Many times businesses will pay key employees who leave the business consulting fees for help in solving difficult problems. In the following case the SEC alleges that these fees were paid as perks and were not properly disclosed to investors. Please read the following excerpt from the SEC web site for more details:
"Washington, D.C., Jan. 12, 2011 — The Securities and Exchange Commission today charged a Kansas-based company that manages government websites and four current or former company executives with failing to disclose to investors more than $1.18 million in perks paid to the former CEO over a six-year period.
The SEC alleges that NIC Inc.'s public filings failed to disclose that the company footed the bill for wide-ranging perks enjoyed by former CEO Jeffrey Fraser, his girlfriend, and his family — including vacations, computers, and day-to-day personal living expenses. NIC failed to disclose that it paid thousands of dollars per month for Fraser to live in a Wyoming ski lodge and commute by private aircraft to his office at NIC's Kansas headquarters. Meanwhile, NIC and its executives falsely represented to investors that Fraser worked virtually for free from 2002 to 2005, and then continued to materially understate the perks that Fraser received in 2006 and 2007. NIC's related party disclosures for 2002 through 2005 also were misleading.
NIC, Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to pay a combined $2.8 million to settle the SEC's charges against them without admitting or denying the allegations. The SEC's litigation continues against NIC's current CFO Stephen Kovzan.
Additional Materials
SEC Complaint vs. NIC, Fraser, Herington, and Bur
SEC Complaint vs. Kovzan
Litigation Release No. 21809
Public disclosure of executive perks helps investors evaluate whether corporate assets are being used wisely or squandered," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "NIC and its executives did not comply with their disclosure obligations and the company's internal controls by paying Fraser's personal expenses while telling shareholders that Fraser was working for little or no compensation."
Among the alleged undisclosed perks for Fraser outlined in the SEC's complaints filed in federal court in the District of Kansas:
More than $4,000 per month to live in a ski lodge in Wyoming.
Costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC's Kansas headquarters.
Monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled.
Vacations for Fraser, his girlfriend and his family.
Fraser's flight training, hunting, skiing, spa and health club expenses.
Computers and electronics for Fraser and his family.
A leased Lexus SUV.
Other day-to-day living expenses for Fraser such as groceries, liquor, tobacco, nutritional supplements, and clothing.
The SEC's complaints allege that Fraser, who did not have a personal credit card, routinely charged living expenses on NIC credit cards and submitted expense vouchers falsely claiming personal items were business-related in order to have NIC pay for these personal expenses. Fraser also sought reimbursement for certain expenses he had not incurred.
The SEC alleges that Kovzan, who was then the company's Chief Accounting Officer, authorized NIC's payment of Fraser's personal expenses, circumventing NIC's internal controls and policies that required the CEO to document the business purpose for his expenses. Kovzan knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records. Kovzan prepared, reviewed or signed NIC's proxy statements, annual reports and registration statements that materially underreported Fraser's compensation, and Kovzan made false representations to NIC's independent auditors.
The SEC alleges that Bur permitted NIC to pay the expenses that Fraser submitted on his expense vouchers even though he was informed that Fraser was not submitting the required documentation. A finance department employee raised concerns to Bur that some of Fraser's expenses were not business-related. Bur was aware of the SEC's rules requiring the disclosure of executive perks, yet he reviewed, signed or certified NIC's public filings that failed to disclose Fraser's perks.
The SEC alleges that Herington, who was then NIC's Chief Operating Officer, was informed of problems with Fraser's expense reporting and failed to adequately address them. Herington received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed or signed NIC's public filings that failed to disclose Fraser's perks.
According to the SEC's complaints, NIC failed to correct Fraser's expense reporting problems even after the finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC's investigation of this matter in mid-2007. The majority of Fraser's perks were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.
NIC agreed to settle the SEC's charges by paying a $500,000 penalty and hiring an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions. NIC consented to a final judgment enjoining it from violating Sections 17(a)(2) and (3) of the Securities Act of 1933; Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9.
Fraser agreed to pay $1,184,246 in disgorgement, $358,844 in prejudgment interest, and a $500,000 penalty, and consented to an order barring him from serving as an officer or director of a public company. Fraser consented to a final judgment enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9, and from aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1.
Herington agreed to pay a $200,000 penalty and consented to a final judgment enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act and Section 13(b)(5) of the Exchange Act, and aiding and abetting NIC's violations of Sections 13(a) and 14(a) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9.
Bur agreed to pay a $75,000 penalty and consented to a final judgment enjoining him from violating Exchange Act Rules 13a-14 and 13b2-1, and aiding and abetting NIC's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to an SEC order prohibiting him from appearing or practicing before the SEC as an accountant with a right to reapply after one year.
Kovzan is charged with violating Section 17(a) of the Securities Act, Section 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. The SEC's complaint seeks a permanent injunction, disgorgement, penalties, prejudgment interest, and an officer-and-director bar against Kovzan, against whom the SEC's charges are still pending."
