On December 18, 2019, the SEC proposed to amend its definition of “Accredited Investor” with hopes to expand access to private capital markets to a wider range of investors.[1] The proposed changes create two new categories of natural persons who may be considered “accredited investors” and add to the categories of institutional investors who qualify. According to the SEC’s press release regarding the proposed changes, the purpose of the changes is to more effectively identify investors that have the “knowledge and expertise” to safely invest in private markets without the additional investor protections created by the filing requirements of the Securities Act of 1933 (the “Securities Act”).[2]

Continue Reading SEC Proposes to Update “Accredited Investor” Definition

Hollywood martial arts sensei Steven Seagal was recently karate-chopped by the SEC for his alleged undisclosed payments for Twitter-touting a security that was being offered and sold in an initial coin offering.  In a settled cease-and-desist order, the Moscow-based B movie actor consented to a violation of Section 17(b) of the Securities Act of 1933, which prohibits the promotion of a security without fully disclosing the receipt and amount of compensation for such promotion.  The SEC found that that Seagal was kung fu fighting on behalf of something called Bitcoiin2Gen in the promotion of investment contracts to be issued on the Ethereum blockchain.  The operator of the dojo with no mojo agreed to repay $314,000 to settle the charges involved in the practice commonly known as scalping.

As everyone in the securities industry appreciates, a registered representative’s departure from one broker-dealer firm to join another is a not uncommon event. Such departures, even when voluntary and made on good terms, can and often raise a host of issues. Just last year for instance, FINRA issued Regulatory Notice 19-10 (April 5, 2019), which can be found here. Continue Reading Risky Business: How Departing Brokers Can Unintentionally Trip Reg. BI

Last year the U.S. Securities and Exchange Commission (“SEC”) approved Regulation Best Interest (“Reg BI”).[1] Reg BI requires broker-dealers and their associated persons to act in “the best interest” of a retail customer when recommending a securities transaction or investment strategy. Reg BI applies not only to broker-dealers but also to investment advisors.[2] It will take effect in June of 2020.[3] Continue Reading It’s the Final Countdown: Being Prepared for Regulation Best Interest

The Fifth Circuit overturned a U.S. District Court’s approval of a settlement between Ralph Janvey, the Receiver for Stanford International Bank, and various insurance company Underwriters, under which the Underwriters had agreed to pay $65 million to the Stanford Receivership estate.  Writing for the Court, Judge Edith H. Jones held that the District Court abused its discretion in approving the settlement because the injunction issued by the District Court (referred to as a “bar order”) nullified claims by third-party coinsureds to policy proceeds without an alternative compensation scheme.  The settlement also improperly released third-party tort and statutory claims against the Underwriters that the estate did not own. Continue Reading Fifth Circuit Overturns Receiver’s Settlement Barring Third-Party Claims Against Stanford Financial Insurers

An opinion this week from the Southern District of New York, SEC v. Alderson[1] [click here], held that an RIA’s communications with lawyers associated with its third-party compliance consultant were not protected by the attorney-client privilege or the attorney work-product doctrine. As a result, the district court compelled disclosure of over 230 communications passing between the RIA’s in-house counsel and its third-party compliance firm (staffed with licensed attorneys) before and during the course of an examination of the RIA by the Securities and Exchange Commission (“SEC”).[2] This ruling raises important considerations for an RIA or broker-dealer when engaging outside compliance consultants and lawyers, especially if the firm intends for certain of or all of those communications to be cloaked with privilege. Continue Reading An RIA’S Communications with Attorney Consultants Associated with its Outside Compliance Firm are Always Privileged, RIGHT? Well, That Depends . . .

KPMG must pay $50 million after the Securities and Exchange Commission charged the accounting giant with cheating on training exams and using purloined information concerning audit inspections to be conducted by the Public Company Accounting Oversight Board (PCAOB).  KPMG agreed to the $50 million penalty and also accepted a public censure as part of the settlement. Continue Reading Audit Firm to Pay $50 Million Penalty for Using Information Pilfered From PCAOB

Celadon Group Inc. announced a settlement with the SEC and the DOJ over allegations of accounting fraud.[1]  The company agreed to pay restitution of over $42 million in connection with a Deferred Prosecution Agreement with the DOJ, and to pay disgorgement of roughly $7.5 million in a parallel SEC settlement.  The disgorgement obligation is deemed satisfied by payment of the $42 million restitution amount. Continue Reading Freight Company Charged with Truckload of Accounting Fraud

Securities litigation frequently raises the question of what conduct constitutes a primary violation of the federal securities laws, specifically, Rule 10b-5 and the various other antifraud provisions.  Must one make a false statement in order to be primarily liable?[1]  The Supreme Court held in Janus Capital Group, Inc. v. First Derivative Traders that only those who “make any untrue statement of material fact” may violate Rule 10b5-(b).[2]  Continue Reading Janus Meets Its Maker: The Supreme Court Expands Primary Liability in Lorenzo v. SEC

The Securities and Exchange Commission (SEC) recently announced other notable examples of the scrutiny being applied to investment advisers’ disclosures of conflicts of interest.  The criticism is notably sharp on issues involving fees and costs associated with advisory services.

Of course, there are the well-publicized actions involving the disclosure of 12b-1 fees pursuant to the share class initiative. On March 11, 2019, the SEC announced that 79 investment advisory firms had agreed to return over $125 million to clients in connection with the SEC’s “Share Class Initiative.”[1]  Continue Reading You WILL (not May) Face the Heat