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.

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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

SEC CHARGES UNLAWFUL PUBLIC OFFERING?

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

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

BIG RETURNS MIGHT HAVE BEEN A SECURITIES FRAUD TARGETING SENIORS

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

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

SEC ANNOUNCES PROPOSED AMENDMENTS TO THE BROKER DEALER REPORTING RULE

The following is from the SEC website:

“Washington, D.C., June 15, 2011 — The Securities and Exchange Commission today unanimously proposed amendments to the broker-dealer financial reporting rule in order to strengthen the audits of broker-dealers as well as the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash.
The SEC’s proposal builds upon rules adopted in December 2009 that strengthened the protections provided to investors who turn their assets over to investment advisers.

“When investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed,” said SEC Chairman Mary L. Schapiro. “To protect investors and help maintain confidence in the market, we must take strong steps to help safeguard the assets held by broker-dealers.”
The SEC’s proposal is intended to strengthen the annual audits of broker-dealers by requiring an increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, the proposed rule amendments would mandate an audit of the controls that the broker-dealer has put in place.
Additionally, the proposal would strengthen oversight of broker-dealer custody practices by requiring broker-dealers that maintain custody of customer assets or self-clear transactions to allow SEC staff and the relevant designated examining authority to review work papers of the public accounting firm that audits the broker-dealer and discuss any findings with the accounting firm. The proposed amendments also would require all broker-dealers to quarterly file a proposed new form that would elicit information about the custody practices of the broker-dealer to be used as a starting point for examinations by regulators.
Public comments on the SEC’s proposal should be received within 60 days of its publication in the Federal Register.
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FACT SHEET
Proposal to Amend Broker-Dealer Financial Reporting Rule
(Rule 17a-5)
Background
What are broker-dealers? Broker-dealers are entities that engage in the business of effecting securities transactions — either for someone else’s account or for their own account. Under the U.S. securities laws, most entities engaged in these activities (with the notable exception of certain commercial banks) must register with the SEC as broker-dealers. Currently, there are approximately 5,000 broker-dealers registered with the SEC. Of those, about 300 maintain custody of their customers’ securities and cash. Broker-dealers also must be members of at least one self-regulatory organization (SRO) such as FINRA or a national securities exchange.
How are customer assets at broker-dealers protected? Broker-dealers that maintain custody of a customer’s securities and cash are subject to strict requirements under the Securities Exchange Act of 1934 that are designed to protect and account for these assets. These requirements include:
The Net Capital Rule (Rule 15c3-1). This SEC rule requires a broker-dealer to maintain more than a dollar of highly liquid assets for each dollar of liabilities. If the broker-dealer fails, this rule helps to ensure that there are sufficient liquid assets to pay all liabilities to customers.
The Customer Protection Rule (Rule 15c3-3). This SEC rule requires a broker-dealer to segregate customer securities and cash from the firm’s proprietary business activities. If the broker-dealer fails, these customer assets should be readily available to be returned to customers.
The Quarterly Security Count Rule (Rule 17a-13). This SEC rule requires a broker-dealer on a quarterly basis to count, examine, and verify the securities it actually holds for customers and for itself — and compare that with the amounts of such securities it should be holding as indicated by its records. This process includes verifying the actual amount of securities located at sub-custodians such as the Depository Trust and Clearing Corporation, or DTCC. If there are differences between the actual amounts held and the amounts that should be held, the broker-dealer must take capital charges until the differences are resolved.
The Account Statement Rule. This SRO rule requires a broker-dealer to send a statement — at least quarterly — to each customer reflecting the customer’s securities and cash positions held at the broker-dealer, as well as the activity in the account.
These requirements are designed to protect customer assets held at broker-dealer. However, if a broker-dealer violates these requirements by, for example, misappropriating these assets, the securities and cash may not be available to be returned to customers. In this situation, the Securities Investor Protection Corporation will initiate a liquidation proceeding to protect customers, including making up for shortfalls in customer accounts up to $500,000 per customer (of which $250,000 can be used to make up a cash shortfall.)
Proposed Rule Amendments
What would the amendments to Rule 17a-5 do?
The proposed amendments would:
Strengthen Audit Requirements — Currently, Section 17 of the Exchange Act and Rule 17a-5 together require a broker-dealer to, among other things, file an annual report with the SEC and the broker-dealer’s designated examining authority. The report must contain audited financial statements and certain supporting schedules and supplemental reports, as applicable. An independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB) must conduct the audit.
Under the proposal, a broker-dealer that maintains custody of customer securities and cash would be required to undergo an examination — by a registered public accounting firm — of:
Whether it is in compliance with the four rules described above.
Its controls for complying with these rules.
In addition, a broker-dealer that does not maintain custody of customer securities and cash would be required to undergo a review by an independent public accountant of its assertion that it is not subject to segregation requirements because it does not maintain custody of customer securities and cash.
Strengthen Oversight of Broker-Dealer Custody Practices — Section 17(b) of the Exchange Act subjects broker-dealers to routine inspections and examinations by staff of the Commission and the relevant SRO.
The proposed amendments would enhance these broker-dealer examinations in two ways:
First, the proposed amendments would require a broker-dealer that maintains custody of customer securities and cash or clears transactions to allow Commission and SRO examiners to:
Access the work papers of the registered public accounting firm that audits the broker-dealer.
Discuss any findings with the personnel of the registered public accounting firm.
The examiners could use this information to better focus their examinations.
Second, the proposed amendments would require a broker-dealer to file a report on a quarterly basis that contains information about whether and, if so how, it maintains custody of its customers’ securities and cash. The report would establish a custody profile for the broker-dealer that examiners could use as a starting point to focus their custody examinations.
How do the amendments relate to the audits that Investment Advisers must undergo?
In 2009, the SEC adopted rules requiring investment advisers — depending on their custody arrangements — to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. Depending on the custody arrangement, the rules also require some broker-dealers to obtain — from the entity that maintains the assets of the investment adviser’s client — a written internal control report prepared by a PCAOB registered public accounting firm. The internal control report must describe the controls in place at the custodian of the assets, test the operating effectiveness of the controls, and provide the results of the tests.
The proposed amendments recognize that some broker-dealers that serve as the custodian for the assets of investment adviser clients must provide the internal control report. Those broker-dealers would be able to rely on the examination outlined in the proposed amendments and, therefore, not also have to obtain the internal control report. “