Tuesday, July 26, 2016

SEC: State Street Misled Custody Clients About Prices for Foreign Currency Exchange Trades

The Securities and Exchange Commission today announced that State Street Bank and Trust Company has agreed to pay $382.4 million in a global settlement for misleading mutual funds and other custody clients by applying hidden markups to foreign currency exchange trades. 

As part of its custody bank line of business, State Street safeguards clients’ financial assets and offers such services as indirect foreign currency exchange trading (Indirect FX) for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities.  An SEC investigation found that State Street realized substantial revenues by misleading custody clients about Indirect FX, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided “best execution,” or charged “market rates” on the transactions.  State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients. 

State Street has agreed to pay $167.4 million in disgorgement and penalties to the SEC, a $155 million penalty to the Department of Justice, and at least $60 million to ERISA plan clients in an agreement with the Department of Labor. 

Under the terms of the agreement, the SEC will issue its order instituting the settled administrative proceeding only after a federal court approves State Street’s proposed settlement with private plaintiffs in pending securities class action lawsuits concerning its pricing of foreign currency exchange trades.  State Street has agreed to admit certain findings in the SEC’s order. 

“State Street misled custody clients about how it priced their trades and tucked its hidden markups into a corner where they were unlikely to notice,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Financial institutions cannot mislead their customers about their trading costs.”

Paul G. Levenson, Director of the SEC’s Boston Regional Office, added, “Mutual funds and other registered investment companies should not face overreaching by the very banks hired to safeguard their assets.”

The SEC’s order will find that State Street willfully violated Section 34(b) of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(b) by providing its registered investment company custody clients with trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions.  State Street will be required to pay $75 million in disgorgement plus $17.4 million in interest to harmed clients as well as a $75 million penalty.     

The SEC’s investigation was conducted by Sue Curtin, Cynthia Storer Baran, Andrew Palid, Deena Bernstein and Celia Moore of the Boston Regional Office, and Stuart Jackson of the Division of Economic and Risk Analysis.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts and the Department of Labor.  



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

FINRA Reminds Broker-Dealer Firms of Their Duty to Arbitrate | Indisputably

Professor Jill Gross' column on FINRA's position regarding broker-dealers' use of forum selection clauses to avoid FINRA arbitration



Last Friday, FINRA issued Regulatory Notice 16-25 reminding member firms that, under FINRA Rules 12200 and 13200, they have a regulatory duty to arbitrate at the request of a customer (account-related disputes) or an associated person (employment disputes). The Notice cited a number of recent circuit court decisions holding that a forum selection clause in the parties’ agreement superseded FINRA rules.  (In those cases, the broker-dealer was attempting to avoid arbitration at FINRA.)  FINRA disagrees with those holdings, arguing that these courts improperly deemed firms’ duty to arbitrate “contractual” and thus can be superseded or waived.
Read the entire column - FINRA Reminds Broker-Dealer Firms of Their Duty to Arbitrate | Indisputably:

Monday, July 25, 2016

LAN Airlines Settles FCPA Charges

The Securities and Exchange Commission today announced that South American-based LAN Airlines has agreed to pay more than $22 million to settle parallel civil and criminal cases related to improper payments it authorized during a dispute between the airline and its union employees in Argentina.

An SEC investigation found that when LAN encountered problems negotiating labor agreements with the unions, it was contacted by a consultant from Argentina who offered to negotiate on the company’s behalf.  The consultant made clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions.  LAN’s CEO approved $1.15 million in payments to the consultant through a sham contract for a purported study of existing air routes in Argentina.  The CEO knew that no actual study would be performed and that it was possible the consultant would pass some portion of the money to union officials in Argentina to settle the wage disputes. 

To settle the SEC’s charges that it failed to keep accurate books and records and maintain adequate internal accounting controls, LAN agreed to pay $9.4 million in disgorgement and prejudgment interest.  In a non-prosecution agreement announced today by the U.S. Department of Justice, LAN agreed to pay a $12.75 million penalty.

Earlier this year, the SEC charged LAN’s CEO Ignacio Cueto Plaza with FCPA violations and he settled the charges.

“LAN used a sham consulting agreement to make its financial reporting appear as though the company was funding a study rather than steering money to settle labor disputes,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “This settlement along with our prior case against the CEO shows that public companies and their executives must be truthful and forthcoming about its overseas consulting agreements or otherwise pay the consequences.”

Under the settlement, LAN must retain an independent compliance monitor for a period of not less than 27 months.  In reaching the settlement, the SEC considered LAN’s remedial acts and general cooperation with the investigation. 

The SEC’s investigation was conducted by Denise Hansberry and Tracy L. Price of the FCPA Unit.  The SEC appreciates the assistance of the Justice Department’s Fraud Section and the Federal Bureau of Investigation as well as the Cayman Islands Monetary Authority.   



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Friday, July 22, 2016

Vincente L. Martinez, Chief of Office of Market Intelligence, to Leave SEC

The Securities and Exchange Commission today announced that Vincente L. Martinez, Chief of the SEC’s Office of Market Intelligence is planning to leave the agency in early August.

Mr. Martinez began working in the SEC’s Enforcement Division in 2003 as a staff attorney and senior counsel.  He became one of the first Assistant Directors in the Office of Market Intelligence when it was formed in 2010 as part of a major restructuring of the Enforcement Division.  Mr. Martinez left the SEC in 2011 to become the first Director of the Whistleblower Office at the Commodity Futures Trading Commission, and he returned to the SEC in 2013 to begin serving as Chief of the Office of Market Intelligence.

