On December 20, 2018, the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities. The six themes for this year’s priorities are: retail investors (including seniors and those saving for retirement), compliance and risk in registrants responsible for critical market infrastructure (clearing agencies, transfer agents, national securities exchanges and Regulation SCI entities), oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board, digital assets, cybersecurity and anti-money laundering. The only new theme for 2019 compared to 2018 is digital assets, which we take to imply a plan to more closely—and substantively—regulate investment advisers and broker-dealers involved with this asset class. The 2019 priorities also more explicitly than the 2018 priorities describe specific practices that OCIE found concerning in examinations of those entities, many of which involved failure to adequately safeguard client assets and the adequacy of disclosures of conflicts of interest. We expect to see a corresponding focus in Enforcement Division investigations and cases on these issues as a result. Continue Reading Lessons from the SEC Office of Compliance Inspections and Examinations’ 2019 Priorities
Robin M. Bergen’s practice focuses on government and internal investigations, and regulatory enforcement and examination of broker-dealers and investment advisers.
On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting. The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year. While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement. Continue Reading Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report
On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018. At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017. This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.
But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division. These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze. We address here the most notable of these subtle but important changes. Continue Reading Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report
Earlier this week, CFTC Chairman J. Christopher Giancarlo announced the signing of a Memorandum of Understanding (MOU) intended to enable greater enforcement coordination and information sharing between the CFTC and state securities agencies. The MOU formalizes a process for exchange of information and coordination between the CFTC, which has jurisdiction over the commodities and swaps markets, and state securities regulators and enforcers. It continues the trend of increasing prominence of the CFTC’s enforcement division, and further reinforces connections with state authorities to promote cross-jurisdictional cooperation and coordinated enforcement action. While the impact of the MOU remains to be seen, it is hoped that it will facilitate more coordinated and efficient enforcement proceedings in cases involving the CFTC. At the same time, the provisions for information sharing reinforce the prudence of assuming that enforcement authorities speak to each other. Therefore, companies facing possible investigations should ensure information provided to all relevant authorities is accurate and complete, and in appropriate cases may consider actively involving state securities agencies early on in order to potentially facilitate a later joint resolution. Continue Reading CFTC Chairman Announces Formal Cooperation Agreement With State Securities Agencies
On May 3, the Second Circuit vacated on evidentiary grounds Jesse Litvak’s conviction – after a second trial – on a single count of securities fraud related to trades of residential mortgage backed securities (“RMBS”) and remanded the case to the United States District Court for the District of Connecticut. This ruling is the latest setback for the government, as the Second Circuit in 2015 had vacated Litvak’s prior conviction on ten counts of securities fraud, one count of fraud against the Troubled Asset Relief Program (“TARP”), and four counts of making false statements to the government, following his first trial. Continue Reading Second Circuit Again Reverses Fraud Conviction of RMBS Trader Litvak
On April 18, 2018, the Securities and Exchange Commission (“SEC”) proposed Regulation Best Interest under the Securities Exchange Act of 1934 to establish a new “best interest” standard of conduct for broker-dealers when making a recommendation of any transaction or investment strategy involving securities to a retail customer. The SEC also proposed an interpretation to reiterate and clarify the fiduciary duty applicable to investment advisers under the Investment Advisers Act of 1940. Finally, the SEC proposed a new disclosure form for investment advisers and broker-dealers to provide to retail investors.
In proposing the new Regulation Best Interest and the Guidance, the SEC has attempted to more closely align the standards of conduct applicable to broker-dealers and investment advisers while recognizing the fundamental differences between the services each provides and maintaining investor choice.
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The U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2018 National Exam Program Examination Priorities. The 2018 priorities highlight areas of emphasis for OCIE, including cryptocurrencies, cybersecurity, anti-money laundering, and issues affecting retail investors (especially seniors and those saving for retirement). While the core areas of focus and many of the priorities for 2018 are similar to those from 2017, there is a clear shift in emphasis that we attribute to the change in leadership at the SEC. Some specific changes also likely stem from OCIE’s 2017 examination findings, recent market developments, and trends in enforcement. Continue Reading Lessons for Broker-Dealers and Investment Advisers from the SEC Office of Compliance Inspections and Examinations 2018 Priorities
As the Securities and Exchange Commission Division of Enforcement signaled in its recent annual report, policing the asset management industry will be a key priority in its continuing focus on protecting retail investors. This renewed emphasis reaffirms the view that if a significant error or misconduct is detected, firms generally should not wait for SEC scrutiny to take corrective steps and mitigate investor harm. Voluntary remediation must be considered as part of any strategy for managing regulatory exposure as well as reputational and litigation risk. Where a firm does decide to remediate, it must proceed carefully to avoid pitfalls that could lead to fresh scrutiny from regulators or even private civil litigation.
This post provides guidance to regulated firms on managing risks once they determine to voluntarily remediate – as distinct from the fact-specific issue of whether to “self-report” errors or misconduct – in the SEC context. It begins with an overview of the benefits and risks of voluntary remediation and common types of remedial measures. It then identifies potential issues that can arise when undertaking remediation. Finally, it advises on structuring and implementing remedial measures to minimize risks of regulatory or litigation exposure. Continue Reading Voluntary Remediation in the SEC Context: Avoiding Common Pitfalls
On December 5, 2017, a Magistrate Judge in the United States District Court for the Southern District of Florida held in SEC v. Herrera that the “oral download” of external counsel’s interview notes to the Securities and Exchange Commission waived protection from disclosure under the attorney work product doctrine. As a result of the decision, issued in an SEC enforcement action, counsel was ordered to disclose to certain former employees of its client those interview notes that were orally downloaded to the SEC. Herrera highlights issues that internal and external lawyers should carefully consider when conducting internal investigations and particularly when providing downloads to the government of material that may be privileged or subject to work product protection.
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On November 15, 2017, the Securities and Exchange Commission Division of Enforcement released its annual report detailing its priorities for the coming year and evaluating enforcement actions that occurred during Fiscal Year (“FY”) 2017. The Report captures the SEC during a period of transition—Chairman Jay Clayton assumed the helm of the Commission in May 20172 and Stephanie Avakian and Steven Peikin were named co-directors of the Enforcement Division soon thereafter.3 The Report provides insight into changes in the SEC’s approach to enforcement actions and a glimpse into its priorities for the coming year. The following summarizes key shifts from FY 2016, outlines the Enforcement Division’s current priorities, and, in view of its stated focus on the conduct of investment professionals and protection of retail investors, provides guidance to the investment management industry as it gears up for the coming year.
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