The Securities and Exchange Commission today announced that Merrill Lynch, Pierce, Fenner & Smith Incorporated will pay over $8 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).
ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
The SEC’s order found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers when Merrill Lynch should have known that those brokers – middlemen who obtained pre-released ADRs from depositaries – did not own the foreign shares needed to support those ADRs. Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring. The order against Merrill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.
This is the SEC’s ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR pre-release practices, which has thus far resulted in monetary settlements exceeding $370 million. Information about ADRs is available in an SEC Investor Bulletin.
“We are continuing to hold accountable financial institutions that engaged in abusive ADR practices,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf.”
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million.
The SEC’s continuing investigation is being conducted by Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office, and is being supervised by Mr. Wadhwa.
The Securities and Exchange Commission today voted to propose rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act.
The proposal would improve access to capital and facilitate investor communications by business development companies and registered closed-end funds. Business development companies—or “BDCs”—are a type of closed-end fund established by Congress that primarily invest in small and developing companies.
The proposed amendments would modify the registration, communications, and offering processes available to BDCs and registered closed-end funds, building on offering practices that operating companies currently use.
“This congressional mandate recognizes the importance of an efficient and cost-effective approach for these funds to raise capital in our public markets, which should ultimately benefit investors in these funds, including Main Street investors,” said SEC Chairman Jay Clayton. “Moreover, the proposed changes should provide business development companies and registered closed-end funds with a more flexible offering process and facilitate capital formation in our public markets.”
The Commission’s proposal would allow eligible funds to engage in a more streamlined registration process to sell securities in response to market opportunities. The proposed amendments also would allow BDCs and registered closed-end funds to use communications and prospectus delivery rules currently available to operating companies. The proposal includes additional amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies and by providing tools to help investors assess these funds and their offerings. These proposed amendments include new periodic and current reporting requirements and new structured data requirements. The Commission also is proposing a modernized approach to registration fee payments for closed-end funds that operate as “interval funds.”
The proposal will have a 60-day public comment period following its publication in the Federal Register.
Securities Offering Reform for Closed-End Investment Companies
March 20, 2019
The Commission is proposing rule and form amendments to allow business development companies and registered closed-end funds (collectively, “affected funds”) to use the registration, offering, and communications reforms the Commission adopted for operating companies in 2005. In 2018, Congress passed two laws directing the Commission to adopt many of these changes. The proposal also includes other amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies and by providing tools to help investors assess these funds and their offerings.
Shelf Offering Process and New Short-Form Registration Statement
Eligible affected funds would be able to engage in a more streamlined registration process to sell securities “off the shelf” in response to market opportunities through the use of a new short-form registration statement. Like operating companies, an affected fund would generally be eligible to use the short-form registration statement if it meets certain filing and reporting history requirements and has a public float of $75 million or more.
Ability to Qualify for Well-Known Seasoned Issuer (“WKSI”) Status
Eligible affected funds would be able to qualify as WKSIs and benefit from the same flexibility available to operating companies that qualify as WKSIs. These include a more flexible registration process and greater latitude to communicate with the market. Like operating companies, an affected fund would qualify as a WKSI if it meets certain filing and reporting history requirements and has a public float of $700 million or more.
Communications and Prospectus Delivery Reforms
Affected funds would be able to use many of the communication rules currently available to operating companies, including the use of a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. Like operating companies, affected funds would be able to satisfy their final prospectus delivery obligations by filing the prospectus with the Commission.
New Method for Interval Funds to Pay Registration Fees
Instead of registering a specific amount of shares and paying registration fees at the time of filing, under the proposal closed-end funds that operate as “interval funds” would register an indefinite number of shares and pay registration fees based on net issuance of shares, similar to what mutual funds and exchange-traded funds are currently permitted to do.
Structured Data Requirements
Under the proposal, affected funds would be required to use Inline XBRL to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. Business development companies also would be required to submit financial statement information using Inline XBRL, as operating companies currently do. Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under the proposed amendments), would be required to submit the form in XML format.
Periodic Reporting Requirements
To support the proposed short-form registration statement framework, affected funds filing a short-form registration statement would be required to include certain key prospectus disclosure in their annual reports, as well as disclosure of material unresolved staff comments. Additionally, registered closed-end funds would have to provide management’s discussion of fund performance (or “MDFP”) in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and business development companies.
Current Reporting Requirements
Under the proposed amendments, registered closed-end funds would be required to file current reports on Form 8-K, like operating companies and business development companies are currently required to do. To better tailor Form 8-K disclosures to affected funds, and to enhance parity with operating companies, all affected funds would be subject to two new Form 8-K reporting events regarding material changes to investment objectives or policies and material write-downs of significant investments.
