Articles Posted in SEC Action

On October 16, 2023, the Securities and Exchange Commission’s Division of Examinations released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.

“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”

“Continuing to make our examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”

Image result for image of securities exchange commission
On September 19, 2022, the SEC’s Division of Examination issued a Risk Alert concerning the new investment adviser marketing rule, Advisors Act Rule 206(4)-1 (“the Marketing Rule”).   In connection with the Marketing Rule, the Commission also amended the Books and Records Rule, Advisors Act Rule 204-2 and the Form ADV.  The Marketing Rule became effective on May 4, 2021 but firms were given an 18-month transition period.  Thus, firms must be compliant with the Marketing Rule by November 4, 2022.

According to the Staff’s announcement, examinations will focus on four areas: a) Policies and Procedures, b) the Substantiation Requirement, c) Performance Advertising Requirements, and d) Books and Records

With regard to policies and procedures, the Commission’s noted that the Marketing Rule Adopting Release, stated that firms must adopt procedures that, “include objective and testable means” of preventing violations of the Marketing Rule.  Examples of such means are:

2,773 Spac Images, Stock Photos & Vectors | Shutterstock
On September 6, 2022, the SEC issued an order instituting administrative and cease-and-desist proceedings against Perceptive Advisors LLC (“Perceptive”) a New York based investment adviser.  In anticipation of the institution of the proceedings, Perceptive and the SEC entered into a Settlement.

Perceptive provides investment advisory advice to pooled investment vehicles and according to its March 31, 2022 Form ADV it had approximately $10.36 billion in assets under management.  One of Perceptive’s investment vehicles is the Perceptive Life Sciences Master Fund, Ltd. (the “PSLM Fund”).

The gravamen of the SEC’s order revolves around Perceptive’s activities concerning special purpose acquisitive companies (“SPACs”).  A SPAC is generally a publicly-traded, shell company which raises money, through an IPO, for the purpose of acquiring other, privately held companies.  SPAC’s have “sponsors” that launch the IPO and generally manage the business of the SPAC, including the process of acquiring target companies.  The sponsor is typically compensated on a percentage (often 20% to 25%) of the SPAC’s initial public offering proceeds (in the form of discounted shares and, at times, warrants).  This compensation is sometimes referred to as the sponsor’s “promote” or “founder shares,” and it is received upon completion of a SPAC’s acquisition of a target company.

What is a securities dealer?  The answer is more complicated than people might think.  On August 2, 2022, the SEC announced that it had reached a settlement with a Long Island firm, Crown Bridge Partners, LLC (“Crown Bridge”) and the two brothers who owned the firm Soheil and Sepas Ahdoot, for failing to register as a dealer.  As part of the settlement, the Defendants agree to pay disgorgement and prejudgment interest of $8,390,601.27 and a civil penalty of $810,307, and to a five-year penny stock bar.

According to the SEC’s complaint, Crown Bridge purchased approximately 250 convertible notes from approximately 150 penny stock issuers.  In all, during the Relevant Period, Crown Bridge sold into the public markets approximately 35 billion shares of unrestricted, post-conversion shares of penny stock issuers, for millions of dollars in profits.  Soheil and Sepas initially found companies interested in issuing convertible notes by reviewing, a website that includes a news feed of SEC filings and press releases from penny stock issuers.  They used the website to identify issuers that appeared to need or had expressed a need for financing. They then cold called the issuers directly.  Over time, as Crown Bridge grew its business and became known in the industry, issuers, brokers, and finders reached out directly to Soheil and Sepas to seek funding.

Absent their apparent failure to register Crown Bridge as a Dealer under Exchange Act Section 15(a) [15 U.S.C.§ 78o(a)], Soheil and Sepas executed what appears to have been a very shrewd and successful business plan.  Crown Bridge purchased convertible notes directly from penny stock issuers.  They negotiated the terms of the notes that led to millions of dollars in profits when the notes were converted into shares of stock.  The notes typically contained terms that were highly favorable to Crown Bridge and reduced Crown Bridge’s exposure to market risk such as a conversion discount ranging from 25% to 50% to the prevailing “market price,” a term the notes typically defined as the lowest trading price, or lowest closing bid price, of the issuer’s common stock during the 10 to 25 days on or before the date of the conversion notice.  Also critical was Crown Bridge’s right to convert the notes in increments, enabling Crown Bridge to convert what it could sell immediately, while shielding the remaining balance from exposure to market price movements.

In April 2018, the SEC proposed a new regulation that would govern the standard of conduct that applies when broker-dealers make recommendations to retail customers.  Specifically, the proposal sought to established an express best interest obligation that would require all broker-dealers and associated persons to act in the best interests of their retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer or associated person ahead of the interests of the retail customer.