The above case is one in which the SEC really got tough on alleged inaccurate disclosures. Trying to pay people off the books is common in business although usually the IRS and not the SEC end up investigating these matters.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Sunday, February 6, 2011
MOONLIGHT MADNESS AT TECH COMPANIES
Many employees moonlight in order to make more money for themselves and their families. However, the SEC takes a dim view of people who moonlight as informational gatherers for certain securities trading operations while working for the companies they are gathering information on. The following SEC web site excerpt explains charges brought against such consultants:
“Washington, D.C., Feb. 3, 2011 — The Securities and Exchange Commission today charged six expert network consultants and employees with insider trading for illegally tipping hedge funds and other investors to generate nearly $6 million in illicit gains. The charges stem from the SEC's ongoing investigation into the activities of expert networks that purport to provide professional investment research to their clients.
While it's legal to obtain expert advice and analysis through expert networking arrangements, it's illegal to trade on material nonpublic information obtained in violation of a duty to keep that information confidential.
The SEC alleges that four technology company employees, while moonlighting as consultants or "experts" to Primary Global Research LLC (PGR) without the knowledge of their employers, abused their access to inside information about such technology companies as AMD, Apple, Dell, Flextronics, and Marvell. The consultants received hundreds of thousands of dollars in purported consulting fees from PGR for sharing the inside information with PGR employees and clients. The SEC charges two PGR employees for facilitating the transfer of inside information from PGR consultants to PGR clients.
"Company executives and other insiders moonlighting as consultants to hedge funds cannot blatantly peddle their company's confidential information for personal gain," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These PGR consultants and employees schemed to facilitate widespread and repeated insider trading by several hedge funds and other investment professionals."
The SEC's complaint filed in federal court in Manhattan alleges that PGR consultants Mark Anthony Longoria, Daniel L. DeVore, Winifred Jiau and Walter Shimoon obtained material, non-public confidential information about quarterly earnings and performance data and shared that information with hedge funds and other clients of PGR who traded on the inside information. PGR employees Bob Nguyen and James Fleishman acted as conduits by receiving inside information from PGR consultants and passing that information directly to PGR clients.
The SEC alleges that:
Longoria, a manager in AMD's desktop global operations group, had access to sales figures for AMD's various operational units. He also obtained from a colleague AMD's financial results, including "top line" quarterly revenue and profit margin information prior to their public announcement. Longoria shared this inside information with multiple PGR clients who, in turn, traded in AMD securities. From January 2008 to March 2010, Longoria received more than $130,000 for talking to PGR and its clients.
DeVore, a Global Supply Manager at Dell, was privy to confidential information about Dell's internal sales forecasts as well as information about the pricing and volume of Dell's purchases from its suppliers. DeVore regularly provided PGR and PGR clients with this inside information so it could be used to trade securities. From 2008 to 2010, DeVore received approximately $145,000 for talking to PGR and its clients.
Shimoon, a Vice President of Business Development for Components in the Americas at Flextronics, was privy to confidential information concerning Flextronics and its customers including Apple, Omnivision, and Research in Motion. Shimoon provided this inside information to PGR and PGR clients so it could be used to trade securities. From September 2008 to June 2010, Shimoon received approximately $13,600 for talking to PGR and its clients.
Jiau was a "private" PGR expert, meaning that PGR made her available only to a small number of PGR clients. Jiau, who had contacts at Marvell and other technology companies, regularly provided certain PGR clients with inside information regarding Marvell and other technology companies. Jiau provided company-specific financial results that companies had not yet announced publicly. From September 2006 to December 2008, Jiau received more than $200,000 for her consultations with select PGR clients.
Nguyen and Fleishman received, directly or indirectly, specific inside information from PGR consultants and passed this inside information on, directly or indirectly, to PGR clients.
The SEC's complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Fleishman, Nguyen and Jiau with aiding and abetting others' violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. The complaint also charges Longoria and DeVore with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Longoria, Shimoon and DeVore from acting as an officer or director of any registered public company.”
“Washington, D.C., Feb. 3, 2011 — The Securities and Exchange Commission today charged six expert network consultants and employees with insider trading for illegally tipping hedge funds and other investors to generate nearly $6 million in illicit gains. The charges stem from the SEC's ongoing investigation into the activities of expert networks that purport to provide professional investment research to their clients.
While it's legal to obtain expert advice and analysis through expert networking arrangements, it's illegal to trade on material nonpublic information obtained in violation of a duty to keep that information confidential.
The SEC alleges that four technology company employees, while moonlighting as consultants or "experts" to Primary Global Research LLC (PGR) without the knowledge of their employers, abused their access to inside information about such technology companies as AMD, Apple, Dell, Flextronics, and Marvell. The consultants received hundreds of thousands of dollars in purported consulting fees from PGR for sharing the inside information with PGR employees and clients. The SEC charges two PGR employees for facilitating the transfer of inside information from PGR consultants to PGR clients.
