Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, July 31, 2009

NASAA Proposes Model Rule on Investment Adviser Solicitors

NASAA’s Investment Adviser Regulatory Policy and Review Project Group is soliciting comments from the public on a proposed model rule regarding solicitors for investment advisers.  The Proposed Rule keeps intact the increased investor protection standards presently required by the states, while clarifying the conditions under which investment advisers, investment adviser representatives, and solicitors must operate. Additionally, the Proposed Rule provides an optional template for Administrators wishing to exempt solicitors performing limited activities from registration under specified conditions. The Proposed Rule is being provided under the Uniform Securities Act of 1956 and under the Uniform Securities Act of 2002. 

The comment period begins on Tuesday, July 28, 2009, and will remain open for 20 days.  All comments should be submitted on or before Monday, August 17, 2009.

July 31, 2009 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Integral Systems Failed to Disclose Criminal Background of Officer

The SEC filed two actions (judicial and administrative) charging that Integral Systems, Inc. (Integral Systems or the Company), a corporation based in Columbia, Maryland that manufactures satellite ground systems, fraudulently concealed for over seven years the identity and involvement of a convicted securities fraud felon in the Company's top management. The civil action named three former officers, and the administrative action was against the corporation.  The company settled the administrative action.

The SEC alleged that from 1999 through August 2006 the company failed to disclose GaryPrince's role at the Company and his legal background in its filings. The complaint states that Prince pleaded guilty to criminal charges of conspiracy to commit securities fraud and bank fraud at another company in 1995. In related Commission actions, he was enjoined from violating the antifraud and other provisions of the federal securities laws and was barred from appearing or practicing before the Commission as an accountant. Prince had been CFO of Integral Systems for several years until he resigned shortly before his criminal conviction. When Prince was rehired in 1998 after serving his criminal sentence, he was given executive officer responsibilities in the Company's accounting, financial reporting, and policy making functions, but was never disclosed as an officer of the Company.

July 31, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Helmerich & Payne Settles FCPA Charges with SEC

On July 30, the SEC settled administrative charges with Helmerich & Payne, Inc. (H&P), finding that from 2003 through 2008 H&P's books, records, and accounts did not properly reflect the improper payments made by H&P through two of its wholly-owned subsidiaries, Helmerich & Payne (Argentina) Drilling Company (H&P Argentina) and Helmerich & Payne de Venezuela, C.A. (H&P Venezuela) to customs officials. As a result, H&P violated Exchange Act Section 13(b)(2)(A). H&P also failed to devise or maintain sufficient internal controls to ensure that H&P Argentina and H&P Venezuela complied with the FCPA and to ensure that the payments those subsidiaries made to foreign officials were accurately reflected on its books and records. As a result, H&P violated Exchange Act Section 13(b)(2)(B).  The SEC ordered H&P to cease-and-desist from committing or causing any violations and any future violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) and to pay disgorgement of $320,604 and prejudgment interest of $55,077.22. H&P consented to the issuance of the Order without admitting or denying any of the findings in the Order. In the Matter of Helmerich & Payne, Inc. Rel. 34-60400; AAE Rel. 3026; File No. 3-13565)

July 31, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York AG Releases Report on Bank Bonuses

New York Attorney General Cuomo released a report on bank bonuses, NO RHYME OR REASON: The Heads I Win, Tails You Lose I Bank Bonus Culture.

July 31, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 29, 2009

SEC's Investor Advisory Committee Raises Issues

The SEC's Investor Advisory Committee , after its first meeting, raised the following questions:  

Fiduciary duty: Should all financial intermediaries who provide investment advice to their customers be subject to the same fiduciary duties, and how should those duties be defined? Many investors rely heavily on financial advisors for investment decisions, but may not understand the different standards that apply to brokers and investment advisers.

Proper disclosures: Does the information that investors currently receive — both before making an investment decision and afterwards — meet their needs, and if not, what changes are necessary to ensure that investors have the information that they need, when they need it?

Technology: Can technology be better used to improve the flow of information to and from investors?

Financial Literacy: Should there be a distinction between "investor information" and "investor education," and if so, what is that distinction? What is the role of "financial literacy," and how can the SEC promote early education of these issues?