“Under Vince’s leadership, the Office of Market Intelligence has served as an important center of expertise in reviewing TCRs and identifying risks and issues worthy of our pursuit,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Vince’s dedication, expertise, and skill has enhanced the Office of Market Intelligence’s efforts and built important bridges to other regulators.”

Mr. Martinez said, “I joined the Enforcement Division because, since my days in law school, I wanted to protect investors.  Leading the SEC’s Office of Market Intelligence has been the culmination of that ambition.  It has been an honor and a privilege to work with the office’s extraordinarily talented, professional, and dedicated staff as well as our many partners in law enforcement, regulation, and self-regulation.”

Under Mr. Martinez’s leadership, the office has overseen the SEC’s collection, evaluation, and dissemination of tens of thousands of tips, complaints, referrals and other forms of market intelligence that come into the SEC each year.  The office harvests intelligence in order to better inform the Enforcement Division’s investigative focus and priorities, and the office’s staff has provided expert support for hundreds of investigations.  The Office of Market Intelligence also has partnered with other parts of the Enforcement Division to play key roles in several important and impactful initiatives, including:

  • Operation Shell-Expel:  A microcap fraud-fighting technology-based initiative to scour the over-the-counter (OTC) market to identify dormant companies ripe for abuse.  Since 2012, the initiative has resulted in trading suspensions of more than 800 microcap stocks, which comprises more than eight percent of the OTC market.
  • The Rule 105 Initiative:  A program of streamlined investigations and resolutions of violations of Regulation M Rule 105 that has resulted in three rounds of sweeps addressing 172 violations by 50 defendants.
  • The Rule 17a-8 Initiative:  An ongoing initiative with the Enforcement Division’s Broker-Dealer Task Force to identify firms that have filed few or no suspicious activity reports (SARs) over extended periods of time and whose failure raises questions about their compliance with their obligations under the Bank Secrecy Act (BSA).  To date, the initiative has led to dozens of examinations and investigations focused on potential BSA violations, as well as the SEC’s first action against a firm solely for failing to file SARs when appropriate.

Victor J. Valdez, Managing Executive of the SEC’s Enforcement Division, will serve as Acting Chief of the Office of Market Intelligence following Mr. Martinez’s departure.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Deputy Chief Accountant Brian T. Croteau to Leave SEC

The Securities and Exchange Commission today announced that Brian T. Croteau, Deputy Chief Accountant, is planning to leave the agency.

Since he was appointed Deputy Chief Accountant in 2010, Mr. Croteau has managed the activities of the Office of Chief Accountant’s Professional Practice group.  In this position, Mr. Croteau has played a key role in the Commission’s work related to overseeing the activities of the Public Company Accounting Oversight Board (PCAOB), managing the resolution of auditor independence matters, monitoring and addressing matters related to requirements for internal control over financial reporting (ICFR), and monitoring audit and independence standard-setting internationally.

“It has been a pleasure and honor to work with Brian for nearly two years in the Office of the Chief Accountant,” said Chief Accountant James V. Schnurr. “The Commission has benefitted greatly from Brian’s knowledge of auditing, auditor independence, internal control, audit inspections, and audit standard-setting.”

“It has been a privilege to work with the many talented and dedicated individuals at both the Commission and the PCAOB during my leadership of OCA’s Professional Practice Group,” said Brian Croteau. “We have worked closely to advance numerous audit quality and internal control over financial reporting initiatives, and I am pleased with what we have accomplished to support and enhance the usefulness and reliability of financial reporting to investors.”

Mr. Croteau has worked collaboratively with the SEC’s Division of Corporation Finance and the PCAOB to promote ongoing, coordinated, and increasingly integrated efforts on oversight of management and auditor assessments of the effectiveness of ICFR and has advised the Division of Enforcement with respect to ICFR matters. He also was integral to staff efforts to develop and recommend a concept release in which the Commission sought public comment on potential ways to improve current audit committee disclosure requirements. He worked with the Division of Trading and Markets to support the development of a proposal and final rules requiring new compliance and exemption reporting requirements by brokers and dealers. In addition, Mr. Croteau provided advice and assistance on internal control, audit, and auditor independence matters to support the Commission’s advancement of numerous rulemaking projects under the Dodd-Frank and JOBS Acts.

Mr. Croteau also worked closely with the PCAOB to advance and develop recommendations to the Commission on numerous PCAOB standard setting and rulemaking projects, including a suite of eight new auditing standards for assessing and responding to risk in an audit, auditing related party transactions, auditor communications with audit committees, and auditor transparency. He assisted the PCAOB with projects related to the auditor’s reporting model, audit quality indicators, auditor supervision, the reorganization of PCAOB auditing standards, and new auditing and attestation standards for broker-dealer engagements. He worked closely with PCAOB staff to promote the evolution of root cause analysis by auditors and the PCAOB to obtain a deeper understanding of the underlying causes of recurring audit deficiencies. In addition, he worked closely with the PCAOB on their efforts to improve the content of inspection reports to improve their usefulness to audit committees and other users.

Prior to his appointment as Deputy Chief Accountant, Mr. Croteau served as an Assurance Partner in the Auditing Service Group of PricewaterhouseCoopers LLP’s national offices where he was responsible for providing consultation and support regarding the implementation, application, and development of auditing policies and standards.



