SEC’s Office of Compliance Inspections and Examinations Releases 2019 Examination Priorities

Posted in Financial Regulation, Investment Regulation, OCIE, SEC

Click here for a comprehensive GT Alert on this topic.

On Dec. 20, 2018, the Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) issued its annual Examination Priorities for 2019 (Exam Priorities), which is available for download here. The Exam Priorities focus around six thematic areas: (1) Retail Investors, including seniors and those saving for retirement; (2) Registrants responsible for critical market infrastructure; (3) FINRA and MSRB; (4) Digital Assets; (5) Cybersecurity; and (6) Anti-Money Laundering (AML) Programs.

As in the past, OCIE notes that their priorities are not exhaustive. The scope of any examination is determined through a risk-based approach that includes analysis of the registrant’s operations and products offered. For example, OCIE typically examines the disclo­sure of services, fees, expenses, conflicts of interest for investment advisers, and trading and execution quality issues for broker-dealers. OCIE is continually evaluating changes in market conditions, industry practices, and investor preferences to assess risks to both investors and the markets.

In connection with OCIE’s priority to protect retail investors, OCIE reviews retail fees and expenses paid by investors, conflicts of interest of industry personnel, treatment of senior investors and the advertising and suitability of retirement products, portfolio management and trading, operations of and the selection of mutual funds and ETFs, procedures of municipal advisors, procedures for broker-dealers entrusted with customer assets, and microcap securities.

OCIE also continues to prioritize critical market registrants impacting the safety and operation of our financial markets, including clearing agencies, entities subject to Regulation SCI, transfer agents, and national securities exchanges.

Finally, OCIE will prioritize examinations of the effectiveness of FINRA and MSRB, which are assigned the responsibility for certain aspects of investor protection. OCIE also will conduct inspections to gather information and evaluate practices affecting digital assets, cybersecurity, and AML programs (especially broker-dealers subject to express obligations and SAR filing obligations).

Overall, OCIE noted that although changes to its priorities may be continual, OCIE’s analytic efforts and examinations remain firmly grounded in its four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.

Prove It or Lose It! Parts I and II: Unexplained Wealth Orders and Civil Recovery Orders in the United Kingdom

Posted in Anti-Money Laundering, Litigation, Uncategorized, Unexplained Wealth Order, United Kingdom, white collar

Unexplained Wealth Orders (UWOs) extend the powers available to UK law enforcement authorities under the Proceeds of Crime Act 2002 (POCA), enabling investigators to ask people who are holding assets, which based on their legitimate income they would not be able to afford, to prove that such assets were obtained from legitimate sources. If the person can’t prove the assets are from a legitimate source, then the authorities can take steps to recover those assets.

How do UWOs work? What role do interim freezing orders play in the process? What are the penalties for non-compliance? How have UWOs been used thus far in the public domain? For answers to these questions, see Prove It or Lose It! – Part I: Unexplained Wealth Orders.

The UWO is the beginning of a journey that can result in assets being taken away from their owners by the state through commencement of civil legal proceedings. UK politicians and law enforcement agents have trumpeted these non-conviction-based asset-recovery powers for their ability to recover and rid the UK of laundered assets. However, many obstacles remain in pursuit of this goal. See Prove It or Lose It! Part II: Civil Recovery Orders for a review of these civil-recovery powers under POCA against the backdrop of UWOs.

NASDAQ Provides Additional Flexibility Under Its 20% Shareholder Approval Rule

Posted in Client Alert, Compliance, Corporate Governance, Financial Services Litigation, Regulatory Compliance, SEC, Securities

Effective Sept. 26, 2018, the Securities and Exchange Commission approved amendments to Nasdaq’s shareholder approval rule regarding issuances of 20% or more of an issuer’s outstanding common stock or voting power in a private offering. The amendments are intended to update Nasdaq’s shareholder approval rules from their 1990 adoption and enhance the ability for capital formation without sacrificing investor protections. In short, the amendments eliminate book value as the minimum price for certain permitted offerings, and modify the market value measure in the rule to use the lower of the closing price or five-day average closing price, instead of the closing bid price.

The “20% rule,” as it is commonly known, requires Nasdaq and NYSE-listed companies in certain situations to receive shareholder approval before they can issue 20% or more of their outstanding common stock or voting power in a private offering. Nasdaq and the NYSE also require shareholder approval in connection with the issuance of securities that will result in a change of control, certain acquisition-related issuances, and issuances of securities involving equity compensation. Nasdaq is not amending these other shareholder approval provisions.

For a summary of changes to Nasdaq’s 20% Rule, click here.

