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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2008-30
February 13, 2008


Chairman Christopher Cox to Testify

Chairman Cox will testify before the Senate Committee on Banking, Housing, and Urban Affairs on Thursday, Feb. 14, 2008. Chairman Cox's testimony, which concerns the State of the U.S. Economy and Financial Markets, will be held in Room 325 of the Russell Senate Office Building at 10:00 a.m.

Erik Sirri to Testify

Erik Sirri, Director of the Division of Trading and Markets, U.S. Securities and Exchange Commission, will testify before the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee of the House Committee on Financial Services on Thursday, Feb. 14, 2008. Mr. Sirri's testimony, which concerns the State of the Bond Insurance Industry, will be held in Room 2128 of the Rayburn House Office Building at 11:30 a.m.

SEC Hosts Historic Meeting of Securities Regulators From Major Emerging Markets

On February 12, the Securities and Exchange Commission announced that it held its first Emerging Markets Conclave with heads of securities regulators from Brazil, China, South Africa and South Korea. These leading emerging markets came together to discuss challenges faced by growing securities markets, including balancing an effective regulatory scheme while promoting capital development.

The Conclave focused on opening up a dialogue between the countries to promote cross-border enforcement, promote the provision of cross-border services, and to collaborate in the wake of recent market developments.

"It has been a great privilege to host this meeting of representatives of major emerging markets," said SEC Chairman Christopher Cox, who hosted the discussion. "This Conclave presented an historic opportunity for the Chairs of regulators in emerging markets to discuss how we can work together to protect investors, both in our own markets and abroad, and maintain a fair and stable global securities market. The discussion today allowed participants to deepen our already strong relationship in order to facilitate the increasingly high level of international cooperation that today's interconnected markets demand."

Ethiopis Tafara, Director of the SEC's Office of International Affairs, said, "We are very pleased to have this opportunity to spend such valuable time with leaders from emerging markets. The exchange of views enhances our understanding of market circumstances around the world and assists us in developing techniques and best practices for promoting effective cross-border market oversight to better protect investors and facilitate efficient capital formation."

For more information on SEC's technical assistance program, contact Dr. Robert M. Fisher or Z. Scott Birdwell in the Office of International Affairs at 202-551-6690, or by email at OIA@SEC.gov. (Press Rel. 2008-18)

SEC Proposes Plain English Narrative Disclosure By Investment Advisers to Investors

The Securities and Exchange Commission today voted unanimously to propose rule amendments requiring investment advisers to prepare and deliver to clients and prospective clients a narrative brochure written in plain English.

Brochures would be made available to the general public through the SEC sponsored Investment Adviser Public Disclosure Web site. The narrative would publicly disclose to investors more detailed information about an investment adviser's business practices, conflicts of interest, and disciplinary history.

"Today's proposal is a significant event for investment advisers and the investors that hire them. The release addresses disclosure, which is at the core of the fiduciary principles that govern the relationship between advisers and their clients," said Andrew J. Donohue, Director of the SEC's Division of Investment Management. "Central to the proposal is narrative plain English disclosure to advisory clients and prospective clients that will empower them to make informed decisions when hiring advisers and to manage the advisory relationship on an ongoing basis."

The Commission is proposing amendments to Part 2 of Form ADV, the adviser brochure, and related rules under the Investment Advisers Act of 1940. If adopted, more than 10,000 investment advisers registered with the SEC would be required to provide clear, current, and meaningful disclosure in narrative form to nearly 20 million advisory clients.

Most advisers currently use a check-the-box, fill-in-the-blank form for their brochures. The plain English narrative brochure being proposed by the Commission would provide investors with more detailed information about an adviser's business practices, including the types of advisory services they provide, fees they charge, and the risks that clients can anticipate. The narrative also would disclose the disciplinary history of an investment adviser including any violation of the securities laws, as well as conflicts of interest such as the use of affiliates to execute transactions, the use of client brokerage to obtain "soft dollars benefits," and the adviser's interests in certain transactions.