Incorporation by Reference Changes
The registration form for affected funds currently requires a fund to provide new purchasers with a copy of all previously-filed materials that are incorporated by reference into the registration statement. The proposal would eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.
The comment period for the proposal will be open for 60 days following publication in the Federal Register.
The Securities and Exchange Commission today voted to adopt amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. These amendments are expected to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.
The amendments, consistent with the Commission’s mandate under the Fixing America’s Surface Transportation (FAST) Act, are based on recommendations in the staff’s FAST Act Report as well as a broader review of the Commission’s disclosure rules. The amendments are intended to improve the readability and navigability of company disclosures, and to discourage repetition and disclosure of immaterial information. Specifically, the amendments will, among other things, increase flexibility in the discussion of historical periods in Management’s Discussion and Analysis, allow companies to redact confidential information from most exhibits without filing a confidential treatment request, and incorporate technology to improve access to information on the cover page of certain filings.
“Investors will benefit from the SEC staff’s exemplary work to improve disclosure,” said SEC Chairman Jay Clayton. “The amendments adopted today demonstrate our focus on modernizing our disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens.”
The amendments relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register. The rest of the amendments will be effective 30 days after they are published in the Federal Register, except that the requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, and the requirement that certain investment company filings be made in HTML format and use hyperlinks will be effective for filings on or after April 1, 2020.
FAST Act Modernization and Simplification of Regulation S-K
March 20, 2019
The Commission voted to adopt amendments to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide all material information to investors. The amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.
Among other things, the amendments:
Simplify disclosure or the disclosure process, including changes that would allow registrants to omit confidential information from most exhibits without filing a confidential treatment request, and changes to Management’s Discussion and Analysis that allow for flexibility in discussing historical periods;
Revise rules or forms to update, streamline or otherwise improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and revising the description of property requirement to emphasize the materiality threshold;
Update rules to account for developments since their adoption or last amendment by eliminating certain requirements for undertakings in registration statements; and
Incorporate technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.
The amendments also include parallel amendments to several rules and forms applicable to investment companies and investment advisers, including amendments that require certain investment company filings to include a hyperlink to each exhibit listed in the exhibit index of the filings and be submitted in HyperText Markup Language (HTML) format.
The amendments will be effective 30 days after they are published in the Federal Register, except that the amendments relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register. The requirements to tag data on the cover pages of certain filings are subject to a three-year phase-in, depending on the nature of the filer. All investment company registration statement and Form N-CSR filings made on or after April 1, 2020 must be made in HTML format and comply with the rule and form amendments pertaining to the use of hyperlinks.
The Securities and Exchange Commission today announced that Justin C. Jeffries has been named the Associate Regional Director for enforcement in the Atlanta Regional Office.
Mr. Jeffries succeeds Aaron Lipson, who left the agency in December 2018. In his new role, Mr. Jeffries will oversee the Atlanta office’s enforcement efforts in Georgia, North Carolina, South Carolina, Tennessee, and Alabama.
Mr. Jeffries has investigated or supervised a number of significant matters, including those that resulted in the SEC’s charges against:
“Justin is a talented lawyer who has made tremendous contributions to the SEC’s Atlanta office,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.
“Justin is tenacious and skilled at developing cases,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “I am excited to have him join the ranks of the Enforcement Division’s senior leaders.”
Richard R. Best, Director of the SEC’s Atlanta Regional Office, added “Justin is widely respected throughout the Atlanta Regional Office for his fairness, excellent judgment, and strong leadership. I am delighted that he will bring his impressive skills to managing our office’s outstanding enforcement group.”
Mr. Jeffries said, “I am honored to have this opportunity. Over the years, I have worked closely with the Atlanta office’s dedicated enforcement staff and I am looking forward to our continued collaborative efforts in protecting investors and maintaining the integrity of the securities markets.”
Mr. Jeffries joined the SEC’s Division of Enforcement as a staff attorney in 2010 and was promoted to Assistant Regional Director in 2017. He also served as a counsel to the Division Director. Before joining the SEC staff, Mr. Jeffries worked as a senior associate in King & Spalding LLP’s business litigation practice group in Atlanta, and as an associate in Akin Gump Strauss Hauer & Feld LLP’s labor and employment practice group in Washington, D.C. He also served as a law clerk to the Honorable William S. Duffey, Jr. in the U.S. District Court for the Northern District of Georgia. Mr. Jeffries received his law degree from the University of Virginia School of Law in 2002 and his bachelor’s degree from Duke University in 1997.
Russian telecommunications provider Mobile TeleSystems PJSC (MTS) will pay $100 million to resolve SEC charges that it violated the Foreign Corrupt Practices Act (FCPA) to win business in Uzbekistan.
