What is the SEC issue in February 2023?

The Church of Jesus Christ of Latter-day Saints manages its commercial investments (such as stocks and real estate) through the non-profit organization Ensign Peak Advisors (EPA). In the United States, the Securities and Exchange Commission (SEC) monitors financial market activity to ensure compliance with the law.

Since 2000, Ensign Peak received and relied upon legal counsel regarding how to comply with its reporting obligations while attempting to maintain the privacy of the portfolio. As a result, Ensign Peak established separate companies (LLCs) that each filed Forms 13F instead of a single aggregated filing. Ensign Peak and the Church believe that all securities required to be reported were included in the filings by the separate companies.

In June 2019, the SEC first expressed concern about Ensign Peak’s reporting approach. Ensign Peak adjusted its approach and began filing a single aggregated report. Since that time, 13 quarterly reports have been filed in full accordance with SEC requirements.^[1]

The issue was resolved between the Church and the SEC in February 2023. At that time, announcements were made regarding the issue and the settlement.

Does this mean the Church hid investments from the SEC?

No. All investments were reported, and all returns had applicable taxes paid. None of the subsidiaries under which investments were reported were illegal. The issue in question was the manner of reporting, not the completeness of the reporting. The Church realized no advantageous gains from using this reporting mechanism. No individual received financial gain, either within the Church or the EPA, using this reporting mechanism.

Why would the Church create shell companies?

Shell companies are corporations created to hold and manage finances on behalf of another organization. Some shell companies are legal while others are not. A primary concern regarding shell companies is that, "even though there are legitimate reasons to set up a shell company, many wealthy individuals abuse shell companies for personal gain."^[2] The Church used shell companies as a dispersed reporting mechanism to make it more difficult for critics and others to track total assets. There are three primary reasons why the Church would want to use shell companies.

First, there are individuals who seem to believe that senior Church leaders direct each investment decision. If that were true, they wouldn't have needed Ensign Peak. There was concern that these people would try to invest in the same way the Church was investing. That is simply not appropriate. Every client has different investment needs and timelines.

Second, making it difficult to track total assets can protect the Church, presumably from those who would use the information to harm the Church or Church members. For example, the Boy Scouts lawsuits included lawyers who have sought to use the Church's holdings in order to sway jury awards. Also, missionaries in Saratov, Russia, were kidnapped in 1998 because of a Time Magazine article that talked about how much money the Church had, so they were being held for ransom.

Third, by limiting easy understanding of its holdings, the Church reduces its impact on market trends. Let's say that the Church simply created a "Latter-day Index Fund" report that signaled to others exactly the strategy it uses. What would happen is that the decisions of Church fund managers would become multiplied by other fund managers that would copy their strategy. This would actually give the Church disproportionate leverage on the markets by magnifying its influence. For example, by 1987, "the Church had become a large enough investor that representatives of the major investment banks regularly visited Salt Lake City."^[3] This affected Church investment decisions, as explained in President Henry B. Eyring's biography: "[President Eyring's team] began to discuss a strategy for selling stocks to capture the gains of the past eighteen months and limit the Church's downside investment risk. But the team recognized a problem: the Church's holdings were so substantial that selling large blocks of stock quickly could 'move the market,' overwhelming the normal demand from buyers."^[4]

Was the Church's approach legal?

The LLCs that EPA used were set up in the late 1990s. From a historical perspective this time period was one of great popularity for these sorts of shell companies. They were everywhere, and the legal limits on what they could be used for hadn't really been tested. That all changed in the early 2000s with the epic frauds of Enron, Worldcom, Tyco, etc. These frauds cost investors billions and many centered around these firms using off balance sheet LLCs to hide what they were doing from investors. In response, GAAP standards concerning these entities changed and the United States legislature passed the Sarbanes-Oxley act in 2002 altering reporting laws.

Legal counsel to the Church determined that the reporting system of these LLCs could continue unchanged. Eventually, the SEC disagreed, so the Church altered its reporting system. One of the things to remember in this current situation is that no funds were misappropriated, no money was stolen, no reports were hidden from the SEC. The SEC just didn't like the way the Church reported all of their investments. The Ensign Peak Advisors used 13 forms instead of one single form to report their earnings. This was not to hide things from the SEC, as indeed they got all of the reports.

Where can I learn more?

To learn more about the SEC issue, see:

• "Church Issues Statement on SEC Settlement," Newsroom, 21 February 2023.
• Public Square Staff, "Ensign Peak: Clarifying the SEC Announcement," Public Square Magazine, 21 February 2023.
• Tad Walch, "Church settles case with SEC over financial reporting," Deseret News, 21 February 2023.
• Jonathan Green, "About that FEC fine," Times and Seasons, 7 March 2023. Note that the first part of the article is about the FEC: Federal Elections Commission. The second part of the article about the SEC: Securities and Exchange Commission.
• To see the charges by the SEC against EPA and the Church, see "SEC Charges The Church of Jesus Christ of Latter-day Saints and Its Investment Management Company for Disclosure Failures and Misstated Filings," U.S. Securities and Exchange Commission, press release 21 February 2023.

Notes

1. ↑ "Church Issues Statement on SEC Settlement," Newsroom, 21 February 2023.
2. ↑ Will Kenton, "What Is a Shell Corporation? How It's Used, Examples and Legality," Investopedia, 17 July 2022, accessed 18 March 2023.
3. ↑ Robert I. Eaton and Henry J. Eyring, I Will Lead You Along: The Life of Henry B. Eyring (Deseret Book, 2013), 378.
4. ↑ Eaton and Eyring, The Life of Henry B. Eyring, 379.