SEC Press Release

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SEC Halts Ongoing Fraudulent Stock Scheme

The Securities and Exchange Commission today announced it has won a court-ordered asset freeze to halt an ongoing fraud by two former brokers with disciplinary histories who allegedly raised more than $5 million from investors without using the money as promised.

In an emergency action filed in federal court in Chattanooga, Tenn., the SEC alleges that James Hugh Brennan III and Douglas Albert Dyer sold purported shares in eight similarly named companies to more than 240 investors since 2008 without ever registering the stock as they promised.  Instead, according to the SEC’s complaint, Brennan and Dyer transferred investor funds into their personal accounts or those belonging to their wives.  The SEC further alleges that Brennan and Dyer continue to solicit investors while touting their securities industry experience and failing to disclose that Brennan was banned from the brokerage industry and Dyer suspended and fined for executing unauthorized transactions in customers’ accounts.

“We allege that Brennan and Dyer have been telling investors the same lies for several years without fulfilling any of the promises they’ve made, and the court’s temporary restraining order stops them from soliciting any more investors and freezes their assets as we pursue litigation,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office.

The SEC encourages investors to check the backgrounds of investment professionals before investing their money.  A quick search on the SEC’s investor.gov website would have shown that neither Brennan nor Dyer has been registered to sell investments as a broker since the late 1990s as well as their disciplinary problems with the Financial Industry Regulatory Authority and state regulators. 

The SEC’s complaint alleges that Brennan, Dyer, and their company Broad Street Ventures have violated Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions.  The SEC also seeks penny stock and officer-and-director bars against Brennan and Dyer.  The court’s order issued this morning freezes the assets of Broad Street, Brennan, and Dyer.  Their spouses are named as relief defendants in the SEC’s complaint for the purposes of recovering ill-gotten gains deposited in their accounts.

The SEC’s investigation has been conducted by Michael Mashburn and Peter Diskin under the supervision of William Hicks, and the litigation is being led by Robert Schroeder, Pat Huddleston, and Graham Loomis in the Atlanta Regional Office.

Public Service Announcement: — Check Out Your Investment Professional



SEC Press Release

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Accountant Suspended for Failing to Spot Fraud in Company Audit

The Securities and Exchange Commission today suspended an accountant for conducting a faulty audit of the financial statements of a public company that was committing fraud, and the firm where he was a partner at the time has been prohibited from accepting new public company clients for one year.

 

New York-based accounting firm EFP Rotenberg LLP also agreed to pay a $100,000 penalty to settle the SEC’s charges, and it can only begin accepting new public company clients again next year after an independent consultant certifies that the firm has corrected the causes of its audit failures.  The accountant, Nicholas Bottini, agreed to pay a $25,000 penalty in addition to being permanently suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.

 

According to the SEC’s order instituting a settled administrative proceeding, the failed audit pertained to Illinois-based ContinuityX Solutions Inc., a publicly-traded company that claimed to sell internet services to businesses and whose executives have since been charged by the SEC for allegedly engineering a scheme to grossly overstate the company’s revenue through fraudulent sales.  

 

The SEC’s order finds that during the audits of ContinuityX, EFP Rotenberg and Bottini failed to perform sufficient procedures to detect the fraudulent sales in the company’s financial statements.  EFP Rotenberg and Bottini also failed to obtain sufficient audit evidence over revenue recognition and accounts receivable, identify related party transactions, investigate management representations that contradicted other audit evidence, perform procedures to resolve and properly document inconsistencies, and exercise due professional care. 

 

“Auditors are supposed to act as gatekeepers to protect the integrity of our markets, but EFP Rotenberg and Bottini failed to live up to their professional obligations,” said David Glockner, Director of the SEC’s Chicago Regional Office.

 

The SEC order finds that EFP Rotenberg violated and Bottini aided and abetted and caused EFP Rotenberg’s violations of Sections 10A(a)(1) and 10A(a)(2) of the Securities Exchange Act of 1934 and Rule 2-02(b)(1) of Regulation S-X.  The order also finds that EFP Rotenberg and Bottini engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) and (iii) of the SEC’s Rules of Practice.  EFP Rotenberg and Bottini agreed to cease and desist from committing or causing any violations of Sections 10A(a)(1) and 10A(a)(2) and Rule 2-02(b)(1) without admitting or denying the findings in the order.

 

The SEC’s investigation has been conducted by Justin M. Delfino and Ann M. Tushaus of the Chicago office, and the case has been supervised by Steven L. Klawans and Scott J. Hlavacek.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Thursday, July 21, 2016

Wesley R. Bricker Named Interim Chief Accountant

The Securities and Exchange Commission today announced that Wesley R. Bricker has been named the Commission’s Interim Chief Accountant responsible for the activities of the Office of the Chief Accountant as James V. Schnurr, current Chief Accountant, recovers from a serious bicycle accident.

Mr. Bricker, as Interim Chief Accountant, will serve as the principal advisor to the Commission on accounting and auditing matters. He will also consult with registrants, auditors and other industry representatives, and be responsible for the oversight of the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB), and carry out the other duties of the Chief Accountant.

“Wes’ expert knowledge, leadership and analytic skills and Jim’s expertise and wealth of experience will continue to provide critical service to investors, companies and the Commission,” said SEC Chair Mary Jo White.

