Securities Law Prof Blog

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

Thursday, June 16, 2011

SEC Proposes Ways to Strengthen Audits and Reporting of Broker-Dealers to Protect Customer Assets

The SEC proposed amendments to the broker-dealer financial reporting rule in order to strengthen the audits of broker-dealers as well as the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash.  The SEC’s proposal builds upon rules adopted in December 2009 that strengthened the protections provided to investors who turn their assets over to investment advisers.

The SEC’s proposal is intended to strengthen the annual audits of broker-dealers by requiring an increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, the proposed rule amendments would mandate an audit of the controls that the broker-dealer has put in place.

Additionally, the proposal would strengthen oversight of broker-dealer custody practices by requiring broker-dealers that maintain custody of customer assets or self-clear transactions to allow SEC staff and the relevant designated examining authority to review work papers of the public accounting firm that audits the broker-dealer and discuss any findings with the accounting firm. The proposed amendments also would require all broker-dealers to quarterly file a proposed new form that would elicit information about the custody practices of the broker-dealer to be used as a starting point for examinations by regulators.

Public comments on the SEC’s proposal should be received within 60 days of its publication in the Federal Register.


June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Concludes that Some Stanford Investors are Entitled to SIPA Protections

The SEC concluded that certain individuals who invested money through the Stanford Group Company are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA) and asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer.

According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit (CDs) issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC). SGC is a SIPC Member.  In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.  In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.

The Commission further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.

A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review.

June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Provides Temporary Relief Regarding Security-Based Swap Provisions of Dodd-Frank Act

The SEC provided guidance as to which of the Title VII requirements of the Dodd-Frank Act will apply to security-based swap transactions as of July 16, the effective date of Title VII. It also granted temporary relief to market participants from compliance with certain of these requirements.  The guidance makes clear that substantially all of Title VII’s requirements applicable to security-based swaps will not go into effect on July 16. The Commission’s action also grants temporary relief from compliance with most of the new Exchange Act requirements that would otherwise apply on July 16.  In addition, the Commission’s action provides temporary relief from Section 29(b), which generally provides that contracts made in violation of any provision of the Exchange Act shall be void as to the rights of any person who is in violation of the provision.

June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 14, 2011

SEC Brings Stop-Order Proceedings Against Two Chinese Issuers

The SEC announced that it instituted proceedings to determine whether stop orders should be issued suspending the effectiveness of registration statements filed by two companies – China Intelligent Lighting and Electronics Inc. (CIL) and China Century Dragon Media Inc. (CDM).

The SEC instituted the stop order proceedings against each company after the companies’ independent auditor resigned and withdrew its audit opinions on the financial statements included in the companies’ registration statements.

June 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Janus Capital Group Majority: Adviser Did Not "Make" Statements in Fund Prospectuses

In a predictable outcome, a divided Supreme Court (5-4) held, in Janus Capital Group v. First Derivatives Traders, that a mutual fund adviser cannot be held liable in a private Rule 10b-5 action for false statements included in the prospectuses of mutual funds even though the funds and the adviser are affiliated entities within a fund family (in this case, Janus).  In finding that the adviser did not make the statements, Justice Thomas relied on the dictionary definition of "make," its previous precedent, Central Bank and Stoneridge,  and its policy of construing the scope of the implied remedy narrowly.  Moreover,

Although First Derivative and its amici persuasively argue that investment advisers exercise significant influence over their client funds, ... it is undisputed that the corporate formalities were observed here. JCM and Janus Investment Fund remain legally separate entities, and Janus Investment Fund’s board of trustees was more independent than the statute requires....  Any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.

Justice Breyer dissented, along with Justices Sotomayor, Ginsburg, and Kagan.

