Under FCPA companies are often charged for bribing foreign officials. Unfortunately, in many places companies in order to do business are forced to give bribes. In the following case the SEC is allowing a corporation to come clean and help with the investigation in order to avoid further prosecution. This excerpt of this case has been taken from the SEC web site:
“Washington, D.C., May 17, 2011 – The Securities and Exchange Commission today entered into a Deferred Prosecution Agreement (DPA) with Tenaris S.A. in its first-ever use of the approach to facilitate and reward cooperation in SEC investigations.
The agreement with Tenaris involves allegations that the global manufacturer of steel pipe products violated the Foreign Corrupt Practices Act (FCPA) by bribing Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas. The SEC alleges that Tenaris made almost $5 million in profits when it was subsequently awarded several contracts by the Uzbekistan government. Under the terms of the DPA, Tenaris must pay $5.4 million in disgorgement and prejudgment interest.
Tenaris is the first company to enter into a DPA with the SEC, an approach announced last year to encourage individuals and companies to provide information about misconduct and assist with an SEC investigation. When Tenaris conducted a thorough, worldwide internal review of its operations and controls, it discovered FCPA violations by personnel in Uzbekistan and informed the SEC. In response to its findings, Tenaris reviewed its controls and compliance measures and significantly enhanced its anti-corruption policies and practices. Tenaris has agreed to cooperate further with the SEC, Justice Department, and any other law enforcement agency in connection with this case. Tenaris also agreed to pay a $3.5 million criminal penalty in a Non-Prosecution Agreement announced today by the Justice Department.
“The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
Cheryl Scarboro, Chief of the SEC Enforcement Division’s FCPA Unit, added, “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”
Tenaris is incorporated in Luxembourg and its American Depositary Receipts (TS) are listed on the New York Stock Exchange. According to the DPA, the SEC alleges that Tenaris bid on a series of contracts in 2006 and 2007 and bribed Uzbekistan officials to gain access to confidential bids by competitors. Tenaris used the information to revise its own bids, and as a result was awarded several contracts by the Uzbekistan government.
Under the terms of the DPA, the SEC will refrain from prosecuting the company in a civil action for its violations if Tenaris complies with certain undertakings. Among other things, Tenaris has agreed to enhance its policies, procedures, and controls to strengthen compliance with the FCPA and anti-corruption practices. Tenaris will implement due diligence requirements related to the retention and payment of agents, provide detailed training on the FCPA and other anti-corruption laws, require certification of compliance with anti-corruption policies, and notify the SEC of any complaints, charges, or convictions against Tenaris or its employees related to violations of any anti-bribery or securities laws. Tenaris has agreed to continue to fully cooperate with the SEC in its investigation.”
The SEC has said this is a first of its kind case and as such, the SEC should be commended for using the real prosecutorial tactic of allowing the alleged criminal get a lighter sentence in exchange for full cooperation.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Tuesday, May 17, 2011
FINAL JUDGMENT AGAINST GARY TRUMP IN SECURITIES CASE
The following excerpt is from the SEC web site:
“Litigation Release No. 21939 / April 20, 2011
Accounting and Auditing Enforcement Release No. 3272 / April 20, 2011
Securities and Exchange Commission v. Duane Martin and Gary Trump, Civil Action No. 09-cv-05259 (N.D. Ill.)
COURT ENTERS A FINAL JUDGMENT AGAINST STOCK PROMOTER GARY TRUMP
On April 12, 2011, the District Court for the Northern District of Illinois entered a Final Judgment against stock promoter Gary Trump in a civil action brought by the United States Securities & Exchange Commission (the “Commission”). The Commission sued Trump as well as Duane Martin, the former CEO of St. Charles, Illinois-based Universal Food & Beverage, Inc. ("Universal"), a now-defunct company, for violating federal securities laws. Trump was charged with violating the registration provisions of the Securities Act of 1933 (the "Securities Act") for improperly issuing S-8 stock to stock promoters and Martin's personal creditors. The Final Judgment entered against Trump permanently enjoins him from violating Sections 5(a) and 5(c) of the Securities Act and permanently bars him from participating in any penny stock offerings. It also orders him to pay $69,976.27 in disgorgement and prejudgment interest, but waives payment based on his demonstrated inability to pay. The Final Judgment was entered based on Trump’s Consent to Final Judgment in which he neither admitted nor denied the allegations in the Commission's Complaint.
