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  • SEC issues $20 million whistleblower award

    Securities

    On November 28, the SEC announced an award totaling nearly $20 million to a whistleblower whose new information and assistance led to a successful SEC enforcement action. According to the redacted order, the whistleblower provided significant information and continuing assistance in the investigation that allowed SEC staff to more quickly and efficiently investigate complex issues.

    Securities Enforcement SEC Whistleblower

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  • SEC seeks to stop the registration of misleading crypto asset offerings

    Securities

    On November 18, the SEC instituted administrative proceedings against a Wyoming-based organization (respondent) to determine whether a stop order should be issued to suspend the registration of the offer and sale of two crypto assets. The SEC alleged that a Form S-1 registration statement filed by the respondent in September 2021 failed to contain required information about its business, management, and financial condition, such as audited financial statements, and contained materially misleading statements and omissions, including inconsistent statements about whether the tokens are securities as required under the Securities Act of 1933. The SEC further alleged that the respondent failed to cooperate in the examination of respondent’s registration statement.

    Securities SEC Enforcement Cryptocurrency Digital Assets Securities Act

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  • SEC charges company with ESG policy violations

    Securities

    On November 22, the SEC announced a settlement with a Delaware-based investment adviser (respondent) resolving allegations that the company violated federal laws concerning the investment process that the respondent’s equity group utilized while advising an environmental, social and governance (ESG) separately managed account strategy and two ESG mutual funds. According to the order, from April 2017 until February 2020, the respondent allegedly had several policy and procedure failures involving the ESG research its investment teams used to select and monitor securities. Specifically, from April 2017 to June 2018, the respondent allegedly failed to have any written policies and procedures for ESG research in one product, and when policies and procedures were established, it allegedly failed to abide by them consistently. The SEC found, among other things, that the respondent’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection. However, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which allegedly was often conducted in a different manner than what was required in its policies and procedures. The SEC alleged that the respondents violated provisions of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. Without admitting or denying the SEC’s findings, the respondent agreed to a censure and to pay a $4 million penalty. The order also provides that the respondent must cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder.

    Securities SEC Enforcement ESG

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  • SEC releases enforcement results for fiscal year 2022

    Securities

    On November 15, the SEC announced that it filed 760 total enforcement actions in fiscal year 2022—a nine percent increase in total enforcement actions from fiscal year 2021. The fiscal year 2022 actions included: (i) 462 new, or “stand alone,” enforcement actions, a 6.5 percent increase over fiscal year 2021; (ii) 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and (iii) 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC also noted that the stand-alone enforcement actions in fiscal year 2022 “ran the gamut of conduct, from ‘first-of-their-kind’ actions to cases charging traditional securities law violations.” Among other things, the SEC described that money ordered in the actions, which is comprised of civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and an increase from $3.852 billion in fiscal year 2021. However, disgorgement was down 6 percent from the prior year, according to the SEC. The SEC also noted that fiscal year 2022 was its second highest year ever in whistleblower awards. According to SEC Director of the Division of Enforcement Gurbir S. Grewal, “the Enforcement Division is working with a sense of urgency to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets.”

    Securities SEC Enforcement Whistleblower

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  • District Court says blockchain network’s token is a security

    Securities

    On November 7, the U.S. District Court for the District of New Hampshire ruled that digital tokens sold by a blockchain network qualify as securities under the Securities Act of 1933. The SEC sued the company in 2021, claiming that by issuing the tokens, the company conducted an unregistered offering of securities. The company countered that its tokens are not securities because they are not being offered as an investment opportunity on its platform, but rather are designed to be used by content creators and users. The company also argued that the tokens are not securities because they function as “an essential component” of the company’s blockchain and that investors acquired them for use on the company’s network, rather than with the intention of holding them as an investment. Further, the company claimed that it did not receive fair notice that its token offerings are subject to securities laws.

    In determining whether the tokens are securities, the court relied on the U.S. Supreme Court’s definition of an investment contract in SEC v. W.J. Howey Co., focusing on the issue of “whether the economic realities surrounding [the company’s] offerings of [the tokens] led investors to have a ‘reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.’” According to the court, multiple statements made by the company led potential investors to reasonably expect the tokens to grow in value as the company continued to oversee the development of its network. “[P]otential investors would understand that [the company] was pitching a speculative value proposition for its digital token,” the court said, rejecting the company’s argument that it had informed some potential investors that the company was not offering its token as an investment. “[A] disclaimer cannot undo the objective economic realities of a transaction,” the court stated, adding that “[n]othing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.” Additionally, the court explained that, while this may be the first instance where securities laws are being “used against an issuer of digital tokens that did not conduct an ICO, [the company] is in no position to claim that it did not receive fair notice that its conduct was unlawful.”

