SEC Takes Steps to Strengthen Existing Rules Governing Securities Trading by Personnel
On May 22, Securities and Exchange Commission Chairman Mary Schapiro outlined a series of measures the agency is taking to strengthen its internal compliance program to guard against inappropriate employee securities trading.
"It only makes sense that we have a world-class compliance program - just as we expect from those we regulate," said Chairman Schapiro. "The employees at the SEC have a well-deserved reputation for integrity and professionalism. These measures will further bolster our standing by helping to prevent not only an actual impropriety, but the appearance of one as well."
Within weeks after arriving at the SEC, Chairman Schapiro learned about potential weaknesses in the internal programs that monitor compliance with these rules and directed prompt action to follow through on the efforts already underway to strengthen the agency's systems. She also directed that additional measures be implemented.
The measures the agency is taking include:
Revising the SEC Rule Governing Securities Trading by SEC Personnel:
The staff has drafted internal rules governing securities trading and has submitted those rules for clearance by the Office of Government Ethics.
Current agency rules prohibit, among other things, short selling, carrying securities on margin, engaging in options or futures transactions in instruments whose value is derived from an underlying security, and holding a security interest in broker-dealers and registered investment advisers. The current rules also mandate that employees hold stock that they purchase for at least six months to limit speculative activity. Further, SEC employees are required to report all trades within five days of receiving confirmations.
In addition to the existing rules, the newly-approved rules will:
As part of the pre-clearance and compliance process, periodic reviews will be conducted by supervisors to compare transactions against the employee's work projects to guarantee compliance with the rules.
Under the current rules, preclearance is recommended but not mandated. If an employee were to voluntarily seek such preclearance the only stocks that would be prohibited would be stocks of companies that have pending registration statements before the SEC. This is in addition to existing laws that prohibit anyone from trading on material non-public information. The new rule will expand the prohibited list to include all companies being investigated by the SEC.
Contracting for an Internal Computer Compliance System:
The SEC is contracting with an outside firm to develop a new agency-wide computer system that will enable the Ethics Office to pre-clear and track all employee securities transactions for compliance with the rules.
The new system would automate employee reporting of personal securities transactions which would simplify the reporting process for employees and ensure accurate pre-clearance checks. The new system would also provide for easy verification of transactions by comparing reported trades against confirmation statements provided directly by each employee's brokerage firm. Further, the system would permit the Ethics Office to monitor transactions and detect any irregularities.
Under the current system, employees are not required to pre-clear their trades but instead must report any trade within five days of the confirmation of the transaction. Currently, if an employee calls to obtain preclearance of a trade, the preclearance check is run through a system that has significant limitations and does not contain information that would identify all stocks that should be prohibited.
Finally, the new system would capture the trades of all employees in one system rather than a series of various handwritten forms that are not presently required from all agency personnel.
Six months after the computer system is established, Chairman Schapiro will bring on board a compliance expert to review the system and ensure the program is operating effectively.
The SEC put out a request for bids in December and agency staff began reviewing proposals in February, with the expectation of selecting a vendor within the coming days.
Centralizing Compliance Functions within the Ethics Office:
Finally, Chairman Schapiro today signed an order consolidating the compliance and reporting responsibilities within the Ethics Office. She also has authorized the hiring of a new chief compliance officer.
Previously, responsibility within the SEC for ensuring staff compliance was spread between two offices. The split in responsibility depended on the type of form that an employee was required to complete.
"Streamlining the responsibilities within one office will help eliminate any potential for inefficiencies," concluded Chairman Schapiro. (Press Rel. 2009-121)
In the Matter of Jose Daniel Iriarte, Jr.
On May 26, the Commission 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 and Notice of Hearing (Order) against Jose Daniel Iriarte, Jr. In the Order, the Division of Enforcement alleges, among other things, that Iriarte, a former registered broker-dealer, misappropriated customer funds for his own use. The Order further alleges that Iriarte was convicted of wire fraud by the U.S. District Court for the District of Maryland based on this misappropriation of funds. The Order states that the administrative proceeding was commenced to determine what remedial action, if any, should be taken against Iriarte based on his criminal conviction.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Iriarte an opportunity to dispute the allegations, and to determine what, if any, remedial action is appropriate in the public interest pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act. The Order requires the Administrative Law Judge to issue an initial decision no later than 210 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rels. 34-59972; IA-2880; File No. 3-13484)
In the Matter of CSK Auto Corporation
The Commission today instituted settled cease-and-desist proceedings against CSK Auto Corporation (CSK), an auto parts retailer headquartered in Phoenix, Arizona, finding that the company violated the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws in connection with its false financial statements in its annual reports filed with the Commission for fiscal years 2002, 2003, and 2004. CSK filed false financial statements materially overstating its pre-tax income for fiscal year 2002 by approximately 47%, or $11 million; fiscal year 2003 by approximately $34 million, thereby reporting pre-tax income instead of a pre-tax loss; and fiscal year 2004 by approximately 65%, or $21 million.
This is the second enforcement action arising out of the Commission's investigation into CSK's financial fraud. In March 2009, the Commission filed a civil injunctive action in federal court against CSK's former president and chief operating officer, former chief financial officer, former controller, and former director of credits and receivables. See SEC v. Fraser, et al. (Lit Rel. No. 20933). In the pending federal court action, the SEC seeks a permanent injunction from future violations, disgorgement, prejudgment interest, and civil penalties against all defendants, and an order barring certain defendants from serving as a director or officer of a public company.
