Finance

SEC Reminds Private Funds of Broker-Dealer Registration Requirements

By Arnold & Porter LLP - Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman | Posted on

[Editor’s Note:  The following is an Arnold & Porter LLP Client Advisory, written by Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman.]

SEC official reminds private funds, including contacts private equity funds, that certain fund-raising and marketing activities and fees for “investment banking activities” require broker-dealer registration.

On April 5, 2013, David Blass, Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission (SEC), spoke before the Trading and Markets Subcommittee of the American Bar Association on broker-dealer registration issues that arise in the private funds context. In his remarks, Mr. Blass warned that acting as an unregistered broker-dealer is a violation of the Securities Exchange Act of 1934, as amended (the Exchange Act), and can have serious consequences, including sanctions by the SEC and rescission rights, even when no other wrong-doing is found. Mr. Blass also noted that the SEC staff has increased its attention to the issue of broker-dealer registration, and he reminded the audience that compliance by private fund advisers with the requirements of the Investment Advisers Act of 1940, as amended, is not enough. In light of the significant consequences of acting as an unregistered broker-dealer and the SEC staff’s increased attention to this issue and the private fund space in general, private fund advisers should review their fund-raising and marketing activities, policies and procedures and contracts and arrangements with portfolio companies and solicitors to ensure compliance.

Click here to read the entire Arnold & Porter Advisory.

Social Entrepreneurship Panel: A Recap

By Libby Hadzima, J.D./M.B.A. Candidate 2015 | Posted on

On April 3, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a Social Entrepreneurship: Legal, Financial and Public Policy Dimensions panel moderated by Professor Eric Talley.  Panelists included legal experts R. Todd Johnson (Partner, Jones Days), Jonathan Storper (Partner, Hanson Bridgett), Kyle Westaway (Founder of Westaway Law) and Jordan Breslow (General Counsel at New Island Capital) as well as Vince Siciliano (CEO and President of the New Resources Bank).

Talley began by asking for a definition of social entrepreneurship.  Johnson offered “any organization that makes money and does social good” and Siciliano added “maximizing distribution [for a given product] while being profitable” as social enterprises attempt to maximize social impact for a given product or service.  Breslow, who works for an impact investment advisor, talked about how one of the downsides of a nonprofit, as compared to a social enterprise, is that “in giving money away [investors] lose control.”

Measuring profits is straightforward but measuring social impact is not always so easy.  However, as Johnson notes, “we need to get past the head-scratching period of asking ‘how do we measure impact’ that comes from looking at social entrepreneurship as a sector. It’s not a sector. It’s a way of doing business.”  Social impact can be applied to any business sector — health care, education, technology, etc. For some sectors, the impact equation is simple. For example, d.light solar sells solar light and power products so it is “relatively easy to calculate how much kerosene and therefore CO2 is avoided by its products.”  It is harder for other sectors, such as services, or where impact is based upon human transformation or long-term goals. “Sometimes the outcome should be obvious, but is simply hard (or expensive to capture) such as greening of supply chains.”  Westaway agreed noting that he “applauds the idea of standardization but it is hard to do.”

Talley asked the panelist to assess whether these types of enterprises are more risky than others, that perhaps, do not consider their social impact. Siciliano suggested that some social enterprises may be considered risky by traditional investors because they are not well understood.  “As a commercial bank, one of the New Resource Bank’s competitive advantages” he explained “is its sector expertise.” He offers that it is not about the risk of the underlying business model as much as that traditional commercial banks assess high risk to these enterprises because of their limited exposure to some of the new sectors these enterprises are operating in. “We don’t view these companies as risky because we better understand their markets and stage of growth.” Specific industry examples include organic products, alternative energy, energy efficiency retrofits, green real estate, and nonprofits.

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Using the Web to Match Private Companies and Potential Investors: SEC No Action Letters Open a Door, but Questions Remain

By Goodwin Proctor LLP | Posted on

[Editor’s Note:  The following post is a Goodwin Proctor Alert, which relays regulatory and legislative developments.]

In a no action letter dated March 26, 2013 (the “FC Letter”), the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicated that they would not recommend action against the operators of the FundersClub website (“FundersClub”) for failing to register as a broker/dealer under the U.S. Securities Exchange Act of 1934 (the “Exchange Act). Two days later, a similar letter (the “AL Letter”) was issued to the operators of the AngelList website (“AngelList”)

The Letters may remove one of the most significant obstacles to the development of a broad-scale, online business in which accredited investors are able to select and invest in private companies. However, the Letters are based upon a number of representations made by FundersClub and AngelList that may be difficult to defend or apply in practice. They also leave unaddressed a number of related legal issues. Thus, the Letters may represent only the beginning of a process in which entrepreneurs, investment managers, private companies, the Staff, the SEC and others explore and develop the rules and practices under which such a business may be operated.

This Client Alert briefly describes certain key issues and conclusions associated with the Letters and highlights some of the issues and risks that remain.

Click here to read the entire article.