The SEC proposal also would address developing areas of concern, including conflicts of interest arising from the side-by-side management of clients who pay performance fees (such as hedge funds) and those who do not; conflicts of interest arising from an adviser's receipt of compensation from issuers of financial products the adviser recommends to clients; and qualifications of a firm's employees who give advice to clients.

Public comment on the proposed amendments should be received by the Commission no later than 60 days after their publication in the Federal Register. (Press Rel. 2008-19)

SEC Votes to Propose All-Electronic Disclosure for Foreign Issuers

Today the Securities and Exchange Commission unanimously voted to propose amendments to modernize its disclosure requirements for foreign companies, including eliminating all requirements for paper submissions. Many of the proposed SEC rule changes are designed to update the Commission’s rules, reflect advancements in technology, and respond to the increasing globalization of the capital markets

“The proposed amendments would bring our foreign company disclosure requirements into the 21st Century by eliminating any requirement for paper, and by giving investors instant access to foreign company disclosure documents electronically, in English, on the Internet,” said SEC Chairman Christopher Cox.

John White, Director of the Commission’s Division of Corporation Finance, said, “Some of today’s rule proposals should be viewed as the latest in a series of recent Commission initiatives to modernize our Exchange Act rules in the wake of the ongoing globalization of securities markets. Others are the result of the Commission’s continuous assessment of its disclosure and other requirements for all registered companies, including registered foreign private issuers, to determine whether they should be revised in light of market developments, new technologies, or other matters. All of the proposals would serve the best interests of investors without, we believe, unduly burdening foreign private issuers.”

Conrad Hewitt, the Commission’s Chief Accountant, said, “As demonstrated by these proposals and other recent action taken by the Commission, the Commission continues to balance the information needs of investors with providing the opportunity for U.S. investors to invest in foreign securities in our markets. I look forward to receiving public input during the comment period.”

One set of proposals, known as the Foreign Issuer Reporting Enhancements, would update Exchange Act filing requirements and enhance disclosure required by foreign private issuers in response to changes in foreign filing requirements, market practices, and other areas of the Commission’s regulation. Another proposal would amend Exchange Act Rule 12g3-2(b), which exempts a foreign private issuer from having to register a class of equity securities under Section 12(g) of the Exchange Act based on the submission to the Commission of certain information published outside the United States, in order to reflect advances in technology and other recent global changes.

Comments on these proposals should be received by the Commission no later than 60 days after publication in the Federal Register.

The full text of the detailed releases concerning these proposals will be posted to the SEC Web site as soon as possible.

Foreign Issuer Reporting Enhancements Proposals

The principal reporting enhancement proposals are as follows:

  • permit reporting foreign issuers to assess their eligibility to use the special forms and rules available to foreign private issuers once a year on the last business day of their second fiscal quarter, rather than on a continuous basis, which is currently required;
  • accelerate the reporting deadline for annual reports filed on Form 20-F by foreign private issuers from six months to 90 days after the issuer’s fiscal year-end in the case of large accelerated filers and accelerated filers, and to 120 days after the issuer’s fiscal year-end for all other issuers, after a two-year transition period;
  • amend Form 20-F by eliminating an instruction to Item 17 of that Form that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements; and
  • amend Exchange Act Rule 13e-3, which pertains to going private transactions by reporting issuers or their affiliates, to reference the recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.

In addition, the Commission voted to solicit public comment on other possible amendments that would affect foreign private issuers. These matters include the following:

  • amend Form 20-F to require disclosure in annual reports filed on that Form about: any changes in and disagreements with the registrant’s certifying accountant; the fees, payments and other charges relating to American Depositary Receipts; certain corporate governance matters; and information about highly significant, completed acquisitions; and
  • eliminate the availability of the limited U.S. GAAP reconciliation option that is contained in Item 17 of Form 20-F for foreign private issuer registrants.

