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Thursday, June 30, 2011

JUDGE ENTERS FINAL JUDGEMENT AGAINST TWO PENNY STOCK PROMOTERS



The following is an excerpt from the SEC website:

"The SEC announced today that on June 24, 2011, the Honorable Judge Richard A. Lazzara, United States District Judge for the Middle District of Florida, entered final judgments against two penny stock promoters, Robert M. Esposito and Gregory A. King, ordering them to pay $19,515,598 and $943,166, respectively, in disgorgement and civil penalties, in a fraudulent touting case the Commission filed on March 17, 2008. SEC v. Esposito, et al., No. 08 CV 494 T26 (M.D. Fla.). See Lit. Rel. No. 20499. The Court had previously entered judgments against Esposito and King permanently enjoining them from violating the anti-fraud and other provisions of the federal securities laws, and barring them from participating in any future penny stock offering. See Lit. Rel. No. 21449 (March 11, 2010).

In this action, the Commission charged that Esposito, King, and others participated in a fraudulent touting scheme of the stock of Anscott Industries, Inc. The complaint alleged that in April 2003, Esposito, a penny stock promoter, orchestrated a reverse merger between Anscott (then a private company) and Liquidix, Inc., a public shell company which, after the merger, changed its name to Anscott. According to the complaint, Esposito received 4 million shares of Anscott stock from the company as compensation for arranging the reverse merger and for future stock promotion work. The complaint further alleged that a fraudulent Form S-8 registration statement was filed with the Commission for the 4 million shares of Anscott issued to Esposito, which improperly enabled Esposito to sell these shares to the public during the fraudulent touting scheme.

As alleged in the complaint, after the reverse merger and the issuance of shares to Esposito, Esposito paid King, another penny stock promoter with whom Esposito had worked previously, to prepare and disseminate materially false and misleading tout sheets promoting Anscott stock. The Commission alleged that these tout sheets -- crafted to appear like independent investment newsletters and entitled the Wall Street Bulletin -- recommended Anscott as a "strong buy," and were disseminated to the public through fax spamming from late May 2003 through July 2003.

According to the complaint, these tout sheets, which King prepared, contained materially false and misleading representations about Anscott's products, business affiliations, and projected revenues. The complaint further alleged that these tout sheets failed to disclose, among other information, that Esposito, who was paid by the company to promote Anscott stock, was paying King to prepare and disseminate these "newsletters," and that Esposito was selling his Anscott stock during the touting scheme contrary to the Wall Street Bulletin's "strong buy" recommendation and price targets.

During the touting campaign, the price of Anscott's stock rose from around $1.40 a share in mid-May 2003, to a high of $4.59 a share on July 11, 2003. The complaint alleged that Esposito sold most of his Anscott stock to the public, realizing millions of dollars in illicit profits.

The Court's final judgment against Esposito orders him to pay disgorgement of $7,691,135, prejudgment interest of $4,133,326, and third tier civil penalty of $7,691,135. The judgment against Esposito also (a) permanently enjoins him from future violations of Sections 17(a), 5(a) and 5(c) of the Securities Act of 1933, Sections 10(b) and 13(d) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 13d-1 and 13d-2; and (b) permanently bars him from participating in any future penny stock offerings.

The Court's final judgment against King orders him to pay disgorgement of $358,000, prejudgment interest of $227,166, and a third tier civil penalty of $358,000. The judgment against King also (a) permanently enjoins him from future violations of Sections 17(b) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5; and (b) permanently bars him from participating in any future penny stock offerings.

The Court previously entered final judgment against other defendants in this case, Anscott and its CEO, Jack R. Belluscio, on October 27, 2008: (1) permanently enjoining them from future violations of Sections 5(a) and 5(c) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5; (2) permanently barring Belluscio from acting as an officer or director of a public company; (3) ordering Belluscio to pay third tier civil penalties of $240,000; and (4) ordering Anscott to pay third tier civil penalties of $1,200,000. In a related administrative proceeding, on May 7, 2008, the Commission issued an Order revoking the registration of Anscott securities pursuant to Section 12(j) of the Exchange Act. See In the Matter of Anscott Industries, Inc., Release No. 34-57791."

COURT SAYS VIOLATER OF ANTIFRAUD PROVISIONS OF SECURITY LAWS MUST PAY



"The Securities and Exchange Commission announced that on June 20, 2011, the United States District Court for the Middle District of Florida entered a final judgment of permanent injunction and other relief against Defendant Shawn A. Icely. The final judgment enjoins Icely from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to injunctive relief, the final judgment orders Icely to pay disgorgement of $391,435.26, prejudgment interest of $20,316.76, and imposes a civil penalty of $130,000. Icely consented to entry of the final judgment without admitting or denying any of the allegations in the complaint.

The Commission commenced this action by filing its complaint against Icely on October 21, 2010. The complaint alleges Icely violated the antifraud provisions of the federal securities laws in connection with his misappropriation of hundreds of thousands of dollars from customers of American Portfolios Financial Services, Inc. while he was employed there as a registered representative."

INVESTORS PLEAD GUILTY TO BID RIGGING FORCLOSURE AUCTIONS



The following is from the Department of Justice website:

WASHINGTON — Eight California real estate investors have agreed to plead guilty for their roles in two separate conspiracies to rig bids and commit mail fraud at public real estate foreclosure auctions in Northern California, the Department of Justice announced.

Charges were filed today in U.S. District Court for the Northern District of California in Oakland, Calif., against Thomas Franciose of San Francisco; William Freeborn of Alamo, Calif.; Robert Kramer of Oakland, Calif.; Thomas Legault of Clayton, Calif.; David Margen of Berkeley, Calif.; Brian McKinzie of Hayward, Calif.; Jaime Wong of Dublin, Calif.; and Jorge Wong of San Leandro, Calif.

According to the felony charges, the real estate investors participated in a conspiracy to rig bids by agreeing to refrain from bidding against one another at public real estate foreclosure auctions in Contra Costa County and Alameda County, Calif. While some of the conspirators participated in the conspiracies in both Alameda and Contra Costa Counties, the collusive activity occurred independently in each county, and some individuals only participated in the conspiracy in one county.

“While the country faces unprecedented home foreclosure rates, the collusion taking place at these auctions is artificially driving down foreclosed home prices and is lining the pockets of the colluding real estate investors,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The Antitrust Division will vigorously pursue these kinds of collusive schemes that eliminate competition from the marketplace.”

The department said that the primary purpose of the conspiracies was to suppress and restrain competition to obtain selected real estate offered at Alameda and Contra Costa County public foreclosure auctions at noncompetitive prices. When real estate properties are sold at these auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with remaining proceeds, if any, paid to the homeowner.

“Through the hard work and partnership between the FBI and the Antitrust Division, we have been able to secure a victory in our fight against bid-rigging and anticompetitive practices in foreclosure auctions,” said FBI Special Agent in Charge Stephanie Douglas of the San Francisco Field Office. “We continue to ask for the public’s assistance in identifying and reporting those engaged in this type of activity.”

According to the court documents, the real estate investors conspired with others not to bid against one another at public real estate foreclosure auctions in Northern California, participating in a conspiracy in various lengths of time between May 2008 and January 2011. After the conspirators’ designated bidder bought a property, the conspirators would hold a secret, private auction at which each participant would bid the amount above the public auction price he was willing to pay. The department said that the secret, private auctions took place at or near the courthouse steps where the public auctions were held. The highest bidder at the private auction won the property. According to the court documents, the difference between the public auction price and that at the second auction was the group’s illicit profit, and it was divided among the conspirators, often in cash.