"Company executives and other insiders moonlighting as consultants to hedge funds cannot blatantly peddle their company's confidential information for personal gain," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These PGR consultants and employees schemed to facilitate widespread and repeated insider trading by several hedge funds and other investment professionals."
The SEC's complaint filed in federal court in Manhattan alleges that PGR consultants Mark Anthony Longoria, Daniel L. DeVore, Winifred Jiau and Walter Shimoon obtained material, non-public confidential information about quarterly earnings and performance data and shared that information with hedge funds and other clients of PGR who traded on the inside information. PGR employees Bob Nguyen and James Fleishman acted as conduits by receiving inside information from PGR consultants and passing that information directly to PGR clients.
The SEC alleges that:
Longoria, a manager in AMD's desktop global operations group, had access to sales figures for AMD's various operational units. He also obtained from a colleague AMD's financial results, including "top line" quarterly revenue and profit margin information prior to their public announcement. Longoria shared this inside information with multiple PGR clients who, in turn, traded in AMD securities. From January 2008 to March 2010, Longoria received more than $130,000 for talking to PGR and its clients.
DeVore, a Global Supply Manager at Dell, was privy to confidential information about Dell's internal sales forecasts as well as information about the pricing and volume of Dell's purchases from its suppliers. DeVore regularly provided PGR and PGR clients with this inside information so it could be used to trade securities. From 2008 to 2010, DeVore received approximately $145,000 for talking to PGR and its clients.
Shimoon, a Vice President of Business Development for Components in the Americas at Flextronics, was privy to confidential information concerning Flextronics and its customers including Apple, Omnivision, and Research in Motion. Shimoon provided this inside information to PGR and PGR clients so it could be used to trade securities. From September 2008 to June 2010, Shimoon received approximately $13,600 for talking to PGR and its clients.
Jiau was a "private" PGR expert, meaning that PGR made her available only to a small number of PGR clients. Jiau, who had contacts at Marvell and other technology companies, regularly provided certain PGR clients with inside information regarding Marvell and other technology companies. Jiau provided company-specific financial results that companies had not yet announced publicly. From September 2006 to December 2008, Jiau received more than $200,000 for her consultations with select PGR clients.
Nguyen and Fleishman received, directly or indirectly, specific inside information from PGR consultants and passed this inside information on, directly or indirectly, to PGR clients.
The SEC's complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Fleishman, Nguyen and Jiau with aiding and abetting others' violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. The complaint also charges Longoria and DeVore with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Longoria, Shimoon and DeVore from acting as an officer or director of any registered public company.”
Thursday, February 3, 2011
SEC PROPOSES RULES FOR SECURITY-BASED SWAPS
The following excerpt fro the SEC website discusses some of the proposed rules for security based swaps. It is a complicated document which has proposals to regulate some extremely complicated securities transactions.
"Washington, D.C., Feb. 2, 2011 — The Securities and Exchange Commission today voted unanimously to propose rules defining security-based swap execution facilities (SEFs) and establishing their registration requirements, as well as their duties and core principles.
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to implement a regulatory framework for security-based swaps, which currently trade exclusively in the over-the-counter markets with little transparency or oversight.
The Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets, and therefore created security-based SEFs as a new category of market intended to provide more transparency and reduce systemic risk.
"Our objective here is to provide a framework that allows the security-based swap market to continue to develop in a more transparent, efficient, and competitive manner," said SEC Chairman Mary L. Schapiro. "This is an important and complex undertaking that adds a significant new component to the regulatory framework for over-the-counter derivatives."
The Commission's proposed rules:
Interpret the definition of "security-based SEFs" as set forth in Dodd-Frank.
Set out the registration requirements for security-based SEFs.
Implement the 14 core principles for security-based SEFs that the legislation outlined.
Establish the process for security-based SEFs to file rule changes and new products with the SEC.
Exempt security-based SEFs from the definition of "exchange" and from most regulation as a broker.
Public comments on the rule proposal should be received by the Commission by April 4, 2011.
FACT SHEET
Security-Based Swap Execution Facilities
Background
Division of Authority
The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets. In the process, it divided regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).
Among other things, Title VII of the Act authorizes the Commission to regulate "security-based" swaps and directs it to engage in rulemaking to shape the regulatory framework for such products.
Security-Based Swaps and Derivatives
A derivative is a financial instrument or contract whose value is 'derived' from an underlying asset, such as a commodity, bond or equity security. The instruments provide a mechanism for the transfer of market risk or credit risk between two counterparties. Derivatives are incredibly flexible products that can be engineered to achieve almost any financial purpose.
For instance, a derivative can be used by two parties who have a differing view on whether a particular financial asset price will go up or down or whether an event will happen in the future. With derivatives, market participants can track or replicate the economics of holding or shorting an underlying asset, such as a security, thereby enabling participants to gain a desired market or credit exposure without actually holding the underlying asset.
