SEC Proposes Measures to Curtail "Pay to Play" Practices
On July 22, the Securities and Exchange Commission voted unanimously to propose measures intended to curtail "pay to play" practices by investment advisers that seek to manage money for state and local governments. The measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.
The proposals relate to money managed by state and local governments under important public programs. Such programs include public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees can invest money for their retirement, and 529 plans that allow families to invest money for college.
To help manage this money, state and local governments often hire outside investment advisers who may directly manage this money and provide advice about which investments they should make. In return for their advice, the investment advisers typically charge fees that come out of the assets of the pension funds for which the advice is provided. If the advisers manage mutual funds or other investments that are options in a plan, the advisers receive fees from the money in those investments.
Investment advisers are often selected by one or more trustees who are appointed by elected officials. While such a selection process is common, fairness can be undermined if advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process.
The selection process also can be undermined if elected officials or their associates ask advisers for political contributions or otherwise make it understood that only advisers who make contributions will be considered for selection. Hence the term "pay to play." Advisers and government officials who engage in pay to play practices may try to hide the true purpose of contributions or payments.
"Pay to play practices can result in public plans and their beneficiaries receiving sub-par advisory services at inflated prices," said SEC Chairman Mary Schapiro. "Our proposal would significantly curtail the corrupting and distortive influence of pay to play practices."
Andrew J. Donohue, Director of the SEC's Division of Investment Management, added, "Pay to play serves the interests of advisers to public pension plans rather than the interests of the millions of pension plan beneficiaries who rely on their advice. The rule we are proposing today would help ensure that advisory contracts are awarded on professional competence, not political influence."
The rule being proposed for public comment by the SEC includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements.
Restricting Political Contributions
Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.
The rule would apply to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule would apply to political incumbents as well as candidates for a position that can influence the selection of an adviser.
There is a de minimis provision that permits an executive or employee to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.
Banning Solicitation of Contributions
The proposed rule also would prohibit an adviser and certain of its executives and employees from coordinating, or asking another person or political action committee (PAC) to:
Banning Third-Party Solicitors
The proposed rule also would prohibit an adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser.
Restricting Indirect Contributions and Solicitations
Finally, the proposed rule would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if that conduct would violate the rule if the adviser did it directly. This provision would prevent advisers from circumventing the rule by directing or funding contributions through third parties.
Public comments on the proposed rule amendments must be received by the Commission within 60 days after their publication in the Federal Register.
(Press Rel. 2009-168)
Revocation of Registration of Securities of Standard Metals Corporation
The Securities and Exchange Commission announced the revocation of the registration of the securities of Standard Metals Corporation of Haverford, Pennsylvania, registered with the Commission pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act), on July 23, 2009, pursuant to Section 12(j) of the Exchange Act.
In its Order revoking the registration of securities of Standard Metals Corporation registered with the Commission pursuant to Section 12 of the Exchange Act, the Commission found the following: that Standard Metals Corporation has failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, while its common stock was registered with the Commission in that it has not filed an Annual Report on Form 10-K for any period subsequent to its fiscal year ending December 31, 1996, or periodic or quarterly reports on Form 10-Q for any fiscal period subsequent to its fiscal quarter ending Sept. 30, 1997.
The Commission cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.
Further, brokers and dealers should be alert to the fact that, 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 pursuant to the preceding sentence.
Without admitting or denying the findings in the Order Instituting Administrative Proceedings Pursuant to Section 12(j) of the Securities Exchange Act of 1934, Making Findings, and Revoking Registration of Securities, Standard Metals Corporation consented the entry of an order finding that it had failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, and revoking the registration of each class of Standard Metals Corporation's securities registered with the Commission pursuant to Section 12 of the Exchange Act. (Rel. 34-60369; File No. 3-13562)
Defendant in SEC Enforcement Action Sentenced to 12 Months and One Day in Prison on Related Criminal Charges for Insider Trading
The Securities and Exchange Commission announced that on July 16, 2009, the federal court in Massachusetts sentenced Michael K.C. Tom for criminal charges for his role in an insider trading scheme. The sentence ordered Tom to serve 12 months and one day imprisonment, followed by three months of supervised release. The sentencing came nearly three years after Tom's original sentencing hearing and followed a series of appeals that ultimately reached the United States Supreme Court.
