SEC Provides Guidance to Open Up Use of Corporate Web Sites for Disclosures to Investors
The Securities and Exchange Commission today voted unanimously to provide new guidance to public companies about how to comply with the securities laws while developing their Web sites to serve as an effective means for disseminating important information to investors.
Issued in the form of an interpretive release, the SEC's guidance provides helpful information for companies considering providing investors with interactive content on their Web sites, as well as summary information and links to third-party information. The SEC's guidance addresses a recommendation made by the SEC's Advisory Committee on Improvements to Financial Reporting in its February 2008 Progress Report for the Commission to provide clarity on issues and questions that arise in connection with SEC rules against selective disclosure of material nonpublic information.
The Internet has changed significantly since 2000, when the SEC last issued extensive guidance on the use of Web sites and electronic media.
"The last time the SEC issued guidance in this area, the idea of 'social networks' hadn't yet been developed, and creating a social network where shareholders could meet and exchange views was barely imaginable," said SEC Chairman Christopher Cox. "Ongoing developments in technology have increased both the markets' and investors' demand for more timely company disclosure on the Web, and in turn, raised new securities law issues for public companies to consider. The guidance issued today clarifies the rules of the road so investors can gain - quickly and in a cost-effective manner - the benefits of Internet disclosure of the latest information on the companies they own or are considering buying."
Chairman Cox added, "I'd especially like to thank the Advisory Committee on Improvements to Financial Reporting, led by Chairman Bob Pozen, for encouraging the Commission to focus its attention on this important issue."
John W. White, Director of the Division of Corporation Finance, said, "The Commission has long recognized the vital role of the Internet and electronic communications in company disclosures to investors and the markets. I believe this guidance, which will assist companies in their compliance with the federal securities laws, will encourage further disclosures on company Web sites. Special thanks to the Advisory Committee on Improvements to Financial Reporting for their work on this matter."
The SEC's guidance is divided into four parts:
The SEC's interpretive release will be effective upon its publication in the Federal Register. (Press Rel. 2008-158)
SEC, MSRB Propose "Giant Step Forward" for Municipal Bond Investors
The Securities and Exchange Commission today voted unanimously to propose measures that would for the first time enable investors to easily access complete financial information about municipal bonds for free on the Internet.
Currently, retail investors in municipal securities usually cannot get ongoing disclosure information about their securities without paying significant fees and waiting for the documents to come in paper form by mail or fax. Issuers of municipal bonds submit their disclosures, such as annual financial data and information about material events including downgrades or notices of default, to a variety of for-profit information repositories that then sell it to the public. This severely limits its availability to retail investors.
The rule amendments proposed by the SEC would designate the Municipal Securities Rulemaking Board (MSRB) as the central repository for ongoing disclosures by municipal issuers. Under a separate MSRB-proposed rule change, its Electronic Municipal Market Access (EMMA) system would make these disclosures available to investors for free on the Internet in the same way the SEC's EDGAR system does for corporate disclosures.
"These proposals would bring dramatic improvements in disclosure to investors in municipal securities," said SEC Chairman Christopher Cox. "Retail investors - who own two-thirds of municipal securities - will soon have the same one-stop, cost-free, instant electronic access to disclosure documents about municipal bonds that they've long had for corporate stocks and bonds. This is a giant step forward for municipal bond investors."
MSRB Chair Frank Chin added, "The centralized collection and dissemination by the MSRB of ongoing financial documents will allow fair and equal access to information about municipal issuers and their bonds. EMMA will give investors an efficient and easy way to get key data about issuers as soon as it becomes available."
Public comment on the SEC's proposed amendments to Rule 15c2-12 under the Securities Exchange Act of 1934, as well as public comment on the MSRB's proposed rule change should be received by the Commission no later than 45 days after their respective publication in the Federal Register. (Press Rel. 2008-159)
SEC Proposes Guidance to Fund Boards Regarding Oversight of Investment Adviser Trading of Portfolio Securities and Use of Soft Dollars
The Commission today voted unanimously to issue proposed guidance to boards of directors of registered investment companies to assist them in fulfilling their oversight responsibilities with respect to investment advisers trading of fund portfolio securities. The proposed guidance follows the interpretive guidance issued by the Commission in 2006, which, among other things, clarified the scope of the safe harbor provided to investment advisers that use soft dollars to purchase brokerage and research services under Section 28(e) of the Securities Exchange Act of 1934.