    Securities SEC Enforcement Courts Digital Assets Cryptocurrency Blockchain Securities Act

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  • Gensler says penalties should not be “seen as the cost of doing business”

    Securities

    On November 2, SEC Chair Gary Gensler delivered remarks before the Practising Law Institute’s 54th Annual Institute on Securities Regulation, warning companies they may face enforcement consequences should they engage in misconduct. Explaining that penalties should not be “seen as the cost of doing business,” Gensler cautioned that “fraud is fraud, regardless of the types of investors you have defrauded and the types of securities used in the fraud.” Reminding companies that they are in violation of federal securities laws should they fail to register a security as required or fail to register an investment company, he highlighted a $100 million action taken against a New Jersey-based financial services crypto lending platform accused of failing to register the offers and sales of its retail credit lending product as one example of a company making materially false and misleading statements about its securities. (Covered by InfoBytes here.) Gensler also warned companies that improperly trading securities on inside information is a violation of securities laws, “regardless of the ‘form’ or ‘name’ of the securities involved,” and touched upon topics related to accountability, high-impact cases, working with partners at the federal, state, and international level, and professionals who violate public trust. Gensler stressed, however, that knowing when to pursue an enforcement action is important, and said that “[i]f the facts and the law merit we do not make a case,” he is “comfortable with that.” He added that the SEC rewards good behavior and encouraged companies to promptly self-report errors and cooperate with investigations. “If you mess up—and people do mess up sometimes—come in and talk to us, cooperate with our investigation, and remediate your misconduct,” he said.

    Securities SEC Enforcement

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  • SEC charges investment operation targeting Muslim community

    Securities

    On November 2, the SEC filed a complaint against the founder of a capital investment company, alleging that the defendant targeted Muslim investors in a multimillion dollar fraudulent scheme. According to the complaint, the defendant started the company with the intention of providing purported investment expertise to members of the New York metropolitan area’s Muslim community. The defendant allegedly “offered investors promissory notes that claimed to offer guaranteed, significant returns on investments” in the company. The SEC claimed the defendant received roughly $8 million from investors by promising that the funds would be invested in Quran-compliant investments. However, the defendant allegedly misappropriated all of the funds to either make Ponzi-like payments to investors or to be used for his own personal use, including purchasing luxury vehicles and expensive jewelry or paying gambling debts. The complaint charges the defendant with violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s announcement noted that the defendant consented to the entry of a judgment (subject to court approval) that imposes a permanent injunction and monetary relief to be determined at a later date. Concurrently, in a parallel action involving the same conduct, the DOJ announced criminal charges against the defendant who pleaded guilty to wire fraud, wire fraud conspiracy, and money laundering.

    Securities SEC Enforcement Fraud Courts DOJ Securities Act Securities Exchange Act

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  • SEC awards whistleblower more than $10 million

    Securities

    On October 31, the SEC announced that it awarded a whistleblower more than $10 million for providing information and assistance that significantly contributed to a successful enforcement action. According to the redacted order, the whistleblower’s actions, including providing substantial information to the SEC and meeting twice with SEC staff, resulted in the return of a significant amount of money to harmed investors. “The charges in the covered action had a close nexus with the whistleblower’s allegations, which were critical to the underlying investigation,” the SEC said in the announcement, explaining that the action “illustrates how the Whistleblower Program works to benefit, via financial remediation, investors who are victimized by those who violate our securities laws.”

    Securities SEC Enforcement Whistleblower

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  • SEC proposes new requirements for advisors that outsource services to third parties

    Securities

    On October 26, the SEC proposed new oversight requirements for outsourced investment advisory services. The proposed rule, issued under the Investment Advisers Act of 1940, would prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence prior to engaging a third-party service provider. The proposed rule would apply to advisors that outsource certain “covered functions,” including services or functions necessary for providing advisory services in compliance with federal securities laws that—if not performed or negligently performed—would result in material harm to clients. Under the proposed rule, advisors would also be required to periodically monitor a third party’s performance and reassess whether it is appropriate to continue to outsource its services and functions. Additionally, the SEC is proposing corresponding amendments so that it may collect “census-type information” about third-party service providers, as well as amendments that would require advisors to maintain books and records related to the proposed rule’s oversight obligations.

    SEC Chairman Gary Gensler released a statement supporting the proposed amendments. “[T]hese rules, if adopted, would better protect investors by requiring that investment advisers take steps to continue to meet their fiduciary and other legal obligations regardless of whether they are providing services in-house or through outsourcing, whether through third parties or affiliates,” Gensler said, explaining that the increased use of third-party service providers “has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public. When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients.”

    Commissioner Hester M. Peirce criticized the proposed rule, with Peirce claiming the proposal “may end up abrogating fiduciary duty and replacing it with [a] predefined approach to best interest—one not responsive to unique facts and circumstances.” She also expressed concerns related to the proposal’s potential impact on smaller advisors that may face disproportionate competitive challenges. Commissioner Mark T. Uyeda also dissented, expressing concerns over whether “there is any observable problem related to investment advisers’ oversight of service providers that necessitates the blanket imposition of specified oversight requirements.”

    Securities Agency Rule-Making & Guidance Third-Party Investment Advisers Act

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  • SEC says exchanges must have policies on incentive compensation given in error

    Securities

    On October 27, the SEC announced final rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by executive officers. The final rules require a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered. The SEC first proposed new rules for executive compensation disclosure in 2015, but they were not finalized. The SEC reopened consideration of the rules last year, and in August, adopted a new requirement that a reporting company’s proxy statement and other disclosures include a table showing executive compensation and financial performance measures.

    According a statement released by SEC Chairman Gary Gensler, the new rules will “strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.” Commissioner Hester M. Peirce also released a statement, where she noted that implementing the statutory clawbacks mandate is “commendable,” but “doing it—expansively, inflexibly, and impractically—is not.” Peirce noted that the final rule “does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense,” and that “[s]uch an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.” The final rules will become effective 60 days after publication in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, with listing standards effective no later than one year following such publication.

    Securities Federal Register Executive Compensation Incentive Compensation Agency Rule-Making & Guidance SEC Clawback

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