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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2011-16
January 25, 2011


SEC Proposes Private Fund Systemic Risk Reporting Rule

The Securities and Exchange Commission today proposed a rule to require advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system.

The proposed rule would implement Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal creates a new reporting form (Form PF) to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on Form PF would remain confidential.

"The data collection we propose will play an important role in supporting the framework created by the Dodd-Frank Act and is designed to ensure that regulators have a view into any financial market activity of potential systemic importance," said SEC Chairman Mary L. Schapiro.

Under the proposal, larger private fund advisers managing hedge funds, "liquidity funds" (i.e., unregistered money market funds), and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, liquidity fund, or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would not be subject to the heightened reporting requirements.

Although this heightened reporting threshold would apply to only about 200 U.S.-based hedge fund advisers, these advisers manage more than 80 percent of the assets under management.

Proposed Form PF is the result of extensive consultation and collaboration between staff of the SEC and other FSOC members. This collaboration followed on earlier work with international regulators to conform hedge fund regulatory reporting standards.

The SEC's public comment period on the proposed reporting requirements will last 60 days. (Press Rel. 2011-23)

SEC Proposes Net Worth Standard for Accredited Investors Under Dodd-Frank Act

The Securities and Exchange Commission today voted to propose amendments to its rules to conform the definition of "accredited investor" to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed amendments would exclude the value of an individual's primary residence in calculating net worth when determining accredited investor status. The amendments also would clarify the treatment of any indebtedness secured by the residence in the net worth calculation.

Under Securities Act rules, individuals and entities that qualify as "accredited investors" are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.

Section 413(a) of the Dodd-Frank Act requires that the net worth calculation for determining accredited investor status must exclude the value of the person's primary residence. This requirement came into effect upon enactment of the Dodd-Frank Act. However, the SEC is proposing to amend its rules to reflect the new standard and clarify the treatment of indebtedness secured by the primary residence in the calculation of net worth.

The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the Commission is required to review the definition of the term "accredited investor" in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.

Under the proposal, the definitions of "accredited investor" in the SEC's rules would be amended to exclude the value of a person's primary residence for purposes of the net worth calculation. The proposed rule amendments clarify that "the value of the primary residence" - which must be excluded from the individual net worth calculation - is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

As a result, under the proposed rule, an investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.

The Commission is seeking public comments on the proposed rules through March 11, 2011. (Press Rel. 2011-24)

SEC Adopts Rules for Say-on-Pay and Golden Parachute Compensation as Required Under Dodd-Frank Act

The Securities and Exchange Commission today adopted rules concerning shareholder approval of executive compensation and "golden parachute" compensation arrangements as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC's new rules specify that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011. Companies also are required to hold a "frequency" vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Following the frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote.

Under the SEC's new rules, companies also are required to provide additional disclosure regarding "golden parachute" compensation arrangements with certain executive officers in connection with merger transactions.

The Commission also adopted a temporary exemption for smaller reporting companies (public float of less than $75 million). These smaller companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013.

"I believe that this two-year deferral is a balanced and responsible way for the SEC to ensure that its rules do not disproportionately burden small issuers," said SEC Chairman Mary L. Schapiro. "The Dodd-Frank Act authorizes the Commission to exempt an issuer or class of issuers, but only after considering a number of factors including whether this disproportionate burden exists. The two-year deferral period is designed to assist the Commission in its consideration of these factors." (Press Rel. 2011-25)


SEC Charges Merrill Lynch for Misusing Customer Order Information and Charging Undisclosed Trading Fees

The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees. To settle the SEC's charges, Merrill has agreed to pay a $10 million civil penalty and consented to a cease-and-desist order.

The SEC's order found that Merrill operated a proprietary trading desk between 2003 and 2005 that was known as the Equity Strategy Desk (ESD), which traded securities solely for the firm's own benefit and had no role in executing customer orders. The ESD was located on Merrill's main equity trading floor in New York City, where traders on Merrill's market making desk received and executed customer orders. While Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, the firm's ESD traders obtained information about institutional customer orders from traders on the market making desk. They then used it to place trades on Merrill's behalf after executing the customers' trades. In doing so, Merrill misused this information and acted contrary to its representations to customers.

The SEC's order also found that, between 2002 and 2007, Merrill had agreements with certain institutional and high net worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

Without admitting or denying the SEC's findings, Merrill consented to the entry of a Commission Order which censures Merrill, requires it to cease and desist from committing or causing any violations and any future violations of Sections 15(c)(1)(A), 15(g), and 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(6) thereunder, and orders it to pay a civil penalty of $10 million.

