Securities Law Prof Blog

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

Friday, May 3, 2013

White Speaks on Global Financial Regulation

SEC Chair Mary Jo White, in her first public speech, addressed the Investment Company Institute today and focused on Regulation in a Global Financial System.  While some had speculated that she would take this opportunity to address mutual fund reform, and specifically money market funds, in fact she said little on the subject in her prepared remarks: 

As the SEC works to develop and propose meaningful money market fund reform, our goal is to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs – runs in which retail investors are especially likely to suffer losses.

While I’m sure that you would like me to say more about this today, I’ll stop there as the staff and Commissioners are actively engaged in discussions designed to yield an appropriate and balanced proposal in the near future. 

I am confident that the ultimate result of this process will take into account the views of Commissioners who vary in background and perspective, but share the goals of protecting investors and promoting market efficiency and capital formation.  The SEC regulatory process is grounded in sound economic analysis and is well-informed by public comment, including helpful comments from the ICI fund investors and others with important and relevant perspectives on money market funds.   

This is the process the SEC will bring to bear as it considers proposing money market fund reform.  And I hope that ultimately it will lead to a good, investor-oriented result that has been informed by and can be shared with other regulators in the global marketplace.

May 3, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, May 2, 2013

FINRA Names New VP for Risk & Strategy

FINRA has a new Executive Vice President, Risk and Strategy.  Carlo V. di Florio, currently Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), is joining FINRA and will lead its Office of Risk, Emerging Regulatory Issues, Enterprise Risk Management and Strategy.  According to the FINRA press release, "Di Florio will have overall responsibility for ensuring that FINRA has effective processes for assessing the most significant risks to the investing public and the integrity of our markets, and developing strategic responses to mitigate, manage and monitor those risks and industry trends."

May 2, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Gatekeepers of Two Mutual Fund Trusts with Inaccurate Disclosures

The SEC charged the gatekeepers of a pair of mutual fund trusts with causing untrue or misleading disclosures about the factors they considered when approving or renewing investment advisory contracts on behalf of shareholders.

An SEC investigation that arose from an examination of the Northern Lights Fund Trust and the Northern Lights Variable Trust found that some of the trusts' shareholder reports either misrepresented material information considered by the trustees or omitted material information about how they evaluated certain factors in reaching their decisions on behalf of the funds and their shareholders. The trustees and the trusts' chief compliance officer Northern Lights Compliance Services (NLCS) were responsible for causing violations of the SEC's compliance rule, and the trusts' fund administrator Gemini Fund Services (GFS) caused violations of the Investment Company Act recordkeeping and reporting provisions.

The firms and the trustees have agreed to settle the SEC's charges.

The five trustees named in the SEC enforcement action are: Michael Miola of Arizona, Lester M. Bryan of Utah, Anthony J. Hertl of Florida, Gary W. Lanzen of Nevada, and Mark H. Taylor of Ohio.

Some trusts are created as turnkey mutual fund operations that launch numerous funds to be managed by different unaffiliated advisers and overseen by a single board of trustees. The federal securities laws require all mutual fund directors to evaluate and approve a fund's contract with its investment adviser, and the funds must report back to shareholders about the material factors considered by the directors in making these decisions. The SEC Enforcement Division's Asset Management Unit has been taking a widespread look into the investment advisory contract renewal process and fee arrangements in the fund industry.

According to the SEC's order instituting settled administrative proceedings, the Northern Lights trusts included up to 71 mutual fund series from January 2009 to December 2010, most of which were managed by different advisers and sub-advisers. The trustees conducted 15 board meetings during that time period, and made decisions about 113 advisory and 32 sub-advisory contracts during what's known as the 15(c) process. Section 15(c) of the Investment Company Act requires fund directors to request and evaluate information that is reasonably necessary to evaluate the terms of any contract for an investment adviser of a registered investment company.

The SEC's order found that some boilerplate disclosures related to the 15(c) process that were included by GFS in some fund series shareholder reports contained untrue or misleading information. For example, one disclosure claimed that the trustees had considered peer group information about the advisory fee, however no such data had been provided to the trustees. Other disclosures misleadingly indicated that the fund's advisory fee was not materially higher than its peer group range, when in fact the fee was nearly double the peer group's mean fee or even higher. GFS failed to ensure that certain shareholder reports contained the required disclosures about the trustees' evaluation process and failed to ensure that certain series within the trusts maintained and preserved their 15(c) files.

The SEC's order also found that certain mutual fund series did not follow their policies and procedures for the trustees' approval of the investment advisers' compliance programs. Fund boards are required to approve the policies and procedures of service providers to a fund, including its adviser. The policies and procedures of each series within the Northern Lights trusts stated that the trustees could approve the compliance program of each series' investment adviser based on their review of an adviser's compliance manual or based on a summary provided by NLCS that familiarized them with the salient features of the compliance program and provided a good understanding of how the program addressed particularly significant compliance risks. Rather than following this process, the trustees' approval of the advisers' compliance programs was based primarily on their review of a brief written statement prepared by NLCS saying that the advisers' compliance manuals were "sufficient and in use" and a verbal representation by NLCS that such manuals were adequate.