A swap is a type of derivative contract that is traded in the over-the-counter market. One type of swap is a "security-based swap", over which the SEC has authority. Such swaps are broadly defined as swaps based on (1) a single security, (2) a loan, (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.
As an example, in a credit default swap transaction, the party who is seeking to hedge against a loss from a particular credit event, say the default of a bond, is referred to as the credit protection buyer. The credit protection buyer will receive a payment to compensate for its loss in the event that the default occurs. A credit protection seller is the counter-party.
The current market for security-based swaps, which trade over-the-counter, is opaque, with swap dealers acting as liquidity providers, and institutional investors and investment managers acting as liquidity takers. Compared to the exchange-traded markets, there is little pre-trade transparency (the ability to see trading interest prior to a trade being executed) or post-trade transparency (the ability to see transaction information after a trade is executed).
Security-Based Swap Execution Facilities
To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.
As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade."
This newly created entity is defined under the Dodd-Frank Act in relevant part as "a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . ."
The Core Principles
The Dodd-Frank Act further requires security-based SEFs to be registered with the Commission and specifies that such a registered security-based SEF, among other things, must comply with 14 core principles.
The core principles would require these security-based SEFs to:
Comply with the core principles and any requirement the Commission may impose.
Establish and enforce rules governing, among other things, the terms and conditions of security-based swaps traded on their markets; any limitation on access to the facility; trading, trade processing and participation; and the operation of the facility.
Permit trading only in security-based swaps that are not readily susceptible to manipulation.
Establish rules for entering, executing and processing trades and to monitor trading to prevent manipulation, price distortion, and disruptions through surveillance, including real-time trade monitoring and trade reconstructions.
Have systems to capture information necessary to carry out its regulatory responsibilities and share the collected information with the Commission upon request.
Have rules and procedures to ensure the financial integrity of security-based swaps entered on or through the facility, including the clearance and settlement of security-based swaps.
Have rules allowing it to exercise emergency authority, in consultation with the Commission, including the authority to suspend or curtail trading or liquidate or transfer open positions in any security-based swap.
Make public post-trade information (including price, trading volume, and other trading data) in a timely manner to the extent prescribed by the Commission.
Maintain records of activity relating to the facility's business, including a complete audit, for a period of five years and to report such information to the Commission, upon request.
Not take any action that imposes any material anticompetitive burden on trading or clearing.
Have rules designed to minimize and resolve conflicts of interest.
Have sufficient financial, operational, and managerial resources to conduct its operations and fulfill its regulatory responsibilities.
Establish a risk analysis and oversight program to identify and minimize sources of operational risk and to establish emergency procedures, backup facilities, and a disaster recovery plan, and to maintain such efforts, including through periodic tests of such resources.
Have a chief compliance officer that performs certain duties relating to the oversight and compliance monitoring of the security-based SEF and that submits annual compliance and financial reports to the Commission.
The Proposal
The Commission proposed a series of rules related to security-based SEFs.
Attributes of a Security-Based SEF
The Commission proposed an interpretation of the definition of a security-based SEF. Under its proposed interpretation, a security-based SEF would be a system or platform that allows more than one participant to interact with the trading interest of more than one other participant on the system or platform.
Various types of trading platforms potentially could meet the proposed interpretation. For example, a limit order book system (i.e., a system or platform that allows a participant to submit executable bids and offers for display to all other participants) could meet the proposed interpretation.
Also, the proposed interpretation would accommodate a "request for quote" system that provides a participant with the ability to send a single request for a quote to all participants providing liquidity on that system, or to choose to send the request to fewer than all such participants.
The security-based SEF would not be able to limit the number of liquidity providing participants from whom a quote-requesting participant could request a quote on the SEF. However, the security-based SEF would be able to let the quote-requesting participant choose to send its request for a quote to less than all the liquidity-providing participants.
The security-based SEF also would have to provide a functionality that allows any participant the ability to make and display executable bids and offers accessible to all other participants on the security-based SEF, if the participant chooses to do so. Also, the security-based SEF would have to create and disseminate composite indicative quotes for all swaps that trade on the security-based SEF to all participants.
The Requirements for Registering SEFs
Under the proposed rules, security-based SEFs would be required to register with the Commission by filing a form, Form SB SEF. The SEF also would be required to update its filing when the information becomes inaccurate and file an amended form annually.
The proposed rules also would require that a security-based SEF:
File with the Commission proposed changes to its rules as well as the security-based swaps that it intends to trade.
Have rules to ensure compliance with the core principles outlined in the Dodd-Frank Act.
Have rules regarding access to, and the financial integrity of transactions on, the security-based SEF.
Put in place rules governing the procedures for trading on the security-based SEF.
Ensure the integrity of security-based SEF systems by having policies and procedures reasonably designed to ensure that its systems have adequate levels of capacity, resiliency, and security.
Make and keep certain books and records.
Have adequate resources to operate as a security-based SEF.
In addition, the proposal would exempt a security-based SEF from the definition of exchange and from most regulations as a broker.
