Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has sanctioned three investment advisory firms for repeatedly ignoring problems with their compliance programs.

The enforcement actions arise from the agency’s Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act upon those warnings.  Had the problems been addressed, the firms could have prevented their eventual securities law violations.  The SEC Enforcement Division’s Asset Management Unit has coordinated with examiners to bring several cases since the initiative began two years ago.

Andrew Bowden, director of the SEC’s National Exam Program, said, “After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination.  Firms must fix deficiencies identified by our examiners.”

For instance, the SEC’s order against a firm referred to as MPM and its owners finds that they failed to correct ongoing compliance violations at the firm despite prior warnings from SEC examiners.  In particular, they failed to complete annual compliance reviews in 2006 and 2009 and made misleading statements on MPM’s website and investor brochure.  For instance, one location on MPM’s website misleadingly represented that the firm had more than $600 million in assets.  However, on its Form ADV filing to the SEC during that same time period, it reported that the firm’s assets under management were $359 million or less.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

In another of what seems to be a blizzard of speeches by SEC officials, SEC Chair Mary Jo White commented on steps the SEC is taking to monitor general solicitations for securities offerings.  Ms. White noted “Contemporaneously with lifting the ban on general solicitation, the SEC staff has undertaken an interdivisional effort designed to monitor how the ability to advertise and “generally solicit” is actually occurring – how companies and hedge funds are taking advantage of the new rule. It includes assessing the impact of general solicitation on the market for private securities and –importantly –on identifying fraud if it is occurring. If it is, we can seek to stop those in their tracks, who would inappropriately take advantage of this new more open environment.”

As to the controversial proposed rules on general solicitation, Ms. White indicated action may be forthcoming soon. “This is an important proposal, and there are a lot of different views about it, so it is important to have an opportunity to consider these views . . . But, for investors’ sake and the sake of the new marketplace, we need to move expeditiously toward adoption, following appropriate consideration of the comments.”

For other information on Regulation D and general solicitation, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

Mary Jo White, Chair of the SEC, recently gave her thoughts on the future of disclosure.  Some of her key points were:

  • Information Overload: Ms. White raised the question as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us.
  • Risk Factor Disclosure:  Before 1995, risk factor disclosure was typically only provided in offering documents for higher-risk companies or securities.  Over time, this cautionary language became more and more extensive, not necessarily because of a change in the SEC requirements for risk factor disclosure (although it is now required in the 10-K) but, at least in part, because of legal advice from attorneys assisting with the preparation of filings.  According to Ms. White, it may be difficult or unwise to significantly walk those disclosures back, but it is fair to ask whether there is more there than is really needed.
  • Redundant Disclosures: Ms. White said “We also should ask: Is there information that appears more than once in a filing, and if so, is that so bad?  Or is there a way to avoid repetition in a document?”  Ms. White used litigation as an example, which may be noted in the legal proceedings section, the MD&A and the notes to the financial statements.  To this Ms. White noted “Accountants say that lawyers insist on the repetition and the lawyers blame the accountants.  Rather than focus on who may be perpetuating this, we should simply figure out what investors want and whether such repetition is really such a burden for companies.”
  • A New Paradigm:  Ms. White suggested that the SEC could explore a possible filing and delivery framework based on the nature and frequency of the disclosures, including a “core document” or “company profile” with information that changes infrequently.  Companies could then be required to update the core filings with information about securities offerings, financial statements, and significant events.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

The Public Company Accounting Oversight Board, or PCAOB, adopted two attestation standards pertaining to audits of brokers and dealers. The PCAOB also adopted an auditing standard applicable when auditors are engaged to perform audit procedures and report on supplemental information that broker-dealers and others file with the SEC. Finally, the Board adopted related amendments to other PCAOB standards.

The two attestation standards cover the auditor’s examination of compliance reports and the auditor’s review of exemption reports. The requirements for broker-dealers to prepare compliance or exemption reports, and for PCAOB-registered auditors to examine or review such reports, are new requirements included in the SEC’s recent amendments to Exchange Act Rule 17a-5. The compliance and exemption reports contain statements made by broker-dealers regarding compliance with key SEC financial responsibility rules, including those involving the safekeeping of customer assets or with applicable conditions for exemption.