In the settled cease and desist proceedings against CSK, the Commission found that CSK materially overstated its income by (1) failing to write off vendor allowance receivables that it knew, or should have known, were not collectible, and (2) during fiscal year 2003, improperly recognizing certain vendor allowances. The Commission also found that CSK engaged in several private debt offerings while its false financial statements were outstanding and that it failed to implement internal accounting controls sufficient to provide reasonable assurances that accounts were accurately stated in accordance with Generally Accepted Accounting Principles. The Commission found that, as a result of its conduct, CSK violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, and 13a-1 thereunder.
Based on the above, the Commission ordered CSK to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-1 thereunder. CSK, in agreeing to the settlement, neither admitted nor denied the Commission's findings. (Rels. 33-9032; 34-59973; AAE Rel. 2974; File No. 3-13485)
SEC Obtains Asset Freeze and Temporary Restraining Order Against Robert D. Watson, Daniel J. Petroski, Privatefx Global One Ltd., SA and 36 Holdings, Ltd.
On May 21, 2009, the Commission filed a civil action against PrivateFX Global One Ltd., SA, 36 Holdings, Ltd., Robert D. Watson, and Daniel J. Petroski alleging their involvement in a multi-million dollar offering fraud targeting U.S. investors. Pursuant to the Commission's motions for emergency relief, the U.S. District Court for the Southern District of Texas entered a temporary restraining order against the defendants, froze their assets, and appointed Thomas L. Taylor III of Houston as a receiver over them and all affiliated entities.
The SEC's complaint alleges that Watson and Petroski raised more than $19 million from investors and claimed they would earn profits through "Alpha One," a foreign-currency trading software program purportedly owned by their firm PrivateFX Global One Ltd. They claimed they would employ the services of 36 Holdings Ltd., a so-called "deal clearing company" owned and controlled by Watson. The SEC alleges that Watson and Petroski misrepresented to investors that it had millions of dollars in bank accounts in the U.S. and Switzerland and that their foreign exchange trading business had achieved an annual return of more than 23 percent since its inception and has never had a losing month. The SEC alleges that the defendants' historical performance claims are not supported by valid financial records.
The SEC's complaint also alleges that in response to Commission investigative subpoenas, Watson and Petroski produced phony records purporting to show that 36 Holdings held an account at Deutsche Bank, where it earned more than $2 million for Global One in 2009 by trading foreign currencies. In fact, 36 Holdings did not even have an account at Deutsche Bank. The SEC's complaint also alleges that the defendants provided the Commission staff with phony bank statements from a Swiss bank and falsely claimed that 36 Holdings had almost $70 million on deposit there, including $11 million of Global One funds.
Specifically, the Commission alleges that the defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's investigation is continuing. [SEC v. PrivateFX Global One Ltd., SA, 36 Holdings, Ltd., Robert D. Watson, and Daniel J. Petroski, Civil Action No. 09-CV-1541 U.S.D.C./Southern District of Texas (Houston Division)] (LR-21056)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change by NYSE Amex (SR-NYSEAmex-2009-17) revising rules governing the use of telephones on the options trading floor has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59939)
A proposed rule change filed by the NASDAQ Stock Market relating to order routing (SR-NASDAQ-2009-047) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59948)
A proposed rule change filed by BATS Exchange to amend BATS rules to offer an after hours trading session (SR-BATS-2009-012) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59963)
A proposed rule change filed by BATS Exchange to amend BATS Rule 11.13, entitled "Order Execution," (SR-BATS-2009-015) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59967)
Accelerated Approval of Proposed Rule Change
The Commission has granted accelerated approval of a proposed rule change, as modified by Amendment No. 1, submitted by NYSE Amex (SR-NYSEAmex-2009-15) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend rule 935NY - Order Exposure Requirements to reduce certain order exposure periods from three seconds to one second. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59956)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-FINRA-2009-018) filed by the Financial Industry Regulatory Authority to adopt National Association of Securities Dealers Interpretive Material 2830-1 ("Breakpoint" Sales) as a FINRA rule. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59961)
The Commission approved a proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2009-020), under Section 19(b)(2) of the Securities Exchange Act of 1934, relating to the FINRA Regulation Board composition and conforming changes to the FINRA Regulation By-Laws. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59962)
The Commission granted approval to a proposed rule change filed by the Municipal Securities Rulemaking Board (SR-MSRB-2009-03) under Section 19(b)(2) of the Securities Exchange Act of 1934, Relating to the Establishment of a Pilot Phase of Its Upcoming Continuing Disclosure Service of the Electronic Municipal Market Access System (EMMA(R)). Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59964)
The Commission granted approval to a proposed rule change filed by the New York Stock Exchange as modified by Amendment No. 2 thereto (SR-NYSE-2009-25), under Section 19(b)(2) of the Securities Exchange Act of 1934, changing certain NYSE rules and rule interpretations to harmonize them with changes to corresponding rules filed by the Financial Industry Regulatory Authority, Inc. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59965)
The Commission approved a proposed rule change submitted under Section 19(b)(1) of the Securities Exchange Act of 1934 by the Municipal Securities Rulemaking Board (SR-MSRB-2009-02) relating to the establishment of a primary market disclosure service and trade price transparency service of the Electronic Municipal Market Access system (EMMA(R)) and amendments to MSRB Rules G-32 and G-36. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59966)
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