The SEC has filed suit against two individuals that sponsored a feeder fund into a Ponzi scheme. The SEC alleges that the defendants knew or reckless in not knowing that the legal settlements purchased by the fund did not exist. The SEC charges that the defendants did not follow procedures described in the PPM including obtaining underlying documentation and engaging a third-party verifier. The SEC charges violations of the various securities anti-fraud laws and regulations. 

FINRA recently issued suitability guidance stating: “The suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interests prohibits a broker from placing his other interests ahead of the customer’s interests.” Continuing, FINRA explained that examples of a broker placing his/her interests ahead of clients include a motivation to receive larger commissions or recommending proprietary or new issues to keep a job. Similarly, in a recent speech, FINRA CEO and Chairman Richard Ketchum said that it was adapting its regulatory focus to ensuring that brokers “identify conflicts and place…customers’ interests before” the firm’s. Ketchum continued by stating that a financial adviser “should be able to write down on a single page why this investment is in the best interests of your client.” Moreover, said Mr. Ketchum: “This does not have to wait until you find out the details of any fiduciary rulemaking the SEC may make. Being able to articulate why an investment is in the best interests of your client is fundamental to what the securities industry must be about if it is to deserve the trust of investors. The time to do it is now.” 

In testimony before the House Committee on Financial Services, SEC Enforcement Director Robert Khuzami defended his Division’s settlement policies. Mr. Khuzami explained the benefits of swift settlements over lengthy litigation including the risks that the SEC could lose at trial or win a lesser penalty. He also noted that the median time for disposition of civil cases in federal courts ranges from 19 to 44 months. Regardless, he explained, the SEC has prevailed in 84% of trials since the beginning of 2010. Mr. Khuzami also defended the SEC’s practice of allowing “neither-admit-nor-deny” settlements as necessary especially where respondents must consider private litigation implications. However, we think Mr. Khuzami did announce that the SEC would no longer allow “neither-admit-nor-deny” settlements where there is a parallel criminal proceeding. 

As a new feature for our loyal and long-suffering OUR TAKE readers, we bring you the “Best of the Web.”  During our daily review of all matters regulatory, we sometimes come across publicly-available pieces from our clients, partners, competitors, and friends that we think are extremely helpful and well done.  Usually, these articles provide in-depth analysis far greater than we can offer in the short-form format that you receive from us every morning.  Sometimes, these industry players address issues well outside our expertise and experience.   We offer these articles and links in no particular order.  We hope you find these gems as valuable as we did.

 

The Final 408(b)(2) Regulation: Impact on Investment Managers (Drinker Biddle)

http://www.drinkerbiddle.com/files/Publication/f65a1caa-223b-4b31-b9aa-45461ed4badb/Presentation/PublicationAttachment/d7ef8a09-ca3b-4552-8d41-4c71b6152ac6/TheFinal408(b)(2)Regulation.pdf

 

2011 Year in Review: Selected Federal Securities Litigation Developments (Morgan Lewis)

http://www.morganlewis.com/pubs/LIT_2011YrReviewSelectedFederalSecuritiesLitDevelopments_13feb12.pdf

 

U.S. JOBS Act Remakes the Standards for Offerings of Hedge Funds and Private Equity Funds (Dechert)

http://www.dechert.com/files/Publication/af8642e0-e42b-416b-8f03-01618113736d/Presentation/PublicationAttachment/a396c42c-777c-47f8-b84e-1511d9244b99/FS_9_04-12_JOBS_Act_Remakes_the_Standards_for_Offerings.pdf

 

New Guidance on Confidentiality Agreements (Ropes & Gray)

http://www.ropesgray.com/files/Publication/d9e30e43-f8a3-4203-a67f-643ff81520f8/Presentation/PublicationAttachment/c89abc9c-d4b6-49ed-9be7-6781f02687a8/20120515_PE_Alert.pdf

 

Board Oversight of Strategic Risk (King & Spalding)

http://www.kslaw.com/imageserver/KSPublic/library/publication/LDNViewPoints_Issue13.pdf

