SPEECH BY SEC CHAIRMAN MARY L. SCHAPIRO

The following is an excerpt from the SEC website:

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

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

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

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

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

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

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

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

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

SEC Priorities

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

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


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

Lack of Accountability

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

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

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

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

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

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

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

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

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

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

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

Flawed Credit Ratings

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

Investor’s Lack of Tools and Information

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

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

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

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

As proposed, this transparency would include:

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

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


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

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

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

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

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

What’s Next?

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

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

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

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

Conclusion

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

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

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

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

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

Thank you."

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

The following excerpt comes from the SEC website:

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

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

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

SEC LARGE FINANCIAL COMPANY WITH MAKING INACCURATE STATEMENTS

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

SEC APPROVES RULE TO DEFINE "FAMILY OFFICES"

The following is an excerpt from the SEC website:

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

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

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

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

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

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

# # #

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

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

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


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

Any company that:

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

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

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

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

Key employees. Key employees include:


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

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

Other family clients. Other family clients generally include:


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

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

Certain family client trusts.

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

By March 30, 2012.

Will existing family office exemptive orders be rescinded?

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

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

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

Grandfathering Provision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you and I have no questions.


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

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

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


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