SEC Releases Staff Study Recommending a Uniform Fiduciary Standard of Conduct for Broker-Dealers and Investment Advisers
On Jan. 22, 2011, the Securities and Exchange Commission submitted to Congress a staff study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers — no less stringent than currently applied to investment advisers under the Advisers Act — when those financial professionals provide personalized investment advice about securities to retail investors.
The study, provided last night to Congress, which looked into obligations and standards of conduct of financial professionals, was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In the study, the staff notes that investment advisers and broker-dealers are regulated extensively under different regulatory regimes. But, many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers. The study also finds that "many investors are also confused by the standards of care that apply to investment advisers and broker-dealers" when providing personalized investment advice about securities.
The study further states that "retail investors should not have to parse through legal distinctions to determine" the type of advice they are entitled to receive. "Instead, retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer."
At the same time, the study notes that retail investors should "continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide."
As a result, the study "recommends that the Commission . . . adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers." The standard, according to the study, should be "no less stringent than currently applied to investment advisers under the Advisers Act."
The study also "recommends that when broker-dealers and investment advisers are performing the same or substantially similar functions, the Commission should consider whether to harmonize the regulatory protections applicable to such functions. Such harmonization should take into account the best elements of each regime and provide meaningful investor protection."
The study concludes that the "staff's recommendations were guided by an effort to establish a uniform standard that provides for the integrity of personalized investment advice given to retail investors. At the same time, the staff's recommendations are intended to minimize cost and disruption and assure that retail investors continue to have access to various investment products and choice among compensation schemes to pay for advice."
(Press Rel. 2011-20)
In the Matter of Horseman Capital Management, L.P.
On January 24, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Horseman Capital Management, L.P. (Horseman). The Order finds that Horseman, a London-based investment adviser with funds in the United States, violated Rule 105 of Exchange Act Regulation M (Rule 105), which prohibits buying shares of an equity security through a public offering after having sold short the same equity security during a restricted period (generally defined as five business days before the pricing of the offering).
The Order finds that Horseman willfully violated Rule 105 on one occasion in 2008. On July 29, 2008, Horseman bought stock through a public offering after selling short the same security during the restricted period. Prior to this purchase, Horseman had never participated in a U.S.-originated follow-on offering. The Commission further found that, at the time of the violation, Horseman had no policies, procedures, or controls in place designed to detect or prevent Rule 105 violations.
Based on the above, the Order censures Horseman and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 105. Horseman will pay a $65,000 civil monetary penalty, $1,295,138 in disgorgement, and $124,814 in prejudgment interest. Horseman consented to the issuance of the Order without admitting or denying any of the findings contained therein. (Rel. 34-63757; IA-3143; File No. 3-14202)
SEC Files Settled Bribery Charges Against Paul W. Jennings
The Securities and Exchange Commission filed a settled enforcement action on Jan. 24, 2011, in the U.S. District Court for the District of Columbia, charging Paul W. Jennings, a former officer at Innospec, Inc., with violating the Foreign Corrupt Practices Act (FCPA) by approving bribes to government officials to obtain and retain business.
The SEC's complaint alleges that:
Innospec engaged in widespread bribery of foreign officials, some of which occurred and was approved by Jennings beginning in mid to late 2004 during his tenure as Chief Financial Officer (CFO) and continuing after he became Chief Executive Officer (CEO) in 2005.
From 2000 to 2008, Innospec, a manufacturer and distributor of fuel additives and other specialty chemicals, routinely paid bribes to government officials in order to sell TEL, a fuel additive, which boosts the octane value of gasoline, to government owned refineries and oil companies in Iraq and Indonesia. Innospec's known bribery activities in Iraq began with its participation in the United Nations Oil for Food Program in 2001, and extended all the way until at least 2008. Innospec also paid bribes to government officials in Indonesia beginning as early as 2000, and continued until 2005, when Indonesia's need for TEL ended. Beginning in mid to late 2004, Jennings, who held various senior roles at Innospec, actively participated in the bribery schemes in Iraq and Indonesia. In all, between 2000 and 2008, Innospec made illicit payments of approximately $6.3 million and promised an additional $2.8 million in illicit payments to Iraqi ministries and government officials as well as Indonesian government officials in exchange for contracts worth approximately $176 million.
