Financial Law Blog

Updates on Banking Law, Investment Management Law, Securities Law, Commodities/Derivatives Law

Tag: Broker-Dealer

RBC settles SEC enforcement action for false and misleading statements in fairness presentation

The SEC last week settled enforcement action against RBC for false and misleading statements in a fairness presentation regarding the sale of a public company.

RBC was the sell-side financial adviser to a listed company in connection with its sale to Warburg Pincus. RBC’s fairness presentation to the company’s Board incorrectly described company EBITDA figures as analyst “consensus projections.” This lowered the company’s valuation, because in fact analysts would have at least added back $6.3 million of one-time expenses. In related shareholder litigation, the Court of Chancery found that “RBC knew that the Board was uninformed … but failed to disclose the relevant information to further its own opportunity to close a deal, get paid its contingent fee, and receive additional and far greater fees for buy-side financing work.” As the court observed, “On Saturday morning, the ‘consensus’ precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19 to $16.71, entirely below the deal price.” The final offer made by Warburg Pincus was $17.25.

RBC’s figures were subsequently used in the company’s proxy statement. Consequently, RBC was found to have caused the company’s violation of Exchange Act rule 14a-9, the general antifraud rule for proxies.

When margin posted on swaps is not excluded from net capital

Assets “not readily convertible into cash” are excluded in calculating net capital for a broker-dealer. SEC Division of Trading and Markets Staff last week took a no-action position that margin collateral posted by a broker-dealer to a DCO for a cleared swap need not be excluded in calculating net capital. Furthermore, even if the swap is not cleared, the initial margin need not be excluded if certain requirements are met. Variation margin on a non-cleared swap, however, must be excluded.

Introducing brokers may have more time to transmit customer checks according to SEC Division of Trading and Markets Staff

SEC Division of Trading and Markets Staff recently issued a No-Action Letter allowing a group of introducing brokers more time to transmit customer checks.

Introducing brokers enjoy a lighter level of regulation than clearing brokers, but they must meet certain requirements to qualify. One such requirement is that they “promptly” transmit customer funds to their clearing brokers. A group of introducing broker-dealers received a No-Action letter allowing them more time to transmit customer funds, contingent on fulfilling other conditions in the letter.

The brokers represented that they were “engaged in the retail distribution of multiple types of financial instruments” (but also that “none of the Firms maintain proprietary positions for sales to customers.”) Earlier no-action letters in this area were limited to different situations.

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