In addition, the eight conspirators were charged with using the U.S. mail in carrying out their conspiracy to defraud financial institutions by paying potential competitors not to bid competitively in the public auctions for foreclosed properties, according to court filings.

Franciose, Jaime Wong and Jorge Wong were charged with one count each of bid rigging to obtain selected real estate at foreclosure auctions in Alameda County and one count each of conspiracy to commit mail fraud. Freeborn and Legault were charged with one count each of bid rigging to obtain selected real estate at foreclosure auctions in Contra Costa County and one count each of conspiracy to commit mail fraud. Kramer, Margen and McKinzie were each charged with two counts of bid rigging to obtain selected real estate at foreclosure auctions in Alameda and Contra Costa Counties and two counts each of conspiracy to commit mail fraud.

Each violation of the Sherman Act carries a maximum penalty of 10 years in prison and a $1 million fine for individuals. Each count of conspiracy to commit mail fraud carries a maximum sentence of 30 years in prison and a $1 million fine. The maximum fine for the Sherman Act charges may be increased to twice the gain derived from the crime or twice the loss suffered by the victim if either amount is greater than the $1 million statutory maximum.

The Antitrust Division and the FBI have identified a pattern of collusive schemes among real estate investors aimed at eliminating competition at real estate foreclosure auctions, and today’s charges are part of the department’s ongoing effort to combat this conduct and restore competition to public auctions. The investigation into fraud and bid rigging at certain real estate foreclosure auctions in Northern California is being conducted by the Antitrust Division’s San Francisco Office and the FBI’s San Francisco office. Anyone with information concerning bid rigging or fraud related to public real estate foreclosure auctions should contact the Antitrust Division’s San Francisco Office at 415-436-6660, visit www.justice.gov/atr/contact/newcase.htm, or call the FBI tip line at 415-553-7400.

Today’s charges are part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force (FFETF). President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the task force, visit www.StopFraud.gov."

HOST STATE LOAN-TO-DEPOSIT RATIOS



The following is an excerpt from an e-mail from the FDIC:

"The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency today issued the host state loan-to-deposit ratios that the banking agencies will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. These ratios update data released on June 24, 2010.

In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 109 also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.

Section 109 provides a process to test compliance with the statutory requirements. The first step in the process involves a loan-to-deposit ratio screen that compares a bank's statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.

A second step is conducted if a bank's statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank's interstate branches.

A bank that fails both steps is in violation of section 109 and is subject to sanctions by the appropriate banking agency."

EILEEN ROMINGER SPEAKS ABOUT INVESTMENTS AND RETIREMENT



The following excerpt is from the SEC website:

"Speech by SEC Staff:
Keynote Address at the Insured Retirement Institute 2011 Government, Legal & Regulatory Conference

byEileen P. Rominger
Director, Division of Investment Management
U.S. Securities and Exchange Commission
Washington, D.C.
June 28, 2011
Thank you for the kind introduction. I am very pleased to be with you today. Before I begin, please note that my remarks here today represent my own views and do not necessarily reflect the views of the Commission, any of the Commissioners, or any other member of the Commission staff.

This is my first occasion to speak to you as Director of the Division of Investment Management. I have been looking forward to this opportunity because, based on my work with the staff so far, I find the area of variable products to be dynamic and challenging. It seems that I have come on board at a critical time of changing landscapes, product innovations, and rapid developments in your industry. It is already clear to me that the variable insurance products industry is wasting no time in tackling what is perhaps the most pressing economic concern of the aging boomer generation: the management of retirement income.

This means that we are seeing a proliferation of new product designs and innovations. Some of these raise substantive regulatory concerns, often driven by the fact that variable separate accounts must operate within the regulatory framework of the Investment Company Act. But even the simpler, more traditional variable contracts we see that do not present significant regulatory issues still face the challenge of clear and useful disclosure, as even the simplest contract designs can be difficult to explain in straightforward plain English. In short, I am struck by the many challenges raised in the regulation of variable contracts. As your industry rises to meet the changing need for retirement income solutions, I look forward to working with you towards our shared goal of protecting the interests of investors.

I would like to review with you a few of the newer product ideas the Division has seen of late and, where appropriate, relate these to some of the broader themes commanding the staff’s attention currently.

I. Insurance Company Control Over Underlying Investments
As you know, the proliferation of so-called living benefit riders in variable annuity contracts has been one of the dominant forces driving contract sales in recent years. Since the market decline in 2008, variable annuities have attracted many investors by virtue of the newer contract benefits – the so-called “living benefit” options offered to owners of variable annuities. These provide insurance with regard to minimum contract values or minimum periodic withdrawals. Of course, these benefits have both direct and indirect costs. First, the investor pays directly for these benefits by way of a charge against contract value, which significantly affects investment performance and reduces the upside potential of the contract. Since 2008, when so many of these benefit riders were “in the money” as a consequence of the recent global financial crisis, the staff has seen many filings reflecting increased fees charged for these benefits.

In addition, purchasers of these optional benefits are facing increasing limitations on investment choices, reflecting an effort by insurers to limit volatility of the investments that are subject to the benefits. For example, variable annuity contracts often prohibit allocations to the more volatile funds, or require participation in a conservative asset allocation model that is designed and maintained with reference to the insurer’s exposure under its living benefit riders. An important staff concern here has been to ensure that investors are apprised of the trade-off involved in such an arrangement. While living benefit riders do provide a measure of protection from a down market, it should be clear to those purchasing the riders that these investment restrictions minimize the likelihood that the riders will ever be “in the money” and actually provide a benefit to the investor, and that such restrictions also may limit the upside potential of the investment.

Many insurers also control underlying investments by implementing so-called “stop-loss” features of the contract. These features typically operate as asset allocation models that move account value among underlying funds pursuant to a formula. Account allocations are changed to more conservative investments, such as government bond funds or money market funds, during declining markets and, in most cases, moved back to the original allocation during periods of sustained market growth. As a disclosure matter, it is important that any ability of an insurer unilaterally to change account allocations be clearly explained. For adequate disclosure, I believe the contract prospectus should set forth the precise parameters under which account allocations may be changed. It should also explain the effects of such changes, such as the possibility of missing a market uptick during a period of fixed income allocations.

On a related topic, underlying funds are frequently managed by advisers that are affiliated with the insurance company. This has been true throughout the history of variable contracts. However, with the proliferation of living benefits under these contracts, the Division has become increasingly concerned about potential conflicts of interest that may result from the fact that the amount of an insurance company’s liability under living benefit riders is directly related to the performance of funds that are managed by its affiliate. Recently, we have begun to see prospectus disclosure acknowledging the conflict, and even indicating that the management of a fund could be influenced by the risk exposure faced by the adviser’s affiliate, the insurance company. Further still, one recent filing disclosed an arrangement under which a fund, which will be a required investment allocation for participants in certain living benefit riders, will be managed through adherence to a formula that uses data provided periodically by the affiliated insurer.

Again, I think it is vitally important in these kinds of arrangements that investors understand the trade-off inherent in an investment of this type. Traditionally, variable annuities offered investors a tax-efficient way to participate in the equity markets, albeit at a cost to cover the insurance company’s mortality and expense risks under the contract’s annuity feature or death benefit. I believe an investor purchasing a living benefit rider should be fully informed of any aspect of the arrangement that could limit the market participation reasonably expected by the investor.

