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.