The Commission's Complaint alleged that Trump and Martin violated the registration provisions of the Securities Act by improperly issuing S-8 stock to stock promoters and Martin's personal creditors. Trump, who took S-8 shares in exchange for promoting Universal stock, (a) helped engineer the illegal S-8 offering by hand-picking a team of promoters who participated in the offering and (b) illegally distributed his S-8 shares to the public without registration. The Complaint also pled several fraud claims against Martin.
The Commission previously settled its claims against Duane Martin by which Martin agreed to entry of (1) a permanent injunction, (2) a permanent penny stock bar, and (3) a permanent officer and director bar. In addition, on March 16, 2010, the United States Attorney’s Office for the Northern District of Illinois (“USAO”) charged Martin with wire fraud based largely on the misconduct identified in the Commission’s Complaint. Martin pled guilty and, on July 13, 2010, was sentenced to 41 months in prison and ordered to pay $618,441 in restitution to Universal’s creditors.”
“Litigation Release No. 21939 / April 20, 2011
Accounting and Auditing Enforcement Release No. 3272 / April 20, 2011
Securities and Exchange Commission v. Duane Martin and Gary Trump, Civil Action No. 09-cv-05259 (N.D. Ill.)
COURT ENTERS A FINAL JUDGMENT AGAINST STOCK PROMOTER GARY TRUMP
On April 12, 2011, the District Court for the Northern District of Illinois entered a Final Judgment against stock promoter Gary Trump in a civil action brought by the United States Securities & Exchange Commission (the “Commission”). The Commission sued Trump as well as Duane Martin, the former CEO of St. Charles, Illinois-based Universal Food & Beverage, Inc. ("Universal"), a now-defunct company, for violating federal securities laws. Trump was charged with violating the registration provisions of the Securities Act of 1933 (the "Securities Act") for improperly issuing S-8 stock to stock promoters and Martin's personal creditors. The Final Judgment entered against Trump permanently enjoins him from violating Sections 5(a) and 5(c) of the Securities Act and permanently bars him from participating in any penny stock offerings. It also orders him to pay $69,976.27 in disgorgement and prejudgment interest, but waives payment based on his demonstrated inability to pay. The Final Judgment was entered based on Trump’s Consent to Final Judgment in which he neither admitted nor denied the allegations in the Commission's Complaint.
The Commission's Complaint alleged that Trump and Martin violated the registration provisions of the Securities Act by improperly issuing S-8 stock to stock promoters and Martin's personal creditors. Trump, who took S-8 shares in exchange for promoting Universal stock, (a) helped engineer the illegal S-8 offering by hand-picking a team of promoters who participated in the offering and (b) illegally distributed his S-8 shares to the public without registration. The Complaint also pled several fraud claims against Martin.
The Commission previously settled its claims against Duane Martin by which Martin agreed to entry of (1) a permanent injunction, (2) a permanent penny stock bar, and (3) a permanent officer and director bar. In addition, on March 16, 2010, the United States Attorney’s Office for the Northern District of Illinois (“USAO”) charged Martin with wire fraud based largely on the misconduct identified in the Commission’s Complaint. Martin pled guilty and, on July 13, 2010, was sentenced to 41 months in prison and ordered to pay $618,441 in restitution to Universal’s creditors.”
Monday, May 16, 2011
JOHNSON AND JOHNSON PAYS OVER $70 MILLION TO SETTLE BRIBERY CHARGES
The following case from the SEC web site details the settlement in a case which involved the Foreign Corrupt Practices act:
“The Securities and Exchange Commission today announced a settlement with Johnson and Johnson (“J&J”) to resolve SEC charges that the New Brunswick, NJ-based global pharmaceutical, consumer product, and medical device company violated the Foreign Corrupt Practices Act (FCPA) by bribing public doctors in several European countries and paying kickbacks to Iraq to illegally obtain business.
The SEC alleges that, since at least 1998, J&J’s subsidiaries paid bribes to public doctors in Greece who selected J&J surgical implants, paid bribes to public doctors and hospital administrators in Poland who awarded tenders to J&J, and paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products. J&J also paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”).
J&J has agreed to pay more than $48.6 million in disgorgement and prejudgment interest to settle the SEC’s charges and to pay a $21.4 million fine to the U.S. Department of Justice to settle criminal charges. A resolution of a related investigation by the United Kingdom Serious Fraud Office is anticipated.
The SEC’s complaint alleges that J&J subsidiaries, employees, and agents paid bribes to public doctors and administrators in Greece, Poland, and Romania. Doctors who ordered or prescribed J&J products were rewarded in a variety of ways, including cash and inappropriate travel. A variety of schemes were used to carry-out the bribery, including the use of slush funds, sham civil contracts with doctors, and off-shore companies in the Isle of Man. A J&J executive was involved in the Greek conduct, and MD&D Poland executives running three business lines oversaw the creation of sham contracts, travel documents, and the creation of slush funds in Poland. The SEC’s complaint also alleges that J&J’s agent paid secret kickbacks to Iraq to obtain nineteen Oil for Food contracts.