Beyond the disclosure implications here, keep in mind that separate accounts and underlying funds, as investment companies, are subject to the Investment Company Act’s conflict of interest provisions. These were designed by Congress to prevent any overreaching on the part of fund affiliates in their dealings with the fund. From that perspective, I think it is important that the board of directors of any fund that may be subject to conflicting interests on the part of its adviser be vigilant watchdogs for the fund’s investors, ensuring that arrangements entered into are for the benefit of those investors. To accomplish that goal, I believe board deliberations should squarely address any potential conflict on the part of the fund’s adviser and other service providers. Meanwhile, a fund’s adviser and the insurance company that offers a fund on its platform should be careful in formulating arrangements to head off any potential for overreaching in their dealings with the fund.

II. Other Contract Developments
I would like to turn now to some other contract developments. As more and more investors turn their attention from accumulating assets to managing income, we expect to see more new types of annuities, funded by or patterned on instruments that have become popular elsewhere in the marketplace. Two indexed annuities that were recently registered bear similarities to structured notes that lately have garnered a lot of attention both in the media and from the Commission staff. These contracts, if held to term, promise some percentage of the return of a specified equity or commodity index, but provide only very limited downside protection if the contract is surrendered early. In this regard the contracts are similar to certain so-called “structured notes with principal protection.”

On June 2nd of this year the Commission’s Office of Investor Education and Assistance and FINRA jointly issued an investor alert about those instruments, which I commend for your review. It noted that, while these structured products have reassuring names, they are not risk-free, and the terms of such notes related to any protections to or guarantee of principal require a careful review. For example, despite the name “principal protection,” protection levels vary, with some of these products potentially returning as little as 10 percent of principal. The investor alert also pointed out that these products can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. In addition, the products have fees, whether implicit or explicit, even if the sales materials suggest otherwise, which of course will limit returns.

Annuities are a form of insurance, which may suggest safety of an investment simply by virtue of the type of issuer. But annuities patterned on the operation of these structured notes call for caution on the part of investors along the lines set forth in the recent investor alert. The staff’s review of the annuity filings I mentioned earlier focused on effective disclosure of the considerable risk associated with the minimal downside protection. I believe it is important that anyone working towards future filings regarding similar products should do all that you can to prepare disclosure aimed at ensuring that investors are not confused or misled. And I would caution you, as well, that you will be well served by exercising vigilance with respect to the suitability of sales of these products.

III. Disclosure Issues Related to Derivatives
I have already mentioned the need for clear, effective disclosure in variable contract and underlying fund prospectuses. I thought I would take this opportunity to stress one aspect of that theme. As funds are increasingly designed and managed with reference to insurance company obligations under living benefit riders, derivative hedging transactions are likely to play an increasing role in the management of these funds. I would like to speak for a few minutes about the disclosure implications of this trend.

The need for disclosures that clearly inform investors about the specific attributes of derivatives has been highlighted by the staff on multiple occasions, virtually from the beginning of the use of derivatives by funds. Just recently, the Division wrote to registrants regarding observations by the staff that funds’ derivatives disclosures were in many cases generic rather than specific, and did not fully apprise investors of the specific types of investments actually expected to be made. The staff noted that several forms of unhelpful disclosure concerning derivatives are commonplace, including laundry list enumeration of virtually all types of derivatives as potential investments; generic language about potential purposes for using derivatives; open-ended, non-specific disclosures concerning the extent of anticipated derivatives transactions; and, generic risk disclosure regarding derivatives that may or may not relate to the actual risks faced by the fund. The staff also observed that some funds provided extensive and hyper-technical discussions of derivatives which, in practice, bore little relation to the actual operation of the fund. These sorts of disclosure relating to the use of derivatives do not provide investors with useful information regarding the operation and management of the fund.

Addressing these shortcomings, the staff noted that disclosure relating to the use of derivatives should be tailored specifically to the intended management of the fund. The level of detail in the disclosure should correspond to the degree of economic exposure the derivatives create, in addition to the amount invested in a derivative strategy. The staff further noted that disclosure should describe the purpose the derivatives are intended to serve and the extent to which derivatives are expected to be used. For example, if the instruments are to be used for hedging, what are the risks being hedged? If for investment purposes, what are the opportunities contemplated?

Finally, the staff also noted that risk disclosures should be tailored to the types of derivatives used, the extent of their use, and their purpose, as a means of providing investors with a complete risk profile of the fund’s investments, taken as a whole.

IV. Summary Prospectus
I’d like now to turn to a topic that I believe has great potential for the variable insurance industry. In January 2009, the Commission adopted rules providing for an improved mutual fund disclosure framework through the use of a summary prospectus. Briefly, the summary prospectus option provides for a concise and user-friendly, plain English document for fund investors containing key information about the fund’s investment objectives and strategies, risks, costs, and performance. More detailed information is available both in paper form and also online in a format that facilitates direct movement between concise information in the summary prospectus and more detailed information in the statutory prospectus.

It has now been over two years since the Commission adopted the summary prospectus option. In that time, the staff has seen an encouraging number of summary prospectus filings. As of March 31, almost 70% of mutual funds had opted to file summary prospectuses with the Commission. Those who worked on the initial submissions should be commended for a strong implementation effort. I encourage you to listen to your investors and to the various parties in the chain of distribution so that you can fine-tune these documents and craft truly effective summary disclosure in this streamlined format.

As the staff gains experience with the mutual fund summary prospectus, we are continuing to consider a similar disclosure framework for variable annuities. In particular, we are studying the feasibility of a summary prospectus for variable annuities that would provide investors with key information in a clear and concise format.

The challenges, of course, are many. Variable annuities can be difficult to understand. They often have complicated features, not the least of which are the living benefit riders I discussed earlier, and they often have complex fee structures.

Disclosure about these products is further complicated because insurers may modify features of existing contracts as time goes on. As a result, any given variable annuity prospectus may include disclosure about features that are no longer available to current purchasers but may remain available to contract owners who purchased their contracts in the past.

While these factors make our task of developing more user-friendly disclosure for variable annuity investors very challenging, they also make the task all the more important. I believe it is essential that investors be provided with clear disclosure and have ready access to the information they need to make well-informed investment decisions because of the central role that variable products play in the financial plans of so many investors, especially those who are in or approaching their retirement years.

We have received valuable input from the IRI and other industry representatives on the topic. I appreciate the industry’s active involvement and willingness to help the staff work through the challenging issues raised by this initiative and encourage your continued involvement as we continue to study improved disclosure in the variable annuity context."

SPEECH BY SEC CHAIRMAN MARY L. SCHAPIRO

The following is an excerpt from the SEC website:

"Remarks Before the American Securitization Forum 2011 Annual Meeting
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Chairman Mary L. Schapiro
Washington, D.C.
June 22, 2011
It is a pleasure to be here today. We share a concern about the future of the mortgage securitization market and, in particular, the private label market that has almost wholly evaporated in the last three years.

In the years leading up to the financial crisis, the nearly $10 trillion securitization market provided liquidity to almost every sector of the economy: from residential real estate to student loans to credit card debt. Lenders were able to make new loans and credit available to a wide range of borrowers and companies seeking financing. In conjunction with low interest rates and rising home prices, securitization helped fuel the real estate boom of the last decade.

In the area of mortgage-backed securities, sound underwriting practices often took a back seat to immediate profits, however, and underwriting standards deteriorated. When home prices stalled and declined, poorly underwritten mortgages began to default and the securities backed by the mortgages lost their value.

The result was a broad crisis in the securitization market, whose aftereffects are still being profoundly felt. Nearly every RMBS offered in 2010 was federally backed and only one publicly registered residential mortgage-backed securities transaction completed an offering last year.

As one research consultant put it in Monday’s Wall Street Journal: “investors are on strike.” In the aftermath of the crisis, would-be investors are waiting for needed reforms in the securitization market before they are willing to wade back in.

