The United States Securities and Exchange Commission (SEC) is the agency tasked with the duty of safeguarding investors. Therefore, it regulates the activities of publicly traded companies to ensure that they engage in prudent financial activities that would ensure the protection of investors’ funds. However, the SEC does not just regulate companies that that are publicly traded. It also regulates partnerships, specifically limited partnerships. The Securities Act of 1933 and the Securities Act of 1934 require limited partnerships to register with the SEC if its meets several conditions. First and foremost, the partnership should be registered with the SEC if it meets the definition of “investor contract” since it engages in the sale of securities to investors. In addition, if a partnership should register with the SEC if it does not meet the conditions for exemption from regulation as a private placement. According to the regulation, the partnership may file to be registered with the SEC as a much smaller company. If the partnership does so, it must ensure that it complies with the Securities Act Regulation S-X and Securities Act Regulation S-K. Regulation S-X details the SEC requirements of the financial statements of the partnerships. On the other hand, Regulation S-K details the non-financial disclosures of the partnership. Subpart 1200 of Regulation S-K also details the industry-specific non-financial requirements of entities in that engage in oil and gas operations. The regulations of the SEC ensure that companies provide information would enable potential investors make informed decisions on whether to invest in the partnerships or not. States may also regulate certain partnerships as a security regardless of whether the entity is exempted from registration at the federal level with the SEC. However, the states may not regulate the partnerships if they are sold exclusively to accredited or sophisticated investors (Eastman, 2014).
Broker-dealer firms and financial advisors who recommend investors to invest in a certain limited partnership also required to be registered with the SEC. However, the employees of the partnership who engage in the sale of the investment to investors are not required to be registered or licensed. According to the SEC regulations, broker-dealers, financial advisors, and their employees should ensure that they provide an independent due diligence report of the limited partnership. The report should also detail whether the limited partnership complies with registration or is exempted from the certain rules. They should also ensure that they review the financial data of the limited partnership. The broker-dealers, financial advisors, and their employees should ensure that they provide an evaluation of the fees and proceeds from their involvement with the limited partner (Rubin, 2015).
According to the SEC regulations, broker-dealers, financial advisors, and their employees should also provide the potential investor with the track records and backgrounds of the managers of the limited partnerships. They should also provide evidence that the investment would be suitable for a certain investor according to the financial risks and liquidity of the limited partnership. Broker-dealers, financial advisors, and their employees should also ensure that they use fair and balanced means to communicate with investors and potential investors. They should ensure that they do not provide any misleading information or make omissions in their report on the limited partnership (Eastman, 2014).
Guggenheim Partners Investment Management LLC, Colorado 2001D Limited Partnership, and Patriarch Partners highlight how the SEC regulates the partnerships. The SEC sanctioned the above partnership for engaging in activities that contravened its regulations. In the case involving Guggenheim Partners Investment Management LLC, the SEC instituted charges against the company for the breach of its fiduciary duty by failing to report a loan of $50 million that one of the senior executives of the company had received from an advisory client. According to SEC regulations, fiduciaries, such as Guggenheim Partners should ensure that they report all material facts to their clients including any areas that potentially have conflicts of interest. As such, Guggenheim Partners did not disclose all fees and proceeds that they got from the advisory client. Guggenheim Partners agreed to pay $20 million to settle the charges filed by the SEC (Stevenson, 2015).
According to the Securities Exchange Act of 1934, limited partnerships that meet certain conditions should make periodic filings with the SEC. The SEC also details the industry-specific non-financial requirements of entities in that engage in oil and gas operations. These were the major issues in the case involving Colorado 2001D Limited Partnership. Colorado 2001D Limited Partnership was a limited partnership that engaged in the onshore oil and natural gas exploration domestically. The limited partnership failed to make periodic filings as required by Section 13(a) of the Securities and Exchange Act of 1934. This prompted the SEC to institute charges against the partnership. The SEC used Rules 13a-1 and 13a-13 to revoke the registration of the limited partnership.
The SEC requires broker-dealers, financial advisors, and their employees to conduct due diligence, which would help investors to make informed decisions. Broker-dealers, financial advisors, and their employees should ensure that they do not provide any misleading information or make omissions in their report. This was the major issue in the case involving Patriarch Partners, a private equity firm that invests in troubled companies. The SEC sued Patriarch Partners LLC and Lynn Tilton, the firm’s financier, for defrauding investors millions of dollars by hiding the real value of loans that some of the funds managed by the private equity had. The SEC claims that Ms. Tilton and Patriarch breached their fiduciary duties by using a method of valuing loans of the funds that was different from the method detailed in the offering documents of the funds. The use of the misleading method of valuing loans enabled Ms. Tilton to receive more than $200 million in fees (Jarzemsky & Viswanatha, 2015).
SEC intervention ensures that companies engaged in prudent financial activities. It helps in safeguarding investor’s funds. Therefore, if a partnership engages in good financial practices it does not have to worry about SEC intervention. The partners in a partnership should ensure that the top level management of the partnership has a good track record. This would prevent the partnership from violating certain SEC regulations in the future due to the unethical financial activities of the top level management of the partnership.
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