Securities Lawyer Blog

Thursday, January 28, 2021

The Securities Law Blog: Gamestop Investigations?

The Securities Law Blog: Gamestop Investigations?: By now, all of our readers are aware of the dramatic rise in Gamestop's stock, after a short squeeze generated by the retail investors ...

Monday, March 11, 2019

SEC Share Class Initiative Returning More Than $125 Million to Investors

The SEC has settled charges against 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors.

The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers. The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued today address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

For more information visit The Securities Lawyer Blog, or contact Mark Astarita at mja@sallahlaw.com

SEC Share Class Initiative Returning More Than $125 Million to Investors

The Securities and Exchange Commission today announced settled charges against 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors. The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers. The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued today address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

History of Share Class Selection-Related Violations of the Federal Securities Laws

Investment advisers, as fiduciaries, have an obligation to make full and fair disclosure to clients and prospective clients concerning their material conflicts of interest, including conflicts arising from financial incentives, and to act consistently with those disclosures. This principle is reflected in Form ADV, which reminds advisers of their general obligation to fully disclose material facts relating to their advisory business and specifically requires disclosure concerning the compensation and fees that advisers and their supervised persons receive, including from asset-based charges and service fees.

In light of these obligations, since at least 2013, the Commission has charged investment advisers with failing to disclose conflicts of interest and failing to implement reasonably designed policies and procedures relating to mutual fund share classes, in violation of the Investment Advisers Act. In those cases, the Commission generally required the investment advisers to pay disgorgement and penalties, and to distribute the funds to harmed clients. In 2016, the Commission’s Office of Compliance Inspections and Examinations issued a Risk Alert specifically addressing share class disclosure and cautioning investment advisers to examine their policies and procedures. FINRA has similarly addressed share class selection issues with brokers, imposing censures and fines on brokers that failed to provide adequate disclosures.

Division of Enforcement’s Share Class Selection Disclosure Initiative

In February 2018, the SEC’s Division of Enforcement announced the creation of the Share Class Selection Disclosure Initiative to address ongoing concerns that, despite the fiduciary duty imposed by the Advisers Act, an OCIE risk alert, Form ADV reminders, and numerous individual Commission enforcement actions, investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices. These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes. The initiative, which was managed by the Asset Management Unit, enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents. To assist advisers evaluating their eligibility for the initiative, the Division of Enforcement issued answers to frequently asked questions, which provided detailed information about the eligibility of advisers to participate, calculation of disgorgement, and other aspects of the initiative.

The SEC staff is continuing to evaluate self-reports that were received from investment advisers prior to the initiative cut-off date.

Comments of Chairman Jay Clayton and Enforcement Co-Directors Stephanie Avakian and Steven Peikin

“The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

“The initiative leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.”

“Investment advisers play a vital and trusted role in our markets. They offer a wide array of products and services to our retail investors, ranging from one-time advice on a model investment portfolio to comprehensive planning combined with continuous investment advice and other services. Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” said SEC Chairman Jay Clayton. “I am pleased that so many investment advisers chose to participate in this initiative and, more importantly, that their clients will be reimbursed. This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure. Also, I am once again proud of our Division of Enforcement for their vigorous and effective pursuit of matters that substantially benefit our long-term, retail investors.”

Summary of Settlement Terms

The SEC’s orders found that the settling investment advisers violated Section 206(2) and, except with respect to state-registered only advisers, Section 207 of the Investment Advisers Act of 1940 by:

Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.

Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisers, Section 207. The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients. Each adviser has also undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary. Consistent with the terms of the initiative, the Commission has agreed not to impose penalties against the investment advisers.

The Share Class Selection Disclosure Initiative is being led by the Division of Enforcement’s Asset Management Unit under the direction of Dabney O’Riordan, AMU’s Chief, and is being coordinated by SEC Assistant Director Jason Burt, attorneys Ronnie Lasky and Brian Basinger, and industry expert John Farinacci. The settlements announced today were coordinated by SEC attorneys Stephen Donahue, Michael Adler, Robert Baker, Cynthia Baran, Michael Moran, William Donahue, Paul Montoya, David Benson, Anne Blazek, Emlee Hilliard-Smith, Michelle Munoz Durk, Andrew Shoenthal, Kara Washington, John Mulhern, Barbara Gunn, Frank Goodrich, Adam Aderton, Corey Schuster, Melissa Robertson, Jessica Neiterman, Donna Norman, Janene Smith, Ivonia Slade, Charles Davis, Max Polonsky, Kate Zoladz, Payam Danialypour, Adam Schneir, Al Tierney, Panayiota Bougiamas, Karen Willenken, Brendan McGlynn, Oreste McClung, Christine R. O’Neil, Jeremy Pendrey, Jessica Chan, Heather Marlow, and Ariana Torchin, and industry expert Dan Pines. The Division appreciates the substantial assistance provided by the Office of Compliance Inspections and Examinations, which has for years identified deficiencies on these issues; and the Division of Investment Management.

