Corporate & Financial Weekly Digest

Corporate & Financial Weekly Digest

Delaware Court of Chancery Rejects Controlling Stockholder Claims and Applies Business Judgment Rule to Merger Suits

Posted in SEC/Corporate

In In re KKR Financial Holdings LLC Shareholder Litigation, C.A. No. 9210 (Del. Ch. Oct. 14, 2014), the Delaware Court of Chancery dismissed a shareholder derivative suit brought by shareholders of KKR Financial Holdings LLC (KFN) alleging, among other claims, a breach of fiduciary duties by each of (1) KKR & Co. L.P. (KKR), as an alleged controlling stockholder, and (2) KFN’s board of directors, in connection with the acquisition by KKR of KFN in a stock-for-stock merger. Continue Reading

FINRA Remarks at the National Society of Compliance Professionals Conference

Posted in Broker-Dealer

On October 20, Carlo di Florio, chief risk officer and head of strategy of the Financial Industry Regulatory Authority, gave a speech at the National Society of Compliance Professionals regarding risk and regulatory issues in the markets and FINRA’s risk-based exam program, Comprehensive Automated Risk Data System (CARDS), the Consolidated Audit Trail (CAT) and FINRA’s efforts to improve transparency. Continue Reading

CFTC Issues Interpretation Regarding Accounting for Customer Margin Payments Using Automated Clearing House Payment Processing

Posted in CFTC

On October 23, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued an interpretation regarding the appropriate treatment of customer margin payments made to a futures commission merchant (FCM) using the Automated Clearing House (ACH) transaction system for purposes of compliance with CFTC Regulations 1.17, 1.22, 22.2, and 30.7. CFTC Regulations 1.22, 22.2, and 30.7(f) require each FCM to compute, as of the close of each business day, the amount by which each customer’s account may be undermargined. An FCM must also maintain a sufficient amount of its own funds (i.e., the FCM’s Residual Interest) equal to or in excess of the total customer undermargined amount. If the total customer undermargined amount exceeds an FCM’s Residual Interest, the FCM must increase its Residual Interest prior to the clearing settlement cycle on the next business day for cleared swaps accounts (CFTC Regulation 22.2), and by 6:00 p.m.. Eastern Time the next business day for futures accounts (CFTC Regulation 1.22) and for foreign futures accounts (CFTC Regulation 30.7). Continue Reading

SEC Denies Two Proposed Applications for Non-Transparent Active ETFs

Posted in Investment Companies and Investment Advisers

The Division of Investment Management (Division) of the Securities and Exchange Commission took an unprecedented action on Wednesday in issuing a preliminary denial to two exemptive relief applications under the Investment Company Act of 1940 for the operation of a non-transparent active exchange-traded fund (ETF). The exemptive relief applications, filed by Precidian Investments (Precidian) for Precidian ETFs Trust and BlackRock Fund Advisors for Spruce ETF Trust, relied upon a patented methodology developed by Precidian. Applications for non-transparent active ETFs filed by other managers that use different methodologies remain pending before the Division. 

Precidian’s non-transparent active ETF methodology relied upon authorized participant arbitrage between the published indicative intraday value per share of a fund’s underlying assets and the current trading price of that fund’s shares. Authorized participants could then create and redeem shares through a blind trust to preserve the identity of the non-transparent portfolio holdings. 

The Division’s releases noted specific issues related to the methodology, particularly in respect of the proposed arbitrage mechanism. Unless the SEC grants a request for a public hearing to discuss the issues, the Division’s denial of the two applications is expected to stand.

SEC Release on Precidian ETFs Trust, et al.

SEC Release on Spruce ETF Trust, et al. 

SEC Sanctions Athena in First High-Frequency Trading Manipulation Case

Posted in Litigation

On October 16, in a groundbreaking trading manipulation case, the Securities and Exchange Commission entered an Order instituting a settled administrative proceeding against high-frequency trading firm Athena Capital Research, LLC (Athena). The SEC claimed that from June through December 2009, on almost a daily basis, Athena engaged in a practice called “marking the close,” buying or selling stocks shortly before the close of trading in order to push the market price and closing price. The SEC asserted that Athena used sophisticated algorithms and rapid trades to manipulate the closing price of tens of thousands of stocks to its benefit. Despite Athena’s relatively small size, as a result of its high-frequency trading strategy, its trades constituted 70 percent of the total NASDAQ trading volume of the affected stocks in the final seconds of the day. According to the SEC, Athena designed a strategy to exploit order imbalances, which occur when there are more on-close orders to buy certain shares than to sell them, or the converse. Shortly before close of trading, NASDAQ releases information regarding the size and direction of potential imbalances to encourage market participants to fill imbalances. Athena would typically fill the imbalance immediately after NASDAQ’s first imbalance message, and then engage in a series of rapid fire transactions on the opposite side of its order over the remaining minutes of the trading day. As a result, the SEC claimed Athena manipulated the prices of targeted stocks. These “manipulated” prices, in turn, were used by NASDAQ to set closing prices for on-close orders during its closing auction. Athena’s internal email communications, quoted in the SEC Order, indicated that the firm was aware that the strategy might raise regulatory concerns. For example, one manager emailed another after the firm received a regulatory alert, “let’s make sure we don’t kill the golden goose.”  

Athena settled with the SEC and agreed to a censure, without admitting or denying the SEC’s finding of violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Athena also agreed to cease and desist from further violations and pay a $1 million penalty.

SEC Announces Record Number of Enforcement Actions in FY 2014

Posted in Litigation

Last week, the Securities and Exchange Commission provided a summary of its enforcement activities for its fiscal year 2014 (ending in September). The SEC announced that it brought a record 755 enforcement actions and obtained orders totaling $4.16 billion in disgorgement and penalties. This was a jump from the 686 enforcement actions and $3.4 billion in disgorgement and penalties obtained in FY 2013. More than 135 parties were charged with reporting and disclosure violations, and 80 individuals were charged with insider trading. FY 2014 also marked the highest penalties to date against individuals who violated the Foreign Corrupt Practices Act. The SEC touted litigation successes, included jury verdicts against individuals who used offshore trusts to conceal shares of public companies, and against a hedge fund manager who funneled money to a Ponzi scheme. Continue Reading

CPMI-IOSCO Recovery of Financial Market Infrastructures Report

Posted in EU Developments

On October 15, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissioners (IOSCO) published a final report entitled, “Recovery of Financial Market Infrastructures” (the FMI Report). The FMI Report provides guidance to financial market infrastructures (FMIs) for designing recovery plans from market threats to prevent severe systematic disruptions or failures. FMIs include central counterparties, payment systems, trade repositories, and settlement systems. Continue Reading

Recap and Update: AIFM Directive for US Private Fund Managers

Posted in EU Developments

Now that three months have passed since the Alternative Investment Fund Managers (AIFM) Directive became binding law in all European Union jurisdictions, US private fund managers (whether hedge funds, private equity funds or other fund types) should ensure that they understand how the AIFM Directive applies to their activities, if at all, and what they need to do to comply with it. Continue Reading

SEC Investor Advisory Committee Releases Recommendations on Changes to Accredited Investor Definition

Posted in Dodd-Frank Developments, SEC/Corporate

On October 9, the Investor Advisory Committee (Committee) established by the Securities and Exchange Commission released its recommendations for changes to the definition of “accredited investor” included in Rule 501 promulgated under the Securities Act of 1933 (Securities Act). Specifically, these recommendations relate to the determination of “accredited investor” status with respect to natural persons. The Committee’s recommendations are part of the SEC’s review of such definition that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Continue Reading