New and Proposed Rules
Money market fund reform. The SEC published amendments to its rules for money market mutual funds. The amendments require institutional prime money market funds to adopt a floating net asset value (NAV) and to allow non-government money market fund boards to impose fees and redemption gates. Enhanced diversification, disclosure and stress testing requirements, and updated reporting requirements are also included. A two-year transition period is included. (7/23/2014) SEC Release No. 33-9616. The SEC also proposed exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds and re-proposed amendments concerning provisions that reference credit ratings. (7/25/2014) SEC press release. The US Department of the Treasury addressed the tax reporting and compliance issues that may result from the floating NAV requirement. Treasury Department press release.
Selected Enforcement Actions
Investment advisor must pay penalty of almost US$15 million for cherry picking and soft dollar schemes. An SEC Administrative Law Judge issued an initial decision finding that J.S. Oliver Capital Management, an investment advisory firm, and Ian O. Mausner, its president, engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested. Respondents then attributed less profitable trades to other clients, including a widow and a charitable foundation. The ALJ further found that Mausner and J.S. Oliver misappropriated more than US$1.1 million in soft dollars for undisclosed purposes that did not benefit clients. The order requires J.S. Oliver and Mausner to disgorge, jointly and severally, US$1,376,440, plus prejudgment interest. J.S. Oliver is also required to pay a civil monetary penalty of US$14,975,000 and Mausner is required to pay a civil monetary penalty of US$3,040,000. A portfolio manager was also found to have participated in the soft dollar scheme. (8/5/2014) In the Matter of J.S. Oliver Capital Management, L.P., ID-649.
Whistleblower award justified by unusual circumstances. The SEC announced an award of more than US$400,000 for a whistleblower who reported a fraud to the SEC after the company failed to address the issue internally. (7/31/2014) SEC press release. The award order noted that the claim was initially denied because of a prior investigation conducted by a self-regulatory organization; however, the claimant’s response detailed unusual circumstances that justified the waiver of the ordinary whistleblower award requirements. (7/31/2014) Order.
CEO and CFO charged with violating SOX certification rules. The SEC instituted partially settled administrative proceedings against the CEO and former CFO of QSGI Inc. for violating the Sarbanes-Oxley Act’s internal control certification provisions. The SEC alleged that CEO Marc Sherman and former CFO Edward L. Cummings represented in a management report accompanying QSGI’s fiscal year 2008 annual report that Sherman participated in management’s assessment of the internal controls. However, Sherman did not actually do so. The SEC further alleged that Sherman and Cummings each certified that they had disclosed all significant internal control deficiencies to outside auditors when, in fact, they had misled the auditors by withholding that inadequate inventory controls existed within the company’s operations and by engaging in other improper accounting practices. Without admitting or denying the allegations, Cummings consented to a cease-and-desist order, agreed to pay a US$23,000 penalty, and to be barred from serving as an officer and director of a publicly traded company for five years. (7/30/2014) SEC press release.
Dual registrant settles best execution claims. The SEC instituted settled administrative proceedings against Dominick & Dominick LLC, a dually registered investment adviser and broker-dealer, and its COO for breaches of fiduciary duty to certain advisory clients. Without admitting or denying the allegations, the respondents consented to the entry of an order finding that D&D did not seek best execution for those clients who participated in D&D’s “Commission-Only” and “Fee Plus Commission” advisory programs, because D&D’s best execution analyses did not account for brokerage commissions and did not analyze the commissions being charged to these advisory clients after it negotiated a reduction in execution and clearing costs with its clearing firm in 2010. D&D also failed to disclose a conflict of interest involving its clearing firm, specifically that it received rebates consisting of a significant portion of the interest these advisory clients paid the clearing firm for margin loans. (7/28/2014) In the Matter of Dominick & Dominick LLC, SEC Release No. 33-9619.
Transfer agent sold counterfeit securities. The SEC charged a Florida-based transfer agent and its owner with defrauding investors by using aggressive boiler room tactics to sell worthless securities. The SEC alleges that Cecil Franklin Speight, whose firm International Stock Transfer Inc. was a registered transfer agent, abused the transfer agent function by creating and issuing fake securities certificates to both US and international investors. While investors collectively sent in millions of dollars thinking they were purchasing high-yield investments and discounted stock, they ended up receiving counterfeit certificates that Speight and IST fooled them into thinking were legitimate. Related criminal charges have also been filed against Speight. (7/24/2014) SEC press release.
SEC Commissioner discusses municipal securities reforms. SEC Commissioner Michael Piwowar discussed municipal securities reforms. Piwowar specifically addressed the disclosure of markups on riskless principal transactions, best execution, pre-trade transparency and the Municipalities Continuing Disclosures Cooperation Initiative. (8/1/2014) Piwowar speech.
Municipalities disclosure initiative. The SEC has extended to December 1, 2014, the self-reporting deadline for issuers and obligors under its Municipalities Continuing Disclosures Cooperation Initiative. The deadline for underwriters remains September 10, 2014. (7/31/2014) SEC press release.
Staff announcement. Alberto Arevalo has been named an associate director in the SEC’s Office of International Affairs. Arevalo will oversee international enforcement, supervisory cooperation, and technical assistance programs. (7/30/2014) SEC press release.
Investor alert. The SEC issued an investor alert concerning the use of social media to spread false or misleading information about stocks. (7/25/2014) Investor alert.