The SEC Announces Settlements with Ten Investment Advisers For Violations of Section 13 and Section 16 Reporting under the Exchange Act

September 11, 2014

Yesterday, the Securities and Exchange Commission (the “SEC”) entered into settlement agreements with ten investment advisory firms in connection with the firms’ failure to make timely filings as required by the beneficial ownership reporting requirements of Section 13(d) and Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).1 Penalties for the violations ranged from $60,000 to $120,000. The settlements appear to signal that there will be more active enforcement of the Exchange Act reporting obligations by the SEC. When announcing the settlements the SEC stated that inadvertence is not a defense for filing violations.

Section 13(d) of the Exchange Act and the rules promulgated thereunder require any person or entity (or group of persons and/or entities acting together) that directly or indirectly acquires beneficial ownership of more than 5% of any voting class of equity security registered under Section 12 of the Exchange Act to publicly file a statement with the SEC on Schedule 13D or Schedule 13G to disclose certain information relating to its beneficial ownership. Significantly, Section 13 broadly defines the term “beneficial owner” to include “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise” has or shares voting or investment power with respect to a registered equity security. Therefore, more than one person may be the beneficial owner of the same securities and beneficial ownership by any entity is ordinarily also attributable to a control person and any parent company in a control relationship with respect to such entity. In the investment advisory context, since an investment manager is the beneficial owner of all accounts over which it exercises investment discretion, it may have a filing obligation if the accounts it manages have, in the aggregate, a greater than 5% position in any given issuer’s registered equity securities. A person is also deemed to beneficially own a security if that person has the right to acquire beneficial ownership within 60 days, such as with warrants and exercisable options.

Section 16 of the Exchange Act is intended to prevent unfair use of inside information by persons with certain “insider” relationships with issuers of equity registered under Section 12 of the Exchange Act. Pursuant to Section 16 and the rules promulgated thereunder, a person who is a director, officer or beneficial owner of more than 10% of any class of an issuer’s equity securities is deemed to be an “insider” of the issuer and thus is required to report its ownership and transactions in such equity securities, and is also subject to disgorgement of short-swing profits realized by such person from any (i) purchase and sale, or (ii) sale and purchase, of such equity securities within a period of less than six-months.

In light of these settlements, investment advisers should: (i) determine whether they, their clients and/or their principals have current Exchange Act reporting obligations; (ii) review past filings to ensure that there are no current amendment obligations and that all persons and entities in the investment adviser’s structure that were required to report on such filings were included as reporting persons; and (iii) remediate any issues identified (i.e., submitting initial filings or amending past filings). These settlements also underscore the need for investment advisers to review their compliance policies and procedures related to Exchange Act reporting to ensure that they are robust and properly implemented.

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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.


1 The SEC’s settlements also included charges for Exchange Act reporting violations against thirteen individuals who were officers or directors of public companies and five individuals who were beneficial owners of publicly-traded companies. In addition, six publicly-traded companies entered into settlements relating to charges for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.