Last month, Representative Maxine Waters, Chair of the House Financial Services Committee, introduced a discussion draft of the “Bad Actor Disqualification Act of 2019” (the “Proposed Act”). Similar to proposed legislation Rep. Waters introduced in 2015 and 2017, the effect of the Proposed Act, if passed, would be to dramatically increase the burdens on institutions
SEC Adopts Regulation Best Interest and Investment Adviser Conduct Guidance
On June 5, 2019, the Securities and Exchange Commission (“SEC”) finalized Regulation Best Interest (“Reg BI” or the “Final Rule”) under the Securities Exchange Act of 1934 (“Exchange Act”) 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
SEC Privacy Risk Alert may Foreshadow Upcoming Reg S-P Enforcement Against Broker-Dealers, Investment Advisers
On April 16, 2019, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert addressing all registered broker-dealers and investment advisers’ (together, “Firms”)[1] privacy-related obligations under Regulation S-P (“Reg S-P”). The Risk Alert set out the most frequent Reg S-P deficiencies OCIE identified during examinations over the past two years, and encouraged registrants to review their written privacy policies and procedures as well as the consistency with which these policies and procedures have been implemented. The Alert is the latest in a series of recent privacy and cybersecurity guidance documents issued by the SEC, including the February 2018 Commission Statement and Guidance on Public Company Cybersecurity Disclosures and October 2018 Report of Investigation on cyber-related frauds and public company accounting controls.
This Risk Alert is consistent with the SEC’s approach of seeking to influence the conduct of registrants by providing guidance on specific compliance issues, followed by Risk Alerts noting common exam deficiencies, prior to pursuing enforcement actions. Investment advisers and broker-dealers should take this as a prompt to review their relevant policies and procedures to ensure they are appropriate and being followed in practice.
Continue Reading SEC Privacy Risk Alert may Foreshadow Upcoming Reg S-P Enforcement Against Broker-Dealers, Investment Advisers
CFTC Division of Enforcement Releases First Public Enforcement Manual
On May 8, 2019, the Division of Enforcement of the Commodity Futures Trading Commission released an Enforcement Manual – the first public document of its kind from the Division.
Though the Manual does not reveal any significant shifts in policy, it will undoubtedly serve as an important resource for individuals and entities dealing with CFTC
FINRA Proposes Rules Targeting Firms With History of Misconduct
On May 2, 2019, FINRA proposed new rules to designate “high-risk” firms and strengthen its ability to impose additional obligations on those firms.[1]
- Proposed Rule 4111 would authorize FINRA to designate “Restricted Firms” based on the number of event disclosures made by the firm and its registered persons. Restricted Firms would be subject to limitations on their operations and could be required to maintain restricted deposits that could only be withdrawn with FINRA’s consent.
- Proposed Rule 9559 would create an expedited appeals process, including a process for challenging a designation as a Restricted Firm and any obligations imposed.
FINRA expects that only a small number of large firms (500 or more registered representatives) would be affected by the proposed rules, and that only zero to two would have been impacted in any given year had the rules been effective from 2013-2018.[2]
Early signals from FINRA about this rulemaking generated concern that the standards would be overly subjective, leading to uncertainty in application. We believe, however, that the proposed rules on balance reflect a reasonable, and largely objective, approach given FINRA’s stated goal to “impose tailored obligations” on those firms that “present heightened risk of harm to investors.”[3]
Continue Reading FINRA Proposes Rules Targeting Firms With History of Misconduct
Supreme Court Finds Rule 10b-5’s “Scheme Liability” Provisions Reach Use of False Statement
On March 27, 2019, the Supreme Court issued a 6-to-2 decision in Lorenzo v. SEC focusing on the distinction between “making” a false statement under Exchange Act Rule 10b-5(b) and engaging in deceptive conduct—so-called “scheme liability”—under Rules 10b-5(a) and (c).
The Court upheld a D.C. Circuit majority decision concluding that the SEC could hold an
Lessons from the SEC Office of Compliance Inspections and Examinations’ 2019 Priorities
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
Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report
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
Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 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
CFTC Chairman Announces Formal Cooperation Agreement With State Securities Agencies
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