Securities and Exchange Commission

SEC to Reject BlackRock Inc. Proposal for Nontransparent Exchange-Traded Fund

Published on: October 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In a preliminary ruling, The U.S. Securities and Exchange Commission said it expects to reject BlackRock Inc.’s (BLK) proposal to put out a nontransparent exchange-traded fund. BlackRock sought permission to sell the ETF from the regulator in 2011.

The fund wants to keep its investments secret, which go against SEC rules. BlackRock proposed using a blind trust to manage the securities of a portfolio without revealing the contents. It sought exemption from the agency’s rules, which mandate that disclosure be provided daily. Instead, BlackRock would have disclosed its holdings with the nontransparent ETF on a quarterly basis. One reason that certain fund managers are pushing for less frequent disclosure is their worry that daily disclosures could allow investors to imitate the trades.

Now, however, the SEC is saying that without portfolio transparency such as a plan does not guarantee that that the ETF would trade consistently or near net asset value. The regulator said that the proposed structure sets up substantive risk that ETF share market prices might materially deviate from the ETF’s NAV/share, especially during stressful periods in the market. This could “inflict substantial cost on investors,” noted the Commission.

SEC, Federal Reserve, HUD Approve Laxer Mortgage-Lending Rule

Published on: October 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission, the Department of Housing and Urban Development, the Federal Reserve, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have jointly approved a new rule for mortgage-backed securities and collateralized loan obligations. The regulation completes what had been a delayed provision of the 2010 Dodd Frank Act.

The rules are supposed to enhance the quality of loans by providing banks with a financial impetus to make sure the mortgages can be repaid. An earlier version of the proposed rule had obligated banks to retain either 5% of the risks of mortgages sold and packaged to investors or require a 20% borrower down payment.

Regulators, however, were concerned that these stipulations could hurt the housing market and they have since rescinded that 20% down payment requirement. The 5% of the risk on banks’ books when securitizing loans, however, still stands. And banks can get around the 5% risk retention requirement as long as they confirm the borrower’s ability to repay the loan and remain in compliance with other requirements, including debt payments that aren’t above 43% of income.

SEC Panel Recommends Changes to Accredited Investor Definition

Published on: October 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC Investor Advisory Committee (IAC) is recommending that the agency to make substantial revision to who should be considered a sophisticated investor. This could change who can get involved in private placements as investors.

Currently, there are about 8.5 million accredited investors. The Dodd-Frank Act obligates the SEC to reexamine the accredited-investor definition every four years.

At the moment, accredited investor standard only allows individuals who make a minimum of $200K or have a net worth of $1M—the value of their primary residence not included—to invest in private placement purchases. If a couple’s net worth is $300K together, they may qualify too.

As SEC Examines Private-Equity Consultant Salaries, Blackstone Stops Monitoring Fees

Published on: October 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, the operating partners of private equity firms, are coming under closer scrutiny. These professionals are typically retained when acquiring a company with the intention of enhancing its operations.

These operating partners are usually listed with full-time employees. Regulators are worried that buyout firms are not providing private equity fund investors enough information about the way these consultants are compensated.

The firm usually doesn’t pay its operating partners. Instead, their salary usually comes from the company they are advising or the investors of the buyout firm. However, the WSJ’s examination of regulator filings regarding 80 private equity companies found that only about fifty percent of them disclosed where the money paid to operating partners comes from.

Shareholder’s $40B Class Action Securities Lawsuit Over AIG Bailout Goes to Trial

Published on: September 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The trial over whether the U.S. government unlawfully seized a majority stake in American International Group Inc. (AIG) during the bailout has started. The securities case was brought by Starr International Co., which is the charitable and investment firm helmed by former AIG CEO Maurice R. Greenberg. Starr was the insurer’s biggest shareholder when the company became a ward of the government at the height of the economic crisis.

The lawsuit, now a class action case, claims that government violated the rights of shareholders to receive fair compensation under the U.S. Constitution. Some 300,000 AIG stockholders from 2008 and 2009, including AIG employees, large mutual fund companies, and retirees, would be entitled to any award issued to Starr. Greenberg wants about $40 billion in compensation over the government takeover and the high interest rates the U.S. charged for the loans. AIG is not one of the plaintiffs.

The insurance giant got into financial trouble in the wake of the financial crisis mostly because of sales of an insurance of the unregulated variety to banks and others, which was intended to mitigate debt exposure risks. The government loaned AIG $85 billion in 2008 to keep it from falling into bankruptcy. In opening statements, Kenneth Dintzer, a lawyer for the U.S., noted that the insurance company’ shareholders hugely benefitted from the efforts made to stabilize AIG. The government maintains that it had to bailout AIG to keep the world economy from collapsing.

