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December 2014 Archives

Enforcement Attorney to Lead SEC’s Los Angeles Exam Program

Resources_21371_POLLOCK_K_20141011115535The U.S. Securities and Exchange Commission “SEC” recently announced that Karol L.K. Pollock is now the new leader of the examination program in the Los Angeles Regional Office.Ms. Pollock has worked in the Los Angeles office for 10 years, where she most recently served as the Deputy Associate Director of the exam program, and prior to that as a staff attorney and a branch chief. According to the SEC press release, Pollock has “played a significant role in numerous SEC enforcement actions, including a 2008 case against five former San Diego city officials involved in inadequate municipal securities disclosures.  She also helped litigate a case against the former CEO and former CFO of Gemstar-TV Guide International for their roles in a widespread and complex scheme to inflate licensing and advertising revenues.”As the Associate Director, Pollock will oversee the exam program covering regulated firms in Southern California, Nevada, Arizona, Hawaii, and Guam.In the SEC press release, Andrew Bowden, Director of the SEC’s National Exam Program stated “Karol has demonstrated an unwavering commitment to protecting investors and our capital markets in a way that is fair, creative, and effective,” and “We are thrilled to recognize her accomplishments and promote her leadership in the National Exam Program.”During 2014 there was a major increase in the SEC’s enforcement actions, so Ms. Pollock’s 25 years of experience in securities enforcement and regulation appears to align with the SEC’s continued commitment to protect investors and capital markets. With this in mind, it is important that firms perform compliance reviews at least annually to test the adequacy and efficiency of their policies, procedures and internal controls in order to help identify and address compliance and business risks.To get an overview of the SEC’s 2014 enforcement cases, be sure to read JLG’s November Legal Tip, 2014 SEC Enforcement Cases- A Year in Review.For more information on this and other related subjects, please contact us at [email protected] or (619) 298-2880.

Accepting a Finder's Fee without Being Registered as a Broker-Dealer

broker_dealer_cloud_400-351Private funds commonly use third parties, often known as finders, to raise capital from potential investors. When entering into arrangements with finders, private fund managers should carefully consider whether the finder is registered as a broker-dealer. Except in very limited circumstances, paying a commission to a finder that is not registered as a broker-dealer violates federal and state securities laws. SEC regulations do provide a safe harbor from the broker-dealer registration requirements for an agent of the issuer in certain limited circumstances. However, outside the safe harbor rule, the determination of whether a finder is subject to registration requirements is highly fact-specific. Some activities generally lead to classification as a broker-dealer, and as such should be avoided by finders. Negotiating terms or providing recommendations of the financing transaction is generally considered to be a broker-dealer activity, along with handling funds involved in the transaction. Providing issuing companies with assistance in drafting or distributing sales and financial materials will generally prompt registration. Soliciting investors and previous involvement in the sale of securities is also a factor weighing in favor of the registration requirement.Moreover, payment of fees to a finder which are contingent on the success of the financing transaction is likely to trigger registration. Percentage commissions and other compensation arrangements that vary depending on the amount invested create a substantial likelihood that a finder would be viewed as a broker-dealer, who is required to register with the SEC. The SEC has consistently treated transaction-based payment as a key factor in determining whether a finder is acting as a broker-dealer. This is because compensation directly tied to the success of the investments in securities heightens the incentive for the finder to engage in sales efforts. Therefore, the finder is acting in a salesman capacity, which is generally reserved for broker-dealers. The finder should receive a fixed fee regardless of the outcome of his or her efforts in order to avoid violations. If the finder is found to be acting as an unregistered broker-dealer, he or she may be barred from enforcing and collecting finder’s fees. The SEC also can issue cease and desist orders, impose civil penalties, and seek criminal prosecution, including criminal fine sand imprisonment for egregious violations. Therefore it is imperative to conduct due diligence on the finder prior to engagement. For more information on this and other related subjects, please contact us at [email protected] or (619) 298-2880.Photo Credit: http://coloradobusinesses.com/wp-content/uploads/2013/08/broker_dealer_cloud_400-351.jpg

SEC's Fiduciary Rule Among Priorities for 2015

trustIn its newly released financial report for fiscal 2014, the SEC has stated that they will be evaluating recommendations from a staff report to consider a uniform fiduciary standard for investment advisors and broker-dealers as well as finding ways to harmonize rules for advisors and brokers in fiscal 2015. The rule would establish a uniform fiduciary duty for retail investment advice. Investment advisers already meet the proposed fiduciary standard. However, brokers are held to a suitability standard, which allows them to sell products to clients if investment needs are met. The SEC will likely make a determination this year on this rule or if they will be taking another approach. "In FY 2015, the SEC will strive to advance the final rules required to build a more stable and transparent financial system by ... evaluating recommendations from a staff report to consider a uniform fiduciary standard of conduct for investment advisers and broker-dealers when providing personalized investment advice to retail investors about securities." The report says the agency also will consider "ways to better harmonize the regulatory requirements of investment advisers and broker-dealers when they are providing the same or substantially similar services to retail investors." SEC Chairwoman Mary Jo White said on November 10 at SIFMA's annual meeting that deciding whether to use the authority given to the SEC by the Dodd-Frank Act to put brokers under a fiduciary mandate is "an issue that I've been focused on since I arrived, and certainly in this last fiscal year." White further noted that she would provide more clarity as to her position on a uniform fiduciary rule in the short term, even though the SEC has not yet made a formal decision. The inquiry on the fiduciary rule will be more complex than simply creating a uniform rule, as there are "a lot of different things that can mean," White said. "Care needs to be taken to ensure we're not harming investors by driving away service providers in the brokerage space." There is much to debate as to whether a fiduciary standard should apply to broker-dealers. But looking ahead, it appears changes to a broker's standard of care will be highlighted. For more information on this and other related subjects, please contact us at [email protected] or (619) 298-2880.   Photo Credit: http://texaslawtoday.com/2012/04/24/understanding-minority-shareholder-oppression/

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