Consistent with the requirements of Rule 17a-5, the attestation standards establish requirements for auditors examining certain statements in broker-dealer compliance reports and reviewing statements in broker-dealer exemption reports.

The supplemental information standard establishes the auditor’s responsibilities when engaged to perform audit procedures and report on supplemental information that accompanies the audited financial statements. Supplemental information includes the supporting schedules that broker-dealers are required to file with the SEC

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

According to this article dated October 4, 2013, eight hedge funds had filed Form D’s indicating they were engaged in general solicitation.

My unscientific review of 25 Form D’s (all filers, not just hedge funds) filed on October 10, 2013, indicated that only 4 of 25 had checked the 506(c) general solicitation box.

This article suggests that the JOBS Act fell short of its goal, since angel investors will be reluctant to invest where self-certification as an accredited investor is not permitted.

For other information on Regulation D and general solicitation, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

Stephen L. Cohen, Associate Director of Enforcement at the SEC, recently gave remarks at a conference.  In his remarks, Mr. Cohen stressed the importance of effective compliance programs.  Mr. Cohen also noted “So far, I am seeing a significant majority of whistleblower claims from people who have reported internally first.  They don’t appear to be running to the SEC and away from corporate compliance programs.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

The CFPB has ordered Mortgage Master, Inc. and Washington Federal to pay civil penalties for violating the Home Mortgage Disclosure Act, or HMDA, which requires certain mortgage lenders to accurately collect and report data about home mortgage loans.

The CFPB also issued a bulletin that puts the industry on notice about the importance of accurate HMDA data and effective HMDA compliance management systems. The bulletin is meant to provide transparency into how the CFPB enforces HMDA.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

Section 753 of the Dodd-Frank Act added a new section to the Commodity Exchange Act to make it unlawful “for any person to make any false or misleading statement of a material fact to the Commission … or to omit to state in any such statement any material fact that is necessary to make any statement of material fact made not misleading in any material respect, if the person knew, or reasonably should have known, the statement to be false or misleading.”

On September 16, 2013, the CFTC sent a strong signal that it would vigorously enforce these new provisions when it entered into a $50,000 settlement with Susan Butterfield, a clerical employee at an Introducing Broker (IB), for lying during a CFTC investigation. In the Matter of Susan Butterfield, CFTC Docket No. 13-33, September 16, 2013 (Butterfield Order).

The CFTC was investigating pre-stamping orders at the IB (the IB was not identified). Done properly, paper ticket orders are time-stamped contemporaneously with the receipt of a customer commodity futures or options order to accurately record the time of day when the IB received the order. In a pre-stamped situation, as the name implies, the tickets are pre-stamped and the documentation completed well after the orders are executed. As the CFTC said, pre-stamping “undermines the reliability of the audit trail of trades executed by the IB and could be used, among other things, to facilitate unauthorized trades and or unlawful post-execution trade allocation.” Butterfield Order at 2.

Ms. Butterfield’s responsibility at the IB included, in part, accepting and recording customer orders. Thus, as part of its investigation of pre-stamping, the CFTC deposed Ms. Butterfield.

Ms. Butterfield knew that the IB pre-stamped orders and that pre-stamping was not appropriate. Prior to the deposition, she told her supervisor at the IB that the IB “pre-stamp orders” and “it’s [pre-stamping] something that is – that we should not be doing.” Id.

During the deposition, however, Ms. Butterfield initially lied that the IB pre-stamped – the record is not clear why she lied and in any event would not have justified the lie.

Q. Was there ever an instance where no one from the pit told you “We just got an order, stamp [FCM A],” and you didn’t personally receive a telephone call with an order?

A. No.

Q. Okay. So you never pre-stamped any tickets?

A. No. Id. at 3.

It was only after the CFTC continued to press and confront Ms. Butterfield with documents to the contrary that she relented and admitted that “her daily practice was to pre-stamp order tickets from multiple futures commission merchants in approximately every time bracket,” so that she was prepared. Id.

As she said during her deposition:

Q: So it was your practice to pre-stamp order tickets, not only when you observed there was a lot of activity in the pit, but also when you hadn’t heard from someone in a while to make sure that you were prepared; is that right?

