Grading the use of plain English in firms’ disclosures of SEC disciplinary actions


IA Week, a publication of IA Watch

It’s up to you to decide whether a disciplinary action is material enough to alert your clients (IA Watch, June 6, 2011). Following a widespread enforcement settlement with numerous advisers last September for short sale violations (IA Watch, Sept. 23, 2013), the advisers moved almost immediately to revise their Form ADVs.

Some were more accomplished in their disclosures than others, according to Deborah Bosley of the Plain Language Group in Charlotte, N.C., who was asked by IA Watch to critique them. Hudson Bay Capital Management ($2.9B in AUM) in New York “was far and away better” than the others, Bosley says.

Hudson Bay “went the extra mile, and it was very smart,” she adds. “They explained how they cooperated with the SEC,” Bosley says.

As with most of the firms cited earlier this year, Hudson Bay briefly referred to the case within the brochure’s materials changes section (“a settled action with the SEC”) and went into greater detail under Item 9 (disciplinary information).

For example, its disclosure notes the firm paid nearly $1 million to the SEC to settle the case, “all of which is being borne by Hudson Bay, and not its investors.” Its new Form ADV brochure reads:

Hudson Bay cooperated with the SEC at all times during its investigation and has implemented procedures for ensuring compliance with the Rule, as well as an internal training program to educate its employees further on its nuances.

“I really like reading that they cooperated, they implemented procedures [and] they have an internal training program” to educate staff, says Bosley. She believes the RIA’s disclosure would “assure its investors that they were going to do something about preventing this” from reoccurring. Hudson’s CCO, as with all of the CCOs at the firms cited here, didn’t return IA Watch inquiries.

Each of the disclosures mentions that the firms neither admitted nor denied the SEC’s allegations. Bosley found such language to be “slippery” but thought that the wording was insisted upon by the firms’ lawyers.

Terms such as “disgorgement” and “pre-judgment” harmed the goal of plain English, she assessed. The average person would struggle with their meanings, Bosley believes. Blackthorn Investment Group ($826M in AUM) in Overland Park, Kan., disclosed that:

Rule 105 generally prohibits buying an equity security in a secondary public offering if the buyer sold short the same security during a restricted period. This prohibition contained in Rule 105 of Regulation M applies regardless of whether any intent to violate the rule existed. Blackthorn agreed not to violate Rule 105 in the future and pay disgorgement of $244,378.24, prejudgment interest of $15,829.74, and a civil money penalty in the amount of $260,000.00 …. no Fund or other client of Blackthorn bore any portion of such payments or any costs resolving the matter.

Bosley approved of New York-based D. E. Shaw & Company’s ($64.2B in AUM) detailing of “five inadvertent violations of Rule 105.” It also referred readers to Form ADV, Part 1, which “may include certain disciplinary events not outlined” in the Part 2 brochure.

Manikay Partners ($1.7B in AUM) in New York passed along that the firm “agreed to settle an SEC inquiry” stemming from “a single secondary offering.” It closed Item 9 by stating “We are not aware of any other legal or disciplinary events that are material to our clients’ or prospective clients’ evaluation of our advisory business or the integrity of our management.”

The brochure for Deerfield Management Company ($4.2B in AUM) in New York points out that the firm “voluntarily agreed to settle an SEC inquiry relating to six alleged violations of Rule 105 of Regulation M.” It goes on to describe the rule, which “generally prohibits purchasing an equity security in a registered offering
if the purchaser sold short the same security during a restricted period (generally defined as five business days before the pricing of the offering)” and refers the reader to its Form ADV, Part 1, but makes the reader find it at “the SEC website at”

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