But efforts to implement the reforms that would bring investors back to the markets are being met with strong and what I believe to be short-sighted resistance.

Look at the numbers: while other asset classes have recovered to varying degrees, the volume of registered RMBS has fallen from $609 billion in 2006 to just $231 million last year. In addition, the number of unregistered, or 144A-eligible ABS, has fallen to a fraction of the volume offered in 2004. Those figures will not significantly improve until investors again feel confident – and that confidence will only come with better standards.

I am sure that today few if any industry professionals, would ignore the lessons of the last few years and assume the risks that enabled the mortgage crisis.

As time passes, though, memories fade. An improving economy makes risks seem smaller while the pressure to assume risk in search of profits can rise. And people have an almost infinite ability to convince themselves that “this time it’s different.” Eventually, conditions accumulate for another crisis like underbrush in a dry forest, waiting for a spark to touch them off.
And so it is important to translate lessons learned at great cost into permanent reform while memories are still fresh. This was a driving force behind the Dodd-Frank Act, and for the securitization rulemakings that we at the SEC have undertaken separately.

SEC Priorities

While there were a number of factors contributing to the securitization slowdown, there are three areas of particular concern to the SEC:

Lack of accountability among participants in the securitization chain.
Flawed credit ratings.
Investors’ lack of tools and information to value the securities properly.


Each of these problems has eroded investor confidence, and without willing investors, the securitization markets cannot possibly come back. I’d like to discuss each in turn and what the SEC can do about them.

Lack of Accountability

One of the root causes of the mortgage crisis was that many originators were not accountable for the loans they made, loosening underwriting standards and passing off the entire credit risk to investors through securitization. It is no wonder that investors remain wary.

As you know, Congress sought to address this concern through the risk retention requirements in the Dodd-Frank Act. In March 2011, the Commission, along with federal banking and housing agencies, proposed rules that push accountability further up the securitization chain. These rules would require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party.

The proposed rules take into account the heterogeneity of securitization markets and practices and reduce the potential for negative impacts on the availability and cost of credit, by offering the sponsor a menu of options with which to satisfy its risk retention requirements.

The public comment period on this proposal has been extended to August 1, and we look forward to reviewing your comment letters. I am aware of concerns regarding the proposed premium capture cash reserve account.

And I encourage commentators on that aspect of the proposal to recommend revisions or alternatives that would still ensure that the issuer does not avoid the requirements by structuring around an option to retain risk.

Another provision of Dodd-Frank requires issuers to undertake a review of the assets underlying the ABS and to disclose the nature of the review and the review’s findings and conclusions. Our rules implementing this requirement establish a minimum standard of review, which should increase the issuer’s accountability for the assets placed in the pool.

We also are concerned with accountability for representation and warranty mechanisms built into underlying transaction agreements. Many of these reps and warranties have proven to be ineffectual, frustrating investors attempting to assert their rights.

One way to provide better assurance that the assets whose credit risk investors purchase meet the criteria required under the contractual provisions is through our fast-track “shelf eligibility” requirements. As you know, the commission proposed ending reliance on investment grade ratings in determining shelf-eligibility early last year, an idea subsequently incorporated into Dodd-Frank as well.

Instead, the Commission proposed requiring a new provision in pooling and servicing agreements that address representations and warranties violations. This provision would require that an independent third party periodically furnish an opinion regarding the obligated party’s decisions to repurchase or not to repurchase any loans that the trustee put back to the obligated party for violation of the representations and warranties.

A number of commentators felt that this proposal was too “clunky” and that a third party opinion would not be an effective means of fully resolving disputes. I continue to believe that some type of mechanism to better redress breaches of representations and warranties and give real meaning to this important investor protection is very important to investors in asset-backed securities. Our staff is currently working to address commentators’ concerns while still achieving this goal.

The necessity of balancing risk and reward is a key to rational investment decisions and a linchpin of market self-regulation. Aligning the interests of originators, securitizers and investors by ensuring that entities at every step in the securitization process are accountable for the risks they assume and pass on will make the market more stable and rational.

Flawed Credit Ratings

A second weak link in the securitization chain was the failure of rating agencies to adequately detect problems in the securities which they rated – magnifying the dangers of the inadequate underwriting practices increasingly adopted by originators. Here again, it was people and institutions who invested in these securities who ultimately suffered the bulk of the harm resulting from failures occurring earlier in the securitization process.

As the Financial Crisis Inquiry Commission noted, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval … This crisis could not have happened without the rating agencies.”

The ultimate effect of flawed ratings was exacerbated by over-reliance on ratings throughout the market and the sheer number of instruments receiving high ratings. On one hand, fixed-income investors in search of low-risk vehicles and institutions required by state and federal laws – or by their own investment criteria – to hold highly-rated securities could choose between only a small handful of corporate issuers with Triple A ratings.

On the other hand, as late as January, 2008, 64,000 asset-backed securities were rated Triple A.

Unfortunately, as the Senate Investigations Subcommittee found, “Over 90% of the AAA ratings given to subprime RMBS originated in 2006 and 2007, were later downgraded by the credit rating agencies to junk status.”

The Commission currently is pursuing reforms aimed at improving transparency and the credit rating process.

On May 18, the Commission issued a series of proposals to establish new requirements for credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs).

These proposed rules, stemming from the Dodd Frank Act, would:

Give market participants access to important information about providers of third party due diligence services and their findings regarding the assets underlying securities.
Require a provider of third-party due diligence services for an asset-backed security to provide a certification that includes their findings and conclusions to any NRSRO that is producing a credit rating for the security. The NRSRO would, in turn, be required to disclose any certifications it receives.
Increase the amount of information an NRSRO must disclose about the assumptions behind, and limitations of, its credit ratings, and about the performance of its credit ratings for different classes of asset-backed securities.


These proposals follow two separate sets of rulemakings issued in 2009, in which the Commission added new requirements for NRSROs that included:

Requiring new disclosure by NRSROs regarding whether and how they rely on the due diligence of others to verify the assets underlying a structured product.
Prohibiting NRSROs from structuring the same products that they rate.
Requiring an NRSRO that is hired by issuers, sponsors, or underwriters to determine an initial credit rating for a structured finance product to disclose to other NRSROs that it is in the process of determining such a credit rating.
Requiring an NRSRO to obtain representations from the issuer, sponsor, or underwriter that it will provide the information it provided to the hired NRSROs to other NRSROs as well.

Investors, too, can play a role in reducing reliance on rating agencies and facilitating increased competition among rating agencies, which should help to improve ratings and which was a goal of the Credit Rating Agency Reform Act of 2006.

That Act’s overarching goal as stated in its legislative history was to “improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency and competition in the credit rating industry.” I encourage institutional investors to revisit their organizational documents that delineate the criteria for investments.

If your documents require a specific rating by a specific rating agency I urge you to revisit it. If investors are not allowed to invest in securities rated by new NRSROs, how will more competition that may improve the quality of ratings develop?

Ratings should serve as a check on originators and issuers of RMBS, and be an additional source of accurate risk assessment for investors. In a world where risk cannot be measured exactly, these reforms should at least ensure that investors have an opportunity to evaluate ratings against a backdrop of third-party findings and improved rating agency practices.

Investor’s Lack of Tools and Information

Realistic analysis of risk by investors is a key component of stable and efficient markets.

However, investors must have access to accurate and useful information. Unfortunately, as the mortgage bubble expanded, investors over-relied on ratings even as market discipline declined.
I remember that when Regulation AB was adopted in 2004, the Commission and its staff endured a lot of criticism and accusations of over-regulation – accusations which look pretty absurd in hindsight. Unfortunately, today, we are hearing echoes of that earlier criticism.