Previous Related Rulemaking
This proposal coincides with rules the SEC proposed in December that would set out the way in which clearing agencies provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps should be required to be cleared.
In addition, under the Dodd-Frank Act, the SEC has engaged in several additional rulemakings related to the derivatives market:
Defining Security-Based Swap Terms: Proposed jointly with the Commodity Futures Trading Commission new rules that would further define a series of terms related to the security-based swaps market, including "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."
Security-Based Swap Reporting: Proposed new rules entailing how security-based swap transactions should be reported and publicly disseminated.
Security-Based Swap Repositories: Proposed rules regarding the registration and regulation of security-based swap data repositories.
Security-Based Swap Fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap as well as in connection with ongoing payments and deliveries under a security-based swap.
Security-Based Swap Conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.
Reporting of Pre-Enactment Security-Based Swaps: Adopted an interim rule requiring certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.
Confirmation of Transactions: Proposed a rule governing the way in which certain security-based swap transactions are acknowledged and verified by the parties who enter into them.
What's Next
The proposal seeks public comment by April 4, 2011, on a broad range of issues relating to the proposed interpretation, exemptions, rules and form relating to security-based SEFs, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider whether to adopt the proposal or modify it."
Hopefully, Security Based Swaps will become less of a vehicle for gamblers and more of a vehicle to help manage risk. Of course it would be nice if you could go long the stock market and make money holding a stock for decades like our grandfathers.
"Washington, D.C., Feb. 2, 2011 — The Securities and Exchange Commission today voted unanimously to propose rules defining security-based swap execution facilities (SEFs) and establishing their registration requirements, as well as their duties and core principles.
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to implement a regulatory framework for security-based swaps, which currently trade exclusively in the over-the-counter markets with little transparency or oversight.
The Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets, and therefore created security-based SEFs as a new category of market intended to provide more transparency and reduce systemic risk.
"Our objective here is to provide a framework that allows the security-based swap market to continue to develop in a more transparent, efficient, and competitive manner," said SEC Chairman Mary L. Schapiro. "This is an important and complex undertaking that adds a significant new component to the regulatory framework for over-the-counter derivatives."
The Commission's proposed rules:
Interpret the definition of "security-based SEFs" as set forth in Dodd-Frank.
Set out the registration requirements for security-based SEFs.
Implement the 14 core principles for security-based SEFs that the legislation outlined.
Establish the process for security-based SEFs to file rule changes and new products with the SEC.
Exempt security-based SEFs from the definition of "exchange" and from most regulation as a broker.
Public comments on the rule proposal should be received by the Commission by April 4, 2011.
FACT SHEET
Security-Based Swap Execution Facilities
Background
Division of Authority
The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets. In the process, it divided regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).
Among other things, Title VII of the Act authorizes the Commission to regulate "security-based" swaps and directs it to engage in rulemaking to shape the regulatory framework for such products.
Security-Based Swaps and Derivatives
A derivative is a financial instrument or contract whose value is 'derived' from an underlying asset, such as a commodity, bond or equity security. The instruments provide a mechanism for the transfer of market risk or credit risk between two counterparties. Derivatives are incredibly flexible products that can be engineered to achieve almost any financial purpose.
For instance, a derivative can be used by two parties who have a differing view on whether a particular financial asset price will go up or down or whether an event will happen in the future. With derivatives, market participants can track or replicate the economics of holding or shorting an underlying asset, such as a security, thereby enabling participants to gain a desired market or credit exposure without actually holding the underlying asset.
A swap is a type of derivative contract that is traded in the over-the-counter market. One type of swap is a "security-based swap", over which the SEC has authority. Such swaps are broadly defined as swaps based on (1) a single security, (2) a loan, (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.
As an example, in a credit default swap transaction, the party who is seeking to hedge against a loss from a particular credit event, say the default of a bond, is referred to as the credit protection buyer. The credit protection buyer will receive a payment to compensate for its loss in the event that the default occurs. A credit protection seller is the counter-party.
The current market for security-based swaps, which trade over-the-counter, is opaque, with swap dealers acting as liquidity providers, and institutional investors and investment managers acting as liquidity takers. Compared to the exchange-traded markets, there is little pre-trade transparency (the ability to see trading interest prior to a trade being executed) or post-trade transparency (the ability to see transaction information after a trade is executed).
Security-Based Swap Execution Facilities
To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.
As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade."
This newly created entity is defined under the Dodd-Frank Act in relevant part as "a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . ."
The Core Principles
The Dodd-Frank Act further requires security-based SEFs to be registered with the Commission and specifies that such a registered security-based SEF, among other things, must comply with 14 core principles.
The core principles would require these security-based SEFs to:
Comply with the core principles and any requirement the Commission may impose.
Establish and enforce rules governing, among other things, the terms and conditions of security-based swaps traded on their markets; any limitation on access to the facility; trading, trade processing and participation; and the operation of the facility.
Permit trading only in security-based swaps that are not readily susceptible to manipulation.
