A large broker-dealer agreed to pay $3.4 Million to settle charges that included failure to report over 350 significant regulatory events to FINRA in a timely manner. FINRA alleges that over an 8-year period, the respondent failed to timely report securities law violations, employee disciplinary actions, and securities litigation settlements. FINRA also faults the firm for failing to file copies of civil complaints and arbitration claims. The firm also failed to notify FINRA that its AML compliance officer and another employee received Wells notices. FINRA rules require the filing of such information within 30 days. FINRA’s Enforcement Chief explained, “FINRA uses this information to identify and initiate investigations of firms and associated persons that pose a risk to investors.”
OUR TAKE: Back in the bad old days, failing to file information may have prompted an unpleasant phone call or, perhaps, a nasty letter. Now, such failings can result in multi-million dollar fines.
A private fund manager has pled guilty to obstruction of justice for misstatements made during an SEC administrative hearing. The SEC charges that the respondent misled investors about the use of funds and profitability of fund investments. During the ALJ hearing, the SEC alleges that the respondent lied under oath that he did not control a related company. The SEC asserts that the respondent set the company up in his son’s name because of the SEC investigation.
OUR TAKE: SEC investigations and hearings should not be taken lightly. Misstatements can lead to prison time.
In a recent speech, SEC Chair Mary Jo White called for “zero tolerance” for white collar enforcement and advocated for changing the law to make it easier for prosecutors and regulators. Ms. White described the SEC’s “priority that we are placing on establishing individual liability” with a focus on holding corporate officers accountable as the “core pillar of any strong enforcement program.” Ms. White argued for changes in the law that would allow prosecutors and regulators to punish an executive without showing that s/he participated or caused the wrongdoing. Ms. White lauded the UK regime that allows prosecution of senior executives for misconduct in their areas of responsibility if they failed to take reasonable steps to prevent the misconduct. Ms. White also expressed her support for deferred compensation arrangements that hold back compensation until a possible prosecution period has run. Ms. White also expressed support for a more-empowered SEC: “Although I often wish it were otherwise, the SEC does not have the authority to send anyone to jail.”
OUR TAKE: While the regulatory emphasis may change with a new Administration, both parties appear to favor heavier-handed enforcement against individual corporate actors. Other developed economies (e.g. UK, Japan, Canada, France) take a much more pro-government approach to private sector enforcement.
The staff of the SEC’s Investment Management Division has provided guidance clarifying that, absent a change in control, an internal reorganization of an investment adviser does not require a new registration. The staff opines that an unregistered entity that acquires the assets of an affiliate RIA need only file a succession by amendment, so long as the same parent company continues to control both entities. The staff offered similar guidance with respect changes in jurisdiction and form of organization. However, a change in control would require the filing of a succession by application. In either event, the registrant must file within 30 days of the subject event.
OUR TAKE: With expected consolidation coming in the asset management sector, the staff offers practical regulatory guidance that will facilitate transactions.
A large investment bank agreed to pay over $264 Million including $130 Million to the SEC, $72 Million to the Justice Department, and nearly $70 Million to the Federal Reserve Board, for violating the Foreign Corrupt Practices Act by giving jobs in return for investment banking business. The SEC charges that the respondent bypassed normal procedures to hire friends and relatives of senior officials at government entities in order to secure investment banking assignments. The SEC asserts that those responsible for the program knew its illegality and intentionally misled internal audit and compliance reviews. According to the SEC, the referral program resulted in the hiring of 200 employees over a 7-year period and generated in more than $100 Million in revenue.
OUR TAKE: This is the second major FCPA case in the last several weeks (see https://cipperman.com/2016/10/04/large-hedge-fund-manager-ceo-pay-413-million-settle-bribery-charges/). The SEC intends to review FCPA compliance and bring enforcement actions with firms seeking business with foreign government entities.
The SEC Investor Advocate, Rick Fleming, recently lauded the benefits of the Dodd-Frank Act as an investor protection statute and supported financial regulation as a key driver of economic growth. Mr. Fleming explained that the Dodd-Frank Act was a reaction to the 2008 economic crisis and that three areas of Dodd-Frank successfully addressed crisis causes: asset-backed securities, derivatives, and credit rating agencies. He did however question other areas such as the FSOC and the SIFI designation for asset managers. Mr. Fleming went on to explain the importance of financial regulation to restore confidence in the markets, thereby creating a “foundation upon which capital formation could thrive.” He compared Dodd-Frank to the Securities Act of 1933, which facilitated retail investors’ return to the markets after the Great Depression. The Office of the Investor Advocate was itself created by the Dodd-Frank Act as the independent voice of the investor that would be accountable directly to Congress.
OUR TAKE: This “protecting the little guy” view of regulation may resonate with the new Administration as well as the minority party in Congress as they debate Dodd-Frank amendments, especially if full-scale Dodd-Frank repeal is viewed as the victory of big businesses and banks over the retail investor.
A broker-dealer agreed to pay a $650,000 fine because an OSJ’s cloud server vendor failed to protect customer information. FINRA asserts that foreign hackers penetrated the cloud-based servers and had access to customers’ nonpublic personal information. FINRA faults the firm for failing to monitor or test the third party vendor’s information security. FINRA also alleges that the BD failed to adopt reasonable data security policies that included specific firewall policies and related testing. FINRA cites violations of Rule 30 of Regulation S-P, which requires the protection of customer records and information.
OUR TAKE: Firms must go the extra mile to protect customer information and not just rely on hiring a third party. FINRA will hold BDs strictly liable for data breaches, even those occurring at the vendor.
The SEC fined and barred the principal of an unregistered private fund manager for breaching his fiduciary duty by failing to disclose that affiliate intermediaries profited from fund transactions. The SEC alleges that the respondent used affiliate companies as intermediaries for the buying and selling oil and gas royalty interests and that the affiliates collected significant profits. The SEC charges the firm with failing to disclose these transactions, instead telling investors that the fund would receive the best price possible and that any affiliate transaction would be conducted at arm’s length. Even though the fund manager was not registered, the SEC accused him of violating the Advisers Act because he engaged in advisory activities and breached his fiduciary duty of full disclosure.
OUR TAKE: Private fund managers maintain accountability for alleged breaches of fiduciary duty even if not registered. This includes conduct that pre-dates Dodd-Frank’s registration requirements. Also, it is unclear how much disclosure is enough to allow affiliate transactions.
The full SEC overturned the decision of an Administrative Law Judge and censured and fined an investment adviser for inadequate disclosure even though the respondent may have relied on the advice of an outside compliance consultant. The SEC accuses the adviser of inadequate disclosure related to revenue sharing received from its custodian. The adviser argued that it relied on the advice of an outside compliance consultant. The full SEC explained that the record could not determine whether the adviser actually sought or received such advice about its disclosure. Regardless, even had the adviser relied on the advice, the SEC opined that, although the adviser did not act with intent to deceive, it still acted negligently because of the “obvious inadequacy” of the disclosure.
OUR TAKE: The takeaway from this decision is that reliance on outside consultants and lawyers will help a registrant avoid a finding of intent (and more punitive penalties). However, if the misconduct is so obvious that the adviser should have known better (in the SEC’s judgment), the firm may still face discipline for negligence.