Tom was charged in a five-count criminal information on December 28, 2005 that alleged, among other things, that Tom partially owned Global Time Capital Management, LLC, the general partner of a Burlington, Massachusetts based hedge fund, GTC Growth Fund, L.P. The information alleges that prior to establishing Global Time Capital Management, Tom served as a senior analyst at Citizens Financial Group, Inc. in Boston, Massachusetts, where he briefly worked with portfolio analyst, Shengnan Wang, in December 2003. According to the information, on April 29, 2004, Wang called Tom and told him that members of her group were performing due diligence of an acquisition target in Cleveland, Ohio. The information further alleges that on April 29, 2004, Tom purchased securities in three Cleveland-based banks, including Charter One Financial, Inc., and that over the next three days Tom purchased hundreds of call options in Charter One as well as certain shares of Charter One common stock. According to the information, after the close of the market on May 3, 2004, Citizens publicly announced that it intended to acquire Charter One. The information further alleges that on May 5, 2005, the day after the merger was announced, Tom sold most of his stock realizing a profit of $743,505.
On February 15, 2006, Tom pled guilty to the five counts of securities fraud as alleged in the criminal information. On November 28, 2006, Tom was sentenced to three years probation, six months of which were to be served in a community confinement center, and was ordered to pay a special assessment of $500. The U.S. Attorney's Office appealed the criminal sentence and, on October 1, 2007, the First Circuit Court of Appeals reversed the District Court of Massachusetts sentence and remanded the matter for re-sentencing. Subsequently, on January 22, 2008, the United States Supreme Court granted Tom's petition for a Writ of Certiorari and vacated the First Circuit Court of Appeals judgment and remanded the case for further consideration. On April 30, 2008, the First Circuit Court of Appeals remanded the matter to the District Court of Massachusetts for reconsideration.
On September 29, 2005, the Commission filed a related civil injunctive action against Tom, among others, in the U.S. District Court in Massachusetts alleging many of the same facts charged in the criminal action. On May 8, 2008, the Massachusetts federal district court entered final judgments by consent against Tom as well against Global Time Capital Management and GTC Growth Fund. Previously, on June 8, 2006, final judgments by consent were entered against three other defendants in the Commission's action. [SEC v. Michael K.C. Tom, et al. (United States District Court for the District of Massachusetts, C.A. No. 05-CV-11966-NMG); United States v. Michael K.C. Tom (United States District Court for the District of Massachusetts, Criminal Action No. 05-10361-RCL)] (LR-21147)
SEC Announces Final Dispositions in Case Involving Alleged Improper Accounting Practices at Qwest Communications Int'l
The Securities and Exchange Commission announced today that on July 8, 2009, the United States District Court for the District of Colorado entered final judgments against Joel M. Arnold, Grant P. Graham, and Richard L. Weston. The entry of final judgments settles the Commission's claims against these individuals. Also, on the same date, the District Court granted the Commission's motion to dismiss all claims against John M. Walker.
In its complaint in this matter, the Commission alleged improper accounting practices by the defendants at Qwest Communications International, Inc., a Denver telecommunications company, relating to two transactions which inflated the company's revenues and overstated its performance during the third quarter 2000 and the second quarter 2001. [SEC v. Joel M. Arnold, Grant P. Graham, John M. Walker, and Richard L. Weston, Civil Action No. 03-cv-0328 (D. Colo.)] (LR-21148; AAER Rel. 3018)
SEC Seeks Return of $4 Million in Bonuses and Stock Sale Profits From Former CEO of CSK Auto Corp.
Enforcement Action is First Solely Under Section 304 of Sarbanes-Oxley Act of 2002
On July 22, 2009, the Securities and Exchange Commission asked the U.S. District Court for the District of Arizona to order the former chief executive officer of CSK Auto Corporation to reimburse the company and its shareholders more than $4 million that he received in bonuses and stock sale profits while CSK was committing accounting fraud. The SEC's enforcement action charges Maynard L. Jenkins of Scottsdale, Ariz., with violations of Section 304 of the Sarbanes-Oxley Act of 2002. It is the first action seeking reimbursement under Section 304 from an individual who is not alleged to have otherwise violated the securities laws. Section 304 deprives corporate executives of money that they earned while their companies were misleading investors.
According to the SEC's complaint, Jenkins made $2,091,020 in bonuses and $2,018,893 in company stock sales that should have been reimbursed to CSK pursuant to Section 304. The complaint alleges that CSK was required to prepare an accounting restatement due to its fraudulent conduct. While Jenkins served as CEO, CSK filed two such restatements related to its overstated vendor allowances. The complaint further alleges that, in violation of Section 304, Jenkins failed to reimburse CSK for bonuses, or other incentive-based or equity-based compensation, and profits from the sale of CSK stock he received during the 12-month periods following the filing of each of CSK's fraudulent financial statements. The SEC's complaint does not allege that Jenkins engaged in the fraudulent conduct.