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Firms Charged:

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Thursday, March 07, 2019

Securities Lawyer Blog: BB&T to Return More Than $5 Million to Retail Inve...

The Securities and Exchange Commission announced that BB&T Securities has agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired misled its advisory clients into believing they were receiving full service brokerage services in-house at a discount while significantly less expensive options were available externally.

According to the SEC’s order, Valley Forge Asset Management used misleading statements and inadequate disclosures about its brokerage services and prices to convince customers to choose the in-house broker. Despite promises of a high level of service at a low cost, the SEC’s order finds that Valley Forge did not provide any additional services to advisory clients using its in-house brokerage than it did to advisory clients who chose other brokerages with significantly lower commission rates. According to the order, Valley Forge charged commissions averaging roughly 4.5 times more than what clients would have paid using other brokerage options, and the firm obscured the price difference by claiming that it was giving clients a 70 percent discount off of its supposed retail commission rate..

BB&T to Return More Than $5 Million to Retail Investors

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Mark Astarita has 30 years of experience representing investors, brokers and issuers in their securities regulatory and litigation matters, including SEC and FINRA proceedings, arbitrations, and due diligence in connection with public and private offerings and investments. For more information call Mark at 212-509-6544 or send an email to mja@sallahlaw.com

Wednesday, March 06, 2019

Mobile TeleSystems Settles FCPA Violations

The Securities and Exchange Commission today announced that Russian telecommunications provider Mobile TeleSystems PJSC (MTS) will pay $100 million to resolve SEC charges that it violated the Foreign Corrupt Practices Act (FCPA) to win business in Uzbekistan.

According to the SEC’s order, MTS bribed an Uzbek official who was related to the former President of Uzbekistan and had influence over the Uzbek telecommunications regulatory authority. During the course of the scheme, MTS made at least $420 million in illicit payments for the purpose of obtaining and retaining business. The payments enabled MTS to enter the telecommunications market in Uzbekistan and operate there for eight years, during which it generated more than $2.4 billion in revenues. In 2012, the Uzbek government expropriated MTS’s Uzbek operations. As further described in the SEC’s order, the bribes were funneled to front companies controlled by the Uzbek official and were disguised in MTS’s books as acquisition costs, option payments, purchases of regulatory assets, and charitable donations.

“The company engaged in egregious misconduct for nearly a decade, secretly funneling hundreds of millions of dollars to a corrupt official. Building business on a foundation of bribery leaves the business and American investor interests at the mercy of corrupt officials,” said Charles E. Cain, Chief of the SEC Enforcement Division’s FCPA Unit.

MTS consented to the SEC’s order finding that it violated the anti-bribery, books and records and internal accounting control provisions of the Securities Exchange Act of 1934, and requiring it to pay a $100 million penalty. In a related matter, MTS has entered into a deferred prosecution agreement with the U.S. Department of Justice and its subsidiary has pleaded guilty in federal court, and has agreed to pay a criminal fine and forfeiture in the amount of $850 million. The Department is crediting the $100 million penalty that MTS is paying to the SEC. The company must also retain an independent compliance monitor for at least three years.

This is the third case brought by the SEC and the Department of Justice involving public companies operating in the Uzbek telecommunications market. Taken as a whole, these actions have led to the recovery by U.S. and foreign authorities of $2.6 billion.

The Commission greatly appreciates the cooperation and assistance of the Department of Justice, Criminal Division, Fraud and Asset Forfeiture Money Laundering Sections, the Internal Revenue Service, the Department of Homeland Security, the Prosecution Authority of the Netherlands, the National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway (ØKOKRIM), the Swedish Prosecution Authority, the Office of the Attorney General in Switzerland, and the Corruption Prevention and Combating Bureau in Latvia. Valuable assistance was also provided by regulatory and law enforcement colleagues in the United Kingdom, France, and Ireland, including the British Virgin Islands Financial Services Commission, the Cayman Islands Monetary Authority, the Bermuda Monetary Authority, the Central Bank of Ireland, the Paris Court of Appeals, the Serious Fraud Office, and the Financial Control Authority.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Tuesday, March 05, 2019

BB&T to Return More Than $5 Million to Retail Investors and Pay Penalty Relating to Directed Brokerage Arrangements

The Securities and Exchange Commission today announced that BB&T Securities has agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired misled its advisory clients into believing they were receiving full service brokerage services in-house at a discount while significantly less expensive options were available externally.

