Author: Doug Cornelius

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Corporate Transparency Act is Back from the Dead, Again, for Now

[Edited] On January 23, the US Supreme Court agreed to stay the injunction issued by Eastern District Of Texas that had halted the final implementation of the Corporate Transparency Act. That means the filing deadline for Beneficial Ownership Information reporting is back. Theoretically, that deadline was January 13 and most companies are currently in violation. I assume FinCEN will issue some form of extension.

The Wall Street Journal states that there is another nationwide injunction in place that may still be blocking implementation. Smith v. US Dept of Treasury, 6:24-cv-336-JDK. The judge in this followed Texas Top Cop Shop like a twin. That nation-wide injunction came out on January 7. I assume it will also fall based on the Supreme Court lifting of the stay in Texas Top Cop Shop.

FinCEN Statement:

On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.

Of course the underlying Texas Top Cop Shop case is still proceeding. The Fifth Circuit is scheduled to hear the appeal. The rollercoaster will continue through the first quarter.

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New ILPA Reporting Templates

On Wednesday, the Institutional Limited Partners Association released updates to its ILPA Reporting Template and a new ILPA Performance Template. The goal is to enhance standardization, transparency and comparability in reporting across geographies for private funds. I assume this release is a response to the failure of the Private Fund Rules that the Securities and Exchange Commission enacted, but got overturned in court.

ILPA is setting a January 1, 2026 date as the opening quarter for using these templates.

For performance reporting, ILPA is proposing two versions. One versions itemizes each capital for its use, called the “Granular Methodology.” The other version does not and just gross them all together, called the “Gross Up Methodology.”

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Speeding Past Your AML Requirements

SpeedRoute is a registered broker-dealer that specializes in routing U.S. equities orders for broker-dealer clients to trading platforms for execution. Being a registered broker-dealer means that SpeedRoute has to comply with the Bank Secrecy Act. Among many other things, that requires SpeedRoute to file Suspicious Activity Reports for suspicious transactions that it knew, suspected, or had reason to suspect involved the use of these trading platforms to facilitate fraudulent activity or that had no business or apparent lawful purpose.

SpeedRoute has what seems like a good written set of AML policies and procedures, at least according to the Securities and Exchange Commission.

The firm’s AML Policies specifically mentioned “spoofing,” “layering,” and “wash trading” as types of market manipulation of particular concern to SpeedRoute. The AML Policies also incorporated each of the red flags listed in Section III of FINRA Regulatory Notice 19-18, which includes orders representing a substantial percentage of the daily trading volume in low-priced securities, pre-arranged trading (including wash trading), and spoofing. The AML Policies also outlined procedures for identifying (manually and through automated surveillance), investigating, and filing SARs for transactions indicative of suspicious activity.

The problem is that SpeedRoute’s surveillance system was not aligned with those policies and procedures. It was not programed to raise red flags for all of the items listed in the policies and procedures.

Even when the system flagged transactions, SpeedRoute did not review all of the suspicious activity identified by its surveillance systems. SpeedRoute’s compliance staff only reviewed a sampling of alerts. SpeedRoute’s AML Policies called for all alerts to be reviewed and documented.

By failing to review all of the red flags, SpeedRoute failed to file Suspicious Activity Reports.

Lessons:

  1. Make sure your surveillance system includes all the red flag items in your policies.
  2. Review ALL of the red flags, especially if your policy says that you will review all of them.
  3. File Suspicious Activity Reports

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AML Failures at GTS

This year is the year that registered investment advisers need to get fully on the bandwagon with the Bank Secrecy Act. FinCEN promulgated the Investment Adviser Rule to spread the Bank Secrecy Act requirements. While most investment advisers are doing some form of AML-CFT reviews, the process is now subject to explicit regulatory requirements. The compliance date is January 1, 2026.

I’ve been keeping an eye on AML actions brought by the SEC to use those failures to help understand what investment advisers need to do (and should not do.)

GTS expanding rapidly as a market maker for OTC securities. From 50,000 daily trades in August 2019 to 200,000 in August 202o, becoming the second largest broker-dealer for OTC securities. According to the SEC order, GTS failed to adopt and implement reasonably designed AML policies and procedures to surveil OTC transactions within its OTC unit and failed to file Suspicious Activity Reports when required to do so by the SAR Rule.

