SEC Enforces Campaign Contributions Rule

Yesterday, the SEC announced a number of political contribution-related settlements with investment advisers, both registered and exempt.  As background, Rule 206(4)-5 under the Investment Advisers Act of 1940 limits the size of political contributions that certain personnel of an investment adviser may make to state and local officials, among other things.  Specifically, limits apply to contributions to officials or candidates (such as a Governor or State Treasurer) who can influence the investment decisions of public institutional investors (such as state employee pension plans) that are clients of the adviser or invest in the adviser’s funds.  If the relevant contribution threshold is breached, an adviser is prohibited from accepting compensation from the specific public investor for a two-year period.  A quick summary of the settlements appears in the table below. Continue Reading

“Odd Lots” and Valuation Déjà Vu–Part 2

In the first part of this post, I explained how trading odd lot MBS can create the same valuation issue as trading PIPEs. I also touched on some important differences between MBS and PIPEs. In this part, I’ll examine why these differences may make the valuation of odd lot MBS more problematic than the valuation of PIPEs. The Order is significant for investment advisers as well as investment companies, insofar as the SEC asserted that PIMCO’s valuation procedures violated Rule 206(4)-7. Continue Reading

“Odd Lots” and Valuation Déjà Vu–Part 1

The SEC’s recent settlement (the “Order”) with Pacific Investment Management Company (“PIMCO”) reflects a new twist on an old issue: buying securities at bargain prices and then marking them up when calculating NAVs. The SEC first addressed this issue in 1969 in the context of what we now refer to as “PIPEs.” The first part of this post examines the similarities and differences between PIPEs and the mortgage-backed securities (“MBS”) addressed in the Order. The second part explains why “odd lot” MBS may be more problematic than PIPES. Continue Reading

SEC Chair’s Suggested Expansion of Executive Liability Unlikely to Occur

Apparently lost in the news of the impending departure of SEC Chair Mary Jo White is her recent suggestion to expand liability of corporate executives. In a speech on November 18, 2016, Chair White suggested a potential change in federal securities law that would hold executives accountable even if they are not involved in the misconduct and did not know about it. Given recent signals from the new administration in Washington, we believe this potential expansion of liability is unlikely to occur.

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Why Tax Exempt Money Market Funds Should Make a Comeback

In a previous post, I noted that recent changes to Rule 2a-7 hit tax exempt money market funds hard, with the loss of half of their pre-reform assets. There are reasons to think these funds will recover, however. Foremost, prior to the post-election surge in interest rates, tax exempt funds were out-yielding every other type of money market fund. According Crane Data, tax exempt funds (which are nearly all retail) out-yielded both institutional and retail prime funds, to say nothing of government funds. These are pre-tax yields; on an after-tax basis, tax exempt funds offer very competitive yields.

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SEC Staff and Chair Talk Examination Priorities (For the Time Being At Least)

Speaking at a compliance workshop sponsored by the Investment Adviser Association held in Atlanta on November 10, 2016, Bill Royer, Associate Director of the SEC examination program in the Atlanta Regional Office of the SEC laid out the priorities that he expected the SEC’s Office of Compliance Inspections and Examination (OCIE) to focus on in the coming year. Continue Reading

The State of the SEC’s Admissions Policy: Three Years Later

In June 2013, SEC Chair Mary Jo White announced a new SEC policy requiring admissions as part of settlements in certain types of cases.  The criteria for admission cases, as stated by Chair White and an SEC staff memo, included the following factors:

  • A large number of investors have been harmed or the conduct was otherwise egregious
  • The conduct posed a significant risk to the market
  • Admissions would aid investors in deciding whether to deal with a particular party in the future
  • Disclosing the facts would send an important message to the market
  • Intentional misconduct
  • Obstruction of an investigation

In practice, the SEC has rarely required defendants to make admissions in settlements.

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Could Blockchain Push Syndicated Loans over the Regulatory Edge?

Some banks are hard at work applying distributed ledger technology to trading syndicated loan transactions. Their system would make it easier than ever to invest in syndicated bank loans. At some point, the combination of widespread holdings and a major default could force a reassessment of whether syndicated loans traded over the new system are “securities” for purposes of the Securities Act of 1933 (the “1933 Act”) and Securities Exchange Act of 1934 (the “1934 Act”). To prevent this eventuality, the designers may want to limit who can trade over the new system. Continue Reading

What Hath FSOC Wrought?

(This post has been updated for October 31st data.)

The SEC released its money market fund statistics for the end of October, giving us a comprehensive view of the impact of the reforms which took effect on October 14th. We now have government, retail and floating NAV money market funds, the later two with the potential for liquidity fees and redemption gates. The Wall Street Journal has run a number of stories about the “unintended” consequences of the reforms. The impact on the funds has been entirely consistent with the comments the SEC received on the proposed reforms–so this outcome should have been expected. By the time the dust fully settles, FSOC may have momentarily succeeded in its objective of reducing the assets of prime money market funds to a level where they cannot pose a threat to the stability of the financial system, assuming they ever did. Continue Reading

SEC Enforcement Staff Touts Year of Firsts and Big Data

Last week, at the Securities Enforcement Forum in Washington, DC, senior staff of the SEC’s Division of Enforcement shed light on risks that asset managers and fund boards should be aware of.  Their comments followed a record enforcement year resulting in more than $4 billion in disgorgement and penalties.  Fueled in part by data collection technology, the SEC brought 868 enforcement actions the past fiscal year.  Approximately 20% involved investment advisers or investment companies, the highest percentage in history, including one that found a private equity adviser to be acting as an unregistered broker/dealer, and others that involved alleged insufficient disclosure around accelerated monitoring fees. Continue Reading