Saturday, March 4, 2023
The Mormon Church v. the SEC
About a week and a half ago, the SEC announced that it had charged Ensign Peak Advisors and the Church of Jesus Christ of Latter-day Saints (the Mormon church) with violating Section 13(f) of the '34 Act and Rule 13f-1. Ensign Peak agreed to settle and pay a $4 million fine for failing to file Form 13F for about 22 years, while the Mormon church agreed to settle the allegation that Ensign Peak acted with its knowledge and direction and pay the SEC $1 million. On this blog we're usually more focused on tax (and, on occasion, state nonprofit) issues than we are securities regulation, but this is a big deal securities reg story involving nonprofits, so it's worth a little time to dig into and understand.
But before we dig into the story, it's worth laying some groundwork:
The Mormon church is organized as a Utah corporation sole and, unsurprisingly, is exempt from tax under section 501(c)(3). (In fact, I'm putting the finishing touches on a book about the Mormon church and taxes, which will probably be published at the end of this year or sometime in 2024.) The church has a strong preference for centralization and hierarchy; in the U.S., the Utah corporation owns basically all of its property (unlike other denominations, which often incorporate different regions or congregations separately). The Mormon church is tremendously wealthy; just before the pandemic, a whistleblower alleged that it had $100 billion of invested assets (an amount that presumably didn't include, for instance, land it uses for church buildings).
Ensign Peak Advisors is the Mormon church's investment manager. Once upon a time the church managed its investments in-house, but in 1997, it spun its investments off to a separate entity. That entity--Ensign Peak--is a nonprofit organization and exempt from federal income taxes as an integrated auxiliary of the church. (As an integrated auxiliary, it shares the church's exemption from filing a Form 990. And why is it name "Ensign Peak"? Presumably after the relatively pretty peak a little north of Salt Lake's Capitol building.)
Section 13(f) of the Securities and Exchange Act of 1934 requires institutional investment managers who exercise investment discretion over investment accounts with $100 million or more of certain equity securities (basically publicly-traded securities) to file periodic reports of those securities with the SEC. Rule 13f-1 clarifies that the filing be done quarterly (45 days after the end of the quarter) on Form 13F, listing the securities and value of securities it owns. Congress enacted this disclosure requirement so that the SEC could create a centralized database of current and historic data about the activities of investment managers, with the goal of increasing investor confidence in U.S. securities markets.
So who is an "institutional investment manager"? Basically, any entity that invests, buys, or sells securities on its own behalf, and any person (natural or legal) who manages another's securities investments. Critically, as the SEC was drafting its regulations, several people requested that nonprofits be exempt from this particular disclosure rule, in light of the many other reports they had to file and the limited utility of such reports. The SEC declined, however, pointing out that any nonprofit with enough assets to fall within the disclosure requirement "would have the same potential to impact upon the market as other large institutional investors." Besides, the SEC said, the disclosure rules under 13(f) aren't terribly onerous.
But it's not enough to be an institutional investment manager; the filing requirement only applies to IIMs that "exercise investment discretion" over securities. To exercise investment discretion, a IIM must either be authorized to determine what property to buy and sell for the account, make decisions about what to buy and sell, even if somebody else executes the trades, or otherwise exercise influence over the purchase and sale of securities and other property.
So What Did the Mormon Church Do?
With all of that background out of the way, on to the story. I'm going to summarize, but the details come from the SEC's order.
Remember how the Mormon church spun off Ensign Peak Advisors in 1997? It seeded Ensign Peak with about $7 billion in assets, a significant portion of which were securities subject to Rule 13f-1. And in 1998, Ensign Peak informed top (as in, very top) Mormon leaders about its obligation to file Form 13F. Top Mormon leadership balked--people knew that Ensign Peak was associated with the church and church leaders worried about "negative consequences" if people knew the size of its portfolio. With their approval, in 2001 Ensign Peak formed an LLC to file the form. It went so far as creating a California address for the LLC, though nothing happened at the address. The LLC filed its first Form 13F for the quarter ending Dec. 31, 2002 and continued to file through the third quarter of 2006.
Around 2005, the church realized that the person signing the Forms 13F was listed in a public directory as a church employee. So it formed a new LLC, this time in Delaware. And in 2011 Ensign Peak became concerned that the portfolio had grown so large that it would attract unwanted attention. It reached out to church leaders with a plan to form additional LLCs so that it could split the portfolio up in its public filings. Church leaders approved, and Ensign Peak formed five new LLCs, all of them also organized in Delaware. Four years later, Ensign Peak learned that somebody had connected the LLCs to Ensign Peak; it went to church leaders, who approved the formation of another 6 clone LLCs.
But there was one significant problem with this plan, a problem that continued throughout: Ensign Peak never actually transferred investment discretion to the LLC. Ensign Peak continued to manage the portfolio, meaning that Ensign Peak continued to have the legal responsibility to file the form (a thing it did not do). While Ensign Peak designated business managers (often chosen because they had common names and limited social media presence) for each LLC, but the business managers' sole role seems to have been signing Form 13F (and, on occasion, forwarding voicemails from regulators to Ensign Peak while deleting all other voicemails).
In 2018, a website made the structure public, tying the LLCs to Ensign Peak. Two of the business managers resigned when they learned what they had been doing. Instead of changing, though, Ensign Peak just assigned new business managers.
Finally, in 2020, Ensign Peak filed its first Form 13F for the quarter ending December 2019; at that point, it had $37.8 billion of securities under management.