May 2, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

DU Online Law Review Devotes Issue to JOBS Act

J. Robert Brown Jr., University of Denver Sturm College of Law, announces that:

The DU Online Law Review has devoted an entire issue to the JOBS Act (available at . The content came from eight students under faculty supervision. The papers each analyzed a specific provision in the JOBS Act and relied upon a common format. The papers addressed the law as it existed on the eve of the JOBS Act and analyzed the changes implemented by Congress, including the relevant legislative history. Each paper offered practical insight into the operation of the selected statute.

The papers encompassed significant portions of the JOBS Act. Three addressed crowdfunding (Lindsay Anderson Smith, Crowdfunding and Using Net Worth to Determine Investment Limits, Lina Jasinskaite, The JOBS Act: Does the Income Cap Really Protect Investors? and Michael W. Shumate, Crowdfunding and State Level Securities Fraud Enforcement under the JOBS Act), two addressed the changes to the private placement process under Rule 506 (Erica Siepman, The JOBS Act and the Elimination of the Ban on General Solicitations and Samuel Hagreen, The JOBS Act: Exempting Internet Portals from the Definition of Broker-Dealer ), and one addressed the number of shareholders of record that trigger registration with the SEC (Susan Beblavi, The JOBS Act Title V: Raising the Threshold for Registration), emerging growth companies (Will McAllister, The JOBS Act Title I: The “On-Ramp” to IPOs for Emerging Growth Companies) and Regulation A (David Rodman, Regulation A , the JOBS Act, and Public Offering Lite).

May 2, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 1, 2013

SEC Proposes Rules and Guidance on Cross-Border Security-Based Swap Transactions

The SEC today voted unanimously to propose rules and interpretive guidance for parties to cross-border security-based swap transactions.  The proposal explains which regulatory requirements apply when a transaction occurs partially within and partially outside the U.S. The proposed rules also set forth when security-based swap dealers, major security-based swap participants, and other entities — such as clearing agencies, execution facilities, and data repositories — must register with the SEC.

The comment period for the proposed rules and interpretive guidance for cross-border security-based swap activities will be open for 90 days after they are published in the Federal Register.

Separately, the Commission voted unanimously to reopen the public comment period for all rules not yet finalized stemming from Title VII of the Dodd-Frank Act (TITLE VII—WALL STREET TRANSPARENCY AND ACCOUNTABILITY). The comment periods for these rules — and a policy statement describing the expected order for these new rules to take effect — will be reopened for 60 days after notice is published in the Federal Register.

May 1, 2013 | Permalink | Comments (0) | TrackBack (0)

House Finance Chair Fundraises and Skis with Wall Street

ProPublica's Justin Elliott has a great story:  House Finance Chair Hensarling Goes on Ski Vacation with Wall Street.  The title says it all.

May 1, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 30, 2013

FINRA Names Chief Economist

FINRA announced the appointment of a Chief Economist and Senior Vice President, who will report directly to FINRA CEO Richard Ketchum.  Jonathan S. Sokobin is currently Acting Deputy Director, Research and Analysis in the Office of Financial Research at the U.S. Treasury Department.  The appointment is further demonstration of the importance of cost-benefit analysis in financial regulation.  According to the press release,

The Office of the Chief Economist will work closely with the Office of General Counsel and other departments in developing new rules and analyze the costs and benefits of existing and potential rulemakings. In order to facilitate that effort, the Office will be responsible for gathering and analyzing data on securities firms and markets.


April 30, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Franken Calls on SEC to Prevent Mandatory Arbitration Clauses in Brokerage Contracts

Senator Al Franken (D-Minn) and other Congressional representatives have written to SEC Chair Mary Jo White, urging the agency to use its authority under Dodd-Frank to prevent mandatory arbitration clauses in brokerage contracts.  Concerns over the use of the predispute arbitration agreements have increased in the wake of Charles Schwab's inclusion of a class action waiver (contrary to FINRA rules) in its brokerage agreement.  A FINRA hearing panel recently held that FINRA could not enforce its rules prohibiting the class action waiver against Schwab because of U.S. Supreme Court's interpretation of FAA preemption in AT&T Mobility v. Concepcion.  FINRA Enforcement has appealed the hearing panel's decision.