According to the SEC’s order, MTS bribed an Uzbek official who was related to the former President of Uzbekistan and had influence over the Uzbek telecommunications regulatory authority. During the course of the scheme, MTS made at least $420 million in illicit payments for the purpose of obtaining and retaining business. The payments enabled MTS to enter the telecommunications market in Uzbekistan and operate there for eight years, during which it generated more than $2.4 billion in revenues. In 2012, the Uzbek government expropriated MTS’s Uzbek operations. As further described in the SEC’s order, the bribes were funneled to front companies controlled by the Uzbek official and were disguised in MTS’s books as acquisition costs, option payments, purchases of regulatory assets, and charitable donations.
“The company engaged in egregious misconduct for nearly a decade, secretly funneling hundreds of millions of dollars to a corrupt official. Building business on a foundation of bribery leaves the business and American investor interests at the mercy of corrupt officials,” said Charles E. Cain, Chief of the SEC Enforcement Division’s FCPA Unit.
—The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email to email@example.com.
The Securities and Exchange Commission today charged Talimco LLC, a registered investment adviser, and Grant Gardner Rogers, the former chief operating officer of the firm, with manipulating the auction of a commercial real estate asset on behalf of one client for the benefit of another.
According to the SEC’s order, in or about April 2015 while selling a commercial real estate asset on behalf of a collateralized debt obligation client, Talimco and Rogers were aiming to acquire the asset for another client, a private fund. Talimco and Rogers owed its selling client a fiduciary duty, which included an obligation to take steps to use its best efforts to maximize the price obtained for the asset by identifying willing bidders. However, rather than seek out multiple bona fide bidders, the order finds that Rogers used the firm’s affiliated private fund client for one bid and convinced two unwilling bidders to participate in the auction by giving assurances that the bidders would not win the auction. As a result of this manipulation, Talimco’s private fund client was the highest bidder and acquired the asset, only to then later sell it for a substantial profit. Talimco and Rogers’s conduct deprived the selling client of the opportunity to obtain multiple bona fide bids for the asset and maximize their profit.
“By rigging the auction, Talimco and Rogers failed to fulfill their fiduciary duty to their client,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Investment adviser firms are expected to have controls in place to detect and disclose conflicts of interest. This action evidences the vigilance of the SEC’s exam and enforcement staff in identifying investments advisers that exploit client relationships and harm investors.”
The settled orders find that Talimco and Rogers violated Section 206(2) of the Investment Advisers Act. Without admitting or denying the findings in the order, Talimco consented to a cease-and-desist order, a censure, disgorgement of its fees of $74,000 plus prejudgment interest of $8,758.80 and a penalty of $325,000. Rogers, who also did not admit nor deny the findings, consented to a cease-and-desist order, a 12-month industry suspension, and a $65,000 fine.
The SEC’s investigation was conducted by Philip A. Fortino, Sharon Bryant, and Osman Nawaz of the Complex Financial Instruments Unit and Haimavathi Marlier and Thomas P. Smith Jr. of the New York Regional Office, and was supervised by Mr. Michael and Lara S. Mehraban. An examination that led to the investigation was conducted by the Private Funds Unit.
The Securities and Exchange Commission today announced that its staff will host a public forum focusing on distributed ledger technology (DLT) and digital assets on May 31, 2019. The forum is being organized by the agency’s Strategic Hub for Innovation and Financial Technology (FinHub) and was announced in connection with the launch of FinHub last year. FinHub is committed to active engagement with market participants on new financial technologies. The forum is the second such forum to be hosted by the agency, will feature panelists from industry and academia, and is designed to foster greater communication and understanding around issues involving DLT and digital assets. Panelists will explore such topics as initial coin offerings, digital asset platforms, DLT innovations, and how these technologies impact investors and the markets.
The Fintech Forum will be held at the SEC’s Washington D.C. headquarters on May 31 and will be open to the public and webcast live via the SEC’s website. More information on the agenda and participants will be published in the coming weeks.
the focus of inquiries by the SEC and FINRA, the FBI recently made an
unannounced visit to the New York investment firm, GPB Capital Holdings.
GPB Capital has raised $1.8 billion through private placements. It raises those funds by getting financial advisers to sell GPB private placements to wealthy clients. According to its website, GPB Capital uses those funds to purchase income producing private companies.
reps from dozens of independent broker-dealers sold the high risk,
high-commission private placements.
GPB is the subject of other investigations and investor lawsuits. For example, it is being investigated by the Securities and Exchange Commission as well as the New Jersey Bureau of Securities, according to the company.
The focus of the SEC’s inquiry was the accuracy of disclosures made by GPB to investors, the performance of various funds and the distribution of capital to investors, according to published reports.