Establish rules for entering, executing and processing trades and to monitor trading to prevent manipulation, price distortion, and disruptions through surveillance, including real-time trade monitoring and trade reconstructions.
Have systems to capture information necessary to carry out its regulatory responsibilities and share the collected information with the Commission upon request.
Have rules and procedures to ensure the financial integrity of security-based swaps entered on or through the facility, including the clearance and settlement of security-based swaps.
Have rules allowing it to exercise emergency authority, in consultation with the Commission, including the authority to suspend or curtail trading or liquidate or transfer open positions in any security-based swap.
Make public post-trade information (including price, trading volume, and other trading data) in a timely manner to the extent prescribed by the Commission.
Maintain records of activity relating to the facility's business, including a complete audit, for a period of five years and to report such information to the Commission, upon request.
Not take any action that imposes any material anticompetitive burden on trading or clearing.
Have rules designed to minimize and resolve conflicts of interest.
Have sufficient financial, operational, and managerial resources to conduct its operations and fulfill its regulatory responsibilities.
Establish a risk analysis and oversight program to identify and minimize sources of operational risk and to establish emergency procedures, backup facilities, and a disaster recovery plan, and to maintain such efforts, including through periodic tests of such resources.
Have a chief compliance officer that performs certain duties relating to the oversight and compliance monitoring of the security-based SEF and that submits annual compliance and financial reports to the Commission.
The Proposal
The Commission proposed a series of rules related to security-based SEFs.
Attributes of a Security-Based SEF
The Commission proposed an interpretation of the definition of a security-based SEF. Under its proposed interpretation, a security-based SEF would be a system or platform that allows more than one participant to interact with the trading interest of more than one other participant on the system or platform.
Various types of trading platforms potentially could meet the proposed interpretation. For example, a limit order book system (i.e., a system or platform that allows a participant to submit executable bids and offers for display to all other participants) could meet the proposed interpretation.
Also, the proposed interpretation would accommodate a "request for quote" system that provides a participant with the ability to send a single request for a quote to all participants providing liquidity on that system, or to choose to send the request to fewer than all such participants.
The security-based SEF would not be able to limit the number of liquidity providing participants from whom a quote-requesting participant could request a quote on the SEF. However, the security-based SEF would be able to let the quote-requesting participant choose to send its request for a quote to less than all the liquidity-providing participants.
The security-based SEF also would have to provide a functionality that allows any participant the ability to make and display executable bids and offers accessible to all other participants on the security-based SEF, if the participant chooses to do so. Also, the security-based SEF would have to create and disseminate composite indicative quotes for all swaps that trade on the security-based SEF to all participants.
The Requirements for Registering SEFs
Under the proposed rules, security-based SEFs would be required to register with the Commission by filing a form, Form SB SEF. The SEF also would be required to update its filing when the information becomes inaccurate and file an amended form annually.
The proposed rules also would require that a security-based SEF:
File with the Commission proposed changes to its rules as well as the security-based swaps that it intends to trade.
Have rules to ensure compliance with the core principles outlined in the Dodd-Frank Act.
Have rules regarding access to, and the financial integrity of transactions on, the security-based SEF.
Put in place rules governing the procedures for trading on the security-based SEF.
Ensure the integrity of security-based SEF systems by having policies and procedures reasonably designed to ensure that its systems have adequate levels of capacity, resiliency, and security.
Make and keep certain books and records.
Have adequate resources to operate as a security-based SEF.
In addition, the proposal would exempt a security-based SEF from the definition of exchange and from most regulations as a broker.
Previous Related Rulemaking
This proposal coincides with rules the SEC proposed in December that would set out the way in which clearing agencies provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps should be required to be cleared.
In addition, under the Dodd-Frank Act, the SEC has engaged in several additional rulemakings related to the derivatives market:
Defining Security-Based Swap Terms: Proposed jointly with the Commodity Futures Trading Commission new rules that would further define a series of terms related to the security-based swaps market, including "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."
Security-Based Swap Reporting: Proposed new rules entailing how security-based swap transactions should be reported and publicly disseminated.
Security-Based Swap Repositories: Proposed rules regarding the registration and regulation of security-based swap data repositories.
Security-Based Swap Fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap as well as in connection with ongoing payments and deliveries under a security-based swap.
Security-Based Swap Conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.
Reporting of Pre-Enactment Security-Based Swaps: Adopted an interim rule requiring certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.
Confirmation of Transactions: Proposed a rule governing the way in which certain security-based swap transactions are acknowledged and verified by the parties who enter into them.
What's Next
The proposal seeks public comment by April 4, 2011, on a broad range of issues relating to the proposed interpretation, exemptions, rules and form relating to security-based SEFs, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider whether to adopt the proposal or modify it."
Hopefully, Security Based Swaps will become less of a vehicle for gamblers and more of a vehicle to help manage risk. Of course it would be nice if you could go long the stock market and make money holding a stock for decades like our grandfathers.
