The SEC announced that at its open meeting on January 14, 2015 it voted to adopt (1) final rules under the Securities Exchange Act of 1934 governing the registration process for security-based swap data repository (SDRs), the duties of SDRs, and the core principles applicable to SDRs, and (2) Regulation SBSR, which provides for regulatory reporting of security-based swap information and the public dissemination of security-based swap transaction, volume and pricing information by registered SDRs. The SEC also voted to propose certain new rules, rule amendments and guidance to Regulation SBSR to address, among other things, the reporting duties for cleared and platform-executed security-based swap transactions. The new rules will become effective 60 days after they are published in the Federal Register, which will also be the compliance date for certain provisions of Regulation SBSR. Compliance dates for the remaining provisions of Regulation SBSR will appear in the release detailing the proposed amendments. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register.
SEC Division of Corporation Finance Announces That for Current Proxy Season It Will Express No View Regarding Requests Under Rule 14a-8 to Exclude a Shareholder Proposal on the Basis That It Directly Conflicts with a Management Proposal
The SEC’s Division of Corporation Finance announced that during the current proxy season, it will express no views on the application of Rule 14a-8(i)(9) under the Securities Exchange Act of 1934, which allows a company to exclude a shareholder proposal that “directly conflicts” with a management proposal. The Division’s announcement followed a statement from SEC Chair White directing the Division to review Rule 14a-8(i)(9), and report to the Commission on its review “[d]ue to questions that have arisen about the proper scope and application of” the exclusion.
NFA Provides Reminder of Member Obligations under NFA Bylaw 1101 and Compliance Rule 2 36(d) When Transacting Customer Business with CPOs and CTAs Relying on Exemptions or Exclusions from Registration
The National Futures Association (NFA) issued Notice to Members I-15-02 providing guidance to its members regarding their obligations under NFA Bylaw 1101 or Compliance Rule 2-36(d) to determine the CFTC registration and NFA membership status of persons with whom they engage in certain transactions to the extent those persons have previously filed a notice of exemption or exclusion from CPO or CTA registration under certain CFTC regulations. The Notice reiterates past guidance on how an NFA member may comply with the aforementioned obligations with respect to CPOs or CTAs who have previously filed a notice of exemption/exclusion, but have not yet (i) made the annual reaffirmation of the applicable exemption/exclusion, which is subject to a March 2, 2015 deadline, or (ii) otherwise complied with the obligation to register or avail themselves of an appropriate exemption or exclusion.
Litigation & Enforcement
The SEC announced today that Standard & Poor’s Ratings Services has agreed to pay more than $58 million to settle charges of federal securities law violations, plus an additional $19 million to settle parallel cases announced by the New York Attorney General’s office and the Massachusetts Attorney General’s office. S&P also agreed to refrain from rating conduit fusion CMBS for one year in connection with one of the three orders the SEC issued instituting settled administrative proceedings against S&P. In that order, the SEC found that S&P had affirmatively misrepresented in its 2011 public disclosures that it was using a uniform approach to rating, while it had actually loosened its rating criteria to obtain business and then obscured those changes from investors. In the second order, the SEC found that, after being frozen out of the market for rating conduit fusion CMBS in late 2011, S&P overhauled its ratings criteria in mid-2012, then published a false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress, despite the fact that its research relied on flawed and inappropriate assumptions and was based on data that was decades removed from the severe losses of the Great Depression. In the third order, the SEC found that S&P allowed breakdowns in the way it conducted ratings surveillance of previously-rated RMBS from October 2012 to June 2014; changed an important assumption in a way that made S&P’s ratings less conservative, and that was inconsistent with the specific assumptions set forth in S&P’s published criteria describing its ratings methodology; and did not follow its internal policies for making changes to its surveillance criteria and instead applied ad hoc workarounds that were not fully disclosed to investors. The SEC also announced a separate order instituting a litigated administrative proceeding against the former head of S&P’s CMBS Group alleging that she fraudulently misrepresented the manner in which the firm calculated a critical aspect of certain CMBS ratings in 2011. The enforcement action against S&P was the SEC’s first against a major ratings firm.
The SEC settled administrative proceedings against Shelton Financial Group, Inc., a registered investment adviser, and Jeffrey Shelton, its principal who also served as chief compliance officer (CCO) during a portion of the relevant timeframe, based on SEC findings that the adviser had not properly disclosed an arrangement with a registered broker-dealer under which the broker dealer served as custodian for the adviser’s clients and paid the adviser an asset-based fee for providing certain custodial support services with respect to the adviser’s clients that were invested in “No Transaction Fee” mutual funds other than proprietary funds advised by affiliates of the broker. The SEC found that the adviser had not fulfilled the requirement under Form ADV that the adviser’s client brochure disclose compensation received from third parties for providing investment advisory services to clients, as well as the resulting conflicts and how the adviser addresses them. In addition to engaging a compliance consultant, providing notice of the settlement to its clients, and requiring its CCO to complete 30 hours of compliance training, the adviser also agreed that for a period of five years the person serving as CCO will not hold any other officer or employee position. The adviser and principal also agreed on a joint and several basis to pay (a) total disgorgement of $99,114.19 and prejudgment interest of $20,952.91, and (b) a civil penalty of $70,000. Shelton Financial Group, Inc. and Jeffrey Shelton, SEC Release No. IA-3993 (Jan. 13, 2015).
The SEC settled administrative proceedings against Consulting Services Group, LLC (CSG), a registered investment adviser whose services included recommending third-party investment managers to actively manage public pension accounts, over SEC findings that CSG failed to disclose and then subsequently inadequately disclosed and mischaracterized in its Form ADV client brochures a 2009 $50,000 personal loan its then-CEO, Edgar Lee Giovannetti, received from a third-party investment adviser that CSG had recommended to certain of its public pension and other clients. CSG agreed to pay a civil money penalty of $150,000. The SEC has commenced administrative proceedings against Mr. Giovannetti. In the Matter of Consulting Group Services, LLC, SEC Release No. IA-4000 (Jan. 16, 2015). In the Matter of Edgar Lee Giovannetti, SEC Release No. 34-74089 (Jan. 16, 2015) .
The CFTC announced that it had settled administrative proceedings against Summit Energy Services, Inc., based on Commission findings that Summit Energy had violated the commodity trading advisor (CTA) registration requirements of the Commodity Exchange Act. Summit Energy’s business consisted of providing advice concerning physical natural gas and electricity transactions to commercial entities that purchase physical natural gas and electricity as part of their energy needs. The CFTC found that from October 2011 to September 25, 2014, Summit Energy was subject to registration as a CTA by virtue of engaging, for compensation or profit, in the business of advising more than 15 of its clients as to the value of or the advisability of trading in OTC natural gas swaps and futures, while holding itself out publicly as a CTA by offering to others its risk management services, including commodity trading advice concerning natural gas futures and OTC swaps, through its website and sales brochures. Summit Energy agreed to a $140,000 civil money penalty. Since September 26, 2014, Summit Energy has been registered as a CTA. In the Matter of Summit Energy Services, Inc., CFTC Docket No. 15-12 (Jan. 16, 2015).
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