Securities and Exchange Commission Report: Enforcement Division & OCIE Collaborate, Broker-Registration in Private Funds, Conflict Minerals Regulation, Short Sale Rules, and New Commissioner Confirmations

Lawyers Not Happy About Growing Collaboration Between SEC’s Enforcement and OCIE

A number of lawyers have expressed dismay that the collaboration efforts between the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations and its Enforcement Division are increasing. There is concern that examinations are ending up becoming the start of later investigations. For example, examiner interviews with the employees of registrants can later turn into the basis of enforcement actions, and some attorneys say this brings up issues of due process.

Meantime, SEC officials have acknowledged the growing collaboration between these two divisions.

Commission’s Trading Division Looks at Broker-Registration in Private Funds
At a recent gathering John Ramsay, the acting direct of the SEC’s Division of Trading and Markets, said that the group is continuing to look at broker-dealer registration matters as they relate to the private fund sector. David Blass, the TM chief counsel, previously had pointed to two practices that implicate registration requirements for brokerage firms, including when private fund advisers get compensation that is transaction-based for broker activities that supposedly relate to at least one of the funds’ portfolio companies.

Ramsey also said that broker-dealer registration requirements as they relate to high-frequency firms are also getting a closer look. He noted that there are questions as to whether firms that are not registered are “appropriately not registered.” These nonregistered brokerage firms’ activities, presentation to the marketplace, and transactions will be up for greater scrutiny.

DC Circuit Asked by Business Groups to Look At Ruling Upholding SEC Conflict Minerals Regulation
The Business Roundtable, the National Association of Manufacturers, and the US Chamber of Commerce is asking the U.S. Court of Appeals for the District of Columbia Circuit to consider a ruling by a lower court upholding the SEC’s conflict minerals regulation. The groups don’t believe that the agency’s record supports the rule, which mandates that US companies and foreign private issuers report their “conflict minerals” use from the Democratic Republic of Congo and the countries near it.

Plaintiffs filed a lawsuit contending that the SEC did not perform sufficient cost-benefit analysis for the rulemaking while misconstruing the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 1502 by not including a de minimis exemption. The Commission had adopted the rule pursuant to that section. They also claimed that the rule improperly compels speech that is “stigmatizing” by making issuers publish conflict material disclosures on their websites, which is a 1st Amendment violation.

SEC Warns About the Use of Options to Get Around Short Sale Rules
The Commission’s Office of Compliance Inspections and Examinations has put out a “risk alert” warning about the use of options trading strategies to get around its rules regarding closing out short sales. The alert talks about these tactics, including strategies to make it seem that the securities were delivered (when they hadn’t been) upon the settling of a short sale, that are employed by some clearing firms, brokerage firms, and their customers to circumvent Regulation SHO.

The SEC staff mentions a number of “red flag” tactics, including excessive/exclusive trading in securities that are “hard-to-borrow,” holding huge “fail-to-deliver” positions, failing to deliver on positions, employing married puts and/or by-writes to fulfill the regulations close-out requirement, and using the same trader as contra-party to make multiple big trades in a number of securities that are hard-to-borrow.

New SEC Commissioners Are Confirmed
Kara Stein and Michael Piwowar were sworn in as SEC Commissioners last month. Both were unanimously approved by the US Senate. Piwowar replaces Commissioner Troy Paredes and Stein replaces Elise Walter.

Attorneys Decry Increasing Convergence Between SEC Exam, Enforcement Functions, Law.Stanford.Edu, August 15, 2013

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Short Sale Rules Alert, SEC

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