Valuation: Do investors fully understand the role that underlying asset valuation plays in portfolio and fund valuation? For example, do investors in variable annuities understand that guaranteed minimum payouts do not necessarily hold if the underlying investments (mutual funds, etc.) decline by a certain amount? Do fixed income investors understand that high yield bond funds involve more risk than other fixed income investments, or that fixed income investments are typically much less liquid and, therefore more difficult to definitively value, than are equities?

Majority Voting: Should majority voting for directors be mandatory for all U.S. companies? Although most large U.S. companies have adopted a form of "majority voting," many other companies still enable directors to be elected based only on plurality support.

Director-Investor Communications: Are there more effective ways for investors and directors to communicate with one another and what steps can the Commission take to facilitate dialogue and help ensure that corporate manager interests are aligned with investor interests?

Proxy Voting: Do investors — both institutional and individual — have the information they need to make informed proxy voting decisions, and are these decisions effective in holding corporate directors accountable? Does the proxy voting process and system foster informed decision-making? Should there be more transparency to the market about investors' proxy decisions? What is the role of proxy advisory firms, and should they be subject to more oversight by the Commission?

Resources: Does the SEC have the resources it needs to effectively achieve its investor protection mission?

July 29, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 28, 2009

SEC's Inspector General Says Stanford Hindered Investigation

The Wall St. Journal reports that the SEC's Inspector General (which has issued recent reports sharply critical of the agency) found that the SEC had been actively investigating Allen Stanford since 2005, but its investigation was hindered by Stanford's and his attorney's lack of cooperation.  The investigation became more active after Madoff and after DOJ gave the SEC the go-ahead.  WSJ, Stanford Hampered SEC Probe.

July 28, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Avery Dennison Settles FCPA Charges with SEC

The Securities and Exchange Commission today filed two settled enforcement proceedings against Avery Dennison Corporation (Avery), a Pasadena, California-based multinational corporation, alleging violations of the Foreign Corrupt Practices Act (FCPA) in connection with improper payments and promises of improper payments to foreign officials by Avery's Chinese subsidiary and several entities Avery acquired.

The SEC filed a civil action in the United States District Court for the Central District of California charging Avery with violations of the books and records and internal controls provisions of the FCPA and seeking a civil penalty. The SEC also issued an administrative order finding that Avery violated the same provisions of the FCPA. In the administrative proceeding, the SEC ordered Avery to cease and desist from such violations, and to disgorge $273,213, together with $45,257 in prejudgment interest. In the federal civil action, Avery agreed to the entry of a final judgment requiring it to pay a civil penalty in the amount of $200,000.

The SEC's complaint and administrative order charge that, from 2002 through 2005, the Reflectives Division of Avery (China) Co. Ltd. (Avery China) paid or authorized the payments of kickbacks, sightseeing trips, and gifts to Chinese government officials. The amount of illegal payments actually paid amounted to approximately $30,000. In one transaction, Avery China secured a sale to a state-owned end user by agreeing to pay a Chinese official a kickback of nearly $25,000 through a distributor. Avery China realized $273,213 in profit from this transaction, which it inaccurately booked as a sale to the distributor rather than to the end user. In addition, after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries, resulting in illegal payments of approximately $51,000. Avery failed to accurately record these payments and gifts in the company's books and records, and failed to implement or maintain a system of internal accounting controls sufficient to detect and prevent such illegal payments or promises of illegal payments.

As a result of the conduct described above, the SEC charged that Avery violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Avery consented to the ordered relief without admitting or denying either the findings contained in the SEC's administrative order, or the allegations of the SEC's complaint.

July 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Removes Requirement of NYSE Surveillance Program to Track Floor Trading

On July 28, 2009, the SEC issued an Order that removes the requirement for NYSE operate an on-floor video and audio surveillance program to track floor trading activity at NYSE trading posts, operated as a pilot, pursuant to the April 12, 2005 Order.  The Order found that:

The Commission has determined that the Pilot Program has played a helpful role in supplementing the NYSE’s routine surveillance, examination, and enforcement programs. While the nature of the NYSE trading has changed significantly in recent years, floor-based trading remains an important component of the NYSE’s current market structure.