Here is the text of the letter:

Dear Chairman White,
We write to express our strong belief that the Securities and Exchange Commission (the “Commission”) should promptly exercise its authority under Section 921 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prohibit the use of mandatory arbitration provisions in customer service agreements.
The Dodd-Frank Act was enacted, among other reasons, to protect American consumers from abusive financial services practices.  Section 921 reflects Congress’s concern over the increasingly widespread use of mandatory arbitration agreements in customer and client contracts, and grants the Commission authority to restrict or prohibit the use of these provisions.  Ensuring a choice of forum, particularly for small investors, heightens fairness and ultimately enhances participation in our capital markets.  To our disappointment, in the almost three years since the Dodd-Frank Act’s enactment, the Commission has largely disregarded this important mandate.
The time is ripe for the Commission to act under Section 921 to protect the investing public and prevent further abuse of forced arbitration contracts.
Recently, we were alarmed to see further attempts to erode investor rights when Charles Schwab, one of the country’s largest brokers, expanded the mandatory arbitration clauses in its customer agreements to include a mandatory class action waiver clause.  In this instance, Schwab argued that, in response to the Supreme Court’s interpretation of the Federal Arbitration Act (FAA) in AT&T Mobility v. Concepcion, it could include a waiver of class action and class arbitration rights in its customer agreements.  FINRA initiated a disciplinary action against Schwab for violation of FINRA rules barring class action waivers.  In February, however, a FINRA hearing panel ruled that although Schwab’s actions did in fact violate FINRA rules, those rules could not be enforced under Concepcion.[1]
While the Supreme Court in Concepcion did find that the FAA preempts state actions that would restrict the use of arbitration, the facts in the Schwab case are notably distinguishable—not least because FINRA is a membership organization seeking to enforce its own rules.  However, the ambiguity created by the panel’s ruling underscores the urgency with which the Commission should adopt rules under Section 921.
Section 921 was included in the Dodd-Frank Act to address the threat to consumers posed by mandatory arbitration clauses in investment contracts.  During Congress’s deliberation of this section, legislators heard concerns that investors forced into arbitration must face “high upfront costs; limited access to documents and other key information; limited knowledge upon which to base the choice of arbitrator; the absence of a requirement that arbitrators follow the law or issue written decisions; and extremely limited grounds for appeal.”[2]
If arbitration offers investors an efficient forum to resolve disputes, as some argue, investors may choose that option—but they should be given the choice.  It is equally important that investors not be precluded from bringing class actions because of contractual fine print imposed by a mandatory waiver class action clause.
Although evidence suggests that the use of mandatory arbitration agreements is widespread, we are concerned about the lack of transparency and reliable data regarding the prevalence of such agreements.  We encourage the Commission to track how many brokerage firms are inserting mandatory arbitration agreements and class action waivers into consumer contracts, so that this questionable practice may be better monitored and addressed.
We are deeply concerned that the Commission’s failure to respond to the dangers posed by widespread forced arbitration will weaken existing investor protections.  Given the uncertainty created by the recent FINRA decision, we urge the Commission to act quickly to exercise its authority under Section 921 to prevent this practice and protect investor rights.
We recognize that the Commission is balancing competing demands, and that it must prioritize its recent mandates by Congress.  The exigent circumstances at hand, however, require that the Commission exercise its authority under Section 921 of the Dodd-Frank Act and prohibit the use of mandatory arbitration provisions.

[1] FINRA Department of Enforcement v. Charles Schwab & Company Inc. (CRD No. 5393) Disciplinary Proceeding No. 201102976021. February 21, 2013.
[2] Senate Committee on Banking, Housing, and Urban Affairs on S. 3217, S. Rep. No.111-176, at 110.

April 30, 2013 in News Stories, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, April 29, 2013

Level Global Investors Settles SEC Insider Trading Charges Involving Dell and Nvidia

The SEC announced that Greenwich, Conn.-based hedge fund advisory firm Level Global Investors LP agreed to pay more than $21.5 million to settle charges that its co-founder, who also served as a portfolio manager, and its analyst engaged in repeated insider trading in the securities of Dell Inc. and Nvidia Corp.  

In January 2012, the SEC filed insider trading charges against Level Global, the firm's co-founder Anthony Chiasson, a former analyst Spyridon "Sam" Adondakis, and six other defendants, including five investment professionals and the hedge fund advisory firm Diamondback Capital Management.  The SEC alleged that Adondakis was a member of a group of closely associated hedge fund analysts who illegally obtained highly sensitive information regarding the financial performance of Dell and Nvidia before this information was made public. The illegally obtained information involved Dell and Nvidia's revenues and profit margins and sometimes indicated that the tech companies' quarterly results would differ significantly from the consensus expectations of Wall Street analysts.

According to the SEC, during 2008 and 2009, Adondakis passed the information on to Chiasson, who used it to execute trades on behalf of hedge funds managed by Level Global and reap millions of dollars in illegal profits. In 2011, following news reports of the government's investigation, Level Global, which had once managed as much as $4 billion, announced that it would close its business and begin returning money to its investors. It is presently in the process of winding down its business.

The settlement with Level Global, which is subject to court approval, requires the firm to disgorge $10,082,725 in fees that it reaped from the alleged insider-trading scheme, to pay prejudgment interest of $1,348,824, and to pay a penalty of $10,082,725. Level Global has also agreed to the entry of an order permanently enjoining the firm from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Section 17(a) of the Securities Act of 1933.

Level Global neither admits nor denies the SEC's allegations. Adondakis previously pleaded guilty to parallel criminal charges and agreed to a settlement with the SEC in which he admitted liability for insider trading. The SEC is continuing to pursue its insider trading claims against the firm's co-founder Chiasson, who was convicted in December 2012 of securities fraud in a parallel criminal proceeding.

April 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)