Division of Corporation Finance Guidance
Proxy voting. The Division issued three Compliance and Disclosure Interpretations (CDIs) regarding Securities Exchange Act Rule 14a-4(a)(3) on the unbundling of matters that are submitted to a shareholder vote by a company or any other person soliciting a proxy. The CDIs are located at Questions 101.01 through 101.03. (1/24/2014) Proxy voting.
General solicitation. Two CDIs were issued on Securities Act Rule 506(c) concerning the use of general solicitation in private offerings. The CDIs are located at questions 260.33 and 260.34.
Selected Enforcement Actions
Parking violations. The SEC instituted partially settled administrative proceedings against two brokers involved in a fraudulent “parking” scheme in which one temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus. The SEC alleges that Thomas Gonnella solicited the assistance of Ryan King to evade a policy at his firm that penalizes traders financially if they hold securities for too long. Gonnella arranged for King, who worked at a different firm, to purchase several securities with the understanding that Gonnella would repurchase them at a profit for King’s firm. King, who has cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry with the right to reapply after three years. The action against Gonnella continues. (2/4/2014) SEC press release.
Two finance professors charged with improper naked short selling. The SEC instituted settled administrative proceedings against two Florida State University finance professors, Gonul Colak and Milen Kostov. Without admitting or denying the allegations, Colak and Kostov consented to the entry of an order finding that they engaged in a manipulative naked short selling scheme that used multiple brokerage accounts to disguise sham transactions. They moved a short position from one brokerage firm to another every few days in order to spread their failures to deliver across multiple firms in an effort to avoid detection. Colak agreed to pay US$285,600 in disgorgement, US$21,957 in prejudgment interest, and a US$150,000 penalty. Kostov agreed to pay US$134,400 in disgorgement, US$10,340 in prejudgment interest, and a penalty of US$70,000. (1/31/2014) SEC press release.
Brokers disgorge profits from illegal markups. The SEC announced that a US District Court entered judgments against Marek Leszczynski, Benjamin Chouchane, and Henry Condron in an SEC fraud case. The judgments permanently enjoin Leszczynski, Chouchane, and Condron and ordered Leszczynski to disgorge US$1,500,000; Chouchane to disgorge US$2,007,408 plus prejudgment interest of US$442,169; and Condron to disgorge US$168,336 plus prejudgment interest of US$39,339. The SEC alleged that the brokers, who formerly worked on the cash desk at a New York-based broker-dealer, illegally overcharged customers US$18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades. The brokers made their scheme difficult for customers to detect because they deceptively charged the markups and markdowns during times of market volatility. The SEC further alleged that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Defendants also pleaded guilty to related criminal proceedings. (1/28/2014) SEC v. Leszczynski, Lit.Rel.No. 22912.
Failing to respond to SEC subpoenas leads to arrest. The SEC announced that a man who is the subject of an agency investigation has been held in contempt of court and arrested for failing to comply with subpoenas requiring him to produce documents and give testimony. The SEC filed a subpoena enforcement action against Anthony Coronati, the founder of a business known as Bidtoask.com. The Commission alleges that Coronati solicited investments relating to the securities of sought-after private companies and used that money to pay personal expenses. Coronati was released on a US$50,000 bond and his travel was restricted to the Southern and Eastern Districts of New York. (1/23/2014) SEC v. Coronati, Lit.Rel.No. 22907.
Strategic plan. The SEC published for comment its draft strategic plan, which outlines the agency’s strategic goals for fiscal years 2014 to 2018. Comments should be submitted by March 10, 2014. (2/3/2013) SEC press release.
Added interest. Investment News discussed the added interest that the SEC and the Financial Industry Regulatory Authority have in alternative investments and complex products. (2/2/2014) Added interest. Separately, Investment News reported that FINRA has submitted to the SEC proposed rules that would require broker-dealers to choose one of two methods for estimating the value of non-traded real estate investment trusts. (2/3/2014) Non-traded REITs.
Price spreads. Bloomberg reported that the SEC’s Investor Advisory Committee will not recommend the testing of wider price spreads for small stocks. (1/30/2014) Price spreads.
Cyber security. The remarks of Jane Jarcho of the Office of Compliance Inspections and Examinations were summarized by Reuters. The Office will be reviewing the cyber security policies of advisory firms, noting that OCIE “will be looking at policies on IT training, vendor access and vendor due diligence, and what information you have on any vendors.” (1/30/2014) Cyber security.
SEC enforcement chief interviewed. In the Washington Post’s interview of Andrew Ceresney, the Director of the SEC’s Division of Enforcement, a broad array of subjects were discussed including the agency’s new policy regarding admissions and the SEC’s enforcement focus. (1/29/2014) Interview.
Exchange-traded funds. According to ETF Trends, the SEC has delayed a decision on whether to permit active exchange traded funds to hold derivatives. (1/29/2014) ETFs.
Risk alert. The SEC’s Office of Compliance Inspections and Examinations issued a risk alert concerning the due diligence processes that investment advisers employ when recommending or placing client assets in alternative investments such as hedge funds, private equity funds, or funds of private funds. The alert describes current industry trends and practices in advisor due diligence and notes deficiencies OCIE has found at advisory firms. (1/28/2014) SEC press release.
SEC Chair discusses analytical tools. SEC Chair Mary Jo White discussed the agency’s new analytical tools. The National Exam Program has developed “NEAT,” the National Exam Analytics Tool which allows SEC examiners to quickly access and analyze large amounts of trading data. NEAT can search for evidence of potential insider trading and other manipulative trading practices. White also summarized SEC enforcement efforts, and changes in its settlement policies. (1/27/2014) White speech.
Commissioner Piwowar on the SEC’s mission. SEC Commissioner Michael Piwowar commented on the two outside forces he believes are threatening the SEC’s mission. The first is special interests who seek to co-opt the SEC’s corporate disclosure regime for their own purposes. The second is banking regulators trying to impose the banking regulatory construct on SEC-regulated firms and investment products. With respect to money market funds, Piwowar believes that more should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions and that there is a need to provide investors with more timely information about fund holdings. (1/27/2014) Piwowar speech.
Regulatory Flexibility Act agenda. The SEC published a list of the rules that it will review in accordance with the Regulatory Flexibility Act. Comments should be submitted within 30 days after publication in the Federal Register, which is expected shortly. (1/23/2014) SEC Release No. 33-9516.