May 24, 2012
SEC Bars Former SEC Attorney from Practicing before SEC
The SEC barred Spencer Barasch, a former enforcement official in the Commission’s Fort Worth office, from appearing and practicing before the Commission for one year for violating federal conflict of interest rules. The bar resolves allegations involving Barasch’s representation of Stanford Group Company after Barasch went into private practice. Barasch consented to the Commission’s action without admitting or denying the Commission’s allegations.
Earlier this year, Barasch agreed to pay a $50,000 civil fine to the U.S. Justice Department for the same conduct.
Barasch was the Associate District Director for the Division of Enforcement in the Commission’s Fort Worth office from June 1998 to April 2005. According to the Commission’s order, while at the Commission, Barasch took part “personally and substantially” in decisions involving allegations of securities law violations by entities associated with Robert Allen Stanford, including Stanford Group Company.
According to the Commission’s order, when Barasch joined a private law firm in 2005, he contacted the Commission’s Ethics Office about whether he could represent Stanford Group Company before the Commission and was told that he was permanently barred from doing so with respect to any matters on which he had participated while at the Commission. The order finds that Barasch declined to represent Stanford Group Company then, but that in the fall of 2006, he accepted an engagement from the Stanford entity and billed it for 12 hours of legal work related to Stanford matters Barasch had participated in while at the Commission.
During this representation, Barasch tried to obtain information about the Commission’s Stanford investigation from Commission staff in Fort Worth, but a staff attorney questioned whether Barasch could represent the firm. The staff attorney declined to have any substantive discussions with Barasch and suggested that Barasch contact the Commission’s Ethics Office on the matter. The order finds that Barasch did so and was again told that he was permanently barred from representing Stanford Group Company in the matter, prompting him to end his representation.
U.S. laws prohibit former federal officers and employees from knowingly seeking to influence or appear before any agency on a matter in which they had “participated personally and substantially” during their federal employment. The Commission’s order finds that Barasch violated this conflict of interest rule, which constitutes “improper professional conduct” under Rule 102(e) of the Commission’s rules of practice.
May 22, 2012
SEC Settles Insider Trading Charges with Former Yahoo! Executive and Mutual Fund Manager
The SEC today charged a former executive at Yahoo! Inc. and a former mutual fund manager at a subsidiary of Ameriprise Financial Inc. with insider trading on confidential information about a search engine partnership between Yahoo and Microsoft Corporation. The SEC alleges that Robert W. Kwok, who was Yahoo's senior director of business management, told Reema D. Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Shah had reached out to Kwok amid market rumors of an impending partnership between the two companies, and Kwok told her the information was kept quiet at Yahoo and only a few people knew of the coming announcement. Based on Kwok's illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000.
The SEC further alleges that a year earlier, the roles were reversed. Shah tipped Kwok with material nonpublic information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754.
Kwok and Shah, who each live in California, have agreed to settle the SEC's charges. Financial penalties and disgorgement will be determined by the court at a later date. Under the settlements, Shah will be permanently barred from the securities industry and Kwok will be permanently barred from serving as an officer or director of a public company.
In a parallel criminal case announced today by the U.S. Attorney's Office for the Southern District of New York, Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charge. Both are awaiting sentencing.
FINRA Fines Citigroup $3.5 Million for Inaccurate Mortgage Performance Information
FINRA announced today that it fined Citigroup Global Markets, Inc. $3.5 million for providing inaccurate mortgage performance information, supervisory failures and other violations in connection with subprime residential mortgage-backed securitizations (RMBS).
Issuers of RMBS are required to disclose historical performance information for past securitizations that contain mortgage loans similar to those in the RMBS being offered to investors. FINRA found that from January 2006 to October 2007, Citigroup posted inaccurate mortgage performance data on its website, where it remained until early May 2012, even though the firm lacked a reasonable basis to believe that this data was accurate. On multiple occasions, Citigroup was informed that the information posted was inaccurate yet failed to correct the data until May 2012. For three subprime or Alt-A securitizations, the firm provided inaccurate mortgage performance data that may have affected investors' assessment of subsequent RMBS.
In addition, Citigroup failed to supervise mortgage-backed securities pricing because it lacked procedures to verify the pricing of these securities and did not sufficiently document the steps taken to assess the reasonableness of traders' prices. Also, Citigroup failed to maintain required books and records. In certain instances, when it re-priced mortgage-backed securities following a margin call, Citigroup failed to maintain a record of the original margin call, document the supervisory approval or demonstrate that the revised price was applied to the same position throughout the firm.