GTS had an AML surveillance system that flagged high-volume trading activity and submitted a report to an OTC unit supervisor. However that supervisor’s primary responsibilities were unrelated to the AML program and did not report to the AML CCO. So the flags went largely unaddressed.

The policies and procedures gave the supervisor little guidance on what to do or what to look for. According to the SEC order, the polices should have listed these as suspicious transactions:

a. Trading activity that comprised a significant proportion of the daily trading volume in a thinly traded or low-priced security;

b. Trading activity involving sudden spikes in demand for, coupled with sudden price changes in, a thinly traded or low-priced security, including instances of such trading coupled with suspicious stock promotion activity; and

c. Significant trading in a thinly traded or low-priced security previously subject to a Commission trading suspension.

The AML failures cost GTS a $350,000 fine.

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Don’t Share Material Non-Public Information with Your Sister-in-Law

Al Tobia was an insider at two publicly traded companies, obtained material nonpublic information about potential corporate transactions involving three other publicly traded companies. With that information, Tobia tipped his sister-in-law who purchased shares of these three companies in her brokerage account and in an account held by her elderly parents. At least according to the complaint filed against them by the Securities and Exchange Commission.

The source is suspicious trading.

In one of the instances, Lee purchased 102,000 shares in her parents’ account for $765,000. That was half of the account value at the time. Two weeks later the share price rises 26% based on the disclosure of a potential acquisition.

I’m sure the brokerage’s compliance team raised a red flag on the transaction and alerted FINRA and the SEC. Then they dived deeper into the trading of this account and Lee’s own account. That revealed other suspicious transactions.

They get phone records and tie calls to the dates and times that Lee traded. Discovered the calls were with Tobia and that he is her brother-in-law.

They sensibly settle and pay penalties. Tobia gets banned from serving as an officer or director of a public company for five years.

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The SEC versus Musk

If you work in compliance at a shop that does buyouts, you know all about the filing requirements under Rule 13d-1 and the filing thresholds for Schedule 13D and Schedule 13G. Elon Musk doesn’t care. The SEC cares and finally filed the enforcement against Mr. Musk for his shenanigans around the acquisition of Twitter.

The case is very straightforward. Rule 13d requires investors to disclose a stake of 5% or more in a public company within 10 days. The rule came out of the Williams Act of 1968 to help investors make informed investment decisions by providing information about large acquisitions of securities of a company by someone who has the potential to change or influence control of that company.

Musk’s defense seems to basically be that the SEC should focus on other, more important issues.

Given the timing, this will be dumped on the new Chair of the SEC. We’ll get an early indication of how independent the SEC will be from President Trump. I’m sure Musk will ask that the case be shut down.

I’m sure that buyout shops are closely monitoring this to see whether they have to follow the rule of law and comply.

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Investment Advisers Hit with Texting Fines

Twelve firms were hit with fines for off-channel communications. I’ve been waiting for these cases to come out. A couple of these firms have publicly traded securities and there have been notes that they are working through enforcement actions for off-channel communications.

  • Blackstone Alternative Credit Advisors LP, together with Blackstone Management Partners L.L.C. and Blackstone Real Estate Advisors L.P., agreed to pay a combined $12 million penalty;
  • Kohlberg Kravis Roberts & Co. L.P. agreed to pay a $11 million penalty;
  • Apollo Capital Management L.P. agreed to pay a $8.5 million penalty;
  • Carlyle Investment Management L.L.C., together with Carlyle Global Credit Investment Management L.L.C., and AlpInvest Partners B.V., agreed to pay a combined $8.5 million penalty;
  • TPG Capital Advisors LLC agreed to pay an $8.5 million penalty;
  • Charles Schwab & Co., Inc. agreed to pay a $10 million penalty;
  • Santander US Capital Markets LLC agreed to pay a $4 million penalty;
  • PJT Partners LP, which self-reported, agreed to pay a $600,000 penalty.

Santander and PJT are broker-dealers and subject to the strict record-keeping of that regulatory regime. Schwab is duly registered. The rest are pure investment advisers.

My reading of the orders indicates that those firms were subject to a sweep examination by the SEC focused on off-channel communications. The SEC asked for review of mobile devices. They found messages that were required to be retained as business records under Rule 204-2(a)(7).