Jennings joined Innospec as the CFO in November 2002. Jennings learned of the longstanding practice of paying bribes to obtain TEL orders in mid to late 2004. In 2004, Jennings assumed the role of head of the TEL unit in addition to his role as CFO. In 2005, Jennings became the interim CEO and became the permanent CEO and President of Innospec in June 2005. Beginning in 2005, Jennings, along with other members of Innospec's management, approved bribery payments to officials at the Iraqi Ministry of Oil (MoO) in order to sell TEL to Iraq. Innospec used its agent in Iraq to funnel payments to Iraqi officials. Innospec made payments totaling approximately $1,610,327 and promised an additional $884,480 to MoO officials. For example, in an October 2005 e-mail copying Jennings, the agent said that Iraqi officials were demanding a 2% kickback and that "[w]e are sharing most of our profits with Iraqi officials. Otherwise, our business will stop and we will lose the market. We have to change our strategy and do more compensation to get the rewards." The kickback and later payments were paid by increasing the agent's commission, which Jennings approved. Jennings was aware of the scheme to pay an official at the Trade Bank of Iraq in exchange for a favorable exchange rate on letters of credit. Another scheme involved a bribe to ensure the failure of a field test of a competitor product. A confidential MoO report for the field trial test was shared with Jennings who was generally aware of the bribery. Bribes were also offered to secure a 2008 Long Term Purchase Agreement that would have caused approximately $850,000 to be shared with Iraqi officials. The agreement, however, did not go forward due to the investigation and ultimate discovery of widespread bribery by United States regulators.
Innospec also paid bribes to Indonesian government officials from at least 2000 through 2005 in order to win contracts worth approximately $48,571,937 from state owned oil and gas companies in Indonesia. Jennings became aware of and approved payments beginning in mid to late 2004. Various euphemisms to refer to bribery were commonly used in e-mails and in discussions with Jennings and others at Innospec, including "the Indonesian Way," "the Lead Defense Fund," and "TEL optimization." Bribery discussions were held on a flight in the U.S. and even discussed at Jennings' performance review in 2005. In one bribery scheme with Pertamina, an Indonesian state owned oil and gas company, Innospec agreed, with approval by Jennings, to a "one off payment" of $300,000 to their Indonesian Agent with the understanding that it would be passed on to an Indonesian official.
From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he had complied with Innospec's Code of Ethics incorporating the Company's Foreign Corrupt Practices Act policy. Jennings also signed annual and quarterly personal certifications pursuant to the Sarbanes-Oxley Act of 2002 in which he made false certifications concerning the company's books and records and internal controls.
Without admitting or denying the SEC's allegations, Jennings has consented to the entry of a final judgment that permanently enjoins him from violating Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 13a-14, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting Innospec's violations of Exchange Act Sections 30A, 13(b)(2)(A) and13(b)(2)(B). Jennings will disgorge $116,092 plus prejudgment interest of $12,945, and pay a civil penalty of $100,000 that takes into consideration Jennings' cooperation in this matter.
Tracy L. Price and Denise Hansberry of the FCPA Unit conducted the SEC's investigation. The SEC appreciates the assistance of the U.S. Department of Justice, Fraud Section, the Federal Bureau of Investigation, and the United Kingdom Serious Fraud Office in this matter. [SEC v. Paul W. Jennings, Case No. 1:11-CV-00144 (D.D.C.) (RMC)] (LR-21822; AAE Rel. 3235)
Court Enters Permanent Injunctions Against Ruben Serrano
The Commission announced that on Jan. 21, 2011, the Honorable P. Kevin Castel, United States District Judge for the Southern District of New York entered a Final Judgment by consent against defendant Ruben Serrano. The Final Judgment enjoins defendant Serrano from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Defendant Serrano consented to the entry of the Final Judgment without admitting or denying any of the allegations in the Commission's complaint. [SEC v. Smart Online, Inc., et al., Civil Action No. 07-CV-7960 (PKC) (S.D.N.Y.)] (LR-21823)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by The NASDAQ Stock Market to link market data fees and transaction execution fees (SR-NASDAQ-2011-010) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63745)
A proposed rule change filed by NYSE Amex (SR-NYSEAmex-2011-05) to adopt standards for market maker electronic quotes that are present during an opening trading auction 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 January 24. (Rel. 34-63746)
A proposed rule change filed by NYSE Arca (SR-NYSEArca-2011-03) to adopt standards for market maker electronic quotes that are present during an opening trading auction 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 January 24. (Rel. 34-63747)
Notice of Filing and Order Approving and Declaring Effective an Amendment to the Plan for the Allocation of Regulatory Responsibilities Relating to the Surveillance, Investigation, and Enforcement of Insider Trading Rules
The Commission noticed, approved, and declared effective a proposed plan for the allocation of regulatory responsibilities relating to the surveillance, investigation, and enforcement of insider trading rules pursuant to Rule 17d-2 under the Securities Exchange Act of 1934 (File No. 4-566). Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63750)
Proposed Rule Change
The Financial Industry Regulatory Authority has filed a proposed rule change (SR-FINRA-2011-004) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder, relating to the trading activity fee rate for transactions in asset-backed securities. Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63751)
Approval of Proposed Rule Change
The Commission granted approval of a proposed rule change submitted by NYSE Arca (SR-NYSEArca-2010-110), pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, to List and Trade Shares of the Teucrium Natural Gas Fund. Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63753)
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