Conflict minerals rule. The SEC has stayed those parts of Securities Exchange Act Rule 13p-1 and Form SD that require issuers to disclose the “conflict free” status of the materials used in their products. The Commission’s order denied a petition which sought a stay of the entire rule. The Division of Corporation has issued guidance on the conflict minerals disclosure requirements that remain in effect. These rules require firms to file their first Form SDs by June 2, 2014. (5/2/2014)
Selected Enforcement Actions
Software execs settle insider trading charges. The SEC filed settled insider trading charges against three software company founders for taking unfair advantage of incorrect media speculation and analyst reports about the company’s acquisition. The SEC alleged that Lawson Software’s co-chairman Herbert Richard Lawson tipped his brother William Lawson and family friend John Cerullo with nonpublic information about the status of the company’s 2011 merger discussions with a privately-held software provider. Lawson Software’s stock price had begun to climb following media and analyst reports that multiple bidders were possible. However, Richard Lawson knew that such reports were incorrect, and that the merger price offered by the lone bidder was significantly lower than what journalists and analysts were speculating. While in possession of the accurate, inside information from his brother, William Lawson sold more than one million shares of his family’s Lawson Software stock holdings. He also tipped Cerullo, who sold approximately 175,000 of the company’s shares on the basis of the nonpublic information. The Lawsons and Cerullo agree to settle the matter without admitting or denying the SEC’s allegations. (5/12/2014) SEC press release.
SEC alleges investment advisor hid custodial account shortfall. The SEC announced the filing of a contested lawsuit against Professional Investment Management (PIM), an investment advisory firm, and its president, Douglas Cowgill, for hiding a shortfall of more than US$700,000 in client assets. The SEC commenced an examination of the firm in November 2013 after learning that, for four consecutive years, PIM had failed to arrange for independent verification of client assets as required by the SEC’s Custody Rule, and had filed a notice withdrawing its registration with the SEC. The examination sought to verify PIM’s client statements which showed that a particular money market fund held US$7.7 million while the SEC alleges the account only held US$7 million, a fact which Cowgill tried to conceal by entering fake trades. (5/5/2014) SEC press release.
Commissioner Gallagher discusses investment advisors. Commissioner Daniel M. Gallagher suggested the use of third-parties to examine investment advisors, in order to help balance the lack of information the SEC has concerning them when compared to what it knows about brokers. The use of third parties, including a self-regulatory organization, would also provide information concerning whether the fiduciary duty owed by brokers and investment advisors should be harmonized. (5/9/2014) Gallagher speech.
Commissioner Stein comments on disclosure. Improvements that could be made to the SEC’s issuer disclosure requirements were the subject of a recent speech made by SEC Commissioner Kara M. Stein. Stein called for fuller, more useable, and more timely disclosure. (5/8/2014) Stein speech.
Investor alert. The SEC issued an advisory to investors concerning the risks related to virtual currencies. (5/7/2014) Investor alert.
Private equity compliance. The SEC’s Director of the Office of Compliance Inspections and Examinations, Andrew J. Bowden, discussed private equity fund compliance. Staff examiners of private equity managers have identified violations of law or material control weaknesses concerning fees and expenses over 50 percent of the time. (5/6/2014) Bowden speech.
Chair White testifies before Congress. Testifying before the House Financial Services Committee, SEC Chair Mary Jo White discussed the SEC’s focus, noting that she expects more settlements in which respondents will be required to admit responsibility. White further stated that the Enforcement Division will be expanding its efforts in the areas of financial reporting, issuer reporting, and audit failures. (4/29/2014) White testimony.
Commissioners comment on well-known seasoned issuers. SEC Commissioner Daniel Gallagher commented on the Division of Corporation Finance’s April 24, 2014 “Revised Statement on Well-Known Seasoned Issuer Waivers,” which outlines how the Division will assess the merits of well-known seasoned issuer (WKSI) waiver applications. Gallagher contends that disqualification is justified (and waivers should be denied), when the issuer’s financial reporting cannot be trusted. (4/29/2014) Gallagher statement. Previously, SEC Commissioner Kara Stein dissented to the Commission’s April 25, 2014 order granting a WKSI ineligibility waiver to The Royal Bank of Scotland after one of the bank’s subsidiaries pleaded guilty to having manipulated the London interbank offered rate. In that dissent Stein asked whether the SEC had decided “that some firms are just too big to bar.” (4/28/2014)