June 14, 2011 in Judicial Opinions | Permalink | Comments (2) | TrackBack (0)

Sunday, June 12, 2011

Heminway on SEC's Reform Efforts

Sustaining Reform Efforts at the SEC: A Progress Report, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

Many recent articles written by U.S. legal practitioners and law scholars in the wake of the financial crisis address regulatory reforms included in or omitted from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related agency initiatives. In contrast, this article focuses on institutional reforms - specifically those instituted at the U.S. Securities and Exchange Commission (SEC) since President Barack Obama took office in January 2009.

In an article published in the Villanova Law Review last year, I assessed the early reform efforts at the SEC in the Obama era from the vantage point of change leadership literature (a branch of business management scholarship). This article updates the preliminary findings reported in the Villanova Law Review article in light of the enactment and initial phases of implementation of the Dodd-Frank Act (which was in the final stages of congressional action when work on the Villanova Law Review article was completed in the spring of 2010) and the subsequent change in the composition of Congress as a result of the mid-term elections in November 2010. The article begins by identifying and assessing ongoing evidence of effective change leadership at the SEC in accordance with the framework used in my earlier article and continues by briefly addressing the potential effects of shortfalls in SEC funding. The article then concludes by making tentative predictions about the future of institutional reform at the SEC in this new political environment.

June 12, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Davis on Berle & Means

The Twilight of the Berle and Means Corporation, by Gerald F. Davis, Stephen M. Ross School of Business at the University of Michigan, was recently posted on SSRN.  Here is the abstract:

This article describes the major features of the public corporation described by Berle and Means in The Modern Corporation and Private Property and how these have been challenged since the early 1980s. A decade into the twenty-first century, the public corporation may have reached its twilight in the United States. The “shareholder value” movement of the past generation has succeeded in turning managers into faithful servants of share price maximization, even when this comes at the expense of other considerations. But the shareholder value movement also brought with it a series of changes that have undone many core features of the Berle and Means corporation. Corporate ownership is no longer dispersed; the concentration of assets and employment have been in decline for three decades; and today’s largest corporations bear little resemblance to the companies analyzed by Berle and Means. Moreover, there are far fewer of them than there used to be: the United States had half as many publicly traded domestic corporations in 2010 as it did in 1997. In another generation, the Berle and Means corporation may be largely a memory, overtaken by new forms of organization and financing.

June 12, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC & CFTC Announce Roundtable on Swaps Definitions

The staffs of the SEC and CFTC announced a joint public roundtable discussion to be held on June 16 to discuss proposed definitions required under Title VII of Dodd-Frank.  The Act provides that the CFTC and the SEC, in consultation with the Federal Reserve, must work jointly to further define the meaning of certain key terms including “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant.” Title VII also provides for the registration of dealers and major participants, and will subject them to a number of statutory requirements including capital, margin and business conduct requirements.

The roundtable will focus on such issues as:

General parameters of dealer activity.
Application of the dealer definitions among different types of asset classes.
Application of the de minimis exception from the dealer definitions.
Adequacy of the proposed major participant tests.

June 12, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Plans as Security-Based Swaps Effective Date Approaches

The SEC announced that it will take a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – and to provide appropriate temporary relief.

The Commission will:

  • Provide guidance regarding which provisions of Subtitle B of Title VII will become operable as of July 16, and, where appropriate, provide temporary relief from several of these provisions.
  • Provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions of the Exchange Act that would otherwise apply to security-based swaps on July 16. Under Dodd-Frank, security-based swaps would be included in the definition of “security” under the Exchange Act. While such swaps will be subject to provisions addressing fraud and manipulation, the Commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the Commission can consider, what if any further guidance or action is required.
  • Take other actions such as extending existing temporary rules under the Securities Act, the Exchange Act, and the Trust Indenture Act, and extending existing temporary relief from exchange registration under the Exchange Act. This will help to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.

The SEC also announced proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.

June 12, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

This Week: Midwest Corporate Scholars Conference

The Second Annual Midwest Corporate Scholars Conference will be held this Wednesday June 15 at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  The full-day program features corporate scholars from across the country presenting papers on a variety of topics.  For more information, visit the Ohio State website.

June 12, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)