SEC Settlements

SEC Sets Deadline for New Fiduciary Standard

Published on: November 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of Management and Budget says to expect the notice of proposed rulemaking for the Personalized Investment Advice Standard of Conduct in October 2016. The SEC’s fiduciary standard rule has been anticipated ever since 2010 when the Dodd-Frank Act gave the regulator the authority to proceed with such a rule.

A new fiduciary rule would mandate that both advisers and brokers who give financial advice do so in their clients’ best interests. Now that the proposed rule isn’t expected for nearly another year, the SEC will be able to see what happens with the Department of Labor’s own proposed fiduciary rule, which is expected to be finalized early in 2016.

SEC, CFTC Look to Enhance Oversight of Alternative Trading Systems, High Speed Trading

Published on: November 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has voted to propose rules to make enhancements to the regulatory oversight and operational transparency of Alternative Trading Systems (ATSs). The proposal would mandate that a ATS trading through the National Market System (NMS) submit detailed disclosures regarding: operations and broker-dealer operator and affiliated-related activities, the kinds of orders and market data used on these trading systems, and procedures regarding priority and execution. The information would be submitted on the newly proposed-Form ATS. ATSs trade stocks on national securities exchanges, such as dark pools.

The SEC’s proposal would make the disclosures at issue are available to the public on the regulator’s website. This could make it easier for market participants to be able to better assess whether to do business with an ATS. The disclosures could also allow participants to have more information when assessing decisions made by their brokers regarding their orders.

Also, the proposals would give the commission a process for qualifying NMS stock ATS for the exemption that they operate under and allow them to review disclosures submitted on Form ATS.

Following the proposal’s publication on the federal register, the SEC has allotted 60 days for comments.

Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

Published on: November 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.

Republican Rep. Introduces Bill to Place Limits on SEC’s Use of In-House Judges

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Scott Garrett (R-N.J.) recently introduced legislation that would let defendants choose the option of having their case tried in federal court instead of by a Securities and Exchange Commission administrative law judge. Garrett believes that the regulator has been overusing its in-house courts, practically turning itself into “judge, jury, and executioner” in enforcement cases.

Garrett, along with others who oppose the use of SEC in-house judges, says that defendants have greater latitude when their cases go to a jury. His bill would also up the evidence standards for cases that are presided over by an SEC judge.

Several parties have filed lawsuits opposing the SEC’s administrative court process. They claim that the system is a constitutional violation. Some feel that the SEC has the upper hand when it comes to the outcome of enforcement cases because its own judges are deciding the rulings.

Fenway Partners to Pay Over $8M For Not Disclosing Conflicts of Interest

Published on: November 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against Fenway Partners LLC and four of its executives. According to the regulator, when fund and portfolio company assets were used to pay ex-firm employees and an entity to which the New York-based private equity firm is affiliated the parties did not disclose to a fund client and investors that there were conflicts of interest.

The SEC says that Fenway Partners, principals William Gregory Smart and Peter Lamm, CFO Walter Wiacek, and ex-principal Timothy Mayhew Jr. did not fully disclose to the client and investors that a number of transactions involving over $20M in payments had come out of portfolio companies or fund assets. SEC Enforcement Division Director Andrew Ceresney said that the investors and the fund client were not told that the firm and its principals had rerouted the portfolio company fees to affiliate Fenway Consulting Partners, LLC for services and that they failed to give the fund client the benefits of those fees via fee offsets for management.

Also, according to the SEC’s order, which institute a resolved administrative proceeding, Fenway Partners went into contracts with the certain portfolio companies that were held by Fenway Capital Partners Fund III L.P. Through these contracts, the companies paid Fenway Consulting Partners the fees at issue.

SEC Issues Over $325K Whistleblower Award to Ex-Investment Firm Employee Who Provided Fraud Tip

Published on: November 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is awarding over $325K to an ex-investment firm employee who notified the regulator about misconduct that had been going on at his former employer. The information he provided allowed the SEC’s enforcement staff to investigate and discover the extent of the fraud.

In addition to providing specific details about the misconduct, the whistleblower identified who was involved in the fraud. However, said the Commission, if the whistleblower had come forward with the information sooner rather than waiting until after departing the investment firm, the award for exposing the fraud may have been greater.

In a statement, SEC Enforcement Division Director Andrew Ceresney spoke about how it is important for corporate insiders who are aware that there have been securities law violations to report what they know right away so that the misconduct can be stopped and investors are protected from any or further harm. He noted that the Dodd-Frank Act provides whistleblowers with substantial protections and incentives for tipping the agency about suspected wrongdoing.

Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions

Published on: October 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Credit Rater Accused of Misrepresenting Surveillance Approach for Complex Securities
Credit rating agency DBSR Inc. will pay nearly $6 million to settle Securities and Exchange Commission charges. The regulator is accusing the credit rater of misrepresenting the surveillance method it used for rating certain kinds of complex financial instruments over a three-year period.

In its yearly examination of DBSR, The agency’s Office of Credit Ratings found that the credit rating agency misrepresented that it would each month monitor its current ratings of re-securitized real estate mortgage investment conduits and residential mortgage-backed securities. DBSR said it did this via a three-step quantitative analysis and a surveillance committee review of each rating.

However, said the SEC, the firm failed to perform this monthly scrutiny and did not have its committee look at each rating every month. Instead, when the committee would get together it would only examine a limited subset of outstanding Re-REMIC and RMBS ratings. The credit rater lacked the sufficient technological resources and staffing for performing surveillance for all outstanding Re-REMIC ratings and RMBS each month. The SEC also said that DBRS failed to disclose modifications to specific surveillance assumptions even though its methodology said that is what it would do.

As part of the settlement, DBRS consented to disgorge over $2.7M in rating surveillance fees that it received from ’09 to ’11 in addition to prejudgment interest. It consented to paying a $2.925M penalty and will hire an independent consultant to look at its internal controls, make recommendations for how to improve them, and other matters.

NFP Advisor Services to Pay $500K to FINRA Over Inadequate Supervision
The Financial Industry Regulatory Authority has censured NFP Advisor Services for failing to properly supervise its registered representatives when they conducted private securities transactions. These representatives were registered not just with the firm but also with a registered investment advisor.

SEC Charges Against Six Firms For Stock Offering-Related Short Sale Violations Results In Over $2.5M in Sanctions

Published on: October 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against J.P. Morgan Investment Management Inc., War Chest Capital Partners LLC, Harvest Capital Strategies LLC, Omega Advisors, Inc., Auriga Global Investors, Sociedad de Valores, S.A., and, Sabby Management LLC. All six firms settled the enforcement actions, which allege short selling violations ahead of stock offerings. They will collectively pay over $2.5 million in sanctions.

Under rule 105, firms are not allowed to participate in public stock offerings after they’ve sold short the same stock. The prohibition is for five days. To do otherwise could lead to illicit profits for the trader while lowering the offering proceeds for a company via the artificial depression of the market price right before that company puts a price on the stock. The SEC contends that all six firms took part in short selling certain stocks right before buying shares from a broker, underwriter, or dealer that participated in a follow-on public offering.

Per the settlements:

• Auriga Global Investors will pay disgorgement of nearly $437K, a penalty of over $179K, and a prejudgment interest of over $2K.

• War Chest Capital Partners will pay disgorgement of over $169K, prejudgment interest of over $22K, and a penalty of $150K.

• Harvest Capital Strategies will pay over 418K of disgorgement, prejudgment interest of $619, and a $65K penalty.

• Sabby Management will pay disgorgement of over $184K, prejudgment interest of over $2300, and a penalty of over $91,600.

• JPMorgan Investment Management will pay disgorgement of over $662K, prejudgment interest of over $56,700, and a penalty of over $364K.

• Omega Advisors will pay disgorgement of $68K, prejudgment interest of $686K, and a penalty of $65K.

SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

Published on: October 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

Latour Trading Faces SEC Charges Over Market Structure Rule Violations, Will Pay Over $8M

Published on: September 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Latour Trading LLC with violating the agency’s rules regarding market structure. To resolve the case, the high-frequency trading firm will pay over $8M, including more than $3 million of disgorgement of gross trading profits, rebates it received from exchanges, and prejudgemenet interest, as well as a $5 million civil penalty.

According to the SEC, Latour violated the SEC’s Market Access Rule and Regulation National Market System for almost four years, sending millions of orders that were non-compliant to US exchanges. The Commission noted that because the firm shares parts of its electronic trading infrastructure with parent company Tower Research, some of the employees from that company could modify the computer code without the firm’s approval or knowledge.

In 2011, Tower Research made a coding modification that produced an error in the infrastructure, causing Latour to transmit millions of orders to exchanges that were not in compliance with Regulation NMS’s requirements. Specifically, from 10/10 through 8/14, Latour sent about 12.6 million intermarket sweep orders for over 4.6 billion shares.

With ISOs, trade centers may execute them at prices that might otherwise seem to violate Regulation NMS’s Rule 611, which usually mandates that trades be done at the best available price displayed. Also, trade centers can execute them right away according to the ISO router’s obligation to transmit additional orders against better price displayed quotes.