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Top 5 Regulatory Alerts – December 2017

 

Here are our Top 5 Regulatory Alerts for December 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – December 2017

  1. LARGE PRIVATE EQUITY FIRM TO PAY $12.8 MILLION FOR ACCELERATED PORTFOLIO MONITORING FEES (12/26/17)
  2. FINRA ISSUES EXAMINATIONS FINDINGS REPORT (12/7/17)
  3. SEC’S CYBER UNIT STOPS VIRTUAL CURRENCY OFFERING (12/5/17)
  4. SEC FINES AND BARS CCO FOR IGNORING COMPLIANCE PROBLEMS (12/27/17)
  5. IA/BD FAILED TO SUPERVISE ITS CEO/CCO (12/12/17)

 

Most Read – December 2017

  1. SEC FINES AND BARS CCO FOR IGNORING COMPLIANCE PROBLEMS (12/27/17)
  2. FINRA ISSUES EXAMINATIONS FINDINGS REPORT (12/7/17)
  3. THREE FIRMS FINED FOR MARKETING HYPOTHETICAL THIRD PARTY PERFORMANCE (12/11/17)
  4. DUAL-HAT PRINCIPAL/CCO IGNORED SEC’S COMPLIANCE DEFICIENCIES (12/18/17)
  5. IA/BD FAILED TO SUPERVISE ITS CEO/CCO (12/12/17)

The Friday List: Top 10 Cryptocurrency Fund Regulatory Concerns

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Last week, the SEC’s Division of Investment Management asked sponsors to refrain from initiating registrations for funds investing in cryptocurrencies and related products.  Dalia Blass, the Division Director, cited “significant outstanding questions” about how such funds could comply with applicable laws and regulations.  In today’s Friday List, we describe the top 10 regulatory concerns raised by the Division of Investment Management.  Despite these concerns, we believe that the SEC and the industry will work through these issues and develop rules and best practices that will ensure the growth of this market in a manner that engenders investor confidence.

 

Top 10 Cryptocurrency Fund Regulatory Concerns

 

  1. Valuation: The SEC asks whether funds could obtain sufficient information to properly value fund assets pursuant to current accounting rules especially given the “nascent state and current trading volume” in the futures markets.
  2. Liquidity: Could funds reduce crypto-assets to cash so as to meet daily redemption requests?  How would funds classify assets under the SEC’s new liquidity rule (22e-4)?
  3. Custody: The SEC questions how a fund custodian could validate the existence and ownership of cryptocurrency assets, and how funds would address physical security where applicable.
  4. ETF Creation: Will the creation unit process operate in a way that ensures that funds and authorized participants limit arbitrage opportunities that harm investors?
  5. Volatility: The limited history and volume of the cryptocurrency markets could negatively impact fund operations and affect investors.
  6. Lack of regulation: Neither cryptocurrency markets nor providers/issuers are subject to prudential regulation.
  7. Market manipulation: The SEC cites Chairman Clayton’s concerns over market manipulation and potential fraud.
  8. Cybersecurity:  Could a potential hack threaten ownership interests and valuation?  What safeguards are in place?
  9. Disclosure:  How would fund sponsors ensure sufficient risk disclosure and transparency in fund prospectuses and other shareholder communications?
  10. Suitability:  How will broker-dealers and advisers ensure their suitability and fiduciary obligations when recommending crypto-funds to retail investors?

Regulators Warn Investors about Cryptocurrency Offerings

NASAA and the SEC warned investors about the risks of investing in cryptocurrency-linked investment products.  The President of NASAA (the association of state securities regulators) warned, “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility.  Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”  NASAA further highlighted the risks of cryptocurrency investments including minimal regulatory oversight, the possibility of cybersecurity breaches, lack of insurance, high volatility, and reliance on unproven companies.  The SEC commended NASAA’s statement, stressing that cryptocurrencies, “lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange.”

OUR TAKE:  We predicted (not very long ago) that the regulators will pursue regulation of cryptocurrency offerings.  This may not be bad for this emerging industry in the long term.  After all, significant regulation made mutual funds the most popular investment vehicle of the last 100 years.

http://www.nasaa.org/44073/nasaa-reminds-investors-approach-cryptocurrencies-initial-coin-offerings-cryptocurrency-related-investment-products-caution/

https://www.sec.gov/news/public-statement/statement-clayton-stein-piwowar-010418

Top 5 Regulatory Alerts – October-November 2017

 

Here are our Top 5 Regulatory Alerts for October-November 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – October-November 2017

  1. SEC ENFORCEMENT DIVISION TARGETS FINANCIAL EXECUTIVES (11/17/17)
  2. PRIVATE COMPANY AND CEO MISLED INVESTORS ABOUT COMPLIANCE FAILURES (11/3/17)
  3. CONSULTANT TO PE PORTFOLIO COMPANY CHARGED WITH INSIDER TRADING (11/16/17)
  4. OPERATIONS MANAGER CHARGED WITH AIDING/ABETTING SECURITIES FRAUD (10/10/17)
  5. LARGE BD FINED $3.5 MILLION FOR CURTAILING SAR FILINGS (11/14/17)