According to the SEC’s order, Valley Forge Asset Management used misleading statements and inadequate disclosures about its brokerage services and prices to convince customers to choose the in-house broker. Despite promises of a high level of service at a low cost, the SEC’s order finds that Valley Forge did not provide any additional services to advisory clients using its in-house brokerage than it did to advisory clients who chose other brokerages with significantly lower commission rates. According to the order, Valley Forge charged commissions averaging roughly 4.5 times more than what clients would have paid using other brokerage options, and the firm obscured the price difference by claiming that it was giving clients a 70 percent discount off of its supposed retail commission rate.

“Valley Forge put its own interests ahead of its advisory clients, causing them to spend more money unnecessarily by portraying inaccurate costs and benefits of using its in-house brokerage,” said Kelly L. Gibson, Associate Director of Enforcement in the SEC’s Philadelphia Regional Office. “Dual registrants and advisers with affiliated broker-dealers must accurately disclose all conflicts of interest arising from their brokerage arrangements. The SEC’s examination and enforcement programs will continue to identify these types of violations and return money to harmed retail investors as quickly as possible.”

The SEC’s order finds that BB&T Securities as the successor in interest to Valley Forge violated Sections 206(2) and 207 of the Investment Advisers Act of 1940. Without admitting or denying the findings, BB&T Securities consented to a cease-and-desist order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected current and former clients through a Fair Fund, as well as a $500,000 penalty. BB&T Securities has ended Valley Forge’s existing directed brokerage program by amending its cost structure and its disclosures.

The SEC’s investigation was conducted by Norman P. Ostrove and Scott A. Thompson of the Philadelphia Regional Office with support from Eric Elefante, Scott Fisher, Michelle Eichner, Andy Green, Andy Groum, Joseph Francks, and Brian Carroll from the Office of Compliance Inspections and Examinations. The case was supervised by Ms. Gibson.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Friday, March 01, 2019

SEC Celebrates African American History Month with Presentation by Award-Winning Filmmaker

The Securities and Exchange Commission celebrated African American History Month with events in its Regional Offices and a presentation by scholar and award-winning filmmaker Dr. Henry Louis Gates, Jr. to discuss his latest documentary series, “Reconstruction: America After the Civil War,” at the agency’s headquarters in Washington, D.C. This year’s African American History Month theme, “Black Migrations,” focuses on the movement of African Americans throughout the United States from the early 20th century to today.

Hosted by the SEC’s African American Council and the Office of Minority and Women Inclusion, Dr. Gates’ presentation culminated a month of events throughout the agency. Dr. Gates has written a number of books and created documentary films and educational programming, including “The African Americans: Many Rivers to Cross” and the television program, “Finding Your Roots with Henry Louis Gates, Jr.”

In introducing Dr. Gates, Chairman Jay Clayton remarked, “I believe in our quest for a pluralistic and inclusive society where opportunity and support are broadly and fairly distributed and our past failures—particularly in the area of race—are faced head on and provide us with the tools to do better. It is people like Dr. Gates who give us that context and enable us to communicate better, who help us on this journey.”

During a discussion about the importance of expanding economic opportunity for everyone, Dr. Gates noted the larger implications of these efforts, “If people think that they have no hope, then they do hopeless things.” He added, “We have to reshape the economy such that people believe in the future again.”

Dr. Henry Louis Gates answered questions during a fireside chat with Chairman Jay Clayton and Glenn Hutchins, Chair of the Hutchins Center for African & African American Research at Harvard University.

Dr. Henry Louis Gates (center) answered questions during a fireside chat with Chairman Jay Clayton (left) and Glenn Hutchins (right), Chair of the Hutchins Center for African & African American Research at Harvard University.

Staff at the SEC’s headquarters in Washington, D.C. watch a presentation by Dr. Henry Louis Gates in honor of African American History Month.

The SEC also celebrated the important contributions of African Americans in law, culture, and history with events at its Regional Offices.

The Atlanta Regional Office hosted Christy Garrison, teacher at Atlanta Metropolitan State College, Samuel T. Livingston, associate professor and director of the African American Studies Program at Morehouse College and Deryl Bailey, professor and admissions coordinator, Department of Counseling and Human Development Services in the University of Georgia’s College of Education for a program about the movements of Americans of African descent to new locations throughout the United States and the new economic and social realities they experienced.