From what I can tell, the Mormon church was probably required to file Form 13F before it spun Ensign Peak Advisors off. If it seeded its investment advisor with $7 billion of assets, many of which were securities, it almost certainly had more than $100 million in securities prior to 1998. It may, however, have been unaware of the filing requirement prior to Ensign Peak informing it.
That said, it took extensive steps to avoid the filing requirement, preferring to maintain the financial opacity it had begun cultivating in the late 1950s. However, the its desire to maintain financial privacy ran up against its desire to maintain tight control--had it devolved management authority to the various clone LLCs, they would have been the correct parties to file the Forms 13F.
It did not, though, and ended up both in hot water both legally and in the public eye.
Samuel D. Brunson
Photo by Joshua Hoehne on Unsplash
My apologies. I’m still trying to understand all this SEC/LDS stuff, and I honestly think you might have the kinds of insights I need. After reading a few of your posts, I am still a bit unclear. I do not want to conclude intent on the part of church leadership until I am absolutely certain they have no wiggle room.
Here is what I think I understand: EPA failed to properly sever 13f assets from its own control, and failed to file 13f in its own name. Both are required for illegality, and they did both.
Here is where I am still confused: Do we have incontrovertible evidence - either in the SEC order or elsewhere - that EPA clearly outlined to church leadership the substance and relevance of Rule 13f-1(b) (~"If you control the manager, you control the funds [and must file 13f in your own name]”)? I cannot find evidence of this in the SEC order, and I am not aware of the other sources on the matter that may have been made public.
Why it matters (to me, at least): If church leaders, who are generally not accountants, did not understand the nuances which differentiate the legal from the illegal, then intent evaporates, even if culpability does not. That is to say, in my own job, I have been held responsible for wrongs committed without my knowledge by those I supervise (as well I should be - I am their supervisor) - but this does not indicate my willful disregard for the law. We know the restructuring was botched, and that the botched version was authorized by church leaders. Do we also know - with certainty - that church leaders were apprised of the right way to execute it, and that it was being done in violation of this? I want sources and I cannot find them.
Dishonest accounting - even intentionally dishonest accounting - happens, and is called on the carpet regularly enough. What makes this story sensational is not mere intentional dishonesty, but that the wrongs were allegedly committed intentionally by the leaders of a church which purports to be “a model for how to act and how to live.” Many feel this debacle begs the question of the church’s legitimacy as such representatives.
LDS lawyers and accountants should lead more exemplary lives - this on its own is a big deal - but they do not claim to speak to the entire world on behalf of God. Hence, the crux of the matter centers on the integrity, not of the lawyers and accountants, but of church leadership. Absent intentional dishonesty on the part of church leaders, this story isn’t very interesting - and that is why I want to know if we know what happened in this respect.
The restructuring was illegal in so many ways, but as best I can tell, the SEC order does not really nail down whether church leaders had a perfect knowledge - or even any knowledge - of the illegality of the restructuring. That is, it is well documented that they had knowledge of certain aspects of the restructuring which did, in fact, happen to be illegal; but we do not know whether they were aware that what they were seeing and approving was illegal.
I get that some people feel that the church should be held to a higher standard - after all, they claim to be the higher standard - but determining guilt is antecedent to holding them accountable: That is, should we be sloppier about attributing guilt to the church just because we decide they should be held to a higher standard? This sloppiness is not about the church’s guilt, but about our own double-standards in determining who we will call guilty.
If we have only circumstantial evidence of dishonest intent by church leaders - that is, if we do not know what happened - we must guess; we must hazard one of two errors: Either we risk erroneously championing a false “light,” or we risk erroneously dismantling a true one. Some say, “innocent until proven guilty.” Others say, “Where there is smoke, there is fire.” Neither choice risks nothing; neither choice can prove its case; and neither choice is more “rational” or more “correct” than the other. Instead, the error we chose to hazard is so contingent upon personal experience that our choice - which is ultimately just speculation - says more about us than it does about church leaders.
Church leaders know what happened, and could tell their story. If guilty of intent, it might make sense that they would just want to close the matter and move on; they might want to hide. But if innocent of intent, it still makes sense that they would just want to close the matter and move on: Telling their story would do little to clear the air. Instead, it would do quite the opposite; it would fuel a pointless and (if innocent) undeserved frenzy. “Never make excuses. Your friends don’t need them and your foes won’t believe them” (John Wooden).
Ultimately, unless there is information I am missing, then nothing has changed: Our view of the church - and more particularly of its leaders, in this case - is, as it always has been, purely a matter of faith. But I want to know if there is better information out there. I want to know what kind of difficulties my faith should be wrestling with. That is why I am asking you whether the SEC order is more pointed than I can discern, or whether we know more than what the SEC order has to offer.
Posted by: Bret | Mar 20, 2023 10:19:04 PM
Bret, if you are a faithful member of the church and trying to determine whether or not this is a shelf breaking event for you, then you should consider that if they are using their "power of revelation" wouldn't god have warned them about this issue? It seems like having a spotlight on them about improperly reporting securities on the scale that they have done would make god warn them about it. That should be the thing that shakes your faith. Not wondering if they were ignorant about the rules or not. At least that is my opinion.
Also, Nonprofit blogger I am very interested in your book I'll keep my eye out for it.
Posted by: John | Apr 19, 2023 12:16:15 PM
Extremely informative. Thanks!
Posted by: Comet | Mar 4, 2023 11:46:00 PM