On June 8, 2022, the SEC announced a notable settlement with national audit firm CohnReznick LLP, charging it with failure to uphold several professional standards during its 2017 audits of two public companies that had previously been sued by the SEC for accounting fraud. In its order, the SEC specifically alleged that CohnReznick violated professional standards and contributed to materially misleading financial statements by, among other things, failing to exercise sufficient professional skepticism and accepting assertions from company management without sufficient supporting evidence. The SEC fined CohnReznick $1.9 million, levied fines and suspensions against several of its audit partners, and imposed an independent consultant with a sweeping mandate to demand various audit-related and internal process reforms and veto new audit clients. This action is consistent with the SEC’s repeated warnings that “gatekeepers” such as auditors are in the agency’s crosshairs.
On June 7, 2022, the Securities and Exchange Commission announced that it had charged software company Synchronoss Technologies, Inc. and seven of its current and former employees in connection with an alleged long-running accounting fraud involving improper revenue recognition of more than $46 million across six quarters. All of those implicated settled with the SEC and agreed to pay a range of penalties, except for the former CFO and controller, who will litigate against the SEC in New York federal court. Synchronoss was ordered to pay a $12.5 million penalty.
On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to rules and related reporting forms under the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “Investment Company Act”) that are ostensibly intended to provide additional transparency regarding the use of environmental, social, and governance (“ESG”) factors by investment advisers and investment companies (the “Proposal,” available here), but which will also give SEC Examination and Enforcement staff additional tools to track and target advisers and funds pursuing an ESG strategy. Continue Reading New ESG Rule Proposal Raises the Stakes under SEC’s New Marketing Rule
On May 23, 2022, the Securities and Exchange Commission (“SEC”) announced the inaugural enforcement action against an investment adviser by its much hyped ESG Task Force. As expected, this case does not find fault with the concept of ESG or conduct suggesting actual wrongdoing. Instead, consistent with bread and butter policy for the SEC’s Enforcement Division, the SEC charged BNY Mellon Investment Advisers (“BNYMIA”) for failing to act consistently with its ESG disclosures to investors and having inadequate policies and procedures to prevent the misleading disclosures. While the penalty of $1.5 million could be seen as small for this SEC, BNYMIA was charged with negligent fraud under Section 206(2), Section 206(4) and Rule 206(4)-8 under the Advisers Act, in addition to compliance violations. Continue Reading SEC’s ESG Task Force Comes Out Swinging with Inaugural Enforcement Action Ahead of New ESG Disclosure Rules
On March 30, 2022, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2022 Examination Priorities (“2022 Priorities”). The Division is undergoing extensive leadership changes, with the recent departures of several top officials. Consistent with the aggressive agenda set by Chair Gensler for the SEC generally, the Division has returned to its pre-pandemic caseload, conducting over 3,000 exams in fiscal year 2021, issuing over 2,000 deficiency letters, and making 190 referrals to the Enforcement Division. Despite the management changes, the 2022 Priorities generally retain perennial risk areas as the core focus, but include several new and emerging risk areas reflecting the policy goals espoused by Gensler in recent proposed rule releases and public statements. Continue Reading SEC Division of Examinations Reinforces Gensler Initiatives in its 2022 Exam Priorities
U.S. federal and state authorities recently announced actions that are designed to give effect to economic measures taken against Russia and hold accountable those who violate U.S. laws. These developments suggest that U.S. authorities’ focus on enforcing U.S. sanctions and export controls, anticorruption and anti-money laundering laws, and the growing scrutiny of cryptocurrency, will continue. They also point to further coordination and cooperation between authorities in the U.S. and other jurisdictions in investigating and prosecuting violations of their respective laws. Continue Reading Authorities in U.S. Take Steps to Strengthen Enforcement of U.S. Measures Against Russia
The SEC and a consortium of 32 states recently announced a $100 million settlement with BlockFi Lending LLC over its crypto lending product, BlockFi Interest Accounts. The SEC alleged BlockFi had violated the securities laws by failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company, and making false statements about the risks of its product.
On the heels of this settlement, BlockFi announced that it will seek to register its crypto lending product as a security. While hailed by SEC Chair Gary Gensler as a signal of “the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with” the securities laws, the settlement leaves unanswered important questions for those similarly situated in the industry. However, given the SEC’s short 60-day timeline for BlockFi to come into compliance with the securities laws, the wait for regulatory clarity may not be long.
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On February 7, 2022, the U.S. Attorney’s Office for the Northern District of Illinois unsealed an indictment against Hytera Communications Corporation, Ltd. (“Hytera”), a company headquartered in Shenzhen, China, and several individuals, charging each with conspiracy to commit theft of trade secrets. The indictment’s allegations parallel those made in two civil complaints Motorola Solutions Inc. (“Motorola”) filed against Hytera for theft of trade secrets and patent infringement in the same Court in 2017. Continue Reading Unsealed Indictment Illustrates Interplay Between Criminal and Civil Liability For Theft Of Trade Secrets
On January 24, 2022, Securities and Exchange Commission Chair Gary Gensler gave a speech at the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute signaling the SEC’s intention to step up its cyber-related regulatory and enforcement efforts. Gensler described the continued rise in cybersecurity incidents targeting the financial sector as a serious threat to the nation’s economy and critical infrastructure, with costs potentially in the trillions of dollars. Continue Reading SEC Chair Previews Ramp Up in Regulation and Enforcement in the Cybersecurity Context
On January 26, 2022 the U.S. Securities and Exchange Commission (“SEC”) adopted proposed amendments to Form PF that would dramatically expand both the frequency and amount of reporting by private fund advisers and hedge fund advisers (the “Proposal”). The Proposal is purportedly intended as part of an effort to bolster the Financial Stability Oversight Counsel’s (“FSOC”) ability to monitor systemic risk. However the breadth of the new reporting requirements goes well beyond this stated objective and captures smaller investment advisers and routine investment activity that appear purely to foster the SEC’s more general objectives – data collection to support examinations, investigations and investor protection efforts relating to exempt reporting advisers. Indeed, many of the new reporting requirements align to recent risk alerts and statements about proposed rulemaking from the staff and SEC Chair Gensler. If adopted, these amendments will facilitate more aggressive action by the Enforcement Division as well as the Division of Examinations.
Most notably, the Proposal would introduce a “current reporting” requirement that would require registered investment advisers to report certain events within one business day of occurrence. For private equity fund advisers, those events would include: general partner or limited partner clawbacks, adviser-led secondary transactions, removal of a fund’s general partner, termination of a fund’s investment period and termination of a fund. Current reporting events for large hedge fund advisers would include substantial declines in a fund’s net asset value or unencumbered cash, certain margin events, material changes in prime broker relationships and significant impairments of fund operations.
Please click here to read the full alert memorandum.