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  • SEC announces $450,000 compliance-related whistleblower award

    Securities

    On March 30, the SEC announced a $450,000 award to a whistleblower in an enforcement action. According to the formal order, the whistleblower—who had compliance-related responsibilities at the company at issue in the enforcement action—suffered “unique hardships” after first attempting to report concerns within the company’s internal compliance structure. The whistleblower then reported the information to the SEC following the required 120-day time waiting period, which ultimately provided assistance to the SEC’s investigation and successful enforcement action. The SEC stated in its press release that this is the third whistleblower award given to an individual with compliance or internal audit responsibilities. As of March 30, the SEC has awarded 77 individuals a total of approximately $396 million in whistleblower awards since its first award in 2012.

    Securities SEC Whistleblower Compliance Enforcement

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  • SEC issues multiple whistleblower awards

    Securities

    On March 24, the SEC announced awards of over $570,000 to two whistleblowers for providing “significant information and assistance that helped the Commission bring multiple successful enforcement actions.” According to the formal order, the first whistleblower received an award of approximately $478,000, and the second whistleblower received an award of approximately $94,000. The SEC stated that the first whistleblower’s award was substantially higher because the information (i) helped the SEC bring antifraud charges related to conduct that was ongoing at the time the whistleblower reported the information to the SEC; (ii) played a critical role in the development of the case; and (iii) related to all the enforcement actions. In comparison, the second whistleblower’s information—while important—contributed to charges brought against only one of the respondents, the SEC stated.

    Earlier on March 23, the SEC announced an award of over $1.6 million to a whistleblower in an enforcement action. According to the SEC’s press release, the whistleblower “provided helpful assistance early in the investigation, preserving Commission time and resources,” and “helped form part of the basis for charges brought in a successful enforcement action.” The formal order—which acknowledged that the allegations reported by the whistleblower “would have been hard to detect”—stated, however, that while the whistleblower “unreasonably delayed” reporting the allegations, the SEC chose not to factor in the delay as severely as it might have done had the delay occurred entirely after the Dodd-Frank Act established the whistleblower award program.

    The SEC’s March 24 press release states that it has awarded 76 individuals a total of approximately $396 million in whistleblower awards since its initial award in 2012.

    Securities SEC Whistleblower Enforcement Regulator Enforcement Investigations

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  • SEC settles with investment entities over ETF recommendations

    Securities

    On February 27, the SEC announced a settlement with a national bank to resolve allegations that two of its investment entities failed to monitor sales of exchange-traded funds (ETFs) to retail investors. The SEC alleged in its order that the bank’s compliance policies and procedures and supervisory processes were unable to adequately prevent and detect unsuitable recommendations of single-inverse ETFs, which allegedly led to bank investment advisors making recommendations to certain clients who were unaware of the risk of losses when ETFs are held long term. While the bank neither admitted nor denied the SEC’s findings, it agreed to pay a $35 million penalty and distribute funds to affected clients. The bank also agreed to cease and desist from engaging in any future violations of the relevant provisions.

    Securities SEC Exchange-Traded Funds Broker-Dealer Compliance

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  • SEC issues $7 million whistleblower award

    Securities

    On February 28, the SEC announced an award of over $7 million to a whistleblower in an enforcement action. According to the SEC’s press release, the whistleblower “provided extensive and sustained assistance, such as identifying witnesses,” which was “critically important to the success of [the] enforcement action.” The formal order also states that the whistleblower helped the SEC “understand complex fact patterns” and that “[t]he whistleblower’s information and assistance helped the SEC staff devise an investigative plan, craft document requests, and ultimately bring an important enforcement action focusing on serious financial abuses.”

    The SEC’s press release states that it has awarded 73 individuals a total of approximately $394 million in whistleblower awards since 2012.

    Securities SEC Whistleblower Enforcement Investigations

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  • SEC settles with blockchain company over unregistered ICO

    Securities

    On February 19, the SEC announced a settlement with a blockchain technology company resolving allegations that the company conducted an unregistered initial coin offering (ICO). According to the order, the company raised approximately $45 million from sales of its digital tokens to raise capital to develop a digital asset trade-testing platform and to build a cryptocurrency-related data marketplace. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it sold were securities under federal securities laws, and the company did not have the required registration statement filed or in effect, nor did it qualify for an exemption to the registration requirements. The order, which the company consented to without admitting or denying the findings, imposes a $500,000 penalty and requires the company to register its tokens as securities, refund harmed investors through a claims process, and file timely reports with the SEC.

    Securities SEC Initial Coin Offerings Settlement Securities Exchange Act Blockchain Cryptocurrency

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  • Broker-Dealer settles with SEC for improper handling of ADRs

    Securities

    On February 6, the SEC announced a settlement with a broker-dealer to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the broker-dealers receiving the ADRs have an agreement with a depository bank; and (ii) the broker-dealer or the broker-dealer’s customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s Order Instituting Administrative Proceedings (order), the broker-dealer improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker-dealer failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker-dealer neither admitted nor denied the SEC’s allegations, but agreed to pay more than $326,000 in disgorgement, roughly $80,970 in prejudgment interest, and a $179,353 penalty. The SEC’s order acknowledged the broker-dealer’s cooperation in the investigation and that the broker-dealer had entered into tolling agreements.

