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September 2012 Archives


On September 21, 2012, Governor Brown signed Senate Bill 323 (Vargas) (the "Bill") into law.  Specifically, Section 20 of the Bill adds the California Revised Uniform Limited Liability Company Act ("RULLCA") to the Corporations Code to govern the formation and operation of limited liability companies ("LLCs").  The RULLCA will become operative on January 1, 2014 and replaces the existing Beverly-Killea Limited Liability Company Act.[1] Why Make This Change? In 1994, California adopted the Beverly-Killea Limited Liability Company Act, which first recognized LLCs in California.  At about the same time, nearly every other state also adopted their own respective statutes recognizing LLCs, resulting in widely varying provisions.[2]  The RULLCA is based on the Revised Uniform Limited Liability Company Act (the "Uniform Act") adopted by the National Conference of Commissioners on Uniform State Laws, with modifications to continue certain aspects of existing California law.  The intent of the Uniform Act is to replace the varying LLC statutes in each state (including California's Beverly-Killea Limited Liability Company Act) with uniform provisions to enable LLCs to more easily operate on a multi-state basis.[3]  As such, the Revised Act moves California LLC statutes toward national uniformity, while establishing a more robust set of default rules that apply to topics on which the LLC operating agreement may be silent.[4] What Are the Consequences? The bill has far-reaching consequences for existing LLCs as well as those LLCs formed after the effective date of the Bill.  While there are some unique California provisions of the Beverly-Killea Act that will be preserved, such as dissenters' rights and the prohibition on professional LLCs, there will also be several profound changes.  Some of the more notable revisions include:

BD Corner: California Appeals Court Clears Path for Greater Expungement

Last month, the California Court of Appeal in San Francisco issued an opinion in Lickiss v. Financial Industry Regulatory Authority explicitly permitting courts across the state to use an equitable balancing test in order to determine whether a broker's CRD record can be expunged. The broker in the case, Edwin Lickiss, defeated FINRA's attempts to have his expungement case thrown out of court after 18 months of litigation. Lickiss is seeking to expunge 17 arbitration matters stemming from a REIT investment he recommended to clients from 1987 to 1991 that ultimately went south, and one FINRA rule violation that was resolved in 1997. FINRA argued successfully in the trial court that the standard set forth in FINRA Rule 2080(b)(1), rather than the court's inherent equitable powers, governed Lickiss's expungement petition. That Rule states that a FINRA member or associated person (like Lickiss) that petitions a court for expungement relief, or seeks judicial confirmation of an arbitration award containing expungement relief, must name FINRA as a party unless FINRA waives that obligation as a result of an "affirmative judicial or arbitral findings that: (A) the claim, allegation or information is factually impossible or clearly erroneous; (B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (C) the claim, allegation or information is false." The relief sought by Lickiss did not fall within this narrow provision; rather, Lickiss argued the court should use its equitable power to remove the disclosures because they "occurred anciently," his "regulatory record has long since been and remained clean," and because the "material sought to be expunged was overwhelmingly caused by the failure of a single investment security which Petitioner brokered for nothing more than ordinary commissions and over which Petitioner had no control or influence." In rejecting FINRA's argument that Rule 2080(b)(1) provides the standard for the trial court's determination of whether Lickiss's record could be expunged, the appellate court described Rule 2080(b) as "a procedural rule that does not provide any substantive criteria as to when expungement would be appropriate." Permitting Lickiss's petition to proceed, the appellate court confirmed an equitable balancing test should be used--i.e., weighing the equities favoring expungement against the detriment to the public should expungement be granted. The appellate court stated that the trial court's use of the "very narrow, rigid legal rule to assess the legal sufficiency of Lickiss's petition--a choice that closed off all avenues to the court's conscience in formulating a decree and disregarded basic principals of equity--was nothing short of an end run around equity." While he may still face an uphill battle in convincing the trial court to expunge his record under the balancing standard adopted by the court of appeals, Lickiss and other brokers seeking expungement now have that chance. For further information about expungement or other securities or compliance concerns, please contact the author at [email protected] or (619)298-2880.

SEC Accuses Radio Personality Ray Lucia with Misleading Clients

Yesterday the Securities and Exchange Commission instituted administrative proceedings against nationally syndicated radio personality and author Raymond J. Lucia. Lucia is the owner of Raymond J. Lucia Companies, Inc., a former federally registered investment adviser doing business as RJL Wealth Management, and RJL Enterprises, Inc., an entertainment company through which Lucia produces the syndicated radio show, The Ray Lucia Show. The order charges Lucia with spreading misleading information about his “Buckets of Money” strategy at a series of investment seminars for potential clients.The charges primarily relate to the performance models that he claimed demonstrated his “Buckets of Money” strategy would provide inflation-adjusted income to retirees while protecting, and even increasing, their retirement savings. The seminars were aimed at attracting new advisory clients to increase the firm’s advisory fees, and in turn the firm’s bottom line. Lucia claimed the models had been subject to extensive backtesting. According to the SEC’s order, however, the “so-called backtests weren’t really backtests, and the strategy wasn’t proven as claimed.” Of note, Lucia’s “backtests” used a hypothetical three percent inflation rate, rather than the actual historical rates, making the strategy appear more favorable. The models also completely failed to account for the deduction of advisory fees and contained no disclosures about any of these material factors, which directly affected the hypothetical returns of his models. The SEC also alleges that Lucia failed to maintain records for the backtesting as required by Rule 204-2(a)(16) under the Investment Advisors Act of 1940. The order states that the only documents for the calculations were “two two-page Excel spreadsheets, which fail to duplicate the advertised investment strategy.”For further information about the Lucia proceeding and related performance advertising considerations, please contact us at [email protected] or (619)298-2880.
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