 

So You Think Your Marketing Practices Are Compliant? (Stark & Stark)

http://www.njlawblog.com/TDG%20-%20IMCA%20Monitor%20-%206.07.pdf

 

Brochure Delivery Rule - Important Reminder (FrontLine Compliance)

http://www.frontlinecompliance.com/compliancealert/compliance_alert_4-12-12.html

 

Fair Valuation– Does Management Know Enough About the Process? (BBD)

http://www.bbdcpa.com/blog/fair-valuation%E2%80%93-does-management-know-enough-about-the-process/

 The New York Court of Appeals (the state’s highest appellate court) has ruled that compliance officers do not have a cause of action for wrongful termination when fired for raising compliance issues. The Court refused to find an exception to the state’s at-will employment doctrine. The case involved a hedge fund manager’s compliance officer who claimed retaliatory termination when he raised personal trading violations by the firm’s majority owner. The plaintiff argued that the nature of a compliance officer’s job requires protection against termination where he/she merely performed the duties inherent in the position. The Court determined that the plaintiff was not entitled to Dodd-Frank whistleblower protection because the plaintiff never claimed to be a whistleblower “i.e. told the SEC or anyone else” about the alleged misconduct. A vigorous dissent argued that an exception from the at-will doctrine was legally justified, asserting: “The message that will be taken from the majority's decision is self-evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers' clients.”

Norm Champ, the Deputy Director of the SEC’s Office of Compliance Inspections and Examinations, announced that OCIE will conduct “a coordinated series of examinations of a significant percentage” of new private fund adviser registrants. OCIE will then publish “a series of ‘after action’ reports” reporting findings. Mr. Champ highlighted 10 “takeaways” for new private fund advisers: conduct compliance reviews, prepare for Form PF reporting, identify firm risks, ensure employees understand their obligations, verify client assets at third parties, identify and eliminate conflicts of interest, ensure accurate disclosure in marketing and advertising, ensure portfolio management compliance, address customer complaints, and check IT security. 

The SEC has instituted administrative proceedings against a foreign accounting firm that has refused to produce its work papers in response to a request related to an investigation into potential accounting fraud. The respondent claims that applicable Chinese law prohibits delivery of the work papers. The SEC charges that the audit firm must produce the work papers pursuant to Section 106(b) of the Sarbanes-Oxley Act.

The SEC has filed a suit against an investment adviser, it principal, and two former public officials charging violation of the securities laws in connection with an influence peddling scheme. The SEC alleges that the adviser provided lavish gifts to Detroit’s then Mayor and Treasurer to win advisory business from certain public pension plans. The SEC noted that the alleged transactions violated a Michigan anti-corruption law and charged violations of Sections 17 and 10 of the 1933 Act and the anti-fraud provision of the Advisers Act. 

An investment manager to a registered fund and a hedge fund agreed to pay over $8 Million in penalties and reimburse fund losses and return management fees for using the registered fund to bail out the hedge fund. According to the SEC, the fund manager directed the registered closed-end fund to make an ill-advised investment in a private Chinese company solely for the purpose of stemming a liquidity crisis impacting its hedge fund. The SEC alleges that the manager and the Chinese company created the transaction whereby the Chinese company would use the proceeds from the investment to redeem certain bonds that the hedge fund held. The SEC charges that the respondent misled the registered fund’s board and its outside counsel by failing to disclose the purpose of the transaction and the Chinese company’s use of proceeds. The SEC also contends that the firm did not properly follow its valuation procedures. Additionally, the SEC charges that the firm had an inadequate compliance program that failed to implement relevant policies and procedures to avoid conflicts of interest. 

Todd Cipperman will present "Our Take" on recent regulatory and enforcement developments at the ICI General Membership Meeting in Washington today at 6:15. Todd will offer some big picture themes and offer his unique opinions and predictions on the regulatory environment. If you plan to attend the conference, please stop by for a lively discussion. If you can't make it, you can see the presentation by clicking on the attached link.