New California Law Imposing Gender Diversity on Boards of Publicly Held Corporations Raises Constitutional Concerns

Posted in Corporate Governance, Government, Litigation

On Sept. 30, 2018, Gov. Jerry Brown signed into law Senate Bill No. 826 (SB 826), California’s new legislation promoting gender balance on the boards of directors of publicly held corporations headquartered in California. The legislation is designed to encourage gender diversity in corporate boardrooms, boost the California economy, and improve opportunities for women in the workplace. The new law requires publicly held domestic California corporations and foreign corporations headquartered in California to have a minimum of one female board member by the end of 2019, and a representative number of female board members by the end of 2021.

California’s new law is facing pushback from California businesses and commentators on various grounds. Some argue the law violates the U.S. and California Constitutions by establishing an express gender classification and requiring companies to select board members based on gender. The law also raises concerns by requiring foreign corporations with principal executive offices in California, whose internal affairs are generally governed by the laws of their state of incorporation, to alter the structure of their boards to comply with California law. This creates a potential conflict between the laws of a foreign corporation’s state of incorporation and the laws of California. The law may also result in disparate treatment of publicly held domestic California corporations based on the location of their principal executive offices.  

Click here for an overview of SB 826, compliance considerations and costs of non-compliance, and potential legal implications.


11th Circuit Answers When Would-Be ‘Customers’ May Bring a FINRA Arbitration Against FINRA Members and Associated Persons

Posted in 11th Circuit, Arbitration, Client Alert, Financial Services Litigation, FINRA, Securities

Last week, in Pictet Overseas, Inc. v. Helvetia Trust, the Eleventh Circuit U.S. Court of Appeals affirmed a Florida district court’s order permanently enjoining two offshore trusts from pursuing a FINRA arbitration against a FINRA member and its associated person owners.

In Pictet, two offshore trusts, Helvetia Trust and AAA Group International Trust, held custodial accounts at a Swiss bank, Banque Pictet, and alleged that they were defrauded into investing in a Ponzi scheme by an unrelated investment advisor. Instead of suing Banque Pictet in Switzerland per the parties’ custodial account agreement, the Trusts brought a FINRA arbitration against FINRA member and Banque Pictet affiliate, Pictet Overseas, and its indirect individual owners. Pictet Overseas and its owners had never agreed to arbitrate with the Trusts before FINRA, so they filed a lawsuit in federal court seeking to enjoin the putative arbitration. Indeed, the Trusts were not customers of nor had they ever done business with Pictet Overseas or its owners. After an evidentiary bench trial, the Honorable Kenneth A. Marra of the United States District Court for the Southern District of Florida agreed with Pictet Overseas and enjoined the FINRA arbitration, concluding that the Trusts’ claims were not arbitrable. The Trusts appealed to the Eleventh Circuit Court of Appeals.

 For a summary of the Eleventh Circuit’s decision in Pictet, click here.


SEC Adopts Amendments to Rule 15c2-12

Posted in Client Alert, Financial Regulation, Investment Regulation, Lending, Regulatory Compliance, SEC, Securities

Rule 15c2-12 of the Securities Exchange Act of 1934 (Rule 15c2-12) was adopted by the Securities and Exchange Commission (SEC) in 1989 to establish standards for the procurement and dissemination of disclosure documents by underwriters as a means of enhancing the accuracy and timeliness of disclosure to municipal securities investors. Previous amendments to Rule 15c2-12 incorporated provisions: (1) prohibiting underwriters from purchasing or selling municipal securities in connection with a primary offering unless the issuer and/or an obligated person had committed to providing continuing disclosure (1994); (2) establishing a single centralized disclosure repository for the electronic collection and availability of information regarding municipal securities (2008); and (3) making significant changes to the material event notice requirements and making the continuing disclosure requirements of Rule 15c2-12 applicable to variable rate demand obligations (2010).

In March 2017, the SEC published for comment proposed amendments to Rule 15c2-12, which focused on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights. A wide range of commenters sent comment letters to the SEC in response to the proposed amendments and encouraged the SEC to consider narrowing the scope of the proposed amendments to avoid overburdening market participants.

On August 20, 2018, the SEC announced that it adopted amendments to Rule 15c2-12 (the 2018 Amendments) in substantially the form as proposed with some revisions, including the deletion of the broader language which would have included all leases and any “monetary obligation resulting from a judicial, administrative, or arbitration proceeding.”

For an overview of the 2018 Amendments and relevant guidance from the SEC, click here.

