Securities Law and Regulations

SEC Adopts Final Rules to Modernize Fund Raising for Intrastate and Regional Offerings, Enhance Information that is Reported by Funds, and Enhance the Effectiveness of Risk Management Programs

Published on: October 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has adopted final rules to modernize the way companies are allowed to raise funds for their businesses via small and intrastate offerings, all the while keeping investor protections in place. The final rules include amendment to Securities Act Rule 147 and a new Securities Act Rule 147A for out-of-state residents and companies organized or incorporated outside the state.

Under the Rule 147A and Securities Act Rule 147 amendments, the current intrastate offering framework, which allows companies to raise funds from investors in their state without having to federally register the sales and offerings, would be modernized. New Rule 147A would differ from Rule 147 in that it would permit out-of-state residents and companies outside the state, or companies that were incorporated outside the state, to access these securities offerings.

There are also now amendments to Regulation D’s Rule 504 that would grant registration exemption for offers and sales as high as $1M of securities within a one-year period, as long as the issuer does not qualify as an Exchange Act reporting company, blank check company, or investment company. The aggregate quantity of securities that could be offered and sold under Rule 504 within any yearlong period would go up from $1M to $5M. Meantime, the new final rules would repeal Rule 505, which allowed for offerings of up to $5M yearly that were sold only to accredited investors or 35 non-accredited investors maximum.

Wine Mogul Accuses Fidelity of Fraud, Seeks up to $500M in FINRA Arbitration

Published on: April 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Wine merchant Peter Deutsch has filed a FINRA arbitration claim seeking $400 – $500M from Fidelity. He claims that he might have earned that amount of money if only the financial firm had not stopped him from obtaining a 66% share of a company in which he had already invested $40M. Meantime, Fidelity is contending that it kept Deutsch from trading because of worries that he was attempting to illegally manipulate the company’s shares.

The dispute began when Deutsch sought to purchase at least another 50 million shares of stock in China Medical Technologies in 2012. His investment efforts, however, were barred by Fidelity, which said it was “uncomfortable” with the transaction. It was in 2011 that a sales team from Fidelity Family Office Services (FFOS) had sought Deutsche out to join its group of wealthy clients.

In court papers, Deutsch alleges that while he was trying to gain control of China Medical Technologies, which is a cancer treatment device maker, FFOS was aggressively buying the stock in secret rather than helping him. He also claims that Fidelity used his shares to its benefit even though this was not what he wanted. He believes that the firm blocked him from trading to conceal its wrongdoing.

He is accusing Fidelity of inappropriate share lending. The firm, however, describes its practice of lending out shares belonging to its clients as fully paid lending. According to Bloomberg, sources said that Fidelity, which insists that the arbitration case is without merit, maintains that it didn’t lend out Deutsch’s shares under its lending program but that it used its authority to lend shares out of his margin account. Securities lending is something that Fidelity clients consent to when they set up a margin account.

SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

Published on: October 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

Senate Bill Would Double Statute of Limitations for The SEC to Pursue Securities Violations

Published on: August 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Sen. Jack Reed, D-R.I. has introduced a bill that would give the Securities and Exchange Commission a longer period of time to uncover and impose penalties for financial fraud. Under his proposal the statute of limitations for pursuing civil penalties would be extended from five years to ten years.

The bill comes in the wake of the Supreme Court’s decision in Gabelli v. SEC, in which the Court held that the current five-year statute to take action against wrongdoers begins when the fraud happened and not upon discovery. According to an announcement about the new legislation, which was published on the Senator’s website, the ruling in Gabelli has made it even harder for the Commission to take action against offenders by shortening how much time the regulator has to investigate and pursue violations of securities laws.

The Gabelli case involved allegations of fraud by Marc J. Gabelli, an investment adviser who managed the Gabelli Global Growth Fund, which is a mutual fund. The SEC said that the alleged fraud took place from 1999 and 2002.

SEC Roundup: Regulator Addresses CDS Portfolio Margin Program & Ex-Commission Officials Want DC Circuit to Grant SIPC Protection to Stanford Ponzi Scam Victims

Published on: May 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection

Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

“Substituted Compliance” Should Regulate Cross-Border Swaps, Says SEC Chairman Elisse Walter

Published on: April 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Elisse Walter, the best way to regulate global over-the-counter derivatives regulation is via “substituted compliance.” Such an approach would let a market participant comply with domestic requirements in a certain area through compliance with comparable foreign regulation while also allowing the domestic regulator to keep applying specific policy requirements of local law when the foreign one fails to impose requirements or protections that compare.

Per its Dodd-Frank Wall Street Reform and Consumer Protection Act Title VII mandate, the SEC intends to put forth a proposal on how to tackle cross-boarder issues. Although the Commission hasn’t figure out how it will go forward with this proposal, Walter stressed that “substituted compliance” could act as a “a reasonable and necessary middle ground” between making foreign participants abide by domestic regulation and widely recognizing foreign swap regimes. She believes that while efforting to give the maximum substituted compliance possible, properly tailored cross-border regulation would take care of the potentially significant regulatory gaps that are likely to exist between jurisdictions.

Walter believes that regulators need to be participating in the world debate on how to cut down systemic risk. Also, noting that brokerage firms, investment advisers, and other market participants that the SEC oversees differs from traditional banking institutes, Walter cautioned that failure to identify these key differences ups the risk that there will be weaker financial institutions and less options for businesses looking for investment capital.

SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

Published on: November 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

Top Financial Regulators Speak Out Against Bill They Claim Gives the White House Authority Over Rulemaking

Published on: November 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The heads of the Office of the Comptroller of the Currency, the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the National Credit Union Administration, and the Federal Deposit Insurance Corporation have sent a letter to Senators Susan Collins (R-Maine) and Joseph Lieberman (I-Conn) about bill S. 3468: Independent Agency Regulatory Analysis Act of 2012. Lieberman is the chair of the Senate Committee on Homeland Security and Governmental Affairs, the committee to which S. 3467 has been referred.

The regulators believe that, if approved, the legislation would give the White House “unprecedented authority” over independent agencies’ rulemaking and policy functions. For example, would let the president of the United States mandate that independent agencies turn in proposed rules to the Office of Management and Budget for approval. It also would require the agencies to analyze the benefits and costs of new regulations, which is a process that they have up to now been exempt from.

The letter reminds Lieberman and Collins, who is a ranking committee member and a cosponsor of the proposal, that Congress set up the independent regulatory agencies to exercise policymaking functions separate from any administration’s control. By requiring that the agencies give their rulemakings to OMB’s Office of Information and Regulatory Affairs, say the regulators, the president would gain power to affect the rulemaking and policy functions of these agencies, taking away that independence. They also believe that the bill gets in the way of their ability to make needed rules in a timely way, which would likely lead to litigation.

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission’s practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked

Published on: May 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the “JPMorgan loophole” (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase‘s (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm’s loss has likely grown to closer than $6 billion to $7 billion.

Volcker Rule Resource Center, SIFMA

More Blog Posts:

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss, Institutional Investor Securities Blog, May 17, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record https://www.investorlawyers.com/our-staff.html, Stockbroker Fraud Blog, March 15, 2012