In settling this matter, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
May 21, 2012
Ketchum Addresses Conflicts of Interest at FINRA Conference
Richard G. Ketchum, FINRA's Chairman and Chief Executive Officer, emphasized identifying conflicts of interest and placing the customer's interest before the firm's in his speech before the FINRA Annual Conference on May 21:
First, I call on you to do a better job of assessing—and disclosing—your conflicts. We've heard a lot in the last couple months about the culture at large firms through various media reports and the conflicts that are part of the day-to-day operations. However, I don't think the conversation should just be about the culture at one firm or another. We understand that conflicts exist in the financial services industry. We need to take a step back, acknowledge that there are risks and look at how we handle those conflicts.
Nine years ago Stephen Cutler, who was then director of the SEC's Division of Enforcement, asked firms to undertake a top-to-bottom review of their business operations with the goal of addressing conflicts of interest of every kind. I would like to see such a concept review become a standard part of operating procedure. You should be assessing whether your business practices place your firm's—or your employees'—interests ahead of your customers. What I can promise you is that, particularly with respect to the large integrated firms, we will look to have a focused conversation with you about the conflicts you have identified and the steps you have taken to eliminate, mitigate or disclose each of them.
Second, I call on you to ensure that the products you sell are appropriate for each investor. We have often reminded firms of their obligation to assess the potential risks associated with products that raise specific investor protection concerns. One of our concerns is the sale of complex products, and in January we published guidance in the form of a Regulatory Notice.
We've brought a number of enforcement actions involving complex products where we found firms didn't adequately supervise the sale of the products, the recommended products were unsuitable for the investors, or the sales material were misleading. We recognize the challenge you face when managing compliance oversight at a time when more customers are searching for yield and financial advisors are looking for products to meet these requests. Nevertheless, the suitability rule remains in effect, and it is the obligation of every firm to take steps reasonably designed to ensure that the suitability issues related to complex and other products are adequately addressed.
Before recommending a complex product to a retail customer, your financial advisers should be discussing the features of the product, how it is expected to perform under different market conditions, and the product's risks, potential benefits and costs. This means describing the circumstances under which the customer could lose money, not just those under which the customer would earn money. It also means explaining carefully the direct and imputed costs your client will incur and, where applicable, the fact that your firm or an affiliate is on the other side of the transaction. For this disclosure to work effectively, it will be equally important that you increase the training provided to your financial advisers to ensure that they fully understand the assumptions underlying the product and what can go wrong as well as right.
Finally, before any complex product is offered to a retail client, your financial adviser should be able to write down on a single page why this investment is in the best interests of your client. This does not have to wait until you find out the details of any fiduciary rulemaking the SEC may make. Being able to articulate why an investment is in the best interests of your client is fundamental to what the securities industry must be about if it is to deserve the trust of investors.
SEC Historical Society Upcoming Events
Here are some upcoming events at the SEC Historical Society that may be of interest to readers. They are webcast at the Society's website.
A Creative Irritant: Upcoming Broadcast on June 7th at noon
"A Creative Irritant: The Relationship between the SEC and Accounting Standard Setters."
Moderated by George Fritz, curator of The Adkerson Gallery, the presenters will include:
• Dennis Beresford, Terry College of Business, University of Georgia and former Chairman, Financial Accounting Standards Board;
• Edmund Jenkins, former Chairman, Financial Accounting Standards Board, and retired partner, Arthur Andersen & Co.; and
• Clarence Sampson, former SEC Chief Accountant.
The program will be preceded by a State of the SEC Historical Society address by Robert J. Kueppers, 2012-13 President; and remarks on the tenth anniversary of the virtual museum and archive of the history of financial regulation by Carla Rosati, Society Executive Director and founder of the museum.
The live video broadcast will be free and accessible worldwide without prior registration.
Looking Back: 30th Anniversary of Regulation D
The thirtieth anniversary of the enactment of Regulation D comes simultaneously with the passage of the Jumpstart our Business Startups (Jobs) Act, which has been criticized for potentially exposing investors to fraud.
The enactment of Regulation D in 1982 addressed the issue of the cost of capital formation by setting out safe harbors from '33 Act registration for private and limited offerings. For a look back at Regulation D, listen to:
• Oral histories interviews with Mary "Mickey" Beach, Edward Greene, William Morley, Richard Rowe and Carl Schneider.