 

Most Read – October-November 2017

  1. SEC CHARGES LAWYERS FOR CLIENTS’ SECURITIES FRAUD (10/17/17)
  2. SEC DEEMS THIRD PARTY VALUATION AGENT AN “INVESTMENT ADVISER” (10/2/17)
  3. SEC TO CREATE WEBSITE OF BAD ACTORS (11/9/17)
  4. LARGE BD FINED $3.5 MILLION FOR CURTAILING SAR FILINGS (11/14/17)
  5. CHIEF ACCOUNTING OFFICER BARRED AND FINED FOR APPROVING CEO EXPENSES (11/20/17)

FINRA Posts Social Media and Digital Content Guidance

FINRA has published a Regulatory Notice that provides guidance on the content, recordkeeping, and supervision of certain digital communications.  FINRA clarifies that text and chat messages with clients must be retained as customer communications to the same extent as written or email communications.  FINRA also offers guidance on when broker-dealers adopt or become entangled when using hyperlinks and other third party content.  Sharing content through hyperlink will make a firm responsible for the third party content unless the third party site is dynamic, ongoing, and not influenced by the firm.  However, a firm may not use a link to a third party that the “firm knows or has reason to know contains false or misleading content.”  FINRA also offers guidance on the use of native advertising, mandating that such content disclose the firm’s name, any relationship, and whether mentioned products or services are offered by the firm.  FINRA will allow unsolicited third party opinions posted on social media sites (e.g. “likes” on Facebook) so long as a registered representative does not subsequently endorse the third party opinion.  FINRA makes clear that the guidance does not change prior rules and does not interpret SEC rules that apply to advisers.

OUR TAKE: Give FINRA credit for its ongoing regulatory guidance that reflects evolving social media and digital content.  The guidance on texts, chats and hyperlinks are fairly reasonable.  The challenge for compliance officers is to find emerging technologies and systems to capture the emerging content.

https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-18.pdf

The Friday List: Our 2017 Predictions

the list

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Every year, we offer our predictions on what will happen in the investment management regulatory world.  Two years ago, we went 6-4, accurately predicting that the SEC would bring a landmark enforcement action against a private equity firm and that both Norm Champ (Investment Management) and Drew Bowden (OCIE) would resign.  Last year, we went 4-3-3.  We accurately predicted such events as the SEC bringing a gatekeeper case against a law firm and that the insurance industry would start offering CCO insurance.  We claim “ties” for predictions that were close: the SEC will commence an enforcement action against a robo-adviser (wrong, but Massachusetts came out strongly against robos), and the SEC will propose third party compliance reviews (wrong, but Mary Jo White said the proposal is on the desk of the Commissioners).

So, without further sandbagging, here are our 2017 predictions:

 

10 Predictions for the 2017 Regulatory Year:

  1. The new Administration will delay implementation of the DoL Fiduciary Rule.   Although we think the Rule will ultimately take effect with some modification, it may take some time.  Most agree with the basic principle of protecting retail IRAs, but many industry participants are struggling with adequate and expeditious implementation.
  2. The SEC will propose third party RIA compliance exams.  Paul Atkins, who leads the transition team on financial regulatory issues, works with Dan Gallagher, who, as an SEC Commissioner, initially suggested this concept to ensure more reviews of registered investment advisers.
  3. Whistleblowers: The Office of the Whistleblower will survive, and there will be more claims and more retaliation cases.  We believe this is one part of Dodd-Frank that will survive because everybody gets behind blowing the whistle on corporate wrongdoing.
  4. The SEC will raise the threshold for private fund registration above $150 Million.  Both Democrats and Republicans can agree to this change to Dodd-Frank and which has been supported by Barney Frank himself.
  5. FINRA will become the primary regulator for retail advisers and brokers.  As the SEC backs away from retail enforcement and examination efforts, look for FINRA to step into the regulatory void.
  6. State regulators will bring 2-3 precedent-setting enforcement actions.  Consistent with the FINRA theme, look for Spitzer-esque regulators to flex their regulatory muscles if the SEC shrinks away.
  7. SEC penalty caps will increase.  This is a component of the Rep. Hensarling-sponsored CHOICE Act (aimed at Dodd-Frank reform) with which both parties agree.
  8. The SEC will focus on prosecuting individuals, not firms.  Mr. Atkins has opposed large corporate penalties that ultimately hurt shareholders.  However, the SEC will continue its policy of prosecuting individuals.
  9. There will be an acceleration of outsourcing non-core functions.  As scale becomes increasingly important, look for firms to find new ways to focus on their core competencies and outsource non-core functions.
  10. Firms and regulators will struggle with bond pricing.  The more volatile bond markets resulting from changes in macro-economic policy will make life difficult for those responsible for bond pricing.

SEC Investor Advocate Defends Dodd-Frank and Financial Regulation

dodd-frank

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.

https://www.sec.gov/news/speech/fleming-speech-keynote-address-111616.html