SEC Regulatory Requirements

SEC Announces New Enforcement Initiatives

By Arnold & Porter LLP | Posted on

[Editor’s Note: The following update is authored by Arnold & Porter LLP]

On July 2, 2013, the Securities and Exchange Commission (SEC) announced three new enforcement initiatives: the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the Center for Risk and Quantitative Analytics. According to the SEC’s announcement, these initiatives are an effort to “build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations.” (more…)

General Solicitation and Other Changes to Regulation D: The Impact on Private Funds

By Ropes & Gray LLP | Posted on

[Editor’s Note: The following update is authored by Ropes & Gray LLP]

On July 10, 2013, the Securities and Exchange Commission adopted an amendment to Rule 506 of Regulation D, promulgated under Section 4(a)(2) (previously Section 4(2)) of the Securities Act of 1933, to allow issuers to engage in “general solicitation” and “general advertising” in certain offerings made under Rule 506, so long as all purchasers of the securities in such offerings are accredited investors and certain other conditions are met (the “General Solicitation Amendment”). Congress directed the SEC to adopt the General Solicitation Amendment last year as part of the JOBS act. In a separate release, the SEC also adopted amendments to Rule 506 to disqualify issuers and other market participants from relying on Rule 506 if “felons” and other “bad actors” participate in the Rule 506 offering (the “Bad Actor Amendment”). The General Solicitation Amendment and the Bad Actor Amendment will go into effect 60 days from publication in the Federal Register, which is expected within the next few days. The SEC has also proposed new rules intended to enhance the SEC’s ability to evaluate and monitor the development of market practices in Rule 506 offerings and address concerns that may arise in connection with allowing issuers to engage in general solicitation and advertising under Rule 506. (more…)

SEC Votes to Lift Ban on General Solicitation in Certain Private Placements

By Goodwin Procter LLP | Posted on

[Editor’s Note: The following update is authored by Goodwin Procter LLP]

At an open meeting, the United States Securities and Exchange Commission (“SEC”) voted to adopt a previously proposed rule that will lift the ban on general solicitation in certain types of private securities offerings, including many offerings of interests in venture capital, private equity, real estate, hedge and other types of private investment funds (the “New Rule”).

For many private fund managers, the New Rule will substantially increase the scope of permitted fundraising activities.  Even for those fund managers that do not intend to conduct a general solicitation in connection with their fundraising activities, the New Rule may reduce the risks associated with inadvertent “foot faults” under prior rules.  It is expected that the New Rule will materially change the fundraising landscape for the private fund industry, and particularly will facilitate use of the Internet and traditional press as means to communicate information about offerings of fund interests.

The SEC also voted to (i) adopt rules that prohibit private placements by certain “bad actors” and (ii) propose for public comment a variety of rules (the “Additional Rules”) that would seek to limit opportunities for abuse of the New Rule and enhance the ability of SEC staff to monitor activities pursuant to, and compliance with, the New Rule.

Click here to read the entire update.

Court Vacates Resource Extraction Rule, Remands to SEC for Further Proceedings

By James Kollar | Posted on

Recently, a U.S. federal judge threw out a securities regulation requiring oil companies to disclose their payments to foreign governments for oil and gas rights.

The Securities and Exchange Commission’s extractive resources rule was added (Section 1504) to the 2010 Dodd-Frank Wall Street reform law. Human rights groups and other proponents of the law argue it would help combat corruption and wasteful spending in resource-rich nations. (more…)

In a Policy Shift, SEC Considers Forcing Offenders to Admit Wrong-Doing; Critics Worry that the Result Will Prove Counter-Productive for Enforcement

By Luke Burton, J.D. Candidate 2015 | Posted on

In a change of course, the Securities and Exchange Commission has begun to discuss the idea of requiring admissions of guilt in civil cases. The possibility of forcing firms to admit guilt has drawn criticism from some circles, as opponents say that the proposal may produce adverse results in enforcement.