[The Alert concludes that t]he Letters may be a key milestone in the development of a broad-based marketplace in which Web-based efficiencies are applied to matching (i) private companies seeking capital with (ii) accredited investors willing to provide it. Nevertheless, important open issues remain. In particular, the representations made by FundersClub and AngelList in obtaining the Letters may prove difficult to defend or apply in practice. Moreover, key questions (e.g., regarding general solicitation and the procedures by which investors may be verified as “accredited”) await further guidance from the SEC. Finally, other parties such as state regulators and various self-regulatory organizations have not yet weighed-in and may have a material impact.

Week in Review: The Administration on Wall Street

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.

Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade.  The Consumer Financial Protection Bureau made the announcement today.  Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”  For more, see the NYTimesand WSJ.

Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government.  The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted.  According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007.  For more, see Thomson Reuters.

On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement.  At a hearing last week, he made a point unlikely to encounter much resistance:  “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.”  Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice.  For more, see Businessweek, Reuters, and The New Yorker.

The Week in Review: SEC Nomination, Symposium, DOJ and FDIC

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee.  Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney.  She appears likely to win confirmation (as early as next week).  If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency.  During her testimony, Ms. White said:  “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.”  For more, see the NYTimes.  On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.

The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15.  Registration is required.  See a previous post for a complete description of this year’s symposium lineup.

Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger.  In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’  “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case.  The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank.  For more, see Bloomberg. 

A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.”  The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.”  Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.”  Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?”  For more, see the LATimes and Forbes.

 

FRB Governor Raskin Urges Banks to Take Proactive Role in Dealing with Reputational Risk

By Eric R. Fischer, Jackson Galloway, and Elizabeth Shea Fries, Goodwin Proctor, LLP | Posted on

[Editor’s Note:  The following post is from Goodwin Proctor’s recent Financial Services Alert by Eric R. Fischer, Jackson B. R. Galloway, and Elizabeth Shea Fries.  This and other updates from Goodwin Proctor are available here.] 

On February 28, 2013, FRB Governor Sarah Bloom Raskin made a presentation entitled “Reflections on Reputation and its Consequences” to the 2013 Banking Outlook Conference at the Federal Reserve Bank of Atlanta.  Governor Raskin noted that, in the aftermath of the 2007-2009 financial crisis, financial institutions of all sizes have seen a decline in the public’s perception of their reputation and trustworthiness (and she added that the quality of their reputation is of particular importance to financial institutions).  Governor Raskin stated that the decline in public trust of, and confidence in, financial institutions has been increased recently by, among other things, “the Occupy Wall Street movement, payday loans, overdraft fees, rate-rigging settlements in London Interbank Offered Rate [LIBOR] cases, executive compensation and bonuses that seem to bear no relationship to performance or risk, failures in the foreclosure process, and a drumbeat of civil litigation.”

Please click here to read the rest of this entry.

The Week in Review: SEC Litigation, Sequester Countdown and AT&T

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In a unanimous opinion yesterday, the Supreme Court limited the SEC’s ability to pursue civil penalties.  The Court held that the five-year statute of limitations begins to run at the moment a fraud is committed, not when regulators become aware if it.  In the case at issue, Gabelli v. SEC, the agency sued in 2008 for alleged violations occurring between 1999 and 2002.  Chief Justice Roberts noted practical difficulties in determining when a large governmental agency first discovers a fraud, concluding that Congress had not intended to permit the SEC to bring such actions so late.  Read the opinion here.  For more, see Reuters.

Two days until the sequester.  Congressional leaders are meeting at the White House this morning, but both sides appear to be bracing for $85 billion in across-the-board cuts on Friday, March 1.  While yet another short-term bill might resolve immediate funding concerns, the parties thus far remain gridlocked on tax reform proposals, which both recognize as an important bargaining chip.  House Speaker John Boehner has recently appeared more willing to tackle a comprehensive tax deal this Congress, but a solid democratic majority in the Senate is unlikely to concede to his current “no tax increases” position.  For more, see NYTimes, BBC and Politico.

AT&T has announced plans to expand into Europe with new lines of business, including wireless home-monitoring and automation.  The company will license its new Digital Life product to more than 30 companies worldwide, exceeding anticipated demand.  The move shows that AT&T, the U.S.’s largest phone provider, is transitioning to become a more general technology company, as consumers are increasingly seeking around-the-clock wireless connectivity and product integration.  For more, see Bloomberg.

From the Bench: Dichter-Mad Family Partners v. United States

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.

The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities.  The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.”  Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function.  An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.

The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception.  The FTCA only allows a claim where statutory language mandates a particular course of action.  By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings.  Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.

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CFPB Announces “Ability to Repay” Rule for Mortgage Lenders

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages.  The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act.  The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.

The Ability-to-Repay rule is aimed at protecting American consumers.  According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”

Under the new rule:

  • 1. Lenders are required to obtain and verify financial information from potential borrowers,
  • 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
  • 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.

In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors:  1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.

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