Without admitting or denying the SEC’s allegations, J&J has consented to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934; ordering it to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest; and ordering it to comply with certain undertakings regarding its FCPA compliance program.
J&J voluntarily disclosed some of the violations by its employees, and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.
Kelly G. Kilroy and Tracy L. Price of the Enforcement Division’s FCPA Unit and Brent S. Mitchell and Reid A. Muoio conducted the SEC’s investigation. The SEC acknowledges the assistance of the U.S. Department of Justice, Fraud Section; the Federal Bureau of Investigation; the Serious Fraud Office in the United Kingdom; and 5th Investigation Department of the Regional Prosecutor’s Office in Radom, Poland. The SEC's investigation is continuing.”
“The Securities and Exchange Commission today announced a settlement with Johnson and Johnson (“J&J”) to resolve SEC charges that the New Brunswick, NJ-based global pharmaceutical, consumer product, and medical device company violated the Foreign Corrupt Practices Act (FCPA) by bribing public doctors in several European countries and paying kickbacks to Iraq to illegally obtain business.
The SEC alleges that, since at least 1998, J&J’s subsidiaries paid bribes to public doctors in Greece who selected J&J surgical implants, paid bribes to public doctors and hospital administrators in Poland who awarded tenders to J&J, and paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products. J&J also paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”).
J&J has agreed to pay more than $48.6 million in disgorgement and prejudgment interest to settle the SEC’s charges and to pay a $21.4 million fine to the U.S. Department of Justice to settle criminal charges. A resolution of a related investigation by the United Kingdom Serious Fraud Office is anticipated.
The SEC’s complaint alleges that J&J subsidiaries, employees, and agents paid bribes to public doctors and administrators in Greece, Poland, and Romania. Doctors who ordered or prescribed J&J products were rewarded in a variety of ways, including cash and inappropriate travel. A variety of schemes were used to carry-out the bribery, including the use of slush funds, sham civil contracts with doctors, and off-shore companies in the Isle of Man. A J&J executive was involved in the Greek conduct, and MD&D Poland executives running three business lines oversaw the creation of sham contracts, travel documents, and the creation of slush funds in Poland. The SEC’s complaint also alleges that J&J’s agent paid secret kickbacks to Iraq to obtain nineteen Oil for Food contracts.
Without admitting or denying the SEC’s allegations, J&J has consented to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934; ordering it to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest; and ordering it to comply with certain undertakings regarding its FCPA compliance program.
J&J voluntarily disclosed some of the violations by its employees, and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.
Kelly G. Kilroy and Tracy L. Price of the Enforcement Division’s FCPA Unit and Brent S. Mitchell and Reid A. Muoio conducted the SEC’s investigation. The SEC acknowledges the assistance of the U.S. Department of Justice, Fraud Section; the Federal Bureau of Investigation; the Serious Fraud Office in the United Kingdom; and 5th Investigation Department of the Regional Prosecutor’s Office in Radom, Poland. The SEC's investigation is continuing.”
COURT JUDGMENT IN EAST DELTA RESOURCES CASE
In the following excerpt from the SEC web site the SEC got a summary judgment against in a securities fraud case:
‘The United States Securities and Exchange Commission announced today that on March 22, 2011, Judge Sandra Feuerstein of the United States District Court for the Eastern District of New York entered summary judgment in favor of the Commission on most of its claims against Mayer Amsel and his brother, David Amsel in a market manipulation case involving the securities of East Delta Resources Corp. Mayer Amsel is a securities fraud recidivist.
The Commission’s motion for summary judgment argued that from 2004 through at least 2006, the Amsels, in concert with several others and through their individual actions, artificially inflated the volume of market activity for, and in turn the price of, East Delta stock, and illegally sold East Delta shares that they received at little or no cost. The Commission’s summary judgment motion further argued that the Amsels together collected illegal profits of $1,322,703 from their manipulative conduct.
