SEC Fines Firm for Confidential Proxy Voting Violations

A large proxy advisory firm is being required to pay a $300,000 fine and retain an independent compliance consultant for failure to implement policies and procedures that would prevent employees from disclosing confidential voting information about proxy voting. The SEC claims that an employee received tens of thousands of dollars in tickets and meals for providing confidential client voting information. The SEC alleged that the firm knew that a proxy solicitor entertained firm employees to curry favor but did nothing to understand or prevent this from occurring. Even though the firm had a Code of Ethics which prohibited the disclosure of material nonpublic information, the firm failed to implement procedures and allowed all employees access to the client voting information; failed to audit employee access; did not train employees about their relationships with proxy solicitors; failed to require reporting and/or pre-clearance of gifts and did not review e-mails.

This shows that once again failure to have adequate policies and procedures is never a good excuse for a bad ending. Policies and procedures must be reasonably designed and these obviously were not according to the SEC. To read the full SEC case, please click here.

Cherry Picking Trades

The SEC has initiated an action against a firm that is not required to be registered. The SEC has stated that the firm cherry-picked profitable trades. The firm principals used a third party bank to custody client accounts and told the bank how to allocate block trades several days after executing the trades through large brokerage firms. According to the SEC, over a four-year period, more than 75% of 13,500 trades allocated to the principals were profitable, and fewer than 25% of trades allocated to clients were profitable. The SEC noted that the principals did not make any compensation from the adviser but relied solely on their personal trading profits. The SEC indicated that "same-day or pre-trade allocations are considered best practices because they protect against unfair allocation schemes such as cherry picking." Moreover, "it is an industry standard...to have a written trade allocation policy."

You can click here to read the full story.

SEC Chairman Mary Jo White Wants to Focus Additional Resources on Investment Advisers

In testimony before a Congressional Subcommittee, SEC Chairman Mary Jo White described how the proposed 2014 SEC budget would add significant additional resources to supervise investment advisers. She indicated that the new budget would include funds to hire 250 additional examiners "to increase the proportion of advisers examined each year, the rate of first-time examinations, and the examination coverage of investment advisers and newly registered private fund advisers." Another 60 jobs would be added to "improve oversight and examination functions related to broker-dealers, clearing agencies, transfer agents, self-regulatory organizations (SROs), and municipal advisors." She also stated that another 131 hires would be added to the Enforcement staff. She believes more funds were necessary for "expanding oversight of investment advisers and improving their regulation and compliance -- a point at which investors are most at risk of being defrauded and harmed." To read the full testimony about budget priorities, please click here.

SEC Official Raises Broker-Dealer Registration Question for Private Equity Firms

The Chief Counsel of the SEC’s Division of Trading and Markets, David Blass, raised concerns during his speech given April 5th, that private equity fund sponsors may be ignoring broker-dealer registration and licensing requirements when selling fund shares or transacting with portfolio companies. Mr. Blass explained that broker-dealer registration and representative licensing requirements are triggered when firm personnel focus on selling fund shares and receive transaction-based compensation. He described activities that may require broker-dealer registration: marketing fund shares, soliciting or negotiating transactions, and handling investor funds or securities. He explained that the issuer exemption (Rule 3a4-1) is very narrow and would not likely be available to most private equity personnel involved with fundraising. Mr. Blass further stated that broker-dealer registration may be required when fund sponsors receive investment banking or success fees for transactions involving portfolio companies. Mr. Blass rejected any argument that private equity firms should be exempt from broker-dealer registration and stated: “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He also discussed the consequences of failing to register including possible rescission of all securities transactions involving unregistered personnel.

To read the full text of his speech please click here.