On July 13, the SEC announced charges against an array of participants in a de-SPAC transaction. Among those charged are the SPAC, the SPAC’s sponsor, the SPAC’s CEO, the merger target, and the merger target’s CEO. Continue Reading SEC Brings Significant SPAC Enforcement Action
Reuters reported today that the SEC is investigating last year’s hack of SolarWinds, focusing on whether SEC registrants failed to disclose that they had been impacted by the cyber breach. According to the article, the SEC sent voluntary requests for information to “a number of public issuers and investment firms…” The SEC is reportedly investigating whether SolarWinds customers had been victims of the hack and failed to adequately disclose that fact.
As is customary in these investigations, the SEC is reportedly inquiring whether such hacking victims had suffered from internal-controls deficiencies. The SEC is also looking for unusual or opportunistic trading patterns suggestive of potential insider trading. And of course the SEC is inquiring into potential violations of Reg SP to determine whether the companies have policies designed to protect customer information and data privacy.
If the hacking victims respond to the SEC by disclosing information about the breaches, they could avoid facing enforcement action “relating to historical failures,” according to the article.
 The article can be accessed at: U.S. SEC probing SolarWinds clients over cyber breach disclosures -sources | Reuters
“Naked short selling” is often claimed by struggling public companies to be the source of their woes. But there have been relatively few cases addressing naked short selling. Recently, however, on May 19, 2021, the SEC charged a broker-dealer (“BD”) with violating the order-making and locate provisions of Regulation SHO. Regulation SHO regulates short sales of securities and, broadly speaking, is aimed at minimizing naked short selling, failures to deliver, and other practices.
What is Short Selling?
According to the SEC’s Complaint, “[s]hort selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.” Thus, short sellers profit from a decline in the price of a security. This is in contrast to “long” investors, who profit from an increase in the price of a security. Short selling is very risky: losses are unlimited because the price of a security can always increase.
What is Regulation SHO?
Regulation SHO, enacted in 2005, established “locate” and “close-out” requirements. Rule 200(g) of Regulation SHO requires BDs to mark all orders to sell stock as “long,” “short,” or “short-exempt.” Continue Reading SEC Brings “Naked Short Selling” Case
On April 1, 2021, the Texas State Securities Board (TSSB) announced the entry of a Consent Order against an SEC registered investment adviser named Independent Financial Group, LLC (“Independent”). The TSSB’s action may represent a large shift in investment adviser regulation and enforcement considerations for SEC-registered investment advisers. (Emphasis on “may.”) Continue Reading SEC Investment Advisers: Texas says “April Fools!” to Federal Preemption?
Capital raising through Special-Purpose Acquisition Companies (“SPACs”) has gone through the roof in the last two years. Last year was by far the single highest deal value for SPACs, and the first quarter of 2021 has already surpassed last year’s total deal value. Given the explosion of SPAC transactions, often backed by celebrities, it is a safe bet that the SEC will increase its scrutiny of SPACs.
In fact, on March 25, 2021, Reuters reported that the SEC has requested voluntary information from Wall Street banks on SPAC deals. Whether this inquiry broadens into a full-scale industry sweep remains to be seen, but it is clear that the hotbed of SPAC activity has captured regulatory attention. Also notable is that the plaintiffs’ bar has been filing lots of cases arising from SPAC transactions, which can be a harbinger of SEC inquiries. For these reasons, it is important to understand the regulatory risks of these deals.
As we discussed in our recent post “What to Expect from the SEC Under the Biden Administration,” market participants can expect a more vigorous SEC enforcement program under the new administration. President Biden’s nominee to chair the SEC, Gary Gensler, was known as a tough enforcer while serving as chairman of the CFTC during the financial crisis. If confirmed as SEC Chairman by the Senate, Mr. Gensler is sure to bring an assertive approach to SEC enforcement. Continue Reading What Investment Advisers and Fund Managers can Expect from the SEC Under the Biden Administration
The dust has settled on the 2020 election, and the Biden administration has begun pressing forward with its policy objectives. Critical to achieving such objectives is the Democrats’ control of both the House of Representatives and the Senate, albeit by the narrowest of margins after the Democratic senatorial candidates won their run-off elections in Georgia. As a result of the Georgia elections, Vice President Harris will be able to cast the tie-breaking vote in the case of a deadlock in the Senate. What does the change in administrations mean for SEC enforcement? Continue Reading What to Expect from the SEC Under the Biden Administration
The government cannot take action against abuses of the various aid programs associated with the CARES Act without first identifying abuses. In a recent round of inquiries, FINRA sent requests to numerous individuals it has identified as having obtained aid under the CARES Act (e.g., the Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL)). FINRA has acknowledged the existence of these requests and has stated the focus of the inquiries is the representatives and not FINRA member firms. Continue Reading When PPP met OBA – An Investigation was Born
The Securities and Exchange Commission’s disgorgement powers have made legal headlines a couple of times over the last few years – most notably, with the U.S. Supreme Court’s decisions in Kokesh v. SEC, 137 S. Ct. 1635 (2017) and Liu v. SEC, 140 S. Ct. 1936 (2020). Disgorgement surfaced again with the recent passage of the National Defense Authorization Act for Fiscal Year 2021, Section 6501 of which doubled the statute of limitations for some disgorgement actions from five years to 10. Continue Reading Four Things You Need to Know About the Extended Limitations Period for SEC Disgorgement
The Securities and Exchange Commission (the “SEC”) recently adopted amendments to the definition of “accredited investor,” which will permit a wider range of investors to participate in certain private offerings. The amended definition includes several new categories of natural persons and entities who qualify as accredited investors for purposes of Rule 501(a) of Regulation D under the Securities Act of 1933 (the “Securities Act”). The amendments also expand the definition of “qualified institutional buyer” under Rule 144A under the Securities Act. Continue Reading SEC Adopts Amendments to “Accredited Investor” Definition