In recent times, the SEC has chosen not to force firms to admit guilt, and has instead opted to levy fines as its primary method of enforcement. Proponents of this model say that it helps the SEC avoid protracted litigation and keeps enforcement out of the courts. The SEC itself has previously advocated for no-admission settlements, touting as benefits the avoidance of court costs and a reduction of the risks associated with litigation. The SEC also noted that having fewer trials allows the agency to pursue more enforcement actions, rather than focusing the majority of their resources into a handful of cases. (more…)

Weekly News Update: SEC Warns Mutual Fund Directors and Announces More Charges in Venezuelan Bank Kickback Scheme

By James Kollar | Posted on

Recently, the Securities and Exchange Commission settled charges against eight former directors of Morgan Keegan bond mutual funds for failing to control the portfolio managers they administered, allowing for mortgage assets to be overvalued prior to the 2007 financial crisis. Under federal securities laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available. In addition, fund directors must determine the methodologies to be used to fair value securities and must periodically reevaluate the appropriateness of those methodologies. The SEC order finds that the eight directors failed to make a diligent effort to understand how fair values were being determined. Furthermore, the directors delegated this responsibility to a valuation committee without providing adequate guidance on how fair-valuation determinations should be made, resulting in the funds having overstated value of their securities. While no fines were imposed on the former directors, the SEC order required that the eight men, cease and desist from committing or causing any future violations. “Our settlement sends a clear warning of our commitment to enforce the duty of mutual fund directors and trustees to closely oversee the process of valuing securities held by their funds,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.

In May, the SEC announced charges against four individuals in an alleged “pay-to-play” scheme in which the global markets group from brokerage firm Direct Access Partners (DAP) executed fixed-income trades for customers in foreign sovereign debt. This generated $66 million in revenue from transaction fees related to fraudulent trades they executed for state-owned Venezuelan bank Banco de Desarrollo Económico y Social de Venezuela (Bandes). Recently, the SEC has charged the former head of DAP’s Miami office, Ernesto Lujan, for his integral role in the massive scheme to secure the bond trading business of Bandes. According to the SEC, Lujan and others allegedly deceived DAP’s clearing brokers, executed internal wash trades, positioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue. In a parallel action, Mr. Lujan was recently arrested for felony charges related to the conspiracy to bribe the Vice President of Finance at Bandes, according to the U.S. Attorney’s Office for the Southern District of New York. The SEC’s amended complaint filed in federal court in Manhattan charges Lujan and the other defendants with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

 

Self-Regulatory Organization Rule Changes Part 2

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

This week, four proposed rule changes became effective for self-regulatory organizations. The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program.  The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule.

The third rule change adopts a strategy fee cap applicable to jelly rolls, which are “transactions created by entering into two separate positions simultaneously.”*  The two positions are buying a put and selling a call that have the same price and expiration, and selling a put and buying a call with the same price but a different expiration.  (more…)

Self-Regulatory Organization Rule Changes Part 1

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

This week, four proposed rule changes became effective for self-regulatory organizations.  The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program.  The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule. (more…)

Weekly News Update: SEC Enforces FCPA and Regulates Shell Companies

By James Kollar | Posted on

Recently, the Securities and Exchange Commission charged France-based oil and gas company Total S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying $60 million in bribes to an Iranian government official. The official then exercised his influence to help the company obtain valuable contracts to develop significant oil and gas fields in Iran. The SEC alleges that the company profited more than $150 million through the bribery scheme. Total S.A. attempted to cover their illegal payments by entering into phony consulting agreements with the intermediaries of the Iranian official and concealing the bribes in its records as legitimate business expenses relating to these consulting agreements. Total S.A., whose securities are publicly traded on the New York Stock Exchange, agreed to pay more than $398 million to settle the SEC’s charges and a parallel criminal matter from the U.S. Department of Justice. The SEC’s order requires the oil company to pay $153 million in illegal profits and retain an independent consultant to review and report the company’s compliance with the FCPA. In the parallel criminal proceedings, Total S.A. agreed to pay a $245.2 million penalty as part of a deferred prosecution agreement.

The Securities and Exchange Commission has halted trading in the securities of 61 empty shell companies in the second-largest trading suspension in history. The suspension is part of the SEC’s ongoing “Operation Shell Expel” crackdown against the manipulation of microcap shell companies that the agency sees as ripe for fraud as the companies lay dormant in the over-the-counter market. The SEC is looking to thwart so-called pump and dump schemes which are among the most common types of fraud involving empty shell companies. By suspending the trading in these companies it obligates them to provide updated financial information to prove they are still operational, essentially rendering them useless to scam artists. This latest round of suspensions follows one under the same operation last year, in which 379 companies were suspended by the SEC before they could be manipulated for fraudulent activity to harm investors.