CSK was an automotive parts and accessories retailer headquartered in Arizona during the relevant time period. In July 2008, after the conduct alleged in the complaint, CSK became a wholly-owned subsidiary of O'Reilly Automotive, Inc.
This is the third enforcement action in the SEC's investigation into CSK's alleged accounting misconduct. [SEC v. Maynard L. Jenkins, Case No. CV 09-1510-PHX-JWS (D. Ariz.)] (LR-21149A, AAER Rel. 3025)
SEC Charges West Marine With Falsifying its Financials
On July 23, 2009, the Securities and Exchange Commission filed a settled enforcement action against West Marine, Inc., a Northern California-based boating supply retailer. According to the SEC, West Marine filed numerous false financial statements from 2004 to 2006 after making undisclosed accounting changes designed to offset an unexpected earnings shortfall.
The SEC's complaint, filed in federal court in San Jose, alleges that shortly after pre-announcing its fiscal 2003 earnings, West Marine determined that it needed to change the way in which the company valued its inventory. That change reduced the value of its inventory by approximately $13.2 million, dramatically decreasing the company's previously-announced earnings. Rather than disclose this change to investors and report reduced earnings in its annual report, the SEC alleges that West Marine sought an offset and eventually devised a solution of capitalizing certain store occupancy expenses such as rent and utilities. This change in accounting methodology was neither disclosed to investors nor in compliance with Generally Accepted Accounting Principles (GAAP). According to the SEC, West Marine failed to properly disclose these significant accounting changes to its auditor by suggesting that its accounting methodology was consistent with prior years.
By capitalizing store occupancy costs, West Marine improperly increased its pre-tax income for the year, offsetting the undisclosed reduction in earnings caused by the change in inventory valuation. As a result, the company's annual report filed in March 2004 was misleading. Moreover, the SEC alleges that the improper accounting resulted in similarly misleading registration statements and periodic reports to investors filed in 2005 and 2006. The wrongful conduct was ultimately uncovered in 2007, when the company restated its financial results for fiscal years 2002 through 2005.
Without admitting or denying the SEC's allegations, West Marine agreed to a permanent injunction against future violations of Section 17(a)(2) and (a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, and 13a-13 under the Exchange Act. [SEC v. West Marine, Inc., Case No. CV-09-3379 PVT (N.D. Cal.] (LR-21150; AAE Rel. 3019)
Federal Court Grants Summary Judgment for SEC and Orders Permanent Injunction Against Philip E. Lowery in Fraudulent Offering Action
The Securities and Exchange Commission announced that on July 15, 2009, the Honorable Paul L. Maloney, United States District Judge for the Western District of Michigan, granted the Commission's motion for summary judgment, in part, against Philip E. Lowery, the architect of a fraudulent offering of Colorado registered limited liability partnership (RLLP) units that were supposedly formed to share in the profits from online casinos Lowery was to create and run. The Court permanently enjoined Lowery from future violations of the registration and antifraud provisions of the federal securities laws.
In its complaint, filed May 19, 2005, the Commission alleged that Lowery violated the antifraud and registration provisions of the federal securities laws in connection with the offer and sale of $5.8 million RLLP units to over 80 investors nation-wide. According to the complaint, Lowery made false and misleading statements in connection with his selling efforts, including providing potential investors with unrealistic profit projections and telling them the investments were guaranteed and their funds would be used for partnership and casino business expenses, when, in fact, most of the funds were used to pay for personal expenses. Eventually, investors lost all of their money after the casinos were shut down due to operational problems.