Monday, January 31, 2011
SEC CHARGES CHARLES SCHWAB & CO. WITH MAKING MISLEADING STATEMENTS
The following case brought by the SEC is against one of the largest low cost brokerage firms in the United States. The case in general alleges that Charles Schwab & Co. and others invested investor money inappropriately. It has been alleged that the company invested in riskier investments then they led investors to believe. The following is an excerpt from the SEC web page and outlines in detail the case against Charles Schwab & Co. and others:
“Washington, D.C., Jan. 11, 2011 — The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
The SEC also filed a complaint in federal court against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.
CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges. The SEC's case continues against the executives.
Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals — including large mutual fund providers — must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, said, "Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to an administrative order issued by the SEC against the Schwab entities and the SEC's related complaints against the entities and the two executives filed in federal court in San Francisco, they failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.
The SEC found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.
According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months. As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing "very, very, very slight" and "minimal" investor redemptions. In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities. Similarly, Merk authored, reviewed and approved misleading statements about the fund, such as a false claim that the fund had a "short maturity structure" that "mitigated much of the price erosion" experienced by its peers.
The SEC also found that CSIM and CS&Co. did not have policies and procedures reasonably designed — given the nature of their businesses — to prevent the misuse of material, nonpublic information about the fund. For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund. As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.
Without admitting or denying the findings in the SEC's order or the allegations in the SEC's complaint, CSIM and CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149 penalty against CSIM, a $5 million penalty against CS&Co., and pre-judgment interest of $9,290,698. Some of CSIM's disgorgement may be deemed satisfied up to a maximum of $26,944,996 for payments made within the next 60 days to settle related investigations by FINRA or state securities regulators.
The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair Fund are subject to approval by the U.S. District Court for the Northern District of California.
CSIM, CS&Co. and Schwab Investments also consented to an SEC order requiring them to cease and desist from committing or causing future violations of the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.
In its order, the Commission found that:
CSIM and CS&Co. willfully violated anti-fraud provisions of the Securities Act of 1933, Sections 17(a)(2) and (3).
CSIM willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Section 206(4) and Rule 206(4)-8.
Schwab Investments willfully violated Section 13(a) of the Investment Company Act of 1940 by deviating from its concentration policy, and CSIM willfully aided and abetted and caused the violation.
CSIM and CS&Co. willfully aided and abetted and caused violations of the false filings provision of the Investment Company Act, Section 34(b).
CS&Co. violated Section 15(g) (formerly Section 15(f)) of the Securities Exchange Act of 1934, and CSIM violated Section 204A of the Advisers Act, both of which require policies and procedures that are reasonably designed, taking into consideration the nature of the entities' businesses, to prevent the misuse of material, nonpublic information.
The SEC's complaint against Daifotis and Merk alleges violations and aiding and abetting violations of the anti-fraud provisions of the Securities Act, Exchange Act, and Investment Advisers Act, including Section 10(b) and Rule 10b-5 of the Exchange Act, and other violations, including Sections 13(a) and 34(b) of the Investment Company Act.”
It is hopeful that companies on Wall Street will soon realize that misrepresentations are not acceptable in a real capitalist society. If everyone lies and no one can be trusted then, business grinds to a halt. If business grinds to a halt then all the people are affected.
“Washington, D.C., Jan. 11, 2011 — The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
The SEC also filed a complaint in federal court against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.
CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges. The SEC's case continues against the executives.
Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals — including large mutual fund providers — must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, said, "Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to an administrative order issued by the SEC against the Schwab entities and the SEC's related complaints against the entities and the two executives filed in federal court in San Francisco, they failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.
The SEC found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.
According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months. As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing "very, very, very slight" and "minimal" investor redemptions. In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities. Similarly, Merk authored, reviewed and approved misleading statements about the fund, such as a false claim that the fund had a "short maturity structure" that "mitigated much of the price erosion" experienced by its peers.
The SEC also found that CSIM and CS&Co. did not have policies and procedures reasonably designed — given the nature of their businesses — to prevent the misuse of material, nonpublic information about the fund. For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund. As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.
Without admitting or denying the findings in the SEC's order or the allegations in the SEC's complaint, CSIM and CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149 penalty against CSIM, a $5 million penalty against CS&Co., and pre-judgment interest of $9,290,698. Some of CSIM's disgorgement may be deemed satisfied up to a maximum of $26,944,996 for payments made within the next 60 days to settle related investigations by FINRA or state securities regulators.
The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair Fund are subject to approval by the U.S. District Court for the Northern District of California.
CSIM, CS&Co. and Schwab Investments also consented to an SEC order requiring them to cease and desist from committing or causing future violations of the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.
In its order, the Commission found that:
CSIM and CS&Co. willfully violated anti-fraud provisions of the Securities Act of 1933, Sections 17(a)(2) and (3).
CSIM willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Section 206(4) and Rule 206(4)-8.