SEC Order Seeks to Clarify Steps Forward Following Lucia

Posted in Client Alert, Financial Regulation, Financial Services Litigation, Litigation, SEC, U.S. Supreme Court

In a previous GT Alert, we summarized and analyzed the Supreme Court’s June 21, 2018, decision in Lucia v. Securities & Exchange Commission, 138 S. Ct. 2044 (2018). That GT Alert cited the SEC’s 30-day stay of “all administrative proceedings” “before an administrative law judge” and foretold continued uncertainty concerning the status of administrative law judges and their decisions. A subsequent 30-day stay was issued on July 20, 2018, and expired on Aug. 22, 2018. On that date, the SEC issued an order entitled In re: Pending Administrative Proceedings (the Order), summarizing the SEC’s position on, and reaction to, the Lucia decision.

The Order is clear in at least one respect. In response to the Supreme Court’s holding that complaining litigants are entitled to “a new ‘hearing before a properly appointed’ official,” the Order provides for “the opportunity for a new hearing before an ALJ who did not previously participate” in a pending proceeding. The SEC will provide such an opportunity through a “remand [of] all proceedings” and will “vacate any prior opinion” issued in these matters. In an exhibit to the Order, the SEC listed 126 proceedings that may be subject to remand.1 The next day, the SEC’s Chief ALJ issued a subsequent notice identifying an additional 68 currently-pending cases for remand.

The Order also leaves some discretion to the litigants themselves. It solicits “express agreement[s] by the parties regarding alternative procedures” for assigning cases to the Chief ALJ for her consideration. The Chief ALJ’s subsequent notice explained that the parties could also, upon mutual agreement, decide to “remain with the previously designated administrative law judge.” The parties’ decisions on these matters must be provided to the Chief ALJ no later than Sept. 7, 2018. She, in turn, will reassign cases no later than Sept. 21, 2018. Then, within 21 days of assignment, the parties may again “submit proposals for the conduct of further proceedings.”

Finally, the Order seems to affirm the SEC’s belief in the constitutional validity of its Nov. 30, 2017, ratification of its five administrative law judges (notwithstanding that their initial appointments were carried out by SEC staff). It states that “in an abundance of caution and for avoidance of doubt, we today reiterate our approval of their appointments as our own under the constitution.”

While the Order’s grant of new hearings to complaining litigants seems straightforward enough, its two other features – giving litigants a say in their fates moving forward and affirming the constitutional validity of the Nov. 30, 2017, ratification – raise several questions. What will be the nature of these alternative procedures? Will those litigants accept ratification of the current crop of ALJs whose initial appointments gave rise to the challenge ultimately heard by the Lucia Court? If the litigants demand adjudicators other than those five ALJs, how might the SEC react? In short, it seems possible that these lingering questions may lead to further uncertainty and, perhaps, to further litigation.

SIFMA C&L 2018 Annual Seminar Summary

Posted in SEC

General Session Panel Highlights

One-on-One with SEC Chairman Jay Clayton and SIFMA President & CEO Kenneth E. Bentsen, Jr.

The conference began with a one-on-one discussion with SEC Commissioner Clayton. He applauded the agency for its diverse talent and an ability to coordinate effectively with other state and federal regulators and FINRA.

Commissioner Clayton acknowledged that the jurisdiction of multiple regulators touches upon the relationship of the typical customer/financial advisor. That presents two related potential challenges: competing standards of conduct and compliance with those standards. In his view, those challenges are at least initially met with less multiple regulatory oversight. That said, he did not expand upon how a reduction in regulatory jurisdiction could be achieved given what are certain to be competing interests of the various regulators.

No Q&A with Commissioner Clayton would be complete without a discussion of the Best Interest Standards and the Fifth Circuit Court of Appeals’ strike down of the DOL’s fiduciary rule last week. Commissioner Clayton said that the decision has not affected the SEC’s rulemaking and that it will be acting reasonably soon to address the issue.

For more information on the Seminar, please read the GT Alert “SIFMA C&L 2018 Annual Seminar Summary.”

SCOTUS Rules Dodd-Frank Does Not Protect Internal Whistleblowing

Posted in Dodd-Frank, Sarbanes-Oxley Act, SEC, Securities, U.S. Supreme Court

On Feb. 21, 2018, the U.S. Supreme Court held that the anti-retaliation provision of the Dodd-Frank Act (DFA) protects only employees who complain to the Securities and Exchange Commission (SEC) and not those who make only internal complaints.

In a unanimous decision, the justices ruled in favor of Digital Realty Trust (Digital Realty), finding that employees who bring securities law complaints against their employers must first take their allegations to the SEC to be protected by the DFA anti-retaliation provisions.

The decision resolves a long-standing circuit split, discussed in a prior GT Alert, between the Fifth Circuit Court of Appeals which held internal reporting was not protected by the DFA, and the Second and Ninth Circuits which held that internal reporting was protected.

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