Rule 12g3-2(b) Proposal

The Rule 12g3-2(b) exemption permits a foreign private issuer to exceed the shareholder thresholds for registration under Exchange Act Section 12(g) and effectively have its equity securities traded on a limited basis in the over-the-counter market in the United States. Currently, in order to obtain the Rule 12g3-2(b) exemption, a non-reporting issuer must initially submit written materials to the Commission in paper, including a list of the issuer’s non-U.S. disclosure obligations, information concerning its U.S. shareholders, and paper copies of its non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year. The proposed amendments would eliminate the paper submission requirements by automatically granting the Rule 12g3-2(b) exemption to a foreign private issuer that meets specified conditions, which do not depend on a count of an issuer’s U.S. security holders, and which would require an issuer to publish electronically in English specified non-U.S. disclosure documents. As a result, the proposed amendments should make it easier for U.S. investors to gain access to a foreign private issuer’s material non-U.S. disclosure documents and make better informed decisions regarding whether to invest in that issuer’s equity securities.

As proposed, in order to be eligible to claim the Rule 12g3-2(b) exemption

  • an issuer must not have any Exchange Act reporting obligations under Section 13(a) or 15(d) of the Exchange Act;
  • an issuer must maintain a listing of the subject securities on one or more exchanges in one or two foreign jurisdictions comprising its primary trading market;
  • the U.S. trading volume for the subject securities must be no greater than 20 percent of its worldwide trading volume for its most recently completed fiscal year, or the issuer must be claiming the Rule 12g3-2(b) exemption in connection with its deregistration under Exchange Act Rule 12h-6; and
  • the issuer must publish specified non-U.S. disclosure documents in English, required since the beginning of its most recently completed fiscal year, on its Internet web site or through an electronic information delivery system that is generally available to the public in its primary trading market, unless claiming the exemption in connection with or recently following its deregistration.

As proposed, in order to maintain the Rule 12g3-2(b) exemption

  • an issuer must electronically publish specified non-U.S. disclosure documents in English for subsequent fiscal years on an ongoing basis;
  • continue to maintain its foreign listing;
  • continue to meet the trading volume threshold for its most recently completed year other than the year in which it first claims the exemption; and
  • does not otherwise incur any Exchange Act reporting obligations.

The rule proposal would establish a three-year transition period to accommodate a currently exempt issuer that could lose the exemption upon the effective date of the revised rule because it did not satisfy the trading volume threshold. That issuer would have to register under Exchange Act Section 12, if it could not qualify for the amended exemption, no later than three years from the effective date of the rule amendments. This transition period would grant affected issuers sufficient time to prepare for and complete the Section 12 registration process.

The rule proposal would also establish a three-month transition period following the rule’s effectiveness, during which Commission staff would continue to process paper submissions under Rule 12g3-2(b), in order to provide issuers with sufficient time to develop their electronic publishing capabilities and investors to determine how best to access the electronic publications of Rule 12g3-2(b)-exempt companies. Following the three-month period, the Commission would no longer process paper submissions under Rule 12g3-2(b). (Press Rel. 2008-20)


R&G Financial Settles Financial Fraud Charges With Commission

On February 13, the Commission filed financial fraud charges against R&G Financial Corporation, a bank holding company with mortgage banking operations in Puerto Rico. The Commission alleges that R&G Financial overstated income by approximately $180 million or 80 percent on a cumulative basis by improperly accounting for billions of dollars worth of mortgage-related transactions in 2002, 2003 and 2004. The Commission further alleges that those accounting irregularities enabled R&G financial to report an apparent twelve quarter streak of "record earnings." Since the accounting and disclosure problems began to surface in early 2005, the market price of the company's common stock plummeted from approximately $40 to $10 per share or 75%, thereby reducing equity market value by approximately $900 million.

According to the Commission's complaint, R&G Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. First, R&G Financial improperly recognized gain on sales of mortgages. These transactions were not true sales under generally accepted accounting principles because of full recourse provisions in the written contracts. Second, R&G Financial significantly overvalued interest-only strips retained by the company in its purported mortgage loan sale transactions. The Commission further alleges that R&G Financial managed earnings through a series of mortgage loan swap transactions with other Puerto Rican financial institutions.

The Commission's complaint, which was filed in the U.S. District Court for the Southern District of New York, charges R&G Financial with violating Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13. Without admitting or denying the Commission's allegations, R&G Financial has consented to the entry of a court order enjoining it from violating those antifraud, reporting, books and records and internal control provisions of the federal securities laws.