The summary judgment opinion grants the following relief: (1) a permanent injunction prohibiting both Amsels from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; (2) a permanent injunction prohibiting both Amsels from violating Section 17(a) of the Securities Act of 1933 (Securities Act); (3) a permanent injunction prohibiting David Amsel from violating Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; and (4) a permanent injunction prohibiting both Amsels from participating in an offering of penny stock, absent an explicit release from the Commission. The opinion reserved judgment on the issue of the Amsels’ liability for violations of Sections 5(a) and 5(c) of the Securities Act (together, Section 5), the question of whether to impose an officer and director bar against David Amsel, and what the appropriate judgment amount should be with respect to disgorgement, civil penalties, and prejudgment interest. Subsequently, the court entered a default judgment against David Amsel that permanently enjoined him from violating Section 5 of the Securities Act after he failed to appear at a bench trial that was held in the case on March 28, 2011.
The latest judgments against the Amsel brothers follow others entered in the same case within the past seven months against East Delta and its former CEO, Victor Sun. On September 22, 2010 and October 13, 2010, the court entered final judgments against East Delta and Sun, respectively. Both defendants settled with the Commission without admitting or denying the allegations against them.
A decision on Mayer Amsel’s Section 5 liability is still pending following the March 28, 2011 trial. A ruling on the officer and director bar against David Amsel and the monetary remedies sought by the Commission is expected after further briefing.
The SEC appreciates the assistance of the Quebec Autorité des marchés financiers (AMF) and the British Columbia Securities Commission (BCSC) in connection with the investigation leading to the litigation.”
‘The United States Securities and Exchange Commission announced today that on March 22, 2011, Judge Sandra Feuerstein of the United States District Court for the Eastern District of New York entered summary judgment in favor of the Commission on most of its claims against Mayer Amsel and his brother, David Amsel in a market manipulation case involving the securities of East Delta Resources Corp. Mayer Amsel is a securities fraud recidivist.
The Commission’s motion for summary judgment argued that from 2004 through at least 2006, the Amsels, in concert with several others and through their individual actions, artificially inflated the volume of market activity for, and in turn the price of, East Delta stock, and illegally sold East Delta shares that they received at little or no cost. The Commission’s summary judgment motion further argued that the Amsels together collected illegal profits of $1,322,703 from their manipulative conduct.
The summary judgment opinion grants the following relief: (1) a permanent injunction prohibiting both Amsels from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; (2) a permanent injunction prohibiting both Amsels from violating Section 17(a) of the Securities Act of 1933 (Securities Act); (3) a permanent injunction prohibiting David Amsel from violating Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; and (4) a permanent injunction prohibiting both Amsels from participating in an offering of penny stock, absent an explicit release from the Commission. The opinion reserved judgment on the issue of the Amsels’ liability for violations of Sections 5(a) and 5(c) of the Securities Act (together, Section 5), the question of whether to impose an officer and director bar against David Amsel, and what the appropriate judgment amount should be with respect to disgorgement, civil penalties, and prejudgment interest. Subsequently, the court entered a default judgment against David Amsel that permanently enjoined him from violating Section 5 of the Securities Act after he failed to appear at a bench trial that was held in the case on March 28, 2011.
The latest judgments against the Amsel brothers follow others entered in the same case within the past seven months against East Delta and its former CEO, Victor Sun. On September 22, 2010 and October 13, 2010, the court entered final judgments against East Delta and Sun, respectively. Both defendants settled with the Commission without admitting or denying the allegations against them.
A decision on Mayer Amsel’s Section 5 liability is still pending following the March 28, 2011 trial. A ruling on the officer and director bar against David Amsel and the monetary remedies sought by the Commission is expected after further briefing.
The SEC appreciates the assistance of the Quebec Autorité des marchés financiers (AMF) and the British Columbia Securities Commission (BCSC) in connection with the investigation leading to the litigation.”
Sunday, May 15, 2011
FORMER BANCO SANTANDER S.A. ANALYST SETTLES WITH SEC
Insider trading is not just a problem in the United States but is a world wide problem. The following case involves an analyst at Banco Santander S.A. who allegedly decided to use company information to make some money for his personal benefit. The following is an excerpt from the SEC web site:
“ Washington, D.C., April 25, 2011 – The Securities and Exchange Commission today announced that former Banco Santander S.A. analyst Juan Jose Fernandez Garcia of Madrid, Spain, has agreed to pay more than $625,000 to settle insider trading charges against him. The SEC accused Garcia in August 2010 of illegally trading in advance of a corporate takeover by a company that Santander advised.
The settlement with Garcia requires the approval of U.S. District Judge Marvin J. Aspen in the Northern District of Illinois.
“This concludes our emergency action against Garcia and demonstrates that the Commission will act swiftly to prevent foreign citizens who commit fraud in the U.S. securities markets from reaping the profits of their illegal activity,” said Daniel M. Hawke, Chief of the Enforcement Division’s Market Abuse Unit.