Mr. Bricker has served as Deputy Chief Accountant since 2015. In that capacity, he has advised the Commission on accounting and auditing matters while also working closely with private sector accounting bodies, such as the FASB.

Mr. Bricker joined the SEC in 2015 from PricewaterhouseCoopers LLP, where he was a partner responsible for audit engagements in the banking, capital markets, financial technology, and investment management sectors. He had previously served as a professional accounting fellow in Office of the Chief Accountant from 2009 to 2011. Mr. Bricker received a B.S. in accounting from Elizabethtown College and a law degree from American University. He is licensed as a certified public accountant and is a member of the New York State Bar.

The SEC’s Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy as well as improving the professional performance of public company auditors. The office works to enhance the transparency and relevancy of financial reporting and ensure that financial statements are presented fairly and have credibility for the benefit of all investors.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Wednesday, July 20, 2016

Kurt Gottschall Named Associate Regional Director in the SEC's Denver Regional Office

The Securities and Exchange Commission today announced that Kurt L. Gottschall has been named the Associate Regional Director for enforcement in the Denver office.

Mr. Gottschall began working as a staff attorney in the Denver office’s Division of Enforcement in 2000, before becoming a Branch Chief in 2003, and an Assistant Regional Director in 2010. Since 2012, he worked in the Asset Management Unit, which focuses on misconduct by investment advisers and investment companies. During his career with the SEC, Mr. Gottschall has investigated or supervised dozens of enforcement matters involving a variety of securities law violations, including:

“Kurt’s deep knowledge of the securities laws, creative thinking, and extensive experience will be significant assets in his new role,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “The Denver office’s enforcement efforts have been immensely productive and I am sure Kurt’s leadership will only enhance their success.”

Julie Lutz, Director of the SEC’s Denver Regional Office, added, “Kurt is respected throughout the Denver Regional Office for his outstanding track record in producing significant enforcement cases, and he has been instrumental in developing the office’s Asset Management Unit into a strong vehicle for collaboration with exam staff and national unit personnel. He brings extraordinary judgment and analytical skill to leading the DRO’s talented enforcement staff.”

Mr. Gottschall said, “For the past 16 years, it has been a privilege to work with the talented, experienced, and dedicated staff of the Denver Regional Office. I am looking forward to leading the enforcement team in Denver as we continue our important mission of investor protection.”

Before joining the SEC staff, Mr. Gottschall worked as a litigation associate at Sherman & Howard L.L.C. in Denver and Sheppard, Mullin, Richter & Hampton L.L.P. in Los Angeles.  Mr. Gottschall earned his law degree with honors from the University of California’s Hastings College of the Law in 1995, and his bachelor’s degree in economics and government with honors from Claremont McKenna College in 1992.



SEC Press Release

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Thursday, July 14, 2016

SEC Announces Agenda for July 19 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the July 19 meeting of its Advisory Committee on Small and Emerging Companies.  The Committee will focus on the first year of Regulation A+, recommendations related to the definition of an “accredited investor,” and the Commission’s recent proposal to amend the definition of “smaller reporting company.”

 

The meeting on July 19 will begin at 9:30 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

 

AGENDA

9:30 a.m.

Co-Chairs Stephen Graham and Sara Hanks call meeting to order

 

Introductory Remarks by Chair Mary Jo White and Commissioner Kara Stein

10:00 a.m.

Consider “Accredited Investor” Definition Recommendation as discussed at May 18th Meeting

10:30 a.m.

Regulation A+ Update and Review

  • Update from SEC Division of Corporation Finance staff on the usage of Regulation A+ in its first year
  • Presentation from Paul Elio, CEO and Chairman of Elio Motors Inc., a company that conducted a Regulation A+ offering
  • Discussion by Committee Members

12:00 p.m.

Lunch Break

1:30 p.m.

Regulation A + (Continued)

  • Presentation by Daniel Zinn, General Counsel, OTC Markets Group regarding secondary trading of Regulation A+ shares

2:30 p.m.

SEC Proposal to Amend the “Smaller Reporting Company” Definition

  • Briefing from SEC Division of Corporation Finance staff regarding the Commission’s proposal issued June 27, 2016 to amend the “Smaller Reporting Company” Definition
  • Discussion by Committee Members

3:30 p.m.

Adjournment



SEC Press Release

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SEC Charges Investment Adviser With Failing to Clearly Disclose Additional Costs to Investors

The Securities and Exchange Commission today announced an enforcement action against an investment advisory firm that failed to properly prepare clients for additional transaction costs beyond the “wrap fees” they pay to cover the cost of several services bundled together.

 

In wrap fee programs, subadvisers typically use a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of those trades are included in the annual wrap fee that each client pays. 

 

An SEC investigation found that Richmond, Va.-based RiverFront Investment Group disclosed to investors in Forms ADV that client trades were typically executed through the sponsoring broker so the wrap fee would cover the transaction costs.  But RiverFront actually used brokers besides the wrap program sponsor to execute the majority of its wrap program trading, resulting in additional costs to clients for those transactions.  While RiverFront did disclose that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, rendering its disclosures materially misleading.

 

RiverFront agreed to settle the SEC’s charges.

 

“Investors were misled about the overall cost of selecting RiverFront to manage their portfolios,” said Sharon Binger, Director of the SEC’s Philadelphia Regional Office.  “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.”

 

The SEC’s National Exam Program has included wrap fee programs among its annual examination priorities, particularly assessing whether advisers are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor. 