    Securities SEC Enforcement Settlement American Depositary Receipts Broker-Dealer

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  • SEC suit alleges fraudulent ICO

    Securities

    On January 21, the SEC announced that it filed suit in the U.S. District Court for the Eastern District of New York against a blockchain company and the company’s founder (defendants) for allegedly “conducting a fraudulent and unregistered initial coin offering (ICO).” The SEC alleges, among other things, that from 2017 until 2018, the defendants raised $600,000 from nearly 200 investors through promoting an ICO of digital asset securities called “OPP Tokens,” using material misrepresentations to create the false impression that the defendants’ platform was creating notable growth in the company. The defendants marketed the tokens by making misstatements to potential investors, greatly exaggerating the numbers of providers that were “willing to do business on, and contribute content to, [defendants’] blockchain-based platform.” The complaint also alleges that in marketing the ICO, the defendants provided a catalog of small businesses eligible to use the defendants’ platform that numbered in the millions, in order to create the false impression that the platform had a huge base of users. In reality, the catalog was not compiled by the defendants, but was simply acquired from a vendor. Additionally, the SEC alleges that the defendants provided numerous customer reviews in its promotions to create the impression that the platform had many users creating content, which were actually reviews stolen from a third-party website. The SEC charges that in addition to the above allegations, the defendants misrepresented that they had filed an SEC registration statement for the ICO. The SEC seeks injunctive relief, disgorgement of profits, civil money penalties, and a permanent bar preventing the founder from serving as officer or director of any public company.

    Securities SEC Initial Coin Offerings Blockchain Fraud Advertisement Fintech

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  • Two whistleblowers earn SEC awards totaling $322,000

    Securities

    On January 22, the SEC announced that it had awarded a total of $322,000 to two whistleblowers in two separate enforcement actions. According to the SEC’s press release, the whistleblowers “played a crucial role in helping the Commission protect Main Street investors,” and “assisted the SEC in returning money to harmed investors.” One whistleblower provided information that reportedly helped the agency “shut down an ongoing fraudulent scheme that was preying on retail investors,” and was awarded $277,000 (see award order here). The other whistleblower, a harmed investor, assisted the agency to “shut down a fraudulent scheme targeting retail investors.” The whistleblower was awarded $45,000 (see award order here). Since 2012, the SEC whistleblower program has awarded roughly $387 million to 72 whistleblowers.

    Securities Agency Rule-Making & Guidance Whistleblower SEC Enforcement Regulator Enforcement

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  • SEC announces 2020 OCIE exam priorities

    Securities

    On January 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced the release of its 2020 Examination Priorities. The annual release of exam priorities provides transparency into the risk-based examination process and lists areas that pose current and potential risks to investors. OCIE’s 2020 examination priorities include: 

    • Retail investors, including seniors and those saving for retirement. OCIE places particular emphasis on disclosures and recommendations provided to investors.
    • Information security. In addition to cybersecurity, top areas of focus include: risk management, vendor management, online and mobile account access controls, data loss prevention, appropriate training, and incident response.
    • Fintech and innovation, digital assets and electronic investment advice. OCIE notes that the rapid pace of technology development, as well as new uses of alternative data, presents new risks and will focus attention on the effectiveness of compliance programs.
    • Investment advisers, investment companies, broker-dealers, and municipal advisers. Risk-based exams will continue for each of these types of entities, with an emphasis on new registered investment advisers (RIA) and RIAs that have not been examined. Other themes in exams of these entities include board oversight, trading practices, advice to investors, RIA activities, disclosures of conflicts of interest, and fiduciary obligations.
    • Anti-money laundering. Importance will be placed on beneficial ownership, customer identification and due diligence, and policies and procedures to identify suspicious activity.
    • Market infrastructure. Particular attention will be directed to clearing agencies, national securities exchanges and alternative trading systems, and transfer agents.
    • FINRA and MSRB. OCIE exams will emphasize regulatory programs, exams of broker-dealers and municipal advisers, as well as policies, procedures and controls.

    Securities Federal Issues Agency Rule-Making & Guidance Fintech Anti-Money Laundering Bank Secrecy Act SEC Risk Management Vendor Management Privacy/Cyber Risk & Data Security FINRA Customer Due Diligence

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  • Broker to pay nearly $4 million to settle ADR mishandling claims

    Securities

    On December 9, the SEC announced a settlement with a broker to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s order, the broker improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker neither admitted nor denied the SEC’s allegations, but agreed to pay more than $2.2 million in disgorgement, roughly $468,000 in prejudgment interest, and a $1.25 million penalty. The SEC’s order acknowledged the broker’s cooperation in the investigation and that the broker had entered into tolling agreements.

    Securities American Depository Receipts SEC Enforcement Settlement

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