SEC Tag Archives — Page 16 of 22

SEC Enforcement Actions Against Corporate Officers – Targeting or Responsible Monitoring?

July 31, 2015 | Shay Virtue

In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.
Continue reading ›

SEC Issues Guidance Update on Cybersecurity

May 29, 2015 | Steve Parker

Last month, the SEC division of Investment Management released Investment Management Guidance in which it discusses a number of measures that investment advisers may wish to consider when addressing cybersecurity risks. This guidance is just the last in a long list of guidance and alerts issued by the SEC and other regulators as to the need for financial firms to improve their policies and procedures dealing with cybersecurity threats.

Among the recommendations made in the current IM are that firms:

• Conduct a periodic assessment of the nature, sensitivity and location of information, what types of cybersecurity threats and vulnerabilities exist, what security controls and processes are currently in place, the impact that would occur in the event of compromise of information, and the effectiveness of the current structure confirms current structure for managing cyber security risks

SEC Vows To Be Aggressive in 2015

April 2, 2015 | Steve Parker

Last month at the Annual Conference of the Securities and Exchange Commission (“SEC”), the Commission revealed its enforcement statistics for 2014, including a record number of enforcement actions (755) and monetary relief obtained ($4.1 Million). The Commission also announced its current initiatives including a continued emphasis in the use of data analytics in both regulation and enforcement investigations. Among the areas of emphasis highlighted at this year’s conference were insider trading, financial reporting and auditing cases, inadequate internal controls for public companies, enhanced scrutiny of auditors and other reporting gatekeepers, and Foreign Corrupt Practices Act enforcement.

In addition, 30 trials were conducted in 2014 by the Commission, the most trials in over a decade. By contrast, the Commission tried only 6 cases in 2013. Two-thirds of the trials were in federal court, while one-third were before Administrative Law Judges.
Continue reading ›

SEC Charges Three Investment Adviser Firms with Improper Registration in Wyoming

March 23, 2015 | Chadd Reynolds

On February 4, 2015, the SEC issued cease and desist orders against three investment advisers that fraudulently maintained registration with the SEC by listing Wyoming as their principal place of business on their Forms ADV. These three incidences highlight Wyoming’s unusual landscape for investment advisers.

In order to explain the uniqueness of these orders, some background on investment adviser regulation will be provided. Originally, investment advisers were prohibited from registering with the SEC under the Investment Advisers Act if it managed under $25 million in assets or met a designated exemption. In July 2011, that threshold was increased to $100 million. If an investment adviser does not meet or exceed the $100 million threshold, it is still required to register with the states in which they maintain their principal place of business. Wyoming is unique in that it does not regulate investment advisers. Any investment adviser with its principal place of business in Wyoming must therefore, according to the amendments to Section 203A of the Investment Advisers Act, register with the SEC.
Continue reading ›

SEC Plans to Increase Focus on Asset Managers in 2015

February 19, 2015 | Chadd Reynolds

In a speech given at The New York Times Dealbook Opportunities for Tomorrow Conference in New York at the end of 2014, SEC Chair Mary Jo White detailed an extensive plan to increase the agency’s scrutiny of asset managers. Her speech highlighted many of the important issues currently facing the SEC in regulating the asset management industry and its planned response to those issues.

Chair White began by noting the evolution of the asset management industry and the tools currently utilized to protect investors and their assets. In 1940, when the Investment Advisers Act was first passed, there were a total of $4 billion in assets under management at 51 firms, compared to the now over $63 trillion of assets under management at over 22,000 firms. Chair White also noted that almost half of all U.S. households own mutual funds. In addition to mutual funds, asset managers also increasingly recommend modern, sophisticated products like ETFs and derivatives. Registered funds have significantly increased the size and complexity of derivates used in asset management.
Continue reading ›

How NASAA’s Proposed Model Rule Exempting M&A Brokers Stacks Up Against Other Efforts

February 10, 2015 | Dan MacIntyre

The Broker-Dealer section of the North American Securities Administrators Association (“NASAA”) recently sent out a notice of request for comment on a proposed uniform state model rule (“Model Rule”) that would exempt merger and acquisition brokers (“M&A Brokers”) from state securities registration if certain requirements were met. While NASAA’s proposed Model Rule is similar to the recent SEC No-Action letter concerning M&A Brokers and the exemption for M&A Brokers provided by HR 37, there are some notable differences. Comments on the Model Rule must be submitted to NASAA by February 16, 2015.