A. Yes.

Q: Okay. And that was just your practice, you know, as best as you could, you would try to make sure you would have a pre-stamped order ticket in approximately every bracket in case someone would need it, right?

A. Right. Id.

While the CFTC ultimately got to the truth, it nevertheless pursued a settlement with Ms. Butterfield for $50,000. David Meister, the CFTC’s Enforcement Director, stated the reason why: “When a witness walks into CFTC testimony, he or she should plan to tell the truth to every question or face the consequences. We will use the new Dodd-Frank false statements provision [the new provision added] against witnesses who provide false or misleading information to make sure it is well understood that lying is not an option.”

The Federal Energy Regulatory Commission (FERC) has not taken action on the exact same situation—though there is no reason to believe they would not if the same situation presented itself. FERC has, however, revoked the market-based rate authority of entities that were not truthful during FERC investigations, see e.g., J.P. Morgan Ventures Energy Corporation, 141 FERC ¶ 61,131 (2012) (violating Section 35.41(b) of the Commission’s regulations requiring market-based rate sellers to provide accurate and factual information and prohibiting submitting false or misleading information or omitting material information in any communication with the Commission when counsel continued to ignore requirements to cooperate with ISO Market Monitoring Unit) and penalized entities providing different (and evolving) explanations for their conduct, thereby causing FERC Staff to expend resources pursuing those explanations, see e.g., Edison Mission, 123 FERC ¶ 61,170 (2008)(violating 35.41(b) of the Commission’s regulations in an investigation by making a series of representations and producing data and documents to staff regarding its supply offer strategy that, upon further explanation by Edison Mission, were revealed to have resulted in misleading staff.).

 

The Consumer Financial Protection Bureau, or CFPB, announced an enforcement action against Meracord LLC, a leading debt-settlement payment processor, for allegedly helping others to collect millions of dollars in illegal upfront fees from consumers. The CFPB has asked a federal district court to approve a consent order that would require Meracord and its CEO and owner, Linda Remsberg, to halt all illegal activities and to pay a $1.376 million civil penalty.

The CFPB charges that Meracord and Remsberg violated the Telemarketing Sales Rule by helping debt-settlement companies charge consumers upfront fees. The rule prohibits debt-settlement companies from charging consumers such fees before settling any of their debts. The rule protects consumers from the risk of spending money on services that may not materialize and then ultimately being left even deeper in debt.

According to the CFPB’s complaint, Meracord processed thousands of these illegal advance fees since October 2010. In total, the CFPB believes that Meracord helped debt-settlement companies charge millions of dollars in unlawful fees to more than 11,000 consumers in multiple states. Nearly 5,000 of those consumers’ accounts were closed without any of their debts being settled.

The proposed order, which the defendants have agreed to, would bar Meracord and Remsberg from processing payments for debt-settlement companies and for members of the related mortgage-settlement industry. The defendants would be subject to monitoring by the CFPB and would be required to make reports to the CFPB to ensure their compliance. The defendants would also have to pay a civil money penalty of $1.376 million.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC Division of Investment Management has issued additional guidance that is meant to assist institutional investment managers that wish to request confidential treatment, or CT requests, for certain information reported on Form 13F.  The guidance elaborates on the types of information that the SEC believes might be relevant in evaluating a confidential treatment request for an Ongoing Acquisition/Disposition Program in a Reportable Security.

In 1998 the SEC provided detailed guidance to Form 13F filers that might be making CT Requests for an Ongoing Acquisition/Disposition Program. In particular, the 1998 letter elaborated on five categories of information that Form 13F requires to be provided in a CT Request for an Ongoing Acquisition/Disposition Program in a Reportable Security, in order for the SEC to be able to make an informed decision about whether delaying or preventing public disclosure is necessary or appropriate in the public interest and for the protection of investors or to maintain fair and orderly markets.

In reviewing CT requests for Ongoing Acquisition/Disposition Programs since issuing the 1998 letter, the SEC staff has further identified information, for each of the five categories, that is particularly helpful in reaching an informed decision on the CT requests.  The new guidance spells out the additional information in detail.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.