Tag Archives: compliance

SEC Charges Six Firms for Short Selling Violations in Advance of Stock Offerings

The Securities and Exchange Commission  (“SEC”) announced enforcement actions against six firms, including more than $2.5 million in monetary sanctions and, in the case of one previously sanctioned firm, an order barring the firm from participating in stock offerings for a period of one year as part of its ongoing enforcement initiative focused on violations of Rule 105 of Regulation M. Intended to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation, Rule 105 prohibits firms from participating in public stock offerings after selling short those same stocks.Through its Rule 105 Initiative, which was first announced in 2013 as an effort to address violations of the rule in an expedited and streamlined way, the Division of Enforcement has taken action on every Rule 105 violation over a de minimis amount that has come to its attention—promoting a message of zero tolerance for these offenses.  As a result, based on available information, the SEC has seen a dramatic decrease in Rule 105 violations since the Initiative began.  In the first fiscal year after the Initiative was announced, Rule 105 violations, detected through various means available to the SEC, decreased by approximately 90 percent over the previous six years.  Rule 105 violations in fiscal year 2015 were similarly lower than before the Initiative.

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Blackstone Group To Pay $39 million to Settle SEC Charges

The SEC last week ordered the $330 billion mega-firm Blackstone Group to pay $39 million to settle charges related to inadequate disclosure of fees charged to portfolio companies. The Blackstone enforcement action represents the SEC’s fourth PE fees and expenses case, with the others involving KKR, Lincolnshire Management and Clean Energy Capital.  The Commission’s enforcement division said it will continue to investigate abuses of fees and expenses by private equity firms. It also cautioned firms that it is better to voluntarily come forward when problems are discovered internally rather than wait for the SEC to find out about them later.

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Legal Developments in Securities Law

Dodd-Frank Update: New Private Fund Rules Released

Recently, the Securities and Exchange Commission (“SEC”) adopted final rules concerning the registration of advisers to private funds. Some of these rules varied greatly from the initial proposed rules. In the Release by the SEC and the Commodity Futures Trading Commission (“CFTC”), it was clear that many changes addressed commenters’ concerns with the proposed rules and their viability or effectiveness at achieving the rule’s purpose. Many commenters expressed concerns with certain fund advisers’ ability to provide reliably accurate data within a short deadline.

A number of these provisions are important to private fund advisers. To begin with, private fund advisers are divided into two general groups – a large private fund adviser or a smaller private fund adviser. Large private fund advisers are divided as follows:

  • Large Hedge Fund Advisers – $1.5 billion in hedge fund assets under management,
  • Large Liquidity Fund Advisers – $1 billion in combined liquidity fund and registered money market fund assets under management, and
  • Large Private Equity Fund Advisers – $2 billion in private equity fund assets under management.

Smaller private fund advisers are all other advisers, but note that not all smaller private fund advisers may be required to file the Form PF, if they have less than $150 million in private fund assets under management. Depending on the fund adviser’s classification, the deadlines to file the Form PF and the portions of the Form that must be completed will vary. The Form PF is a new reporting form developed to provide regulators with private fund information; notably, this Form will receive confidential treatment by the SEC and CFTC, although its contents may be disclosed to other Federal departments, agencies or self-regulatory organizations, in addition to the CFTC and FSOC. The Form PF is divided as follows:

  • Section 1: Information regarding the adviser’s identity and assets under management; limited information regarding the size, leverage and performance of all private funds subject to the reporting requirements, and; requires additional basic information regarding hedge funds.
  • Section 2: Aggregate information about the hedge funds the adviser manages; additional information about any hedge fund it advises that has a net asset value of at least $500 million as of the end of any month in the prior fiscal quarter.
  • Section 3: Information regarding the fund’s portfolio valuation and its valuation methodology, as well as the liquidity of the fund’s holdings; information regarding whether the fund, as a matter of policy, is managed in compliance with certain provisions of rule 2a-7 under the Investment Company Act.
  • Section 4: Information regarding the activities of private equity funds, certain of their portfolio companies and the creditors involved in financing private equity transactions.

Of course, the requirements and questions within each section are more detailed than the overview provided above, but private fund advisers should prepare themselves for the type of information that will be requested of them.

The deadlines to submit Form PFs to the SEC are categorized as follows:

  • Smaller Private Fund Advisers: Within 120 days after the end of the fiscal year. Reporting occurs on an annual basis. The previous proposed deadline provided 90 days.
  • Large Private Equity Advisers: Within 120 days after the end of the fiscal year. Reporting occurs on an annual basis. The previous proposed deadline provided only 15 days.
  • Large Hedge Fund Advisers: Within 60 days from the end of each fiscal quarter. Reporting occurs on a quarterly basis. The previous proposed deadline provided only 15 days.
  • Large Liquidity Fund Advisers: Within 15 days from the end of each fiscal quarter. Reporting occurs on a quarterly basis.