 

The SEC’s order against RiverFront finds that the firm violated Sections 207 and 204 of the Investment Advisers Act of 1940 and Rule 204-1(a).  Without admitting or denying the findings, RiverFront agreed to be censured and pay a $300,000 penalty, and the firm must post on its website on a quarterly basis the volume of trades by market value executed away from sponsors and the associated transaction costs passed onto clients.

 

The SEC’s investigation was conducted by Matthew S. Raalf and Kelly L. Gibson of the Philadelphia office, and supervised by G. Jeffrey Boujoukos.  The examination that led to the investigation was conducted by Ly T. Nguyen, Kristy L. Moore, Kelli P. Byrne, Arthur Cajulis, Matthew L. Guthier, and Brian Carroll of the Philadelphia office under the supervision of Steven R. Dittert.
 



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Wednesday, July 13, 2016

SEC Adopts Amendments to Rules of Practice for Administrative Proceedings

The Securities and Exchange Commission today adopted amendments updating its rules of practice governing its administrative proceedings.

 

“The amendments to the Commission’s rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of our administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings,” said SEC Chair Mary Jo White.

 

In September 2015, the Commission proposed for comment amendments to its rules of practice. 

 

After careful consideration of the comments received, the Commission adopted final amendments that, among other things:

  • Extend the potential length of the prehearing period from the current four months to a maximum of 10 months for the cases designated for the longest timelines.
  • Allow parties in the cases designated for the longest timelines the right to notice three depositions per side in single-respondent cases and five depositions per side in multi-respondent cases, and to request an additional two depositions.
  • Clarify the types of dispositive motions that may be filed at various stages of proceedings and the applicable procedures and legal standards for the motions.
  • Make additional clarifying and conforming changes to other rules, including rules regarding the admissibility of certain types of evidence, expert disclosures and reports, the requirements for the contents of an answer, and procedures for appeals.

 

The amendments will become effective 60 days after publication in the Federal Register and will apply to all proceedings initiated on or after that date.  The release specifies the applicability of the rule amendments to pending proceedings, applying the amended rules based on the phase of the proceeding. 

 

*   *   *


FACT SHEET

 

Amendments to Commission’s Rules of Practice Regarding Administrative Proceedings

 

SEC Open Meeting
July 13, 2016


Action

 

The Securities and Exchange Commission is voting on amendments to its rules of practice regarding administrative proceedings.  The amendments are intended to update the rules and introduce additional flexibility into administrative proceedings, while continuing to provide for the timely and efficient resolution of the proceedings.

 

Highlights of the Amendments

 

Among other things, the final rules would adjust the timing of administrative proceedings and give parties additional opportunities to take depositions of witnesses:

 

  • Initial decision of hearing officer and timing of hearing (Rule 360):  Under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75 or 120 days from the completion of post-hearing or dispositive motion briefing or a finding of a default.  Amended Rule 360 also would extend the length of the prehearing period from the current four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases. 

 

  • Depositions upon oral examination (Rule 233):  Amended Rule 233 would permit parties in 120-day proceedings the right to notice three depositions per side in single-respondent cases and five depositions per side in multi-respondent cases, and would permit each side to request an additional two depositions under an expedited procedure.

 

  • Answer to allegations (Rule 220):  Amended Rule 220 would require a respondent to disclose in its answer to an order instituting proceedings whether the respondent is asserting any “reliance” defense and whether the respondent relied on the advice of counsel, accountants, auditors, or other professionals in connection with any claim, violation alleged, or remedy sought.

 

  • Dispositive motions (Rule 250):  Amended Rule 250 would provide that three types of dispositive motions may be filed at different stages of an administrative proceeding and would set forth the standards and procedures governing each type of motion.  

 

  • Evidence (Rule 320):  Amended Rule 320 would exclude evidence that is irrelevant, immaterial, unduly repetitious, or unreliable and would provide that hearsay may be admitted if it is relevant, material, and reliable.

 

The amendments also would address, among other things, procedures for the service of the order instituting proceedings in foreign jurisdictions, disclosures regarding expert witnesses and reports prepared by expert witnesses, and procedures governing appeals to the Commission. 

 

Background

 

In September 2015, the Commission proposed for comment amendments to its rules governing its administrative proceedings. 

 

What’s Next?

 

The amendments would become effective 60 days after publication in the Federal Register and would apply to all proceedings initiated on or after that date.  The release specifies the applicability of the rule amendments to pending proceedings, applying the amended rules based on the phase of the proceeding.  
 



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Proposes Amendments to Update and Simplify Disclosure Requirements As Part of Overall Disclosure Effectiveness Review

The Securities and Exchange Commission today voted to propose amendments to eliminate redundant, overlapping, outdated, or superseded provisions, in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (U.S. GAAP), International Financial Reporting Standards (IFRS), and technology.

 

The Commission is also soliciting comment on certain disclosure requirements that overlap with U.S. GAAP to determine whether to retain, modify, eliminate or refer them to the Financial Accounting Standards Board (FASB) for potential incorporation into U.S. GAAP. 

 

The amendments, along with the input received on the Regulation S-K concept release, are designed to further inform the Commission’s actions to enhance disclosure.

 

“The proposed amendments address outdated and redundant disclosure requirements while continuing to require companies to provide investors with what they need to make informed decisions,” said SEC Chair Mary Jo White.  “We are keenly interested in investors’ views on all aspects of the proposal and look forward to receiving their input as we continue to consider changes and enhancements to our disclosure requirements.” 