Here are the four areas the SEC mentioned in the orders:

(a) any recommendation made or proposed to be made and any advice given or proposed to be given;
(b) any receipt, disbursement or delivery of funds or securities;
(c) the placing or execution of any order to purchase or sell any security; or
(d) predecessor performance and the performance or rate of return of any or all managed accounts, portfolios, or securities recommendations.

Let’s see if the those orders give us any insight into the SEC’s take on off-channel communications for investment advisers.

Blackstone:

For example, a Blackstone Alternative Credit Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning proposed investment advice for a client. Similarly, a Blackstone Management Partners senior managing director exchanged messages with a colleague on an unapproved platform concerning proposed investment advice for a client. Additionally, a Blackstone Real Estate Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning investment advice for a client.

TPG:

For example, a TPG Capital Advisors principal exchanged multiple messages with a colleague and with personnel at another investment adviser on an unapproved platform concerning a proposed investment by a client fund in a target company.

For example, a TPG Capital Advisors partner exchanged messages with a colleague on an unapproved platform concerning potential trades on behalf of a client fund.

KKR:

For example, two KKR partners exchanged messages on an unapproved platform concerning the specific pricing, within the range previously approved by the investment committee responsible for a client’s investments, at which KKR should bid for the client to participate in a transaction.

As another example, the two KKR partners exchanged messages on an unapproved platform concerning whether KKR should offer to have one or more of its private fund clients buy into the junior tranche of a transaction.

Apollo:

For example, an Apollo partner exchanged a number of messages on an unapproved platform with Apollo colleagues about a proposed recommendation to increase a position for a client. Another partner exchanged messages with a colleague on an unapproved platform about the terms and execution of a securities transaction for a client.

Carlyle:

For example, a managing director affiliated with Carlyle Credit exchanged several messages with an insurance company regarding the disbursement of funds related to a transaction. In another example, a partner associated with Carlyle exchanged messages with another partner about the performance of a Carlyle investment vehicle.

The big question is whether these off-channel communications investigations are going to continue under the new SEC Chair. These seem like relatively easy wins for the SEC. And they keep compliance officers up at night.

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Don’t Forget to Trim Your Hedge Clauses

An investment adviser has an non-waivable fiduciary duty to its clients. If you try to waive the fiduciary or deceive your clients into thinking its waivable, the Securities and Exchange Commission is going to be unhappy with you. These waivers of fiduciary duty are often called “hedge clauses.”

The SEC settled charges against a registered investment adviser and fund manager, ClearPath Capital Partners, for using hedge clauses in advisory agreements and fund documents in violation of Section 206(2) of the Advisers Act (anti-fraud). The SEC claimed that the private fund documents included “misleading” hedge clauses limiting the scope of its non-waivable fiduciary duty.  The SEC found that the hedge clauses “could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by state or federal law.” 

If you remember back to the proposed Private Fund Adviser Rules (now defunct), the SEC initially proposed a new regulation that would have explicitly prohibited hedge clauses. That regulation was dropped from the final rule, but in the release commentary the SEC said the regulation was unnecessary because hedge clauses are a clear violation.

In the ClearPath case, the SEC cites back to the Commission Interpretation Regarding Standard of Conduct for Investment Advisers, IA Rel. No. 5248 (June 5, 2019).

“[T]here are few (if any) circumstances in which a hedge clause in an agreement with a retail client would be consistent with [] antifraud provisions, where the hedge clause purports to relieve the adviser from liability for conduct as to which the client has a non-waivable cause of action against the adviser provided by state or federal law. Such a hedge clause generally is likely to mislead those retail clients into not exercising their legal rights, in violation of the antifraud provisions, even where the agreement otherwise specifies that the client may continue to retain its non-waivable rights.” p. 11, fn. 31.

The SEC also pointed out that hedge clauses are generally inconsistent with an adviser’s fiduciary duty regardless of the sophistication of the client.

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Corporate Transparency Act is Back from the Dead (Update: No it’s Not)

On Monday afternoon, the Fifth Circuit issued and order to stay the nationwide injunction against the Corporate Transparency Act. Filings are now due by the end of the year.

UPDATE: And another panel at the Fifth Circuit reversed and let the stay remain in place.

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