In addition to the new deadlines, the rules also made clear which portions of the Form PF each type of private fund adviser must complete, as follows:

  • Smaller Private Fund Advisers: Must provide only basic information regarding their operations and the private funds they advise, including their performance, leverage and investor data (all or portions of Section 1 of Form PF).
  • Private Equity Advisers: Must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large private equity advisers are required to provide additional information in section 4 of the Form.
  • Hedge Fund Advisers: Must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large hedge fund advisers are required to provide additional information in section 2 of the Form.
    • Under the rules, to be classified as a hedge fund, the private fund must have one of the following three characteristics:
      • (a) a performance fee that takes into account market value (instead of only realized gains)
      • (b) high leverage; or
      • (c) short selling.
  • Liquidity Fund Advisers: Must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large liquidity fund advisers are required to provide additional information in section 3 of the Form.

Obviously, the above summary is provided as an indication of the requirements private fund advisers will face in the near future (as early as June 15, 2012 for some advisers). Private fund advisers should prepare for compiling, reviewing and filing the Form PF, and contact an experienced attorney if you have any questions.


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Legal Developments in Securities Law

The Foreign Corrupt Trade Practices Act: Why It Matters to Your Company

Recently, Deloitte LLP conducted a survey which demonstrated that United States companies are having a difficult time detecting or preventing corruption prohibited by the Foreign Corrupt Trade Practices Act (“FCPA”). You can read more about Deloitte’s survey here.

Of course, Deloitte’s survey is particularly of interest as government agencies are increasing the number of FCPA enforcement actions each year. In 2009, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) collectively brought 40 enforcement actions concerning the FCPA; in 2010, that number jumped to 74 enforcement actions – 85% greater than the previous year. Indeed, 2009 itself was another record year for its number of FCPA related enforcement actions.

Clearly, the number of enforcement actions have been increasing as it has become obvious that the stakes are high. In 2008, the United States’ settlement with Siemens AG, a Germany based company, netted the government $800 million in fines and disgorgement of ill-gotten gains. In 2009, Halliburton Co. paid $579 million in criminal fines and disgorgement, the largest combined settlement ever paid by a United States company since the FCPA’s inception. In 2010, with settlements of over $350 million by Snamprogetti Netherlands B.V. and BAE Systems plc, among other massive settlements, the SEC and the DOJ showed the true strength and impact of the FCPA.

What is the FCPA?

The FCPA was passed in 1977, as a response to numerous SEC investigations in the mid-1970s that revealed over $300 million in bribes to foreign officials. The FCPA’s purpose was to restore public confidence in the integrity of American businesses. The FCPA provides for internal accounting requirements and provisions which prohibit bribery of foreign officials. The FCPA potentially applies to payments by any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm.

Internal Accounting Requirements

Under the FCPA, public companies are required to keep records of their transactions and disposition of assets of the company and must maintain a system of internal accounting controls.The controls must be able to detect any differences between the accountability for assets and the existing assets.

Anti-bribery Provisions

U.S. public companies, U.S. nationals, and foreign firms or persons who take any act to further a forbidden transaction in the United States  are all prohibited from making an offer, payment or promise of payment to any foreign official or foreign political party in order to obtain or retain business with any person. Under this provision, foreign official means any officer or employee or individual acting in an official capacity for a foreign government or any department, agency, or instrumentality, or of a public international organization.

What is at stake?

The SEC and DOJ have been aggressive with their enforcement of the FCPA and with demanding large penalties. Under the FCPA, there are numerous criminal and civil remedies available to the SEC and the Department of Justice for violations. Criminal sanctions state that corporations and other business entities are subject to a fine of up to $2,000,000, while officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Moreover, under the Alternative Fines Act, these fines may be much higher – the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Given these sanctions, a small bribe could result in significant fines. It is also important to note that fines imposed on individuals may not be paid by their employer or principal.

What can my company do to protect itself?

The DOJ and the SEC have stated that the existence of a corporate compliance program is a factor to be considered when deciding whether to bring charges. Additionally, Federal Sentencing Guidelines allow lower fines if an effective compliance program exists within a company.  The compliance program must have been effective or designed to detect potential corrupt practices.

A good FCPA compliance program will include a written corporate policy that makes clear which standards should be followed by those involved in any foreign transactions in order to avoid violations of the FCPA and other anti-corruption laws. The procedures should include a system to which potential violations should be reported, preferably with an anonymous tipline. The written policies should include appropriate disciplinary actions for violations of the FCPA, foreign anti-bribery laws or the company’s own policies. Companies should obviously maintain an adequately staffed compliance office, which will also maintain a list of people who are most likely to do business with foreign entities. The compliance office should also maintain very good records, including permanent records of all approvals for foreign transactions. Other factors to consider include:

  1.             Education of the company’s officers, directors, employees                 and agents
  2.             Due diligence of the companies with which your company                 does business
  3.             Identifying high risk countries

Companies that take precautions to detect FCPA violations by implementing a compliance program are in a better position to avoid costly investigations and damage to their reputation. Given the potential costs at stake, companies are advised to retain an attorney with FCPA experience, who can aid the company in developing an effective compliance program that will suit its needs.

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