 

The proposing release is part of the disclosure effectiveness review, which is a broad-based staff review of the requirements, and the presentation and delivery of disclosures that companies make to investors.  The proposal is also part of the Commission’s work to implement the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

           

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register. 

 

*   *   *

 

FACT SHEET

 

Disclosure Update and Simplification

SEC Open Meeting

July 13, 2016

 

Action

 

The Commission will consider whether to propose amendments to update and simplify certain disclosure requirements by eliminating redundant, overlapping, outdated and superseded requirements due to changes in disclosure rules, accounting principles, and technology.  The Commission also will consider issuing a related request for comment on whether other requirements should be modified, eliminated, or included in U.S. Generally Accepting Accounting Principles (U.S. GAAP).

 

The proposal under consideration arises out of the staff’s work on the disclosure effectiveness review, which is intended to update and modernize the Commission’s disclosure requirements for the benefit of investors and companies.  The proposal also would implement certain provisions of the Fixing America’s Surface Transportation (FAST) Act.

 

Highlights

 

The proposal would be primarily applicable to public companies (including foreign private issuers), but also would involve requirements applicable to other entities the Commission regulates, including Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations. 

 

The proposing release covers:

 

  • Duplicative requirements, which require substantially the same disclosures as U.S. GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.  The Commission will consider whether to propose to delete these requirements in light of the requirements elsewhere.

 

  • Overlapping requirements, which are related to, but not the same as U.S. GAAP, IFRS, or other Commission disclosure requirements.  For these requirements, the Commission will consider whether to:

 

  • Delete Commission disclosure requirements that:  require disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements, or require disclosure incremental to the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements and may no longer be useful to investors;    

 

  • Integrate Commission disclosure requirements that overlap with, but require information incremental to, other Commission disclosure requirements; or

 

  • Solicit comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP to determine whether to retain, modify, eliminate, or refer them to the Financial Accounting Standards Board (FASB) for potential incorporation into U.S. GAAP.

 

  • Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.  The Commission will consider whether to propose to amend these outdated requirements. The Commission will consider whether to propose to require additional disclosure of information to reduce any loss of information or increased burdens for investors.

 

  • Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated U.S. GAAP.  The Commission will consider whether to propose to amend these superseded disclosure requirements to reflect, as applicable, the more recently updated requirements.

 

Background

 

The proposal is the result of the staff’s work on the disclosure effectiveness review, which is a comprehensive evaluation of the Commission’s disclosure requirements with the objective of improving the disclosure regime for both investors and companies.

 

The work is focused on considering the type of information the rules require issuers to disclose, how the information is presented, where and how the information is disclosed, and how technology can be leveraged for improving disclosure to investors’ access to the information. 

 

The Commission has issued several releases in connection with the disclosure effectiveness review.  The Commission is seeking public comment on modernizing certain business and financial disclosure requirements in Regulation S-K and on proposed amendments to its disclosure requirements for registrants involved in mining activities. The Commission also requested comment on financial disclosure requirements in Regulation S-X for certain entities other than the issuer. 

 

What’s Next?

 

The Commission will seek public comment on the proposed rules for 60 days.  
 



SEC Press Release

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SEC Proposes Rules to Enhance Order Handling Information Available to Investors

The Securities and Exchange Commission today voted to propose rules that for the first time would require broker-dealers to disclose the handling of institutional orders to customers.  The proposed rules also would expand the information included in existing retail order disclosures. 

 

“These proposed rules are intended to bring order handling disclosure in line with modern technology and market practice, providing valuable information to retail and institutional investors about how their orders are treated,” said SEC Chair Mary Jo White.  “This information should provide investors more transparency and a powerful new tool to more effectively monitor broker-dealer routing decisions, especially when combined with the additional disclosures from alternative trading systems proposed by the Commission late last year.”

 

Institutional Order Disclosures

 

The proposed rules would require a broker-dealer to provide a customer, upon request, a report on its handling of that customer’s institutional orders (orders in exchange-listed stocks with an original market value of at least $200,000), containing specified monthly data for the previous six months.  The customer-specific report also would require detailed order handling information for each venue to which the broker-dealer routed institutional orders for the customer and would be presented in the aggregate and broken down by passive, neutral, and aggressive order routing strategies.

 

Separately, the proposed amendments would require broker-dealers to make public on a quarterly basis aggregated reports of their handling of all institutional orders.

 

Retail Order Disclosures

 

The proposed rules also would enhance current retail order disclosures by requiring: 
 

  • More detailed information about the payments received by broker-dealers from execution venues or paid to such venues.
  • Reporting by calendar month rather than by quarter.
  • Separate reporting information for marketable and non-marketable limit orders.

 

The Commission is seeking public comment on the proposal for 60 days following its publication in the Federal Register.

 

*   *   *

 

FACT SHEET

 

Disclosure of Order Handling Information

SEC Open Meeting
July 13, 2016

Action

The Securities and Exchange Commission will consider whether to propose rules that for the first time would require broker-dealers to disclose specific data related to the routing and execution of institutional orders and enhance existing disclosure requirements related to the routing of retail orders.  The proposed amendments would assist customers in assessing the services of their broker-dealers and comparing the services of multiple broker-dealers.

