by T. GormanPosted on Posted in SECActions

Conflicts of interests are always a critical issue for investment advisers. The management of other people’s money by advisers can present situations in which conflicts can arise unless there is proper disclosure. It is those conflicts, and the failure to disclose them, that often gives rise to enforcement actions involving investment advisers. It is just such a failure that is at the center of the Commission’s most recent action involving an investment adviser, SEC v. Greneco, LLC., Civil Action No. CIV 22-673 (W.D. Okla. Filed August 8, 2022).

Named as defendants in the action are: GreneCo, LLC a firm owned by defendants Gene Larson and Gregory Womack; Gene Larson, a co-owner of GreneCo with defendant Gregory Womack; and Womack Investment Advisers, Inc., a state registered investment adviser controlled by Mr. Womack.

Over about a one-year period, beginning in late December 2018, GreneCo and Messrs. Larson and Womack raised about $23.3 million from 250 investors in four unregistering offerings involving what were called real estate investment opportunities. Potential investors were solicited to purchase membership units in limited liability companies managed by GreeneCo. The units were unregistered securities.

Defendant Womack also recommended interests in one or more of the four offerings to clients of Womack Investment Advisers. Those investors were not told that Mr. Womack would receive substantial management fees from investor funds through the GreneCo offerings. Likewise, he and the Advisory did not inform Womack Investment Advisers clients that the firm would received at least $160,000 in fees directly from GreneCo. To the contrary, Part 2 of the Advisor’s Form ADV stated in part that the firm “receives no compensation from a client’s participation and does not charge the client a fee for the investment.” Mr. Womack and the firm had a duty to disclose the management fees paid to him and the compensation paid to the investment advisor from GreneCo. The disclosures were not made.

The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Advisers Act Section 206(2).

Defendants resolved the action. Each Defendant consented to the entry of permanent injunctions based on the Sections cited in the complaint. Each will also pay a penalty in the amount of: $414.364, $41,440 and $186,471, respectively. Defendant Womack also agreed to pay disgorgement of $236,349 plus prejudgment interest. And, the Adviser agreed to pay disgorgement of $160,000 plus prejudgment interest and a penalty of $517, 995. See Lit. Rel. No. 25464 (August 10, 2022).

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by T. GormanPosted on Posted in SECActions

Rules and more rules. The Commission seems to continually be proposing new rules. This is not to say that new rules, or at least updated rules, are not needed in many areas. The agency under Chair Gary Gensler, however, seems to have a never-ending agenda of proposed new rules.

The latest proposed rules focus on conflicts of interest at clearing agencies, the basic plumbing of the markets. The statutory authority traces to Section 765 of Dodd-Frank. There Congress directed the Commission to address conflicts of interest for security-based swap clearinghouses.

The Commission’s new proposed rules would cover the Dodd-Frank provision but apply more broadly to all clearing facilities. The proposed rules would also build on those adopted in 2012 for clearinghouses which were strengthened in 2016.

The rules proposed have several key provisions:

·1) To establish policies and procedures regarding conflicts of interest which include board members;

·2) The provisions adopted by the clearing agencies must promote consideration of the views of owners, participants and other relevant stakeholders;

·3) Any new provisions adopted must cover the functioning, composition and membership of the nominate and management committees; and

·4) The provisions must be structured so that the majority of the board members are independent.

Finally, clearinghouses will be required to develop policies and procedures to oversee it the firm’s relationship with certain critical service providers. Chairman Gary Gensler, Statement on Proposal to Enhance Clearing Agency Governance (Aug. 8, 2022)(here).

While the proposals are built on familiar concepts such as eliminating conflicts and having a board majority of independent directors, two Commissioners stated they do not support the proposals. Commissioner Mark Uyada raised a number of concerns despite initially stating that an effective regulatory framework is “particularly important . . .” in view of the impact of clearing agencies. His concerns included the fact that the rules may limit competition, increase market concentration, appear overly broad and do not clearly mirror differences among clearing agencies. Commissioner Mark T. Uyeda, Statement on Clearing Agency Governance and Conflicts of Interest (Aug. 8, 2022)(here).

Commissioner Hester M. Peirce also did not support the proposals. She effectively summarized her concerns by stating: “The proposal takes an overly prescriptive, regulator-knows-best approach to these matters that risks diluting the duties of directors to the clearing agency and depriving clearing agencies of the flexibility and expertise needed to effective governance.” Commissioner Hester M. Peirce, Dissenting from Shareholder Governance for Clearing Agencies (Aug. 8, 2022)(here).

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