Schwab Investments willfully violated Section 13(a) of the Investment Company Act of 1940 by deviating from its concentration policy, and CSIM willfully aided and abetted and caused the violation.
CSIM and CS&Co. willfully aided and abetted and caused violations of the false filings provision of the Investment Company Act, Section 34(b).
CS&Co. violated Section 15(g) (formerly Section 15(f)) of the Securities Exchange Act of 1934, and CSIM violated Section 204A of the Advisers Act, both of which require policies and procedures that are reasonably designed, taking into consideration the nature of the entities' businesses, to prevent the misuse of material, nonpublic information.
The SEC's complaint against Daifotis and Merk alleges violations and aiding and abetting violations of the anti-fraud provisions of the Securities Act, Exchange Act, and Investment Advisers Act, including Section 10(b) and Rule 10b-5 of the Exchange Act, and other violations, including Sections 13(a) and 34(b) of the Investment Company Act.”
It is hopeful that companies on Wall Street will soon realize that misrepresentations are not acceptable in a real capitalist society. If everyone lies and no one can be trusted then, business grinds to a halt. If business grinds to a halt then all the people are affected.
Tuesday, January 25, 2011
The following is an excerpt from the SEC web site and discusses proposed changes in the definition of an "accredited investor". Accredited investors are allowed to participate in certain investments that are exempt from some security act rules. Read the following excerpt to find the details of the proposal:
"Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today voted to propose amendments to its rules to conform the definition of "accredited investor" to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The proposed amendments would exclude the value of an individual's primary residence in calculating net worth when determining accredited investor status. The amendments also would clarify the treatment of any indebtedness secured by the residence in the net worth calculation.
Under Securities Act rules, individuals and entities that qualify as "accredited investors" are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.
Section 413(a) of the Dodd-Frank Act requires that the net worth calculation for determining accredited investor status must exclude the value of the person's primary residence. This requirement came into effect upon enactment of the Dodd-Frank Act. However, the SEC is proposing to amend its rules to reflect the new standard and clarify the treatment of indebtedness secured by the primary residence in the calculation of net worth.
The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the Commission is required to review the definition of the term "accredited investor" in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.
Under the proposal, the definitions of "accredited investor" in the SEC's rules would be amended to exclude the value of a person's primary residence for purposes of the net worth calculation. The proposed rule amendments clarify that "the value of the primary residence" — which must be excluded from the individual net worth calculation — is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.
As a result, under the proposed rule, an investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.
The Commission is seeking public comments on the proposed rules through March 11, 2011."
"Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today voted to propose amendments to its rules to conform the definition of "accredited investor" to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The proposed amendments would exclude the value of an individual's primary residence in calculating net worth when determining accredited investor status. The amendments also would clarify the treatment of any indebtedness secured by the residence in the net worth calculation.
Under Securities Act rules, individuals and entities that qualify as "accredited investors" are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.
Section 413(a) of the Dodd-Frank Act requires that the net worth calculation for determining accredited investor status must exclude the value of the person's primary residence. This requirement came into effect upon enactment of the Dodd-Frank Act. However, the SEC is proposing to amend its rules to reflect the new standard and clarify the treatment of indebtedness secured by the primary residence in the calculation of net worth.
The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the Commission is required to review the definition of the term "accredited investor" in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.
Under the proposal, the definitions of "accredited investor" in the SEC's rules would be amended to exclude the value of a person's primary residence for purposes of the net worth calculation. The proposed rule amendments clarify that "the value of the primary residence" — which must be excluded from the individual net worth calculation — is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.
As a result, under the proposed rule, an investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.
The Commission is seeking public comments on the proposed rules through March 11, 2011."
Sunday, January 23, 2011
SEC ALLEGES FRAUDULENT FEES COLLECTED BY MUTUAL FUND PORTFOLIO MANAGERS
Many people who put money into mutual funds may find that they are charged a large fee for maintaining the fund. The following case is about two portfolio managers who the SEC alleged defrauded a mutual fund that purchases securities issued by the State of Utah and other governmental organizations in Utah. Please read the following details that are a part of the SEC releases on their web site:
“Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.
The SEC found that Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.
Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.
"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."
According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.
The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.
According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.
The SEC's orders found that Young violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and that Albright violated Section 206(2) of the Advisers Act. The SEC's orders further found that Young and Albright violated Section 17(e)(1) of the Investment Company Act of 1940, which prohibits any affiliated person of a registered investment company, or any affiliated person of such affiliated person, from receiving compensation from any source other than the investment company in connection with the sale of such company's property.
Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations."
“Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.
The SEC found that Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.
Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.
"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."
According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.
The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.
According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.
The SEC's orders found that Young violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and that Albright violated Section 206(2) of the Advisers Act. The SEC's orders further found that Young and Albright violated Section 17(e)(1) of the Investment Company Act of 1940, which prohibits any affiliated person of a registered investment company, or any affiliated person of such affiliated person, from receiving compensation from any source other than the investment company in connection with the sale of such company's property.
Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations."
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