• Programs on Safe Harbors (March 30, 2004), Cross-Border Regulation (September 20, 2005), and the SEC Division of Corporation Finance (February 24, 2009).
NYSE Panel Recommends Changes to Proxy Distribution Fees
On May 16 the Proxy Fee Advisory Committee (PFAC), formed by the New York Stock Exchange, published its recommendations for changes to the fees paid by public companies to banks and brokers for the distribution of proxy materials to shareholders who hold their stock in "street name." Composed of issuers, broker dealers and investors, the PFAC was formed in September 2010 to review the existing proxy distribution fee structure and make recommendations for change. Any changes to these fees are subject to SEC approval. (Download NYSE.ProxyAdvisoryPanelReport)
Overall, the Committee's recommendations would streamline proxy fees and make them more transparent to issuers as well as result in a modest decrease in total fees paid of approximately 4%
The goals of the Committee have been to support the current proxy distribution system, including continued support for the elimination of mailings; to encourage and facilitate active voting participation by retail beneficial owners; improve transparency of the fee structure and ensure that fees are as fair as possible and aligned with the work involved.
Streamline the proxy fee categories into three basic fee categories - a nominee fee, a basic processing fee and a preference management fee - to increase transparency.
Provide a more gradual tiering of the basic processing fee to smooth the "cliff effect" that occurs between large/small issuers.
Reduce preference management fees for managed accounts to half the normal rate, and eliminate all processing fees for managed account positions of five shares or less.
Increase modestly the processing fees for special meetings and contests.
Reduce by half the fee for annual meeting reminder notices, to support improved shareholder communication.
Subject the Notice & Access fees to the proxy fee rules.
Allow issuers to stratify their NOBO lists, rather than require issuers to pay for complete lists as is currently industry practice (see below).
The PFAC also recommended that the NYSE:
Explore the impact of allowing issuers to request stratified NOBO lists, including an extra fee for stratification.
Discuss the proposal to create an investor mailbox as a possible means to increase voting participation by retail shareholders with additional industry representatives so it can be determined whether the proposed "success fee" is at an appropriate level.
Create an ongoing process to review proxy fees and services more frequently going forward.
May 20, 2012
Ricks on Short-Term Funding Markets
Reforming the Short-Term Funding Markets, by Morgan Ricks, Harvard University Law School, was recently posted on SSRN. Here is the abstract:
Traditionally, governments have established licensing requirements for the issuance of important classes of monetary instruments — namely, deposit obligations and bank notes. Their issuance has been a legal privilege. This article proposes a similar legal regime for other short-term IOUs, which present similar problems. The approach would be functional rather than formalistic. The article sketches a prototype of such a regulatory system. In addition, the article offers a critical analysis of current reform initiatives pertaining to the short-term funding markets. It finds reasons to doubt that they will be effective. It proposes an alternative, coordinated regulatory approach that could be implemented under current U.S. law.
Couture on Actionable Opinions
Opinions Actionable as Securities Fraud, by Wendy Gerwick Couture, University of Idaho College of Law, was recently posted on SSRN. Here is the abstract:
This Article proposes a new analytical framework to apply to statements of opinion in securities fraud cases. Although statements of opinion form the basis of some of the most cutting-edge securities fraud claims -- such as those asserted against securities analysts and credit rating agencies -- statements of opinion do not fit squarely within the elements of securities fraud. In particular, three issues arise: (1) When is a statement of opinion "false" so as to qualify as a misrepresentation? (2) When is a statement of opinion "material"? (3) And, for that matter, what is the distinction between a statement of fact and a statement of opinion? Courts confronting these issues apply various analytically unsound and inconsistent tests. In response, this Article, drawing on the policy rationales underlying securities fraud claims, case law and scholarly commentary addressing how to apply the elements of securities fraud to statements of opinion, and comparable analyses in the contexts of common law fraud and defamation, proposes a novel approach. First, this Article argues that statements of opinion are only false if both objectively unreasonable and subjectively disbelieved. Second, this Article proposes the following new "evaluation/deduction test" to differentiate statements of opinion from statements of fact: Does the statement express the speaker's evaluation or deduction of facts? Finally, this Article proposes the following new "reasonable implication test" to distinguish opinions that are immaterial as a matter of law from those that are potentially material: Does the opinion reasonably imply an allegedly false, material fact?