If you have any questions or concerns regarding your investment in GPB Capital, or any other private placement, contact Mark Astarita at firstname.lastname@example.org. Mark has been representing investors and financial professionals in securities disputes for over 25 years, and has represented parties in over 700 securities arbitrations.
The Securities and Exchange Commission today charged Volkswagen AG, two of its subsidiaries, and its former CEO, Martin Winterkorn, for defrauding U.S. investors, raising billions of dollars through the corporate bond and fixed income markets while making a series of deceptive claims about the environmental impact of the company’s “clean diesel” fleet.
According to the SEC’s complaint, from April 2014 to May 2015, Volkswagen issued more than $13 billion in bonds and asset-backed securities in the U.S. markets at a time when senior executives knew that more than 500,000 vehicles in the United States grossly exceeded legal vehicle emissions limits, exposing the company to massive financial and reputational harm. The complaint alleges that Volkswagen made false and misleading statements to investors and underwriters about vehicle quality, environmental compliance, and VW’s financial standing. By concealing the emissions scheme, Volkswagen reaped hundreds of millions of dollars in benefit by issuing the securities at more attractive rates for the company, according to the complaint.
“Issuers availing themselves of American capital markets must provide investors with accurate and complete information,” said Stephanie Avakian, Co-Director of the Division of Enforcement. “As we allege, Volkswagen hid its decade-long emissions scheme while it was selling billions of dollars of its bonds to investors at inflated prices.”
The SEC’s complaint, filed in the U.S. District Court for the Northern District of California, charges Volkswagen AG, its subsidiaries Volkswagen Group of America Finance, LLC and VW Credit, Inc., and Winterkorn with violating the antifraud provisions of the federal securities laws. The SEC complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. The complaint also seeks an officer and director bar against Winterkorn.
The SEC’s investigation was conducted by Kevin Wisniewski, Jake Schmidt, Amy Flaherty Hartman, and Daniel Nigro of the Complex Financial Instruments Unit and the Chicago Regional Office, under the supervision of Jeffrey Shank and Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. The litigation is being led by Daniel Hayes.
The Securities and Exchange Commission today announced that Jason J. Burt has been named the Associate Regional Director for enforcement in the SEC’s Denver Regional Office. Mr. Burt succeeds Kurt Gottschall, who became Regional Director of the SEC’s Denver office in November 2018.
Mr. Burt joined the SEC’s Division of Enforcement as a staff attorney in 2007. After the division was reorganized in 2010, he served as a member the division’s Market Abuse Unit until he was promoted to Assistant Regional Director in the SEC’s Asset Management Unit in 2016. Since August 2018, he also has served as an Assistant Regional Director in the SEC’s Market Abuse Unit.
Mr. Burt helped develop and lead the SEC’s Share Class Selection Disclosure Initiative (SCSDI), a self-reporting initiative designed to return money quickly to investors harmed by inadequate fee disclosures. The SEC recently announced the first set of actions brought under the initiative against 79 firms, resulting in over $125 million being returned to harmed investors.
In addition to helping to develop and lead the SCSDI, Mr. Burt has investigated or supervised a number of significant matters, including cases involving:
Nine defendants charged with participating in a scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading
Investment advisers charged with breaching fiduciary duties to clients, requiring them to repay over $12 million in improper fees to harmed clients
“Jason is known for being tenacious and having an unwavering commitment to the SEC’s mission,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.
“Jason is highly respected by his peers for his insight and intelligence and will be a fantastic addition to our senior leadership team in Denver,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.
Kurt Gottschall, Director of the SEC’s Denver Regional Office, added, “Throughout his long career with the SEC, Jason has earned the respect of his colleagues by working hard, sharing his deep knowledge of the federal securities laws, and developing programmatically important enforcement cases. We are excited to have Jason lead Denver’s talented enforcement staff.”
Mr. Burt said, “I am honored and thrilled to have the opportunity to lead such an amazing group of people. I look forward to continuing the Denver enforcement program’s unwavering pursuit of wrongdoers who prey on retail investors.”
Mr. Burt joined the SEC in 2004 as an attorney in the Office of Compliance Inspections and Examinations’ Broker-Dealer group. Before joining the SEC staff, Mr. Burt worked as a litigation associate in the Washington, D.C. office of Fried, Frank, Harris, Shriver & Jacobson. He earned his bachelor’s degree in business administration with high honors from James Madison University, and his law degree with honors from the University of North Carolina School of Law. Mr. Burt also presently serves as an adjunct professor at the University of Denver’s Sturm College of Law.
Mr. Burt received the SEC Chairman’s Award for Excellence in 2010 for his work related to the Flash Crash and the SEC’s Analytical Methods award in 2016 for his work on the hacked news releases matter.