Judge Maloney granted the Commission's motion as to all of its claims against Lowery. In his 46-page order granting summary judgment, Judge Maloney found that, "in failing to find arguably-sound statistics or other bases for his profit and market-share projections, and in diverting investor-"partner" capital from the RLLPs and casinos to his personal use without consulting or even informing them, [Lowery] engaged in 'highly unreasonable conduct which is an extreme departure from the standards of ordinary care.'" The Court permanently enjoined Lowery from further violating Sections 5(a), 5(c) and 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 Court ordered Lowery to disgorge his ill-gotten gains, and remanded the case to Magistrate Judge Ellen S. Carmody for a determination of the amount of disgorgement and any prejudgment interest, civil penalties, and other damages or relief deemed appropriate. [SEC v. Philip E. Lowery, Civil Action No. 1:05-CV-354 (PLM) (W.D. Mich.)] (LR-21151)
INVESTMENT COMPANY ACT RELEASES
Orders of Deregistration Under the Investment Company Act
Orders have been issued under Section 8(f) of the Investment Company Act declaring that each of the following has ceased to be an investment company:
JPL Separate Account D of Jefferson Pilot LifeAmerica Insurance Company
An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that JPL Separate Account D of Jefferson Pilot LifeAmerica Insurance Company has ceased to be an investment company. (Rel. IC-28831 - July 22)
Colonial Separate Account VA-2
An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that Colonial Separate Account VA-2 has ceased to be an investment company. (Rel. IC-28832 - July 22)
Chubb Separate Account VA-1
An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that Chubb Separate Account VA-1 has ceased to be an investment company. (Rel. IC-28833 - July 22)
Pax World Funds Trust II, et al.
A notice has been issued giving interested persons until Aug. 12, 2009, to request a hearing on an application filed by Pax World Funds Trust II, et al. for an order to permit (a) certain open-end management investment companies and their series, to issue shares (Fund Shares) that can be redeemed only in large aggregations (Creation Units); (b) secondary market transactions in Fund Shares to occur at negotiated prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days after the tender of Fund Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units; and (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Fund Shares. (Rel. IC-28834 - July 22)
Compagnie De Financement Foncier
A notice has been issued giving interested persons until Aug. 12, 2009, to request a hearing on an application filed by Compagnie de Financement Foncier for an order under Section 6(c) of the Investment Company Act granting an exemption from all provisions of the Act in connection with the offer and sale of its securities in the United States. (Rel. IC-28835 - July 22)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the NASDAQ Stock Market (SR-NASDAQ-2009-059) modifying fees for members using the NASDAQ Options Market 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 July 27. (Rel. 34-60352)
Proposed rule changes filed by NASDAQ OMX PHLX (SR-Phlx-2009-60) and NASDAQ OMX BX, Inc. (SR-BX-2009-040) amending the By-Laws of The NASDAQ OMX Group, Inc., their parent company, have 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 July 27. (Rel. 34-60358)
A proposed rule change filed by the Municipal Securities Rulemaking Board relating to guidance on disclosure and other sales practice obligations to individual and other retail investors in municipal securities (SR-MSRB-2009-08) 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 July 27. (Rel. 34-60359)
A proposed rule change filed by Financial Industry Regulatory Authority to update rule cross-references and make other various non-substantive technical changes to FINRA rules (SR-FINRA-2009-046) 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 July 27. (Rel. 34-60362)
Approval of Proposed Rule Changes
A proposed rule change (SR-NYSE-2009-08), filed by the New York Stock Exchange rescinding NYSE Rule 110, which establishes the role of Competitive Traders, and Exchange Rule 107A, which establishes the role of the Registered Competitive Market Makers, has been approved pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60356)
The Commission approved a proposed rule change by the Financial Industry Regulatory Authority (SR-FINRA-2009-030) to amend Rules 6440 and 6540 to, among other things, require members to create a contemporaneous record of certain customer and order information. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60366)
Proposed Rule Changes
The NASDAQ OMX PHLX filed a proposed rule change (SR-Phlx-2009-61) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to Exchange Rules for the Options Order Protection and Locked/Crossed Market Plan. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60363)
BATS Exchange filed a proposed rule change (SR-BATS-2009-026) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder to amend BATS Fee Schedule to impose fees for ports used for order entry and receipt of market data. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60364)
JOINT INDUSTRY PLAN RELEASES
Amendments to the National Market System Plan for the Purpose of Creating and Operating an Intermarket Option Linkage
The Chicago Board Options Exchange, International Securities Exchange, the NASDAQ Stock Market, NASDAQ OMX BX, NASDAQ OMX PHLX, NYSE Amex, and NYSE Arca have submitted amendments to the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage pursuant to Rule 608 of Regulation NMS under the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60360)
Amendment No. 3 to the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options
Pursuant to Rule 608 under the Securities Exchange Act of 1934, the Chicago Board Options Exchange, International Securities Exchange, NASDAQ Stock Market, NASDAQ OMX BX, NASDAQ OMX PHLX, NYSE Amex, NYSE Arca, and the Options Clearing Corporation have filed an amendment to the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options to apply uniform objective standards to the range of options series exercise (or strike) prices available for trading on the exchanges. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60365)
SECURITIES ACT REGISTRATIONS
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