The proposed guidance focuses on the board's oversight of investment advisers' obligation to seek best execution when it trades a fund's securities. In this regard, the guidance addresses the board's oversight of the conflicts of interest that arise with respect to an adviser's trading practices, including those associated with an adviser's use of soft dollars.
The proposed guidance does not impose any new requirements on fund directors or investment advisers. Rather, it proposes a flexible framework for directors to work within when conducting their oversight of an adviser's trading activities. Specifically, the guidance suggests the information that a fund board should request from an investment adviser to enable the directors to determine that the adviser is managing any conflicts and using fund assets in the best interests of the fund.
RULES AND RELATED MATTERS
Proposed Amendments to Rule 15c2-12
On Jul. 30, the Commission proposed amendments to Rule 15c2-12, under the Securities Exchange Act of 1934, relating to municipal securities disclosure. The Commission invites public comment on the proposed amendments. For further information, contact Martha Haines, Assistant Director, (202) 551-5681, Mary Simpkins, Senior Special Counsel, (202) 551-5683, Cyndi Rodriguez, Special Counsel, (202) 551-5636, or Rahman Harrison, Special Counsel, (202) 551-5663, Division of Trading & Markets, Commission, 100 F Street, NE, Washington, DC 20549-6628. (Rel. 34-58255; File No. S7-21-08)
Commission Orders Hearings on Registration Revocation Against Five Delinquent Companies for Failure to Make Required Periodic Filings
On July 29, the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registration of each class of the securities of five companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the five issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-58247; File No. 3-13105)
Commission Revokes Registration of Securities of K-2 Logistics.Com, Inc. for Failure to Make Required Periodic Filings
On July 30, the Commission revoked the registration of each class of registered securities of K-2 Logistics.Com, Inc. (K-2 Logistics.Com) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings in the order, except as to jurisdiction, which it admitted, K-2 Logistics.Com consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to National Fruit and Vegetable Technology Corp. finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of National Fruit's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against National Fruit in In the Matter of K-2 Logistics.Com, Inc., et al., Administrative Proceeding File No. 3-13075.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of K-2 Logistics.Com, Inc., et al., Administrative Proceeding File No. 3-13075, Exchange Act Release No. 57989 (June 19, 2008). (Rel. 34-58249; File No. 3-13075)
SEC Orders E*Trade Brokerage Firms to Comply with Anti-Money Laundering Rule
The Commission today announced a settled enforcement action concerning requirements resulting from the USA PATRIOT Act against E*Trade Clearing LLC and E*Trade Securities LLC (collectively, hereinafter "E*Trade") for documenting Customer Identification Programs (CIP) that did not reflect their actual practices, which included repeatedly failing to verify the identities of more than 65,000 of its customers. Verification of customer identities is crucial to the detection and prevention of money laundering and terrorist financing efforts conducted through U.S. financial institutions.
The CIP rule generally requires a broker-dealer to establish, document and maintain procedures for identifying customers and verifying their identities. The SEC's Order finds that E*Trade established, documented and maintained a CIP that specified that it would verify all accountholders in a joint account; however, during a 20-month period, E*Trade failed to follow the verification procedures set forth in its CIP. The Order finds that E*Trade did not verify the identities of secondary accountholders in newly opened joint accounts. Consequently, the Order finds that E*Trade's documented procedures differed materially from its actual procedures.
The SEC's Order specifically finds that, from October 2003 to June 2005, E*Trade did not verify the identities of 65,442 secondary accountholders in joint accounts as required by the CIP rule and its own procedures. The Order further finds that E*Trade's compliance failure was systemic, resulting from lack of a cohesive organizational structure, lack of adequate management oversight, and miscommunications among personnel in several E*Trade business groups.