SEC Investigates Pimco Exchange-Traded Fund for Artificial Inflation

Published on: September 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is looking at whether Pacific Investment Management Co, artificially upped the returns of a fund that targeted smaller investors. At issue is the way the $3.6B Pimco Total Return ETF (BOND) purchased investments at a discount but depended on higher valuations for the investments when the fund worked out its holdings’ value soon after. This type of move could make it appear as if the fund made rapid gains when it was actually just availing of the variations in how certain investments are valued.

According to The Wall Street Journal, sources familiar with the probe say that SEC investigators have already interviewed firm owner Bill Gross. The regulator could be looking at whether investors ended up with inaccurate data about the performance of the fund. If so, this could be a breach of securities law, even if the wrongdoing wasn’t intentional.

While the probe has been going on for at least a year, it seems to have recently escalated. Other Pimco executives have also been interviewed.

Barclays to Pay $15M SEC Settlement Over Compliance Failures Following Lehman Brothers Acquisition, Pays $61.7M Fine to U.K.’s FCA Over Client Asset Issues

Published on: September 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Capital Inc. (BARC) has consented to pay $15 million to the U.S. Securities and Exchange Commission to resolve civil charges claiming that it did not make sure the financial institution was in proper compliance with securities laws and its own rules after acquiring Lehman Brothers’ advisory division. According to the regulator, the firm did not adopt and execute written procedures and policies or keep up the needed records and books to stop certain violations.

For example, says the SEC, Barclays executed over 1,500 principal transactions with advisory client accounts but did not seek the necessary written disclosures and get the requisite customer consent. It also made money and charged fees and commissions that were not consistent with disclosures for 2,785 advisory client accounts, underreported assets under management by $754 million when amending its Form ADV a few years ago, and violated the Advisers Act’s custody provisions.

The violations caused clients to lose about $472,000 and pay more than they should have, while Barclays made additional revenue that was greater than $3.1 million. Barclays has since paid back or credited $3.8 million plus interest to customers who were affected. It also consented to remedial action and will retain a compliance consultant to perform an internal review.

T.J. Malone’s Lincolnshire Management Settles with SEC for $2.3M Over Purportedly Improper Allocations That Cost Its Funds

Published on: September 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lincolnshire Management has consented to pay $2.3 million to the Securities and Exchange Commission to settle charges alleging improper expense allocations involving two of its funds’ investments in the same company. The New York-based private equity firm, which is run by businessman T.J. Maloney, claims to oversee $1.7 billion.

Lincolnshire acquired PCS Inc. via its debut fund. Several years later it acquired Computer Technology Solutions with the intention of merging the two. However, reports Forbes.com, the first fund ran out of money, so Lincolnshire used its second fund to pay for the acquisition.

Commingling investments can be precarious, especially as each fund had a slightly different investor base. Because of this, the firm created expense allocation policies that were paid directly to it. This meant that each company’s allocation would be determined by the percentage of respective contributions to the total revenue of the overall revenue. However, the policies were never put in writing, which sometimes led to misallocations.

SEC News: Regulator to Review Rule Change on New Hire Background Checks, Prepares Mutual Fund Regulations, and is Defendant of Oxfam America Lawsuit

Published on: September 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Sends Background Check for New Hires Rule to the SEC

The Financial Industry Regulatory Authority is moving ahead with a rule change that would mandate that broker-dealers do a better job of vetting new hires. The SRO sent a rule to the Securities and Exchange Commission that would obligate brokers to implement written procedures to confirm the accuracy of information provided in an applicant’s U4 form.

Already, firms must review applicants for jobs. However, under the new rule, they would have to look into their public records.

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million

Published on: August 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. State of Kansas has agreed to settle U.S. Securities and Exchange Commission fraud charges accusing it of failing to disclose in offering documents that the Kansas Public Employees Retirement System (KPERS), its pension system, was very underfunded. The regulator says that this established a repayment risk for bond investors. At issue were eight bond offerings valued collectively at $273 million.

According to the regulator’s order, the bond offers were issued via the Kansas Development Finance Authority (KDFA). Not only did the bond offering documents purportedly fail to disclose KPERS’ unfunded liability but also the paperwork did not describe what effect this could have on payments. The SEC said these poor disclosures stemmed from inadequate communications and procedures between KDFA and the state’s Department of Administration, which let the former know what data should have gone into the offering materials.

As a result, said the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit chief LeeAnn Ghazil Gaunt, Kansas gave investors were given an “incomplete” picture of the state’s finances and its potential ability to pay back the bonds (because of other stresses on its budget). The state has since put into place new procedures and policies to make sure that the appropriate disclosures about pension liabilities are disclosed in offering documents.