With proper information, investors actually become partners in the pursuit of stable markets. This is why I believe that improving the quality and timing of disclosure to investors will have the most beneficial impact on this market of any of the reforms now underway.

In April, 2010, the SEC proposed changes to Regulation AB that would transform a one-dimensional system into a vastly more transparent system that that allows investors in ABS to more easily and efficiently assess the securities and the underlying assets.

As proposed, this transparency would include:

Standardized terms and definitions, so that investors can easily compare the assets underlying different offerings.
Pool characteristics provided on a granular basis, with issuer discussion of exception loans.
Timely investor access to transaction agreements.
Sufficient time for investors to process the information.

The April 2010 proposal also included several other significant changes to Regulation AB, requiring:


A computer program of the contractual cash flow provisions of the securities.
Enhanced descriptions relating to static pool information, such as a description of the methodology used in calculating the characteristics of the pool performance.
Static pool information for amortizing asset pools that comply with the Regulation AB requirements for the presentation of historical delinquency and loss information.
The filing of Form 8–K for a one percent or more change in any material pool characteristic from what is described in the prospectus, rather than for a five percent or more change, as currently required.
Provisions of the Dodd-Frank Act also address the need to put better information in investors’ hands. Issuers will be required to report on the performance of the underlying assets and the securities on an ongoing basis, rather stopping after a single annual report.

And rules adopted under Section 943 require disclosure related to representations and warranties in ABS offerings, which will shine needed sunlight on underwriting practices and the responsiveness of sponsors.

Investor decisions ultimately drive the financial markets. When investors do not have the proper tools and information to make sound decisions, the consequences can be dire: for investors’ accounts, for capital allocation, for the financial markets and for the economy as a whole.

Ensuring access to detailed information and time enough to analyze it, is an effective and a cost-effective way to bring vitality to the ABS markets.

I am determined that we will pursue and require the greatly enhanced disclosure in this market that investors must have, in the near term.

What’s Next?

For all the progress we have made, there is still a great deal of work ahead of us.

We will be re-evaluating our April 2010 AB proposals in light of the changes brought about by the Dodd-Frank Act, and I expect we may re-propose a few of these, such as the tests for shelf eligibility.

In addition, I look forward to a constructive dialogue dedicated to improving the information available to investors in the unregistered market. I know there is some concern about our proposal to impose registered offering disclosures in the Rule 144A market, particularly with respect to asset classes that have not historically been offered on a registered basis so that there aren’t explicit requirements to import from registered deals to Rule 144A deals.

But I believe it is important for us to address concerns about information gaps in the unregistered markets and we should be able to craft a regulatory solution that appropriately balances the competing concerns.

Conclusion

As we work to finalize our rules, I want to thank you for your comments on our proposals and ask you to continue to work with us to address concerns.

We believe that the weaknesses we have identified in the ABS market can best be addressed by embracing the SEC’s investor protection role and reinforcing building blocks of stable markets: accountability; improved performance by the rating agencies; and better information for investors.

Although our reform initiatives are the result of lessons learned only a short time ago, it does sometimes seem that memories are fading. While we are focused on the current weaknesses in the securitization market, we aim to adopt rules that support a market that functions not just in the near term, but also when markets heat up. We should not weaken reform for short-term gain.

Investors will return to the market when a structure for long-term strength and stability is in place, and they can be confident that the interests of other participants are aligned with their own and that the information they need is available and accurate.

There is and should be a healthy debate about how precisely to implement effective regulation. But I believe that we can all agree that important reforms that make this market healthier and more stable are essential to the securitization markets’ recovery.

Thank you."

SEC CHARGED RAYMOND JAMES & ASSOCIATES INC. WITH MAKING INACCURATE STATEMENTS


The following excerpt comes from the SEC website:

“Washington, D.C., June 29, 2011 — The Securities and Exchange Commission today charged Raymond James & Associates Inc. and Raymond James Financial Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers.

Raymond James agreed to settle the SEC’s charges and provide its customers the opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS market in February 2008.
According to the SEC’s administrative order, some registered representatives and financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to money market funds and other cash-like investments. In fact, ARS were very different types of investments. Among other things, representatives at Raymond James did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity.
“Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Harmed investors who are covered by this settlement will have the opportunity to get full payment for their illiquid ARS.”
The SEC previously announced ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank, and TD Ameritrade. As a result of these settlements, more than $67 billion has been returned to ARS customers following the SEC’s investigation into the ARS market collapse of February 2008 that left tens of thousands of investors holding ARS they could not sell.
The SEC’s order against Raymond James finds that the firm willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm.
Without admitting or denying the SEC’s allegations, Raymond James consented to the SEC’s order and agreed to:
Offer to purchase eligible ARS from its eligible current and former customers.
Use its best efforts to provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers.
Reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after Feb. 13, 2008.
Compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest.
At the customer’s election, participate in a special arbitration process with those eligible customers who claim additional damages.
Establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.
Investors should be alerted that, in most instances, they will receive correspondence from Raymond James. Investors must then advise Raymond James that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to Raymond James. Investors should review the full text of the SEC’s order, which includes the terms of the settlement.
The Commission acknowledges the assistance and cooperation of the State of Florida Office of Financial Regulation, the Texas State Securities Board, and the North American Securities Administrators Association.”

Although financial penalties are becoming more common in cases like the one above criminal penalties are not really increasing. The problem is that it is hard to link upper levels of management with a business decision to commit a crime. A word used like “puffery” when selling a product is often confused with the word “fraud” by over zealous salespeople who are trying to earn a commission or large bonus check and pay their bills. Commission sales by definition; means that Salespeople are paid by their employers to talk up their products and overcome objections. This is a slippery slope and top management is responsible for making sure those directly offering the products to the public do not slip off the “slippery slope” and say things that might earn a nice check now but in the long run will seriously harm the reputation of the firm they are working for.

SEC LARGE FINANCIAL COMPANY WITH MAKING INACCURATE STATEMENTS

The following excerpt comes from the SEC website: “Washington, D.C., June 29, 2011 — The Securities and Exchange Commission today charged Raymond James & Associates Inc. and Raymond James Financial Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers. Raymond James agreed to settle the SEC’s charges and provide its customers the opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS market in February 2008. According to the SEC’s administrative order, some registered representatives and financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to money market funds and other cash-like investments. In fact, ARS were very different types of investments. Among other things, representatives at Raymond James did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity. “Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Harmed investors who are covered by this settlement will have the opportunity to get full payment for their illiquid ARS.”
The SEC previously announced ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank, and TD Ameritrade. As a result of these settlements, more than $67 billion has been returned to ARS customers following the SEC’s investigation into the ARS market collapse of February 2008 that left tens of thousands of investors holding ARS they could not sell. The SEC’s order against Raymond James finds that the firm willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm. Without admitting or denying the SEC’s allegations, Raymond James consented to the SEC’s order and agreed to: Offer to purchase eligible ARS from its eligible current and former customers. Use its best efforts to provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers. Reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after Feb. 13, 2008.
Compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest. At the customer’s election, participate in a special arbitration process with those eligible customers who claim additional damages.
Establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.
Investors should be alerted that, in most instances, they will receive correspondence from Raymond James. Investors must then advise Raymond James that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to Raymond James. Investors should review the full text of the SEC’s order, which includes the terms of the settlement. The Commission acknowledges the assistance and cooperation of the State of Florida Office of Financial Regulation, the Texas State Securities Board, and the North American Securities Administrators Association.”
Although financial penalties are becoming more common in cases like the one above criminal penalties are not really increasing. The problem is that it is hard to link upper levels of management with a business decision to commit a crime. A word used like “puffery” when selling a product is often confused with the word “fraud” by over zealous salespeople who are trying to earn a commission or large bonus check and pay their bills. Commission sales by definition; means that Salespeople are paid by their employers to talk up their products and overcome objections. This is a slippery slope and top management is responsible for making sure those directly offering the products to the public do not slip off the “slippery slope” and say things that might earn a nice check now but in the long run will seriously harm the reputation of the firm they are working for."