Without admitting or denying any of the findings, E*Trade consented to the issuance of an order instituting administrative and cease and desist proceedings for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. E*Trade also agreed to a censure, to pay civil money penalties totaling $1 million, and to retain a qualified independent compliance consultant to verify the adequacy of its CIP rule compliance program.
In advance of settling this matter, E*Trade stated that it submitted the secondary accountholder information on joint accounts originally missed to its third party vendor for verification. According to E*Trade, the verification process did not identify any joint accounts that should not have been opened. (Rel. 34-58250; File No. 3-13106)
In the Matter of Pax World Management Corp.
On July 30, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940 against Pax World Management Corp. The Order finds that Pax World, an investment adviser registered with the Commission, acted contrary to representations it made to investors and to the boards of the mutual funds it advised (the Pax World Funds) that it complied with various socially responsible investing (SRI) restrictions, including, among other things, that it would not purchase for the Funds securities issued by companies that derived revenue from the manufacture of weapons, alcohol, tobacco or gambling products.
Specifically, the Order finds that Pax World acted contrary to these representations and violated the Funds' SRI restrictions from 2001 through 2005 when it purchased for the Pax World Growth and High Yield Funds ten securities that these Funds' SRI restrictions prohibited them from buying, including securities of companies that: (1) derived revenue from the manufacture of alcohol and/or gambling products; (2) derived more than 5% of their revenue from contracts with the U.S. Department of Defense; and (3) failed to satisfy the Funds' environmental or labor standards. During this period, Pax World also failed to consistently follow its own SRI-related policies and procedures with respect to these two funds that required that all securities be screened by Pax World's Social Research Department prior to purchase to ensure compliance with the SRI disclosures. In addition, during this period, Pax World did not consistently adhere to other SRI-related policies and procedures, including continuously monitoring fund holdings. As a result of conduct during the period from 2001 through 2005, the Pax World Funds held at least one prohibited security at all times from 2001 through early 2006.
Based on the above, the Order censures Pax World, requires it to cease and desist from committing or causing violations of Section 206(2) of the Advisers Act, and Sections 13(a)(3) and 34(b) of the Investment Company Act, and orders Pax World to pay a civil penalty in the amount of $500,000. Pax World consented to the issuance of the Order without admitting or denying the Order's findings. (Rel. IA-2761; IC-28344; File No. 3-13107)
Former Refco CEO Phillip R. Bennett Settles SEC Fraud Action
The Commission announced that on July 29, 2008, a final judgment by consent was entered by the United States District Court for the Southern District of New York against Phillip R. Bennett, the former Chairman and Chief Executive Officer of Refco Inc., in a civil injunctive action brought by the Commission. The Commission's complaint alleged that Bennett orchestrated a fraud that periodically concealed hundreds of millions of dollars owed to Refco Inc. and its corporate predecessor, Refco Group Ltd. (together, Refco), by a private entity that Bennett controlled. The complaint also alleged that Bennett directed practices that artificially inflated Refco Inc.'s reported financial results. The final judgment, to which Bennett consented without admitting or denying the Commission's allegations, permanently enjoins Bennett from violating antifraud, record keeping, periodic reporting, internal controls, and certification provisions of the federal securities laws and bars him from serving as an officer or director of a public company.
On July 30, the Commission also issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Phillip R. Bennett. The Order finds that Bennett was enjoined from future violations of the federal securities laws pursuant to the final judgment entered by the district court in the Commission's civil injunctive action. While engaged in the misconduct alleged in the civil injunctive action, the Order finds that Bennett held controlling interests in Refco Securities LLC, a broker-dealer registered with the Commission, and in Forstmann-Leff Associates LLC and FLA Asset Management LLC, both of which were registered as investment advisers with the Commission. The Order bars Bennett from association with any broker, dealer, or investment adviser. Bennett consented to the issuance of the Order, without admitting or denying the Commission's findings except as to entry of the injunction. [SEC v. Phillip R. Bennett, Civil Action No. 08-cv-1631 (GEL), USDC, SDNY] (LR-20660; AAE Rel. 2853); Administrative Proceeding - (Rel. 34-58257; IA-2762; AAE Rel. 2854; File No. 3-13108)
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