The SEC filed an emergency court action on Aug. 20, 2010, against Garcia and another trader in Spain and obtained an ex parte temporary restraining order and asset freeze over the funds held in Garcia’s brokerage account at Interactive Brokers LLC. The SEC alleged that Garcia just days earlier had traded on the basis of material, nonpublic information about a multi-billion dollar cash tender offer by BHP Billiton Plc to acquire Potash Corp. of Saskatchewan Inc. At the time, Garcia was the head of a research arm at Santander, a Spanish banking group advising BHP on its bid. Garcia purchased 282 call option contracts for Potash stock in the days leading up to the public announcement, and immediately sold all of his options following the announcement for illicit profits of $576,033.
Without admitting or denying the SEC’s allegations, Garcia agreed to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3, and ordering him to pay disgorgement of $576,033 and a penalty of $50,000.
The SEC’s charges against the other trader, Luis Martin Caro Sanchez, remain pending.”
“ Washington, D.C., April 25, 2011 – The Securities and Exchange Commission today announced that former Banco Santander S.A. analyst Juan Jose Fernandez Garcia of Madrid, Spain, has agreed to pay more than $625,000 to settle insider trading charges against him. The SEC accused Garcia in August 2010 of illegally trading in advance of a corporate takeover by a company that Santander advised.
The settlement with Garcia requires the approval of U.S. District Judge Marvin J. Aspen in the Northern District of Illinois.
“This concludes our emergency action against Garcia and demonstrates that the Commission will act swiftly to prevent foreign citizens who commit fraud in the U.S. securities markets from reaping the profits of their illegal activity,” said Daniel M. Hawke, Chief of the Enforcement Division’s Market Abuse Unit.
The SEC filed an emergency court action on Aug. 20, 2010, against Garcia and another trader in Spain and obtained an ex parte temporary restraining order and asset freeze over the funds held in Garcia’s brokerage account at Interactive Brokers LLC. The SEC alleged that Garcia just days earlier had traded on the basis of material, nonpublic information about a multi-billion dollar cash tender offer by BHP Billiton Plc to acquire Potash Corp. of Saskatchewan Inc. At the time, Garcia was the head of a research arm at Santander, a Spanish banking group advising BHP on its bid. Garcia purchased 282 call option contracts for Potash stock in the days leading up to the public announcement, and immediately sold all of his options following the announcement for illicit profits of $576,033.
Without admitting or denying the SEC’s allegations, Garcia agreed to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3, and ordering him to pay disgorgement of $576,033 and a penalty of $50,000.
The SEC’s charges against the other trader, Luis Martin Caro Sanchez, remain pending.”
Thursday, May 12, 2011
SEC: RAISE WORTH THRESHOLD BEFORE CLIENTS CHARGED BY ADVISERS
The following announcement came from the SEC web site. In this announcement the SEC discusses proposed changes to how a threshold is determined before a financial adviser can charge a fee:
Washington, D.C., May 10, 2011 – The Securities and Exchange Commission today provided public notice of its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. The SEC seeks public comment on the plan, which would satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in certain circumstances. Two of the circumstances are:
The client has at least $750,000 under management with the adviser.
The adviser reasonably believes the client has a net worth of more than $1.5 million.
Section 418 of the Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011, and every five years thereafter. As a result, the SEC issued today’s notice that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.
The Commission also proposed related amendments to Rule 205-3 that would:
Provide the method for calculating future inflation adjustments of the dollar amount tests.
Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard.
Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.”
One important change noted above is the provision to exclude the value of a person’s primary residence when computing net worth. After the real estate collapse and current weakness in the real estate market, the determination of the value of a person’s home seems to be precarious. In many areas of the United States the value of homes is still falling with no end in sight.
Washington, D.C., May 10, 2011 – The Securities and Exchange Commission today provided public notice of its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. The SEC seeks public comment on the plan, which would satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in certain circumstances. Two of the circumstances are:
The client has at least $750,000 under management with the adviser.
The adviser reasonably believes the client has a net worth of more than $1.5 million.
Section 418 of the Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011, and every five years thereafter. As a result, the SEC issued today’s notice that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.
The Commission also proposed related amendments to Rule 205-3 that would:
Provide the method for calculating future inflation adjustments of the dollar amount tests.
Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard.
Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.”
One important change noted above is the provision to exclude the value of a person’s primary residence when computing net worth. After the real estate collapse and current weakness in the real estate market, the determination of the value of a person’s home seems to be precarious. In many areas of the United States the value of homes is still falling with no end in sight.
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