Editor’s Note
The Goodwin Procter Financial Services Weekly News Roundup, introduced last week, provides headlines and brief summaries of developments affecting the financial services industry, with links to primary sources. The developments covered include legislation, rulemaking, the publication of interpretive guidance by regulatory agencies, litigation and enforcement matters and industry news. The Roundup will also provide links to client alerts and other articles by and about Goodwin Procter lawyers.
Regulatory Developments
FINRA Requests Comment on a Revised Proposal to Adopt Consolidated FINRA Rule 2231 (Customer Account Statements)
FINRA seeks comment in Regulatory Notice 14-35 on a revised proposal to transfer current NASD Rule 2340 (Customer Account Statements) and incorporated NYSE Rule 409 (Statements of Accounts of Customers) into the consolidated FINRA rulebook as FINRA Rule 2231. The revised proposal includes changes made in response to comments on the prior proposal, which was subsequently withdrawn. The key changes in the revised proposal from the prior proposal are to (1) maintain the quarterly delivery requirement in the current rule and (2) allow customers to direct the transmission of customer account statements and other documents to third parties, provided the firm sends duplicates of such account statements and other documents directly to the customer.
Enforcement & Litigation
SEC Settles with Advisory Firms Over Short Sales During Restricted Period Prior to Offerings
The SEC announced settled administrative proceedings against 19 investment advisory firms and one individual trader for violations of Rule 105 of Regulation M under the Securities Exchange Act, which prohibits short selling during the restricted period prior to certain public offerings and then purchasing the same security in the public offering. The respondents agreed to disgorge profits, and pay civil penalties and prejudgment interest, totaling more than $9 million. The settlements are part of an ongoing initiative announced last year to enhance enforcement of Rule 105.
SEC Settles with Adviser, Files Proceeding Against Portfolio Manager, Over Improper Withdrawals from Hedge Fund Characterized as Management Fees
The SEC announced that it had settled administrative proceedings against a registered adviser over amounts withdrawn from a hedge fund by its portfolio manager purportedly as management fees that were in fact for his own personal use. Among other violations, the SEC found that the adviser had failed to reasonably supervise the portfolio manager who had sole authority to transfer money from the fund and was not subject to any controls in the exercise of that authority. The adviser agreed to pay a $150,000 civil penalty. In a related action, the SEC commenced administrative proceedings against the portfolio manager.
SEC Settles with Adviser Over Principal Transactions and Performance Advertising Violations
The SEC announced that it had settled administrative proceedings against an investment adviser and the adviser’s CEO over (1) principal transactions between clients and the adviser’s affiliated broker-dealer, (2) related best execution and disclosure violations, (3) misleading performance advertising and (4) related compliance program implementation violations. Among other sanctions, the Adviser agreed to pay nearly $600,000, including approximately $368,000 to be distributed to affected clients in disgorgement of profits realized by the affiliated broker-dealer from the principal transactions in question. The CEO agreed to pay a $50,000 penalty.
SEC Settles with Private Equity Fund Manager Over Allocation of Shared Expenses Between Portfolio Companies
The SEC announced that it had settled administrative proceedings against a private equity fund adviser over the improper allocation of shared expenses between two portfolio companies that were operated on an integrated basis. Each portfolio company was owned by a separate fund managed by the adviser. The SEC found that a general policy of allocating expenses that benefitted both companies based on relative revenue was not followed in certain instances when one portfolio company (and, indirectly, the fund that owned it) paid more than its share of certain shared administrative expenses, joint employee salaries, and subsidiary overhead and salary expenses. On this basis, the SEC found that the adviser had breached its fiduciary duty to the funds in violation of Section 206(2) of the Investment Advisers Act of 1940. The adviser agreed to pay $1.5 million in disgorgement plus $358,112 in prejudgment interest and a $450,000 civil penalty.
