by T. GormanPosted on Posted in SECActions

Recently Julie M. Rieve, Co-chief, Asset Management delivered remarks titled Conflicts, Conflicts Everywhere to the IA Watch 17th Annual IA Watch Compliance Watch Conference (Feb. 26, 2015)(here). Conflicts are in fact the focus of many of the cases that have recently been brought involving investment advisers and other market professionals.

Ms. Rieve’s remarks might also have been seen as presaging the Commission’s most recent action involving an investment adviser, In the Matter of Edgar R. Page, Adm. Proc. File No. 3-1607 (March 10, 2015). There the Order names as Respondents Page One, a registered investment adviser, and its principal, Edgar Page, 95% owner, CEO and COO.

The Order centers on a late 2008 arrangement entered into by Mr. Page and a Fund Manager who managed a series of private investment funds. The two men entered into an agreement under which Fund Manager would acquire Page One for about $3 million. The payments would be made in installments over time. The agreement also stipulated that Mr. Page would refer Page One clients to the funds managed by Fund Manager. The acquisition would not close unless, and until, those clients had invested $20 million in the funds managed by Fund Manager.

Subsequently, the arrangement was modified. Under the new terms Fund Manager would only acquire 49% of Page One. While the purchase price was reduced, Mr. Page’s obligation to refer $20 million of business to the funds was not.

In preparing the Form ADVs for Page One – Mr. Page was the chief compliance officer – the deal to sell Page One was not disclosed. To the contrary, in the 2009 filing the firm told clients that it was not charging management fees because it was compensated by Fund Manager. That filing significantly understated the amount of that compensation. More importantly, it failed to disclose the arrangement under which Fund Manager would acquire the firm. Subsequently, amendments were made to the filings. The deal for Fund Manager to acquire Page One was not disclosed.

Eventually the deal collapsed. Mr. Page was unable to refer $20 million in business to the funds managed by Fund Manager. Likewise, Fund Manager did not comply with the purchase obligations.

The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 207.

The Respondents partially resolved the proceeding. Each consented to the entry of a cease and desist order based on the Sections cited in the Order. Page One also consented to the entry of a censure. Further proceedings will he held to determine what monetary sanctions, if any, should be imposed.

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by T. GormanPosted on Posted in SECActions

Capital formation is one of the primary missions of the SEC. Commissioner Kara Stein recently discussed this basic SEC mission in remarks delivered at the Stanford Rock Center for Corporate Governance, Stanford Law School (here), outlining several new options. The Commissioner began by noting that while “[i]nnovation isn’t explicitly part of our mission . . .” the SEC does support it. In this regard a “key question the Commission is always grappling with is – how do we continue to facilitate innovation as business models are disrupted, financial markets change, and technology evolved? How do we ensure that our rules keep pace with all this innovation?”

Set in in this context, Commissioner Stein turned to the question of capital formation and approaches which are either being considered or might be in the future. While many start-ups benefit from venture financing, there are other options which can provide them with a variety of choices. One is Regulation A+. This option traces to the JOBS Act and “would expand upon the Commission’s current, but little used, Regulation A exemption. Reg A+ would enable companies to offer up to $50 million in a 12-month period without registering its securities with the Commission, as opposed to the current $5 million limit. It also would allow small businesses to raise money from the public with a streamlined approach to oversight by the Commission. Reg A+ is a creative example of reimagining a capital formation option that was essentially broken” the Commissioner declared. The rules for Regulation A+ are in the process of being finalized.

A second option is crowdfunding. This path to raising capital also traces to the 2012 JOBS Act. It would permit “small companies to harness the power of a community of small investors via the internet, to fund themselves quickly and efficiently,” according to Commissioner Stein. A variation of this approach might be to pool “each class of crowdfunding investors into a fund vehicle. If done right, this could potentially solve the problem of hundreds or thousands of small investors on a company’s register, while also ensuring that crowdfunding investors could effectively exercise their governance rights . . . other jurisdictions are experimenting with this idea.”

At the same time crowdfunding presents substantial “challenges” according to the Commissioner. It does not fit into the current framework of the securities laws. Rather. it requires new rules and a new approach. It also presents new risks which must be effectively resolved. A lack of investor confidence in the approach could undermine its effectiveness.

A third option might be regional exchanges. The state legislature in Hawaii passed legislation in 2011 authorizing this approach. This could benefit local enterprises and investors while providing more secondary market liquidity. A variation of this approach is venture exchanges. “These exchanges could allow small companies to exclusively trade their shares. Disclosure and other rules might be somewhat relaxed. Perhaps such an exchange could provide a new runway for growth for smaller companies, while also providing the essential, material disclosures that investors need,” Commissioner Stein stated.

In the end Commissioner Stein noted that “many of our securities laws have held up remarkably well . . .” over time. At the same time the “Commission should always be innovating to make it work better” she declared.

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