 

Highlights

 

Institutional Orders Disclosures

 

The proposed rules would require broker-dealers to provide customers with standardized information about their institutional order handling and execution quality and to disclose publicly the same information on an aggregated basis across all customers.  The customer-specific disclosures would help customers assess their broker-dealers’ services, including the handling of potential conflicts of interest, risks of information leakage, and best execution.  The public disclosures would assist market participants in assessing and comparing the institutional order handling services provided by broker-dealers.

 

Customer-specific report on institutional order handling

The proposed rules would require a broker-dealer to provide a customer, upon request, a report on the broker-dealer’s handling of the customer’s institutional orders (orders in National Market System (NMS) or exchange-listed stocks with an original market value of at least $200,000) that contains specified monthly data for the previous six months. The report would include the number of: 

  • Shares sent to the broker-dealer
  • Shares executed by the broker-dealer as principal
  • Institutional orders exposed by the broker-dealer through actionable indications of interest, and the venues to which they were exposed

The report also would include the following information for each venue to which the broker-dealer routed institutional orders for the customer, in the aggregate and broken down by passive, neutral, and aggressive order routing strategies as determined and assigned by the broker-dealer:

 

  • Information on Order Routing
    • Total shares routed
    • Total shares routed marked immediate or cancel
    • Total shares routed that were further routable
    • Average order size routed

 

  • Information on Order Execution
    • Total shares executed
    • Fill rate (shares executed divided by the shares routed)
    • Average fill size
    • Average net execution fee or rebate (cents per 100 shares, specified to four decimal places)
    • Total number of shares executed at the midpoint
    • Percentage of shares executed at the midpoint
    • Total number of shares executed that were priced on the side of the spread more favorable to the institutional order
    • Percentage of total shares executed that were priced at the side of the spread more favorable to the institutional order
    • Total number of shares executed that were priced on the side of the spread less favorable to the institutional order
    • Percentage of total shares executed that were priced on the side of the spread less favorable to the institutional order

 

  • Information on Orders that Provided Liquidity
    • Total number of shares executed of orders providing liquidity
    • Percentage of shares executed of orders providing liquidity
    • Average time between order entry and execution or cancellation, for orders providing liquidity (in milliseconds)
    • Average net execution rebate or fee for shares of orders providing liquidity (cents per 100 shares, specified to four decimal places)

 

  • Information on Orders that Removed Liquidity
    • Total number of shares executed of orders removing liquidity
    • Percentage of shares executed of orders removing liquidity
    • Average net execution fee or rebate for shares of orders removing liquidity (cents per 100 shares, specified to four decimal places)

 

Public aggregated report on institutional order handling

 

The proposed rules would require broker-dealers to make aggregated reports of their handling of institutional orders publicly available on a quarterly basis.  Broker-dealers would be required to post the aggregated report on a free, publicly-accessible Internet website for three years.

 

Retail Order Disclosures

The proposed rules would rename “customer order” to “retail order” and would require enhanced disclosures of retail order routing information.  Specifically, broker-dealers would be required to reflect the following in their quarterly reports on retail order routing information: 

  • Separately report limit orders as marketable and non-marketable limit orders
  • Report routing information by calendar month instead of quarterly and no longer report NMS stocks by listing market
  • Post the report on a free, publicly-accessible Internet website for three years
  • Include the following information for the 10 venues to which the largest number of total non-directed orders were routed for execution and for any venue to which five percent or more of non-directed orders were routed for execution: 
    • The net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid per share, and transaction rebates received, both as a total dollar amount and per share for: non-directed market orders, non-directed marketable limit orders; non-directed non-marketable limit orders; and other non-directed orders
  • Include a description of the terms of any payment for order flow and any profit-sharing arrangements that may influence a broker-dealer’s order routing decision, including, among other things: 
    • Incentives for equaling or exceeding an agreed upon order flow volume threshold
    • Disincentives for failing to meet an agreed upon minimum order flow threshold
    • Volume-based tiered payment schedules
    • Agreements regarding the minimum amount of order flow that the broker-dealer would send to a venue

 

Format of Reports

 

All reports on institutional and retail order handling and routing would be provided using XML and PDF formats as published on the Commission’s website, so that the data in the report would be in a consistent, structured format that would facilitate search capabilities and statistical and comparative analyses across broker-dealers and date ranges. 

 

Disclosure of Order Execution Information

 

Similar to the proposed requirement for the public order handling reports, the proposed rules would require market centers to make order execution reports publicly available for three years.

 

Background

 

Currently, Rule 606 requires broker-dealers to disclose publicly, on a quarterly basis, certain aggregated order routing information for customer orders in NMS securities, and to disclose separately, to a customer upon request, certain customer-specific order routing information for the past six months.  The term “customer order” is defined as an order that is not for the account of a broker-dealer, and is less than $200,000 for NMS stocks and less than $50,000 for options. 

Rule 606 currently does not require disclosure of order routing information for institutional-sized orders.  At the time Rule 606 was adopted, institutional-sized orders were excluded because they were handled by broker-dealers in a manual, individual manner.  As such, generalized order handling information was not practical.

 

What’s Next?

 

If approved for publication by the Commission, the proposed amendments will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed amendments will be 60 days after publication in the Federal Register.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Adopts Additional Rules Related to Security-Based Swap Transaction Reporting

The Securities and Exchange Commission today announced that it has adopted amendments and guidance related to rules regarding the regulatory reporting and public dissemination of security-based swap transactions, known as Regulation SBSR.  The new rules and guidance are designed to increase transparency in the security-based swap market.