At the time, the Commission received over 6,000 comments on the proposed rule.  Ultimately, in July 2019, the SEC adopted Rule 15l-1(a) of the Securities Exchange Act of 1934 (“Reg BI”).  On June 15, 2022, the SEC filed the first complaint for a violation of Reg BI since it was enacted.  The SEC filed a complaint against Western International Securities, Inc. (“Western”) and five of its registered representatives for violating Reg BI in connection with the sale of high risk, illiquid and unrated debt securities known as L Bonds issued by GWG Holdings, Inc. (“GWG”).

Compliance with Reg BI consists of four components: the Disclosure Obligation, the Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation.  Registered representatives must comply with the Disclosure Obligation and the Care Obligation, which include:

Since 1972 the Securities & Exchange Commission (the “SEC”) has maintained a rule that imposes a gag order on settling defendants in civil enforcement actions.  In 2003, Barry D. Romeril, CFO for Xerox, entered into a consent agreement with the SEC that included the following language:

“Defendant understands and agrees to comply with the [SEC]’s policy ‘not to permit a defendant . . . to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint . . . .’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. If Defendant breaches this agreement, the [SEC] may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation in which the [SEC] is not a party.”

Language to this effect is in every consent agreement with the SEC.  The CFTC and FINRA also place substantively identical injunctions regarding what defendants can say about their cases once they settle.

On January 14, 2021, the SEC issued an Order Determining Whistleblower Award Claims (the “Order”).   The Order grants “Claimant 1” a $600,000 award while completely denying any award to “Claimant 2.” The heavily-redacted Order makes it impossible to determine what Covered Action and monetary sanction triggered the claims for a Whistleblower Award.  You can quickly tell when reading the Order, however, that things are not going to go well for Claimant 2 when the commission notes early on in the Order that:

“Enforcement staff responsible for the Covered Action confirmed that they did not receive any information from Claimant 2, nor did they have any communications with Claimant 2, before or during the investigation.”

Claimant 2’s theory, we learn, is that his tip did not have to be communicated directly to the Enforcement Staff responsible for the Covered Action.  It turns out that Claimant 2 provided information about a company to Enforcement Staff in an entirely different regional office.  An investigation was commenced and Enforcement Staff was unable to substantiate Claimant 2’s claims.  The investigation was closed without commencement of an enforcement action.  The Commission pointedly defines the redacted company as the (“Unrelated Company”) and the investigation as the (“Unrelated Investigation”).

It has long been clear that the SEC opposes 12b-1 fees, the fees that funds use to compensate investment advisors for their sales and marketing efforts.  For the past two decades, the SEC has embarked upon various attempts to repeal Rule 12b-1 or render it meaningless.  The SEC, however, has never been able to build the political will to amend or repeal Rule 12b-1 and it remains the law.

The SEC’s latest attack on 12b-1 is a classic example of rule-making by enforcement.  On February 12, 2018, the SEC issued a press release announcing its new Share Class Selection Disclosure Initiative (SCSD Initiative).  The SCSD Initiative relies on Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”) which imposes a fiduciary duty on investment advisers to act in their clients’ best interests, including an affirmative duty to disclose all conflicts of interest.  When an adviser receives 12b-1 fees from a mutual fund it presents a possible conflict of interest if a less expensive share class is available.  Prior to the SCSD Initiative, the industry standard was to disclose this conflict of interest in a straight forward manner.

The SCSD Initiative and subsequent guidance put out through FAQs has effectively amended 12b-1 by requiring disclosure of:

If you are the target of an investigation by the Securities and Exchange Commission, do not assume it will go away on its own. Instead, it may linger for months or years, all the while you face the possibility of fines, loss of license and your job or business, and the possibility of criminal charges if the SEC refers your matter to the Department of Justice. When this happens, the smart thing to do is to become aware of the investigation as soon as possible and hire legal representation. If you need to know more about SEC investigations, here are some important details to keep in mind, as well as how New York securities attorneys at Herskovits PLLC can help you navigate this complex process.

Tips and Referrals

For an SEC investigation to begin, the agency usually relies on tips and referrals from various sources, such as:

If you exchanged an official email with any SEC employee recently, you have seen the banner for Howeycoins Travel Network. And if you like to get in on a profitable deal, you probably thought, “well, if the SEC is endorsing them, these guys must be legit.” Perhaps you clicked on the banner to see what it was all about. If so, you must have been surprised at what you found.

Pre-initial coin offering deals usually promise spectacular returns, and HoweyCoins are not the exception. The attractive website for the ICO shows alluring scenes from luxury travel destinations. As you scroll down, you will quickly find that HoweyCoins will yield returns of at least 1 percent daily.

If you are not sold yet, the site quickly boasts, “The average registered coin return over a two month period in 2017 was an amazing 72%.”

Contact Information