Wednesday, June 29, 2011

SEC APPROVES RULE TO DEFINE "FAMILY OFFICES"



The following is an excerpt from the SEC website:

Washington, D.C., June 22, 2011 — The Securities and Exchange Commission today approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.

The rulemaking stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.

The rule is effective 60 days after its publication in the Federal Register.

# # #

FACT SHEET
Defining A Family Office
How are family offices impacted by the Dodd-Frank Act?
Family offices typically are considered to be investment advisers under the Advisers Act because of the investment advisory services that they provide. As such, they are subject to the registration requirements set forth in that Act. Historically, however, most family offices have been structured to take advantage of an exemption from registration for firms that advise less than fifteen clients and meet certain other conditions.

The Dodd-Frank Act repeals the 15-client exemption to enable the SEC to regulate hedge fund and other private fund advisers. But, the Dodd-Frank Act includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

Today, the Commission is considering adopting a final rule defining family offices that will be excluded from regulation under the Advisers Act.


Which family offices will be excluded from Advisers Act regulation under the rule?

Any company that:

Provides investment advice only to “family clients,” as defined by the rule.

Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.

Does not hold itself out to the public as an investment adviser.
Which family members and employees can the family office advise under the exclusion?

Family members. Family members include all lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members), and such lineal descendants’ spouses or spousal equivalents.

Key employees. Key employees include:


Executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office.

Any other employee of the family office or its affiliated family office (other than a clerical or secretarial employee) who, in connection with his or her regular duties, has participated in the investment activities of the family office or affiliated family office, or similar functions or duties for another company, for at least 12 months.

Other family clients. Other family clients generally include:


Any non-profit or charitable organization funded exclusively by family clients.

Any estate of a family member, former family member, key employee, or subject to certain conditions a former key employee.

Certain family client trusts.

Any company wholly-owned by and operated for the sole benefit of family clients.
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?

By March 30, 2012.

Will existing family office exemptive orders be rescinded?

No. Family offices that obtained exemptive orders from the Commission will be able to continue operating under their existing exemptive orders or they may operate under the new rule.

When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?

That family office will have to obtain a Commission exemptive order or register as an investment adviser.

Grandfathering Provision

The Dodd-Frank Act requires that the Commission not preclude certain family offices from meeting the new exclusion solely because they provide investment advice to certain clients (and provided that advice prior to January 1, 2010). The adopted rule incorporates this grandfathering provision."

SPEECH BY SEC COMMISSIONER KATHLEEN L. CASEY AT SEC OPEN MEETING


The following is a speech given by SEC Commissioner Casey and is an excerpt from the SEC website:

"Speech by SEC Commissioner:
Statement at SEC Open Meeting — Rules Implementing Amendments to the Investment Advisers Act of 1940; Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers
by
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
Washington, D.C.
June 22, 2011
As always, I join the Chairman in thanking the Staff of the Division of Investment Management, and all other participating divisions and offices, for their work on these releases.

I am able to support the adoption of only one of the two releases presented: the rules defining the scope of three exemptions to registration under the Advisers Act. As has been stated, the Dodd-Frank Act required that the Commission, via rulemaking, define the scope of exemptions from registration for certain types of advisers.

The rule defining “venture capital fund” for purposes of one of these statutory exemptions is particularly significant. The legislative record is replete with evidence that Congress did not regard venture capital funds as posing the kinds of risks that justify registration under the Advisors Act and indeed, was concerned with burdening these important drivers of capital formation and economic growth.

While I believe that our definition of venture capital fund could have been broader, I am ultimately able to support this rule because I believe it recognizes the need for flexibility in these funds’ investment strategies. Importantly, facilitating that flexibility via the basket of non-conforming activity seeks to ensure that funds are not unjustifiably prevented from making the most advantageous investments and from responding to changing market conditions in an efficient way. But at the same time, the rule also seeks to fulfill Congress’s intent that this exemption be applicable to venture capital fund advisers only.

I am, however, unable to support adoption of the companion release which sets out the Advisors Act implementation rules because, as I stated when I opposed the release as proposed, I believe that these rules will needlessly harm innovation and capital formation without a demonstrated, articulable, or measurable benefit to investors or financial stability.

As a consequence of the requirements imposed under the implementing rules, there will be no meaningful relief from the burdens of registration for those advisers that will be able to fit themselves within the boundaries of the Advisers Act exemptions we define today. Venture capital fund advisers, along with mid-sized private fund advisers, although explicitly exempt from registration under the Dodd-Frank Act, have been designated under the rules’ framework to be “exempt reporting advisers,” and are therefore subject to many of the same requirements as registered advisers, including public reporting requirements, and eventually recordkeeping obligations, just as if they were registered.

The Commission today pays lip service to the idea that it must maintain some difference between the reporting requirements imposed on exempt advisers and those for registered advisers, and therefore only adopts a certain subset of the items on Form ADV as applicable to exempt reporting advisers.

To be clear, my disagreement with the reporting requirements is not a mere quibble with which and how many Form ADV items are being required. Instead, I am deeply concerned by the wholesale lack of any principled, meaningful distinction drawn in the release between exempt advisers and registered advisers. Indeed, I believe it is not simply a function of degree, but of design. That is to say, I believe that the adoption of the current reporting requirements is only the first step in what will surely be an ongoing process of emptying the distinction between an “exempt reporting adviser” and a “registered” adviser of all meaning.

While the proposing release alluded to the possibility of future additional requirements, the adopting release is not as coy, and clearly refers to the prospect of future regulations, predicting not only a future recordkeeping rule but also explicitly signaling the Commission’s prerogative and intent to further expand the Form ADV and examination obligations. Indeed, the tenor of the release is such that it can only be assumed that the ultimate goal is to promote registration of these funds by nullifying any benefit of exemption through the imposition of comparable regulatory and compliance requirements.

So why does this matter? It matters first because the Commission has failed to meaningfully implement the will of Congress that these advisers be exempt from registration.1 It is true that Congress gave us the authority to require certain reporting and recordkeeping “as the Commission determines are necessary or appropriate in the public interest or for the protection of investors.” But the release before the Commission today provides no substantiated justification on public interest or investor protection grounds for the decision to impose these reporting requirements. Given that Congress instructed us to make these kind of findings before imposing additional requirements on these exempt advisers, the presumptions contained in the release as to the usefulness of the required information are entirely insufficient to meet our statutory obligations.

But more fundamentally, these rules needlessly impose compliance costs on funds that are the incubators of tomorrow’s great companies, companies that our economy necessarily relies on to propel job growth. This, at a time, when policymakers and Congress continue to emphasize the importance of finding ways to further promote capital formation and economic growth.

But we don’t need a white board to contemplate how to promote capital formation — we can start right here by not unnecessarily hampering it. Every dollar that is spent by a venture capital fund to satisfy the Commission’s newly imposed regulatory requirements is a dollar that cannot be invested in the next Google, Apple, or Amazon. These dollars will never reach nascent companies that are developing green tech, cutting-edge biotechnology, or products that are even beyond our dreams today.