First, this post will lay out the three current proposals by SEC staff, Congress, and NASAA to create an M&A Broker registration exemption. Second, a comparison between all three will be made in order to highlight how each body plans to regulate and define the scope of the exemption for M&A Brokers. Each comparison will be broken up into key aspects of each proposal’s efforts to create an exemption for M&A Brokers. Third, this post will emphasize the need to create an exemption, along with M&A Brokers, that will encompass other important unregistered actors: Private Placement Brokers.
Continue reading ›

Non-Registered Crowdfunding Site Reaches Settlement with SEC

January 26, 2015 | Chadd Reynolds

In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.

Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
Continue reading ›

Private Placement Brokers Should Be Legalized Along with M&A Brokers

January 21, 2015 | Dan MacIntyre

In 2005, an American Bar Association task force published an exhaustively researched report that highlighted a huge “gray market” of unregistered brokerage activity, conducted by people that sometimes refer to themselves as “finders,” that is critical to the development of early stage companies, but operating in technical violation of the Securities Exchange Act of 1934 (“ABA Report”). Other than occasional enforcement actions against bad actors, the SEC did little to address this problem until early 2014, when it issued a No-Action letter which blessed certain restricted activities of merger and acquisition brokers (“M&A Brokers”). The SEC’s approach to other private placement brokers has been to restrict their activities even further. Compare Paul Anka, SEC No-Action Letter (July 24, 1991) (granting legal “finder” status) with Brumberg, Mackey & Wall, PLC., SEC No-Action Letter (May 17, 2010) (restricting “finder” status). Courts have not always agreed with the SEC. See SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011) (proposing a non-exhaustive six-factor test for registration).

On January 6th, the first day of the 114th Congress’s new session, the House of Representatives considered H.R. 37. This bill proposes again multiple pieces of legislation that passed the House in the previous congress but were not taken up by the Senate. The bill has now been remanded to the House Committee process. H.R. 37 contains eleven separate items which would affect the current financial regulatory landscape. One of the proposed provisions responds to concerns about financial intermediaries such as finders that participate in mergers and acquisitions. This blog post advocates that Congress, while considering legalization of M&A Brokers, should also legalize a limited class of private placement brokers.
Continue reading ›

SEC to Conduct Presence Exams for Never-Before Examined Investment Advisers in 2015

January 20, 2015 | Chadd Reynolds

During the January 7th Practising Law Institute conference on Hedge Fund Compliance and Regulatory Challenges, the Director of the SEC Office of Compliance Inspections and Examinations (“OCIE”), Andrew Bowden, previewed some of the new priorities on which the SEC will focus in 2015. Some of the areas of focus include protecting investors, specifically those in or close to retirement, cyber security, and the use of data analytics to identify potential wrongdoers. One of the other priorities discussed was OCIE’s new initiative to use “presence exams” to examine certain investment advisers that have never been examined. Investment advisers who have been registered with the SEC for three or more years will potentially be selected for a presence exam.

Presence exams are less intensive, shorter exams, taking up about two-thirds the time of a regular SEC examination. These exams tend to be more narrow in scope and focus on specific areas of concern that the SEC may have. In October 2012, SEC staff created presence exams for investment advisers who were required to register with the SEC for the first time because of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). These newly required SEC registrants under Dodd-Frank included, for example, hedge fund advisers with more than $150 million in assets under management. Bowden stated that the SEC performed close to 400 of these exams and that OCIE’s goal to examine 25% of the investment advisers required to register with the SEC under Dodd-Frank by 2014 was met.
Continue reading ›

Investment Adviser Settles with SEC Over False Advertising Claims

January 15, 2015 | Chadd Reynolds

On December 22, 2014, the SEC announced a settlement with F-Squared Investments (“F-Squared”) in which F-Squared will pay a civil penalty and disgorgement for violations of the anti-fraud provisions of the Investment Advisers Act by advertising falsely inflated performance numbers of its most successful exchange traded fund (“ETF”) investment strategy. Under the terms of the settlement, F-Squared, the largest U.S. marketer of index products using ETFs, agreed to disgorge $30 million and pay a $5 million penalty.

In October 2008, F-squared, along with its co-founder and former CEO, developed an investment strategy called AlphaSector. AlphaSector used data received from an algorithm to decide whether or not to buy or sell nine industry-focused ETFs. The algorithm was developed by an intern at a private wealth advisory firm, who told F-Squared’s CEO that it had been used before to manage the private wealth advisor’s client assets. The intern sent F-Squared’s CEO three separate data sets of hypothetical, back-tested weekly trends for each of the ETFs. This data was then used by an F-Squared employee to calculate hypothetical back-tested results for AlphaSector from April 2001 to September 2008.
Continue reading ›