In determining to accept Merrill's offer, the Commission considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America. (Rel. 34-63760; File No. 3-14204)

SEC Charges Company, CEO, and Stock Promoter With Market Manipulation

The Securities and Exchange Commission announced that it filed a civil injunctive action against Pantera Petroleum, Inc. (Pantera), Pantera's President and CEO, Christopher S. Metcalf, and stock promoter Bozidar "Bob" Vukovich, alleging that they engaged in a fraudulent broker bribery scheme designed to manipulate the market for Pantera's common stock.

The complaint, filed on Jan. 24, 2011 in federal court in Manhattan, alleges that beginning in at least March 2008, Christopher S. Metcalf, Pantera's President and CEO, and stock promoter Bozidar "Bob" Vukovich engaged in an undisclosed kickback arrangement with an individual (Individual A) who claimed to represent a group of registered representatives with trading discretion over the accounts of wealthy customers. Metcalf and Vukovich promised to pay a 30% kickback to Individual A and the registered representatives he purported to represent in exchange for the purchase of up to $2 million of Pantera stock through the customers' accounts.

The complaint further alleges that from March 25-31, 2008 and again on Aug. 22, 2008, Vukovich instructed Individual A to purchase approximately 295,000 shares of Pantera stock for a total of approximately $150,000 through matched trades using detailed instructions concerning the size, price and timing of the purchase orders. Thereafter, Vukovich paid Individual A bribes of almost $37,000.

The complaint charges Vukovich, Metcalf, and through Metcalf, Pantera, with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Commission seeks permanent injunctive relief from the Defendants, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, and civil penalties from Metcalf and Vukovich, a judgment prohibiting Metcalf and Vukovich from participating in any offering of penny stock, and a judgment prohibiting Metcalf from serving as an officer or director of a public company. [SEC v. Christopher S. Metcalf, Bozidar "Bob" Vukovich, and Pantera Petroleum, Inc., Civil Action No. 11 Civ. 0493 (CM) (S.D.N.Y.)] (LR-21824)

Court Enters Final Judgment Against Joseph P. Nacchio, Former CEO of Qwest Communications International Inc.

The Securities and Exchange Commission announced today that the United States District Court for the District of Colorado entered a Final Judgment dated Jan. 24, 2011, in a civil action against Joseph P. Nacchio, the former chief executive officer of Qwest Communications International Inc., a Denver-based telecommunications company. Nacchio, without admitting or denying the Commission's allegations, consented to the entry of a Final Judgment that enjoins him from violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; finds that he is liable for disgorgement of $44,632,464, plus interest, which will be deemed satisfied by Nacchio's forfeiture of that amount in the related criminal case, United States v. Nacchio, 05-cr-00545 (D. Colorado); and prohibits him from acting as an officer or director of a public company. A civil penalty was not imposed against Nacchio by agreement of the parties in light of the criminal sanctions ordered in the related criminal case and because Nacchio agreed to waive all rights to appeal a criminal fine of $19 million imposed upon him in the related criminal case. It is anticipated that the Commission will ask the Court to add the disgorgement ordered against Nacchio of $44,632,464, plus interest, to a Fair Fund which was established in SEC v. Qwest Communications, Inc., Civ No. 04-cv-1267 (D. Colorado), through which the Commission thus far has marshaled and distributed approximately $275 million to harmed investors.

According to the SEC's complaint in this matter, from at least April 1, 1999 through March 31, 2002, Nacchio and others at Qwest engaged in a large-scale financial fraud that hid from the investing public the true source and nature of the company's revenue and earnings growth. The complaint alleged that, although Qwest publicly touted its purported growth in services contracts which would provide a continuing revenue stream, in fact the company fraudulently and repeatedly relied on revenue recognition from one-time sales of assets known as "IRUs" and certain equipment without making required disclosures. The complaint also alleged that Nacchio and others fraudulently and materially misrepresented Qwest's performance and growth to the investing public. The complaint further alleged that Nacchio sold Qwest stock in violation of the insider trading prohibition of the securities laws. [SEC v. Joseph P. Nacchio, et al, Civ. No. 05-cv-480-MSK-CBS (D. Colorado)] (LR-21825)




Modified: 01/25/2011