I fear here that the Commission has lost sight of the fact that its mission includes the mandate to facilitate capital formation. The implementation rules before the Commission today will, without a doubt, negatively and unduly impact capital formation and economic growth. As a result, I cannot support it.

Thank you and I have no questions.


1 As explained in the legislative history, Section 407 of the Dodd-Frank Act directs the Commission to define "venture capital fund," and "provides that no investment adviser shall become subject to registration requirements for providing investment advice to a venture capital fund." S. REP. NO. 111-176, at 74, 75 (2010)."

Tuesday, June 28, 2011

SEC CHARGES FORMER MORTGAGE COMPANY CEO WITH HAVING A PART IN A TARP SCHEME



It is taking years for the SEC to handle the huge number of cases related to Mortgage fraud. Still, the SEC is moving ahead with individuals and companies being charged for their part in The Great Mortgage Fraud and Meltdown. Now not only has the SEC to contend with fraud from the mortgage meltdown but, with the fraud committed during the great banking bail-out program that was instituted after the mortgage meltdown. That program was known as TARP. In the news release below the SEC alleges that a former mortgage company CEO is guilty of having a part in a TARP scheme.


On June 17, 2011 the Securities and Exchange Commission (SEC) charged Paul R. Allen, the former chief-executive officer at Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository mortgage lender, with aiding-and-abetting the efforts of TBW’s former chairman, Lee B. Farkas, to defraud the U.S. Treasury's Troubled Asset Relief Program (TARP).
According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas, with the substantial assistance of Allen, was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — The Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.
The SEC's complaint alleges that Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Farkas also issued a press release on behalf of TBW announcing that TBW had secured the necessary financing for BancGroup. Contrary to his representations to BancGroup and to the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent. Allen substantially assisted Farkas in making these false statements.
The SEC's complaint against Allen charges him with aiding and abetting violations of the antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act). Without admitting or denying the SEC's allegations, Allen consented to the entry of a judgment permanently enjoining him from violation of Section 10(b) of the Exchange Act and Rules 10b-5 thereunder. The preliminary judgment, under which the SEC's requests for financial penalties against Allen remain pending, was entered by the Honorable Leonie M. Brinkema on June 17, 2011.
The SEC's investigation is ongoing. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Housing Finance Agency's Office of the Inspector General, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development

Monday, June 27, 2011

SEC CHARGES UNLAWFUL PUBLIC OFFERING?

The following is an excerpt from the SEC web site and defines what the SEC calls an “unlawful public offering”:

Litigation Release No. 21967 / May 13, 2011
Securities and Exchange Commission v. Advanced Optics Electronics, Inc., Leslie S. Robins, JDC Swan, Inc. and Jason Claffey, Civil Action No. 11-cv-1321 (S.D.N.Y. February 25, 2011)
SEC Brings Civil Action Against Advanced Optics Electronics, Inc., its Former Chairman Leslie S. Robins, and Stock Seller Jason Claffey For Engaging in an Unlawful Public Offering
Related Administrative and Cease-and-Desist Proceedings Brought against Broker-Dealer Divine Capital Markets, LLC, its CEO Danielle Hughes and associated person Michael Buonomo.
In an action brought in federal district court, the Securities and Exchange Commission on February 25, 2011, charged Advanced Optics Electronics, Inc. (ADOT), its former Chairman Leslie S. Robins, JDC Swan, Inc. and its former President, Jason Claffey with engaging in an unlawful public offering of the securities of ADOT, a development stage Nevada corporation located in New Mexico.
The Commission’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that from at least as early as January 2006, through June 2007, ADOT, acting through Robins, issued a total of over 9.8 billion shares of ADOT to JDC Swan through the use of purchase agreements that represented falsely that the shares were registered and free trading. The complaint further alleges that Claffey arranged to have the ADOT shares sold through a securities account he established at Divine Capital Markets, LLC, a registered broker-dealer located in New York. According to the SEC’s complaint, the defendants raised over $2 million through the offer and sales of ADOT shares into public market without a registration statement on file, or declared effective by the SEC. The complaint alleges that Claffey acquired the shares with a view to distribution and that there was no applicable exemption from registration to the offers and sales.
According to the SEC’s complaint, Claffey retained approximately 30% of the proceeds of the ADOT sales and wired the remainder to an ADOT account controlled by Robins. The complaint further alleges that ADOT, Robins, JDC Swan and Claffey’s offers and sales of ADOT shares violated Sections 5(a) and (c) of the Securities Act.
The SEC’s complaint against ADOT, Robins, JDC Swan and Claffey seeks a final judgment permanently enjoining the defendants from future violations of the Sections 5(a) and (c) and ordering them to pay civil money penalties, disgorge their ill gotten gains, plus prejudgment interest, and prohibiting them from participating in an offering of penny stock pursuant to Section 20(g) of the Securities Act
The Commission also instituted related cease-and-desist and administrative proceedings against registered broker-dealer Divine Capital Markets, LLC (Divine Capital), its CEO and President Danielle Hughes, and Divine Capital employee, Michael Buonomo. In the Matter of Divine Capital Markets, Danielle Hughes and Michael Buonomo, Release No. 34-63980 (Feb. 25, 2011). In the contested proceedings, the Commission’s Division of Enforcement alleges that Divine and Buonomo each violated sections 5(a) and (c) of the Securities Act and that Hughes and Divine failed to supervise Buonomo with a view to preventing his violations. The Division seeks administrative sanctions, penalties and disgorgement against all three respondents.”

Sunday, June 26, 2011

BIG RETURNS MIGHT HAVE BEEN A SECURITIES FRAUD TARGETING SENIORS

The following case is an excerpt from the SEC web site:

“Litigation Release No. 21959 /May 5, 2011
Securities and Exchange Commission v. Robert C. Butler, United States District Court for the Central District of California, Case No. 11-03792 MMM (FFMx) (filed May 3, 2011)
SEC HALTS FRAUDULENT DAY TRADING SCHEME TARGETING SENIOR CITIZENS
The Securities and Exchange Commission obtained an emergency asset freeze and court order to halt an ongoing securities fraud being orchestrated by Robert C. Butler of Bermuda Dunes, Calif.
The SEC alleges that from January 2009 to March 2011, Butler raised approximately $3.3 million from at least 17 investors who were mostly senior citizens living in or around Indio, Calif. He operated out of his home and dazzled investors with his multiple computer screens and a purported proprietary trading program that he claimed to use in his day trading business. Butler promised exorbitant returns to investors through investments in his hedge fund, but instead stole $1.6 million and lost the other half of investor funds in his securities trading.
The SEC’s complaint alleges that Butler sent falsified account statements to investors in order to conceal his fraud, and grossly inflated the hedge fund balances. According to one statement, the fund balance was $8.9 million compared to the true balance of merely $22. The SEC further alleges that Butler lied that he was a graduate of MIT and he concealed from investors his Chapter 7 bankruptcy filing in 1998. Despite investor requests, Butler has failed to return their money and instead continues to solicit new funds and lull existing investors into believing that repayments are forthcoming.
The Honorable Margaret Morrow, United States District Judge, granted the SEC’s application for emergency relief and froze the defendants’ assets. On May 11, 2011, the court will hold a hearing on the SEC’s motion for a preliminary injunction.
The SEC’s complaint charges Butler with violating the antifraud provisions, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, of the federal securities laws. In addition to the emergency relief, the complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, and financial penalties.
The SEC’s investigation was conducted by Janet Weissman and Katharine Nolan in the Los Angeles Regional Office, and David Van Havermaat will lead the SEC’s litigation.”