The staff of the Chicago Regional Office heard the fascinating history of gospel music from its beginnings to the present, along with recordings and sung examples, as explained by E. Patrick Johnson, PhD, Chair of the Department of African American Studies and Carlos Montezuma Professor of African American Studies and Performance Studies at Northwestern University. The presentation included technical descriptions and demonstrations of musical characteristics of gospel music from its origins in nineteenth century hymns of the south through present day. It explored melodic lines and harmonic structures that are indicative of past and modern day gospel music as well as its influences on modern day blues and jazz. Dr. Johnson explained the use of syncopated instrumentation to the “worrying” of notes, made famous by gospel greats such as Aretha Franklin, Mahalia Jackson, Shirley Caesar, and the father of gospel music, Mr. Thomas Dorsey.

The New York Regional Office hosted Rob Fields, president and executive director of the Weeksville Heritage Center. He discussed the history of Weeksville, the second-largest slavery-free African American community in pre-Civil War America.

The Philadelphia Regional Office hosted Mark C. Alexander, Esq., dean and professor of law at Villanova University’s Charles Widger School of Law. Mr. Alexander shared experiences from his legal career and highlighted a few current legal issues in the election law arena.

“Thank you to all who contributed to the SEC’s celebration of African American History Month, particularly those at the African American Council and the Office of Minority and Women Inclusion,” said SEC Chairman Jay Clayton. “On a personal note, it was a great honor to host Dr. Henry Louis Gates Jr. and, in particular, to hear his insight about how our world has been shaped by matters of race and by economic circumstances, and that widely-distributed economic opportunity is important to the betterment of our society. This reminded all of us at the SEC of the significance of our responsibility to America’s investors.”

Dr. Henry Louis Gates (center) with Naseem Nixon and Olawale Oriola, Co-Chairs of the SEC’s African American Council.

Pam Gibbs, Director of the Office of Minority and Women Inclusion, thanks Dr. Henry Louis Gates for his presentation with a certificate of appreciation from the SEC.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Thursday, February 28, 2019

SEC Names Gabriel Benincasa As Its First Chief Risk Officer

The Securities and Exchange Commission today announced that Gabriel Benincasa has been named the Commission’s first Chief Risk Officer. This position was created by SEC Chairman Jay Clayton to strengthen the agency’s risk management and cybersecurity efforts.

As Chief Risk Officer, Mr. Benincasa will coordinate the SEC’s continued efforts to identify, monitor, and mitigate key risks facing the Commission. Working within the SEC’s Office of the Chief Operating Officer, he will also serve as a key adviser on other matters related to enterprise risks and controls. Julie Erhardt, who had been serving as Acting Chief Risk Officer while the SEC completed its recruitment efforts, will return to her role as Deputy Chief Accountant for Technology and Innovation in the Commission’s Office of the Chief Accountant.

“Establishing the Chief Risk Officer position at the SEC is an important step forward in our continuing efforts to strengthen the agency’s risk management program,” said Chairman Jay Clayton. “Gabe is an experienced senior leader with deep risk, legal, compliance, and financial markets expertise. I am certain we will benefit from his advice and insights. I also want to thank Julie for giving us a running start on this initiative.”

“I look forward to working with Gabe to maintain a robust risk management program at the agency,” said Ken Johnson, the SEC’s Chief Operating Officer. “Gabe’s strong background in risk management positions him well to help the SEC continue to evaluate a wide range of current and emerging challenges, whether related to our markets, cybersecurity, or our own operations.”

Mr. Benincasa added, “It is an honor to serve America’s investors and markets as the SEC’s first Chief Risk Officer. I look forward to joining the team and building upon existing programs to help the agency tackle current and future challenges.”

Mr. Benincasa brings to the SEC significant experience in senior leadership roles in risk and compliance in the financial sector. He began his legal career as an attorney at Davis Polk & Wardwell before working for Morgan Stanley and other financial firms. He has served in roles including as Director of Enterprise Risk Management and Vice Chair of the Risk Control Committee for a financial services holding company; Deputy Global Head of Operational Risk Management for an investment bank; General Counsel and Chief Compliance Officer for an institutional asset management company; and Global Head of Compliance for a financial technology company.

Mr. Benincasa is an attorney and a Certified Public Accountant. He earned his J.D. from Fordham Law School and a Bachelor’s in Business Administration from Baruch College.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.