Last week, the Securities and Exchange Commission (SEC) charged more than 20 individuals and companies with violations of the Securities Exchange Act of 1934 (the Exchange Act) related to the buying and selling of investment-grade corporate bonds. The SEC charged the respondents with trading in corporate bonds without first registering as broker-dealers. Two respondents, Global Fixed Income and its owner Charles Perlitz Kempf, were charged with aiding and abetting these violations.
Section 15(a) of the Exchange Act prohibits any individual or corporation from purchasing securities on behalf of another without first registering as a broker-dealer with the SEC. According to the SEC, the respondents purchased corporate bonds on behalf of Kempf and Global Fixed Income, who then resold the bonds at a profit. The respondents conducted these transactions without registering with the SEC. Under the SEC’s order, the respondents are subject to roughly $5 million in disgorgement of profits plus $1 million in penalties.
This action, as well as other, similar SEC enforcement actions in the corporate bond market, may be part of the SEC’s broader focus of increasing transparency in the corporate bond markets in 2016 and beyond. Last month, SEC Commissioner Daniel Gallagher spoke publicly on the need for increased transparency and liquidity in the corporate bond market. And, just two days before the SEC issued its press release on the GFI enforcement action, SEC Chair Mary Jo White gave testimony in front of the House Committee on Financial Services regarding the SEC’s budget and agenda for 2016. In discussing the SEC’s continued efforts toward improving the “market structure” for municipal and corporate bonds, Ms. White noted that the total principal amount of corporate bond issues totaled approximately $11.6 trillion, more than three times the amount of municipal bonds. Ms. White also discussed the difficulties created by the “rapid expansion of the size and complexity of the securities market” and cited the agency’s need for additional resources to monitor registered investment advisers. Taken together, these comments may foreshadow an increase in compliance efforts by the SEC in the corporate bond market to foster transparency and consumer confidence.