SEC and CFTC Updates - July 2013 Publication


SEC Eliminates Ban against General Solicitation and General Advertising in Hedge Fund Offerings


The SEC recently adopted a Final Rule which eliminates the ban against general solicitation and general advertising in private fund offerings. In order to implement certain provisions of the JOBS Act which was enacted in April 2012, the SEC amended Rule 506 of Regulation D of the Securities Act (as well as Rule 144A). Through these amendments, issuers, including issuers of private funds, can offer securities by means of general solicitation provided that all purchasers of these securities are accredited investors and that the issuer has taken reasonable steps to verify the purchasers of the securities are accredited investors. (The SEC has proposed that a general solicitation effort be predicted on the filing of a Form D under Rule 506; see the next section of this Update below.) In the Final Rule, the SEC provided specified methods for verifying a purchaser’s accredited investor status including a Principles-Based Method of Verification as well as Non-Exclusive Methods for verifying accredited investor status. 


Under the Principles-Based Method of Verification, factors that issuers should consider when verifying whether a purchaser of securities is an accredited investor include the nature of the purchaser and the type of accredited investor that the purchaser claims to be; the amount and type of information that the issuer has about the purchaser; and the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount. Non-Exclusive Methods for verifying accredited investor status included reviewing tax returns or bank and brokerage statements as well as obtaining a written confirmation from a registered broker-dealer or investment adviser or from a licensed attorney.


The Final Rule also provides that resales of securities pursuant to Rule 144A can be conducted using general solicitation, so long as the seller reasonably believes that the purchaser is a Qualified Institutional Buyer.


These Final Rules will become effective 60 days after the Final Rule is published in the Federal Register. We would therefore expect the Effective Date of this Final Rule to be in mid-September 2013.


The Adopting Release of the SEC pertaining to this Final Rule can be found via the following link:


Proposed Form D Amendments


The SEC also recently proposed a rule in connection with the adoption of the Final Rule that removed the ban on general solicitation. The Proposed Rule would require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation; require the filing of a closing amendment to Form D after the termination of any Rule 506 offering; require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures; require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the SEC; and disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering.


Comments to the Proposed Rule should be received within 60 days after the proposed rule is published in the Federal Register, meaning that the deadline for comments is likely to be in mid-September 2013.


The text of the Proposed Rule can be found via the following link:


Disqualification of Felons and Other “Bad Actors” from Making Certain Private Fund Offerings


The SEC also recently adopted a Final Rule which precludes certain “bad actors” or “bad boys” from relying on Rule 506 of Regulation D of the Securities Act (via which the vast majority of private fund offerings are made). In particular, if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws, the issuer may be precluded from private fund offerings that rely on the Rule 506 exemption.


These Final Rules will become effective 60 days after the Final Rule is published in the Federal Register. We would therefore expect the Effective Date of this Final Rule to be in mid-September 2013.


The Adopting Release of the SEC pertaining to this Final Rule can be found via the following link:


Insider Trading Action - Steven A. Cohen


Insider Trading continues to be an area of enhanced focus for the SEC. The SEC recently instituted public administrative proceedings against Steven A. Cohen, the founder of S.A.C. Capital Advisors, LLC (“SAC”), which, along with its affiliates, managed portfolios of $15 billion, for failing reasonably to properly supervise two of SAC’s portfolio managers. The SEC’s Division of Enforcement alleges that on at least two separate occasions in 2008, two portfolio managers who reported to Cohen obtained material nonpublic information about three different publicly traded companies, including Elan Corporation, plc, Wyeth, and Dell Inc. Both portfolio managers provided information, including via email, to Cohen indicating that they may have had access to inside information to support their trading.


Based on that information, the SEC alleges that both portfolio managers engaged in unlawful insider trading. The SEC further alleges that in each case, Cohen received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws. The SEC states that Cohen failed to take reasonable steps to investigate and prevent such violations, and instead, faced with red flags of potentially unlawful conduct by employees under his supervision, allowed his traders to execute the recommended trades and stood by while the portfolio managers traded in the portfolios they managed.


In response to this proceeding, The Wall Street Journal has reported that Cohen’s attorneys issued a white paper to SAC employees where they state that Cohen never even read an email regarding Dell Inc. that the SEC says was “highly suspicious” and “reflected the clear possibility” that the traders that sent it “were unlawfully in possession of material nonpublic information.” According to the WSJ, the white paper further states that “[Cohen] received about 20,000 emails a month and about 1,000 per business day at that time in his life. He didn’t read many of them, even those sent by a “research trader” whose job was to email him possible trading ideas.”


Based on the trades described above, and Cohen’s failure reasonably to supervise his portfolio managers who executed the trades, the SEC states that Cohen’s hedge funds earned profits and avoided losses totaling more than $275 million. The SEC also states that Cohen later praised one of the portfolio managers, Michael Steinberg, for his role in one of the trades and rewarded the other, Michael Martoma, with a $9 million bonus for his work.


Both of these portfolio managers have been criminally charged with insider trading. Jon Horvath, an analyst who reported to one of those portfolio managers, has pleaded guilty to criminal insider trading charges. The Wall Street Journal has further reported that Federal prosecutors are preparing to announce criminal charges as early as this week against SAC.


The text of the SEC’s Order Instituting Administrative Proceedings against Steven A. Cohen can be found via the following link: SEC order against Steven Cohen.


SEC, European Regulators Establish Supervisory Cooperation Arrangements Related to the Asset Management Industry


The Securities and Exchange Commission recently announced that it has established supervisory arrangements with financial regulators of the member states of the European Union (EU) and the European Economic Area (EEA) as part of long-term strategy to improve the oversight of certain entities in the asset management industry that operate across national borders.


The memoranda of understanding (MOUs) signed this week provide a framework for supervisory cooperation and exchange of information between SEC and the EU/EEA member state national regulators in the area of asset management. These MOUs were negotiated between the SEC staff and staff of the European Securities and Markets Authority (ESMA). ESMA negotiated the MOUs required under the EU Alternative Investment Fund Managers Directive on behalf of the EU/EEA member-states’ national regulators.


The MOUs were concluded with 25 EU and 3 EEA member-state regulators. The EU member-state regulators with whom the Commission signed MOUs are those from Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden and the United Kingdom. The EEA signatories to the MOUs are regulators from Iceland, Liechtenstein and Norway.


These supervisory cooperation arrangements will enhance SEC staff’s ability to share information about certain entities in the asset management industry, such as investment advisers and investment fund managers.


The SEC’s official press release announcing these cooperation arrangements can be found via the following link:


FSOC: AIG and GE Capital Designated to Address Potential Threats to Financial Stability


The Financial Stability Oversight Council (“FSOC”) recently designated AIG and GE Capital as the first two nonbank financial companies in order to address potential threats to financial stability. The FSOC’s designation of AIG and GE Capital subjects them to supervision by the Board of Governors of the Federal Reserve System and to enhanced prudential standards. The FSOC determined that material financial distress at these companies – if it were to occur – could pose a threat to U.S. financial stability. The FSOC was clear to state that this designation does not constitute a determination that either company is currently experiencing material financial distress. The FSOC believe that its authority to make these designations is an important tool to mitigate risks posed by these companies, fill gaps in their overall supervision, and provide enhanced standards under which they must operate.


The text explaining the FSOC’s decision can be found via the following links:



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