5 Areas Where The SEC is Concerned

The Securities & Exchange Commission continues to propose new rules and identify areas of potential harm to investors. A number of those areas have been discussed in the media over the past month. To the extent that the SEC is identifying them as an area of concern, they may also be looking into potential enforcement actions related to their concerns. Securities whistleblowers with information implicating one of these areas should contact us to discuss their information.

Auditor Relationships

The SEC is considering requiring auditors to disclose the length of their relationship with public companies. The SEC and investors are concerned that the length of the relationship could impact the independence of the oversight of the company by the auditor.

Data reported by the Financial Times indicates that “a large number” of auditors have been with their S&P 500 clients for more than 50 years. The Financial Times article highlighted a few different companies that had used the same auditor for more than 85 years. Those companies were Proctor & Gamble, General Electric, Caterpillar and Goldman Sachs.

The article really didn’t put a timeline on the matter. It said simply that the securities regulator would be discussing the issue with investors this summer.

Stapled Transactions

SEC officials expressed concerns last month about private equity funds combining the sale of assets in a current fund with a required investment in a new fund. According to the website Pensions & Investments, this could be an area of focus for the office of compliance inspections and examinations.

Generally, the general partner of a fund gives investors the option of cashing out their position or investing in a new fund when closing down a past fund. The stapled transaction, however, may sell the old fund and its remaining portfolio companies to a new fund with different terms. The limited partners in the deal may not be aware of it until after it is done, since only the advisory committee needs to approve asset-sale transactions.

ETFs, Mutual Funds

Commissioner Kara Stein expressed concern at a Brookings Institution event about weaknesses in the regulation of complex mutual funds and exchange traded funds. Stein indicated that exemptions granted by SEC staff has allowed these asset managers to circumvent leverage restrictions and funds are bypassing

The SEC is currently seeking public comment on the marketing of ETFs and SEC Chair White has already proposed rules requiring disclosure of additional data by mutual funds, new risk controls on these products and other measures.

Transfer Agents

Commissioners Luis Aguilar and Daniel Gallagher released a statement last week supporting the modernization of the agency’s rules concerning transfer agents. The SEC hasn’t significantly revised the rules in this area for almost thirty years.

Transfer agents keep track of the purchases and sales of stocks and the issuance of shares. They are a gatekeeper in safeguarding investor assets against fraud.

Social Media

The SEC has proposed new rules for disclosures of investment funds on social media. The SEC currently reviews websites to ensure the information and services offered is up to date. This scrutiny is being extended to social media sites such as LinkedIn and Twitter. The proposed changes to the regulations are open for public comment until mid-July.

Last year, the SEC issued guidance on the implications of social media toward the Investment Advisers Act of 1940’s testimonial rule. Rule 206(4)-1(a)(1) prohibited the distribution of advertisements with testimonials concerning investment advisers or their advice. The guidance was part of the SEC’s attempt to update the application of the rule to account for review sites like Yelp.

Do you have evidence of corporate wrongdoing in one of these areas? Contact one of our SEC whistleblower lawyers to discuss your options under the securities whistleblower program. An attorney can be reached by our contact form or by phone at 1-800-590-4116.

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