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Regulation and Compliance > Federal Regulation > FINRA

SEC, FINRA Enforcement: Firm Fined Over Interfund Loans

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Among recent enforcement actions, the Securities and Exchange Commission charged eight corporate insiders for failing to update stock ownership disclosures as they worked to take a company private, and a fund sponsor is charged over inadequate Form ADV disclosure.

Also, the Financial Industry Regulatory Authority took on supervisory failures on expense reports and failures to provide trade confirmations.

SEC Fines Fund Sponsor Over Undisclosed Interfund Loans

A private fund sponsor and its principal agreed to pay over $500,000, hire an independent monitor, and notify clients that it has settled SEC charges that the firm arranged undocumented and undisclosed loans among its affiliated funds.  The SEC order faults the firm and its principal for using certain private funds it managed as a funding source when other funds had cash needs related to securities positions or margin.

Although the loans were repaid, the SEC charges that the respondents did not adequately disclose the loans, document their terms, or obtain any client consent. The SEC also criticizes the firm for insufficient compliance policies and procedures and inadequate ADV disclosure.

Cipperman Compliance Services notes that private fund firms that registered after Dodd-Frank cannot continue to run their firms as they did before registration. “The Advisers Act strictly limits interfund transactions such as those described in this action,” Cipperman says. “A fiduciary must ensure complete transparency and put every client’s interest before its own.” 

The SEC order states that the proceedings arise out of the failure of an investment advisor and its principal to adequately disclose conflicts of interest presented by interfund loans made between certain private funds (the “Stilwell Funds” or the “Funds”) managed by the advisor and principal.

From at least 2003 to 2013, respondents directed certain Stilwell Funds to make a series of loans totaling approximately $20 million to other Stilwell Funds to help finance significant aspects of the borrowing funds’ investment strategies, e.g., to purchase securities and repay margin.

“All of the loans were repaid; however, respondents did not adequately disclose to client funds or to the investors in the funds the existence and terms of the loans, as well as the conflicts of interest arising from such loans.”

SEC Fines Eight for Disclosure Failures

The SEC has charged eight officers, directors or major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private.

According to the agency, the eight were engaged in various steps to take companies private without disclosing their actions. Some determined the form of the transaction to take the company private, got waivers from preferred shareholders, and helped with shareholder vote projections, while others told company management that they intended to privatize the company and put together a consortium of shareholders to participate in the going private transaction.

These actions constituted material changes from the disclosures they’d made in their Schedule 13D filings, but none of them updated those filings in a timely manner. In fact, some failed to timely report their ownership of securities in the company that was the subject of a going private transaction. Six respondents didn’t disclose company securities transactions until months or years after the fact, instead of the two business days required. Each has agreed, without admitting or denying the charges, to pay a financial penalty to settle the SEC’s charges.

Berjaya Lottery Management (H.K.) Ltd., a Hong Kong corporation, waited eight months to disclose it had taken steps to effectuate a going private transaction for International Lottery & Totalizator Systems Inc. Berjaya was ordered to pay a civil penalty of $75,000.

The Ciabattoni Living Trust; SMP Investments I, LLC; Anthony Ciabattoni; Jane Ciabattoni; William Houlihan; and Brian Potiker were all involved in steps to take First Physicians Capital Group, Inc. private. The Trust and the Ciabattonis waited more than five months to amend their Schedule 13D disclosure after they took steps to effectuate a going private transaction. SMP Investments I LLC, and Brian Potiker waited approximately three months to update their Schedule 13D disclosure. Houlihan waited approximately five months before amending his previous Schedule 13D. They also all waited months or years before reporting material transactions in First Physicians Capital Group shares.

The Ciabattoni Living Trust and the Ciabattonis were ordered to pay a civil penalty of $75,000. SMP and Potiker were ordered to pay a $63,750. Houlihan was ordered to pay $15,000.

Shuipan Lin, the chairman and CEO of China-based Exceed Co. Ltd., failed to amend his Schedule 13D report in the required time after working on a going private transaction for Exceed. He also failed to file his first Schedule 13D report until months after it was required, and then failed to update it after he acquired additional shares. He was ordered to pay $30,000.

FINRA Censures, Fines Firm Over Entertainment Expenses

ICAP Corporates LLC was censured by FINRA and fined $800,000 after the agency found it lacked an adequate supervisory system or written supervisory procedures to track and monitor expenses to ensure they conformed with regulations and to prevent potential or actual conflicts of interest.

According to the agency, the firm usually neither required nor received itemized receipts for entertainment reimbursement claims. It also did not track expenses in the aggregate or require that all names and affiliations of people entertained at company expense be noted.

As a result, it was unable to determine whether expense forms might have included improper gifts exceeding the $100-per-year limitation, or whether the presence of certain individuals might have been inappropriate or even presented a conflict of interest.

Supervisors routinely approved forms that lacked not just the names and affiliations of those present, but even accurate numbers of attendees at a given event. In addition, adequate and/or accurate descriptive information was not provided on these forms, so supervisors had no way of knowing whether the expenses were appropriate or complied with regulations.

The firm neither admitted nor denied the findings but consented to the sanctions.

FINRA Censures, Fines Firm on Trade Confirmation Failures

Thrivent Investment Management Inc. was censured by FINRA and fined $375,000 after the agency found that that from Jan. 1, 2004, through March 21, 2013, the firm failed to deliver thousands of trade confirmations of certain categories of mutual fund transactions to customers due to coding errors in the computerized system that it had established through an outside vendor to generate and send customer confirmations.

The firm conducted an internal investigation and found the problem, then reported it, and its scope, to FINRA. An independent consultant retained by the firm found that the coding errors in the computerized system affected certain categories of the firm’s mutual fund transactions during the approximate nine-year time period, and that the firm failed to deliver customer confirmations for 454,426 transactions, with an aggregate value of $3,324,753,206, in 207,468 mutual fund positions held by 131,194 unique customers.

The firm neither admitted nor denied FINRA’s findings but consented to the sanctions.

— Check out FINRA Enforcement: I-Bank Hid Client’s Criminal Record From Investors on ThinkAdvisor.


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