The Commission recognizes, however, that allowing the NYSE greater flexibility in its usage of the on-floor surveillance hardware installed pursuant to the Pilot Program and the resulting data would allow it to devote additional resources to regulatory issues that arise. As such, the Commission has determined to amend the Order and to no longer require the NYSE to operate the Pilot Program so that the NYSE may be afforded greater flexibility in determining the appropriate regulatory usage of its audio-visual surveillance technology and data to maximize the potential benefit to the NYSE’s surveillance, examination, and enforcement process.

In the Matter of the New York Stock Exchange LLC (f/k/a "The New York Stock Exchange, Inc.").

July 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Merrill & UBS for Unsuitable CEF Sales

FINRA announced today that it fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $150,000 and UBS Financial Services, Inc. $100,000 for supervisory failures that led to unsuitable short-term sales of closed-end funds (CEF) purchased at the funds' initial public offerings.  FINRA also suspended five Merrill Lynch brokers each for 15 days and fined them $10,000 for making unsuitable CEF recommendations to customers. FINRA's investigation into the activities of former UBS brokers involved in the short-term sales of CEFs continues.

 CEFs are investment companies that sell a fixed number of shares in an initial public offering (IPO), subject to built-in sales charges. After the offering, the shares trade in the secondary market, typically at a discount from the initial offering price. The CEFs at issue had sales charges of 4.5 percent, as well as a "penalty bid period" of generally 30 to 90 days immediately following the IPO.  During this period, brokers would lose their sales commission if their clients sold the CEFs purchased at the offering. One regulatory concern related to CEFs is the potential for brokers to earn high fees at their customers' expense by soliciting their customers to purchase CEFs at the IPO and then later, after the expiration of the penalty bid period, recommend that customers sell the CEFs, often at a loss, using the proceeds to purchase yet another CEF at an initial offering.

 FINRA found that despite being aware that CEFs purchased at the IPO are more suitable for long-term investments - and that the sales charges applied to purchases at the IPO make short-term trading of these CEFs generally unsuitable - Merrill Lynch and UBS did not have adequate supervisory systems and procedures designed to detect and prevent unsuitable short-term trading of CEFs.  The firms also failed to provide supervisors with any guidance or warning about the potential abuses and disadvantages relating to short-term trading of CEFs purchased at the IPO. Without adequate guidance, branch managers were not on notice that there were potential problems with short-term sales of CEFs bought at the IPO.

 FINRA also found that the firms failed to provide guidance or training to its registered persons regarding the impact of the sales charges on the short-term sales of CEFs purchased at the IPO. As a result, certain UBS and Merrill brokers recommended CEF purchases at the IPO and subsequent short-term sales without having a sufficient understanding of the effects that the sales charges and other pricing considerations had on the clients' investments.

 In determining the appropriate sanctions against the firms, FINRA considered the firms' remediation efforts, which included payments to customers in excess of $3 million by Merrill Lynch and more than $2 million by UBS. Also, FINRA considered the firms' self-reviews and prompt remedial measures to correct systems and procedures to prevent future violations.

July 28, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, July 27, 2009

SEC Finalizes Short Sales Rule and Announces Other Initiatives

The SEC published amendments to Regulation SHO to make permanent amendments contained in Interim Final Temporary Rule 204T (“temporary Rule 204T”) of Regulation SHO, with some modifications to address commenters’ concerns. These amendments are intended to help further the goals of reducing fails to deliver and of addressing abusive “naked” short selling in all equity securities. These goals will be furthered by requiring that, subject to certain limited exceptions, if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency it must immediately purchase or borrow securities to close out the fail to deliver position by no later than the beginning of regular trading hours on the settlement day following the day the participant incurred the fail to deliver position. In addition, a participant that does not comply with this close-out requirement, and any broker-dealer from which it receives trades for clearance and settlement, will not be able to short sell the security either for itself or for the account of another, unless it has previously arranged to borrow or borrowed the security, until the fail to deliver position is closed out.

In addition, the SEC announced other actions to protect against abusive short sales and to make more short sale information publicly available.  These include working with several SROs to make short sale volume and transaction data available through the SRO Web sites. The SEC is also considering proposals on a short sale price test and circuit breaker restrictions.

Finally, the SEC intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.

July 27, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)