Saturday, June 25, 2011

SEC ANNOUNCES PROPOSED AMENDMENTS TO THE BROKER DEALER REPORTING RULE

The following is from the SEC website:

“Washington, D.C., June 15, 2011 — The Securities and Exchange Commission today unanimously 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.

“When investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed,” said SEC Chairman Mary L. Schapiro. “To protect investors and help maintain confidence in the market, we must take strong steps to help safeguard the assets held by broker-dealers.”
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.
# # #
FACT SHEET
Proposal to Amend Broker-Dealer Financial Reporting Rule
(Rule 17a-5)
Background
What are broker-dealers? Broker-dealers are entities that engage in the business of effecting securities transactions — either for someone else’s account or for their own account. Under the U.S. securities laws, most entities engaged in these activities (with the notable exception of certain commercial banks) must register with the SEC as broker-dealers. Currently, there are approximately 5,000 broker-dealers registered with the SEC. Of those, about 300 maintain custody of their customers’ securities and cash. Broker-dealers also must be members of at least one self-regulatory organization (SRO) such as FINRA or a national securities exchange.
How are customer assets at broker-dealers protected? Broker-dealers that maintain custody of a customer’s securities and cash are subject to strict requirements under the Securities Exchange Act of 1934 that are designed to protect and account for these assets. These requirements include:
The Net Capital Rule (Rule 15c3-1). This SEC rule requires a broker-dealer to maintain more than a dollar of highly liquid assets for each dollar of liabilities. If the broker-dealer fails, this rule helps to ensure that there are sufficient liquid assets to pay all liabilities to customers.
The Customer Protection Rule (Rule 15c3-3). This SEC rule requires a broker-dealer to segregate customer securities and cash from the firm’s proprietary business activities. If the broker-dealer fails, these customer assets should be readily available to be returned to customers.
The Quarterly Security Count Rule (Rule 17a-13). This SEC rule requires a broker-dealer on a quarterly basis to count, examine, and verify the securities it actually holds for customers and for itself — and compare that with the amounts of such securities it should be holding as indicated by its records. This process includes verifying the actual amount of securities located at sub-custodians such as the Depository Trust and Clearing Corporation, or DTCC. If there are differences between the actual amounts held and the amounts that should be held, the broker-dealer must take capital charges until the differences are resolved.
The Account Statement Rule. This SRO rule requires a broker-dealer to send a statement — at least quarterly — to each customer reflecting the customer’s securities and cash positions held at the broker-dealer, as well as the activity in the account.
These requirements are designed to protect customer assets held at broker-dealer. However, if a broker-dealer violates these requirements by, for example, misappropriating these assets, the securities and cash may not be available to be returned to customers. In this situation, the Securities Investor Protection Corporation will initiate a liquidation proceeding to protect customers, including making up for shortfalls in customer accounts up to $500,000 per customer (of which $250,000 can be used to make up a cash shortfall.)
Proposed Rule Amendments
What would the amendments to Rule 17a-5 do?
The proposed amendments would:
Strengthen Audit Requirements — Currently, Section 17 of the Exchange Act and Rule 17a-5 together require a broker-dealer to, among other things, file an annual report with the SEC and the broker-dealer’s designated examining authority. The report must contain audited financial statements and certain supporting schedules and supplemental reports, as applicable. An independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB) must conduct the audit.
Under the proposal, a broker-dealer that maintains custody of customer securities and cash would be required to undergo an examination — by a registered public accounting firm — of:
Whether it is in compliance with the four rules described above.
Its controls for complying with these rules.
In addition, a broker-dealer that does not maintain custody of customer securities and cash would be required to undergo a review by an independent public accountant of its assertion that it is not subject to segregation requirements because it does not maintain custody of customer securities and cash.
Strengthen Oversight of Broker-Dealer Custody Practices — Section 17(b) of the Exchange Act subjects broker-dealers to routine inspections and examinations by staff of the Commission and the relevant SRO.
The proposed amendments would enhance these broker-dealer examinations in two ways:
First, the proposed amendments would require a broker-dealer that maintains custody of customer securities and cash or clears transactions to allow Commission and SRO examiners to:
Access the work papers of the registered public accounting firm that audits the broker-dealer.
Discuss any findings with the personnel of the registered public accounting firm.
The examiners could use this information to better focus their examinations.
Second, the proposed amendments would require a broker-dealer to file a report on a quarterly basis that contains information about whether and, if so how, it maintains custody of its customers’ securities and cash. The report would establish a custody profile for the broker-dealer that examiners could use as a starting point to focus their custody examinations.
How do the amendments relate to the audits that Investment Advisers must undergo?
In 2009, the SEC adopted rules requiring investment advisers — depending on their custody arrangements — to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. Depending on the custody arrangement, the rules also require some broker-dealers to obtain — from the entity that maintains the assets of the investment adviser’s client — a written internal control report prepared by a PCAOB registered public accounting firm. The internal control report must describe the controls in place at the custodian of the assets, test the operating effectiveness of the controls, and provide the results of the tests.
The proposed amendments recognize that some broker-dealers that serve as the custodian for the assets of investment adviser clients must provide the internal control report. Those broker-dealers would be able to rely on the examination outlined in the proposed amendments and, therefore, not also have to obtain the internal control report. “

POOR CITY OF CHICAGO

The following is from the SEC website:
Former Executive of Illinois Refuse Container Repair Company Sentenced to Serve 16 Months in Prison for Conspiring to Defraud the City of Chicago
WASHINGTON — A former vice president of an Illinois refuse disposal container repair company was sentenced today to serve 16 months in prison and to pay a $40,000 criminal fine for his role in a conspiracy to commit mail and wire fraud in connection with bids on a contract with the city of Chicago, the Department of Justice announced.
Steven Fenzl, a California resident, was also sentenced by U.S. District Court Judge Ruben Castillo to pay $35,302 in restitution for his participation in a conspiracy to defraud the city of Chicago on a contract for the repair of refuse carts from as early as November 2004 to as late as September 2008. Fenzl, along with his business partner Douglas E. Ritter, was charged in an indictment filed on April 21, 2009, in U.S. District Court in Chicago. Fenzl was found guilty by a jury on Sept. 28, 2010, of one count of conspiracy to commit mail and wire fraud, two counts of mail fraud and one count of wire fraud. Ritter, an Illinois resident, pleaded guilty to the conspiracy on June 3, 2010, and was sentenced on May 10, 2011, to serve 16 months in prison and to pay $35,303 in restitution.
According to the indictment, Fenzl, Ritter and their co-conspirator conspired to deceive city of Chicago officials about the number of legitimate, competitive bids submitted for the contract. Specifically, Fenzl and his co-conspirators fraudulently induced other companies to submit bids for the contract at prices determined by Fenzl and his co-conspirators and greater than the price for which Fenzl’s company had submitted a bid. The department said that included in these bids were fraudulent documents indicating that, if awarded the contract, the bidder would enter into subcontracts to purchase goods or services for a specified percentage of the contract from a minority-owned business and a women-owned business, as required by the city of Chicago. According to the indictment, Fenzl and his co-conspirators also fraudulently certified to the city on Fenzl’s company’s bid that it had not entered an agreement with any other bidder relating to the price named in any other bid submitted to the city for the contract.
Today’s sentencing resulted from an investigation of the refuse cart repair industry being conducted by the Antitrust Division’s Chicago Field Office and the city of Chicago’s Office of Inspector General.”

Friday, June 24, 2011

CFTC ON EXEMPTIVE RELIEF

The following is from the CFTC website:

Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011



Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011
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