The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company. [SEC v. R&G Financial Corporation, 08 CV 1471 (Marrero, J.) (S.D.N.Y.)] (LR-20455)

Commission Charges Group of Florida Brokers Stock Manipulation And Other Violations In Connection With Sale Of Stock In SCL Ventures And Weida Communications

On February 7, the Commission filed a civil action in the U.S. District Court for the Southern District of Florida against Dean A. Esposito, Frederick J. Birks, Joseph DeVito, Theodore B. Holbrook and Walter A. Tye, a group of Florida-based brokers alleged to have violated the federal securities laws in connection with the sale of stock in two companies, SCL Ventures Ltd. and Weida Communications, Inc.

According to the Commission's complaint, from approximately late January until early May 2004, defendants sold approximately $3 million worth of SCL Ventures securities to approximately 78 investors while working out of the company's offices. Defendants were not registered with the SEC or associated with a registered broker or dealer during this period. Defendants received undisclosed commissions of between 10%-and-20% for selling SCL Ventures stock. The Commission further alleges that, from approximately June 2004 through April 2005, Esposito and Birks manipulated - and dominated and controlled - the market price for the common stock of SCL Ventures' successor company, Weida Communications, to approximately $5 per share, in part to facilitate the sale of Weida stock in private transactions at approximately $3 per share by Defendants. Approximately 165 investors paid at least $9.2 million for Weida's near-worthless securities during the manipulation period. The Commission alleges that, during the manipulation period, Esposito, Birks and Holbrook were registered representatives in the Florida branch of GlobalVest Group, Inc., a registered broker-dealer with a branch office in the same building as Weida, and DeVito and Tye were unregistered brokers. Defendants received excessive undisclosed commissions of between 10% and 20% for selling Weida stock. The Commission suspended trading in Weida securities on April 25, 2005 (34 Act Rel. No. 51603).

The SEC alleges that Esposito and Birks violated Section 5(a) and 5(c) of the Securities Act of 1933 (Securities Act) and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and that DeVito, Holbrook and Tye violated Section 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The SEC seeks as relief permanent injunctions, disgorgement with prejudgment interest, civil penalties and penny stock bars. For additional information, see LR-19843 (Sept. 21, 2006), LR-19525 (Jan. 10, 2006); LR-19858 (Oct. 4, 2006).

The SEC acknowledges the assistance of the United States Attorney's Office for the Southern District of Florida, Federal Bureau of Investigation and Florida Office of Financial Regulation. [SEC v. Dean A. Esposito, Frederick J. Birks, Joseph DeVito, Theodore B. Holbrook and Walter A. Tye, Case No. 8-80130-CIV (Dimitrouleas, J.; Rosenbaum, M.J.) (S.D. Florida)] (LR-20456)


Northern Institutional Funds, et al.

An order has been issued on an application filed by Northern Institutional Funds, et al. under Section 12(d)(1)(J) of the Investment Company Act for an exemption from Sections 12(d)(1)(A) and (B) of the Act, and under Sections 6(c) and 17(b) of the Act for an exemption from Section 17(a) of the Act. The order permits certain registered open-end management investment companies to acquire shares of other registered open-end management investment companies and unit investment trusts that are within and outside the same group of investment companies. (Rel. IC-28149 - February 12)


Proposed Rule Change

The Options Clearing Corporation filed a proposed rule change (SR-OCC-2008-01) relating to its facilities management agreements. Publication is expected in the Federal Register during the week of February 18. (Rel. 34-57304)

Immediate Effectiveness of Proposed Rule Change

A proposed rule change filed by the National Stock Exchange. (SR-NSX-2008-03) relating to the creation of a Zero Display Reserve Order with a pegging option 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 February 18. (Rel. 34-57311)

Accelerated Approval of Proposed Rule Change

The Commission granted accelerated approval to a proposed rule change, as modified by Amendments No. 2, 3, and 5, submitted by the New York Stock Exchange (SR-NYSE-2004-70) to amend Rule 104 to require specialists to yield proprietary trades to later-arriving system orders. Publication is expected in the Federal Register during the week of February 18. (Rel. 34-57312)





Modified: 02/13/2008