability. That practice, according to SEC Chairman Mary Jo White, is going to change – at least in some cases. Chairman White, at a conference organized by the Wall Street Journal, said that a new practice of forcing defendants to admit wrongdoing will be applied in “cases where … it’s very important to have that public acknowledgment and accountability.” The SEC will retain its “no admit, no deny” practice for most cases.
Last year, the SEC began forcing defendants who had already admitted wrongdoing in parallel criminal cases to admit liability as a condition of settlement with the SEC.
Defendants are reluctant to admit wrongdoing in SEC settlements because that admission can be used in private litigation. For that reason, the SEC may be forced to take more cases to trial as a result of the new practice.
Almost a year after former Chairman Schapiro’s failed attempt at reform, the SEC has once again proposed amendments to the rules that govern money market mutual funds. The SEC proposed two alternatives: The first alternative would require money market funds to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios, i.e., transact at a “floating” NAV. The second alternative would require money market funds to impose a liquidity fee if a fund’s liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to “gate” the fund under the same circumstances. The release announcing the proposed rules can be found here: http://www.sec.gov/rules/proposed/2013/33-9408.pdf
As part of its “Operation Shell Expel” initiative, the SEC today suspended trading in 61 “shell” companies – companies that are dormant and frequently used as fraud vehicles. As part of its crackdown on shell companies, the SEC suspended trading in 379 companies on a single day in May 2012.
The SEC yesterday charged the City of Harrisburg, Pennsylvania with securities fraud based on misleading public statements concerning the city’s financial condition in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This enforcement action marked the first time the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg agreed to settle the charges.
Separately, the SEC issued an investigative report addressing the obligations of public officials relating to secondary market statements. The SEC cautioned public officials to be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors and to understand that these public statements, if materially misleading, can lead to liability under the federal securities laws. Given this potential for liability, the SEC advised public officials to consider taking steps to reduce the risk of misleading investors. At a minimum, public officials should consider:
In an April 16th speech, Commissioner Aguilar made clear that he supports Commission action under Section 921 of the Dodd-Frank Act to restrict or prohibit pre-dispute arbitration provisions in broker and adviser customer agreements:
“Currently, almost all customer agreements with brokerage firms include an arbitration clause requiring customers to arbitrate their claims in an arbitration forum– and they’re now popping-up in the investment advisory industry. By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest. The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.
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In passing the Dodd-Frank Act, Congress recognized the need to protect investors from abusive practices in the financial services industry. As many of you know, Section 921(a) of the Dodd-Frank Act authorizes the Commission to prohibit or restrict mandatory pre-dispute arbitration provision in customer agreements, if such rules are in the public interest and protect investors. The authority covers broker-dealers and investment advisers. I believe the Commission needs to be proactive in this important area. We need to support investor choice.”
The SEC sued St. Anselm, an oil and gas exploration and development company, its three principals, and one other individual, in March 2011 alleging that the defendants engaged in a Ponzi-like scheme. The SEC also alleged that the defendants misrepresented or failed to disclose information to investors about its deteriorating financial condition. The parties tried the case in July and August 2012 and, on March 29, 2013, Judge Blackburn of the U.S. District Court for the District of Colorado issued his decision. In that decision, Judge Blackburn found that St. Anselm had none of the true hallmarks of a Ponzi scheme. Judge Blackburn summarized his findings as follows:
“What this court perceives from the evidence presented in this case is not fraud, whether intentional or reckless, or even negligence, but a company that got too far out over its skis. [St. Anselm’s] business model worked well for years, and there was nothing inherently suspect about relying on investor financing as one piece among several to service debt and operate a business. Beginning in 2007, the confluence of several promising opportunities that seemed likely to yield enormous returns enticed the company to take on additional debt in order to acquire additional assets. Yet with the economic downtown of 2008 and the sudden decline in the relevant markets, the company’s historical ability to sell assets to fund operations was compromised. No defendant is charged with clairvoyance in the prediction of such external events. When defendants realized their business model no longer worked in the then-current economy, they moved with appropriate speed to revamp it and save investors’ principal. That strategy worked, as [St Anselm] is still operating today.”
The SEC’s downfall seems to have been in focusing on […]