 

The rules and guidance implement mandates under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

“This action ensures the public’s accessibility to transaction information, extends the scope of Regulation SBSR to additional entities and transactions and completes an important mandate under Title VII of the Dodd-Frank Act,” said SEC Chair Mary Jo White.  “By providing for the regulatory reporting and public dissemination of security-based swap transactions, Regulation SBSR will bring much-needed transparency to the security-based swap market.”

 

Among other things, the final rules:

 

  • Assign the reporting duties for platform-executed security-based swaps that will be submitted to clearing and for security-based swaps resulting from the clearing process

 

  • Establish regulatory reporting and public dissemination requirements for certain cross-border security-based swaps

 

  • Prohibit registered swap data repositories (SDRs) from imposing fees or usage restrictions on the security-based swap transaction data that Regulation SBSR requires them to publicly disseminate. 

 

The Commission also is issuing guidance with respect to the application of Regulation SBSR to security-based swaps resulting from prime broker arrangements and from the allocation of cleared security-based swaps.

 

The rules also establish a new compliance schedule for the portions of Regulation SBSR for which the Commission has not previously specified compliance dates.  Compliance for these portions of Regulation SBSR will be phased in over a period of months, beginning on the first Monday that is the later of: six months after the date on which the first SDR that can accept transaction reports in an asset class registers with the Commission; or one month after security-based swap dealers and major security-based swap participants are required to register with the Commission.

 

*   *   *


 

FACT SHEET

 

Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information

 

SEC Open Meeting

July 13, 2016

 

Action

 

The Commission will consider whether to adopt rules and guidance related to the reporting and public dissemination of security-based swap transaction data designed to enhance transparency in the security-based swap market and ensure that swap data repositories (SDRs) maintain complete and accurate records that can be accessed by regulators.  The rules and guidance would also provide market participants with more comprehensive information with which to make trading and valuation decisions.

 

The rules and guidance would implement mandates under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Highlights

 

The final rules and guidance addressing security-based swap data reporting and public dissemination, known as Regulation SBSR, would:

 

  • Require a national securities exchange or security-based swap execution facility to report a security-based swap executed on the platform that will be submitted to clearing
  • Require a registered clearing agency to report any security-based swap to which it is a direct counterparty, as well as whether or not the clearing agency accepts a transaction for clearing
  • Prohibit a registered SDR from imposing fees or usage restrictions on the security-based swap transaction data that it is required by Regulation SBSR to publicly disseminate
  • Require any security-based swap transaction connected with a non-U.S. person’s security-based swap dealing activity that is arranged, negotiated, or executed by personnel of such non-U.S. person located in a U.S. branch or office—or by personnel of its agent located in a U.S. branch or office—to be reported and publicly disseminated
  • Provide guidance regarding the application of Regulation SBSR to security-based swaps resulting from prime brokerage arrangements and from the allocation of cleared security-based swaps
  • Establish a compliance schedule for the portions of Regulation SBSR for which the Commission has not previously specified compliance dates.  Under the new compliance schedule, transaction reporting will not begin until after security-based swap dealers and major security-based swap participants have registered with the Commission. 

 

Other Regulators

 

In June 2016, the U.S. Commodity Futures Trading Commission (CFTC) adopted rules that amended the CFTC’s existing swap reporting requirements to provide additional clarity with respect to the reporting of cleared swap transactions.  The Commission staff consulted with the staff of the CFTC during this rulemaking.

 

Background

 

Dodd-Frank Act—The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established a comprehensive framework for regulating the over-the-counter derivatives market.  Title VII of the Dodd-Frank Act gave the Commission regulatory authority over security-based swaps and certain key players in that market, including security-based swap dealers and major security-based swap participants.  Title VII, among other things, amends the Securities Exchange Act of 1934 to address the registration, regulation, and business conduct standards of security-based swap dealers; the registration and duties of security-based swap data repositories; the reporting and public dissemination of security-based swaps; and the mandatory clearing and trade execution of certain security-based swaps.

 

Final Regulation SBSR and Related Proposed Rules—The Commission adopted Regulation SBSR in February 2015.  Among other things, Regulation SBSR set forth the information that must be reported and publicly disseminated for each security-based swap transaction, assigned the reporting duties for many security-based swap transactions, required SDRs registered with the SEC to establish and maintain policies and procedures for carrying out their duties under Regulation SBSR, and addressed the application of Regulation SBSR to certain cross-border transactions.  At the same, the Commission issued a companion release proposing additional provisions of Regulation SBSR to address issues not covered in the first adoption.  The companion proposing release included new provisions for the reporting of platform-executed security-based swaps that will be submitted to clearing and for security-based swaps resulting from the clearing process.  In April 2015, the Commission proposed rules that, among other things, addressed the application of Regulation SBSR to security-based swap activity of non-U.S. persons within the United States.  The rules and guidance being considered today would address these open issues.

 

What’s Next?

 

If approved for publication by the Commission, the rules will be published on the Commission’s website and in the Federal Register.  They will become effective 60 days after publication in the Federal Register.  The rules also would establish a compliance schedule for the portions of Regulation SBSR for which the Commission has not previously specified compliance dates.  Compliance with these portions of Regulation SBSR will be phased in over a period of months, beginning on the first Monday that is the later of:  six months after the date on which the first SDR that can accept transaction reports in an asset class registers with the Commission; or one month after security-based swap dealers and major security-based swap participants are required to register with the Commission.

 



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.