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DOL Extends Fiduciary Rule Applicability Date by 60 Days
On April 4, the U.S. Department of Labor (DOL) issued a 60-day extension of the applicability dates of its “Fiduciary Rule”—a 2016 final rule expanding the definition of who qualifies as a “fiduciary” under ERISA and the Internal Revenue Code. The rule treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA as fiduciaries in a wider array of “advice relationships.” The extension also delays (by 60 days) the applicability of certain prohibited transaction exemptions. Accordingly, exemptions such as the “Best Interest Contract Exemption” and the “Principal Transaction Exemption” will become applicable on June 9, 2017. In its press release announcing the issuance of the final rule, the DOL noted, among other things, that the extensions are necessary to enable the DOL to perform the examination of the fiduciary rule directed by the President in his February 3 Presidential Memorandum (see previously posted InfoBytes summary regarding February 3 memo) to consider possible changes with respect to the fiduciary rule and related Prohibited Transaction Exemptions based on new evidence or analysis developed pursuant to the examination.
The 60-day extension was published in the Federal Register on April 7. As previously covered on InfoBytes, the DOL has released two sets of “frequently asked questions” about the Fiduciary Rule.
SEC Announces Investigation Concerning Alleged $6.7 Million Michigan Real Estate Scheme
On March 30, the SEC announced charges against a Michigan pastor, his company, and business associate (Defendants) for allegedly cheating church members, retirees, and laid-off autoworkers out of approximately $6.7 million by convincing them to invest in a “successful” real estate scheme. The complaint alleges the pastor presented the investment opportunity at churches nationwide and through media outlets using “faith-based rhetoric” and guaranteed high returns. The Defendants—who were never registered to sell investments—raised the money from more than 80 investors who were told their money would be kept in qualified IRAs and could be rolled over tax-free. However, investors stopped receiving agreed-upon interest payments, and to date, Defendants owe more than 40 Michigan-based investors $2 million in past due promissory notes and also allegedly have obligations to investors outside the State of Michigan. The complaint claims violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.
FINRA Bars Broker Charged in NY Pension Fund Scandal
On March 28, FINRA filed a disciplinary action in the form of a Letter of Acceptance, Waiver and Consent (Letter of Acceptance) against one of the brokers charged in December of last year for participating in a "pay-for-play" bribery scheme involving the $184 billion New York State Common Retirement Fund (NYSCRF). The Letter of Acceptance bars the broker from the industry and prohibits association with “any FINRA member in any capacity.” From 2014 through 2016, the broker, along with two other individuals, engaged in a scheme to defraud the pension fund, its members and beneficiaries, by paying bribes to a portfolio manager totaling more than $100,000 in the form of entertainment, travel expenses, narcotics, luxury gifts, and other items in “exchange for fixed-income business from the NYSCRF.” The broker was charged with allegedly conspiring to commit securities fraud, conspiring to obstruct justice in a Securities and Exchange Commission investigation, as well as wire fraud charges. Currently the SDNY criminal case and SEC civil action are pending against the broker.
Members of the House Financial Services Committee Weigh in on Rollout of the DOL Fiduciary Rule
On March 17, GOP members of the House Financial Services Committee sent a letter to Acting Labor Secretary Ed Hugler expressing their support for the Department of Labor’s (DOL’s) proposal to delay the implementation of its Fiduciary Rule from April 10 until June 9. The letter asserts, among other things, that a delay is “necessary to review the rule’s scope and assess potential harm to investors, disruptions within the retirement services industry, and increases in litigation, as required by the Presidential Memorandum signed by President Trump on February 3, 2017.” The GOP Members also note that they “have long been concerned with the DOL Fiduciary Rule's impact on retail investors and the U.S. capital markets,” and, have therefore “advocated that the expert regulator—the Securities and Exchange Commission (SEC)—should craft an applicable rule.”
Later that day, House Democrats sent their own letter to the Acting Labor Secretary expressing opposition to the DOL’s proposed 60-day delay of its Fiduciary Rule. Specifically, the Democratic members contend that “the rule is reasonable and workable for advisers,” because, among other reasons, “the DOL provided appropriate relief that mitigates industry concerns and compliance costs.”
Proposed FINRA Rule Would Streamline Securities Competency Exams for Industry Professionals
On March 8, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule with the SEC to streamline its competency exams for professionals entering or re-entering the securities industry. Currently, only individuals associated with FINRA-regulated firms are eligible to take the qualification exam. The proposed rule would allow individuals with no prior securities industry experience to take FINRA’s Securities Industry Essentials exam, an “important first step to entering the industry,” which would serve to “provide enhanced flexibility and efficiency in [the] qualifications programs, while maintaining important standards and investor protections.” While these individuals would also be required to pass a more specialized knowledge exam—and must be associated with, and sponsored by, a firm—the proposed change would potentially expand the pool of qualified candidates for positions. Further, under this proposal, individuals who transfer to a financial services affiliate of a FINRA-regulated firm may qualify for a waiver that allows their credentials to be reinstated without re-taking their qualification exams, should they return to the industry within a seven-year period and meet the requirements of the waiver program. Currently, a registered individual who transfers for two or more years must re-take an exam to be re-qualified. The proposed rule is under review with the SEC.
Securities-Related Bills Advanced Through Committees in Both Senate and House
On March 9, the Senate Banking Committee and the House Financial Services Committee introduced and advanced five securities-related bills out of committee. The bills—listed below—now await scheduling for consideration by each chamber in full.
- S. 327 / H.R. 910 - Fair Access to Investment Research Act of 2017. This legislation will direct the SEC to provide a safe harbor for certain investment fund research reports.
- S. 444 / H.R. 1219 - Supporting America’s Innovators Act of 2017. This legislation will amend the Investment Company Act of 1940 by expanding “the limit on the number of individuals who can invest in certain venture capital funds before those funds must register with the SEC as ‘investment companies.’”
- S. 462 / H.R. 1257 - Securities and Exchange Commission Overpayment Credit Act. This legislation will require the SEC to refund or credit excess payments made to the Commission under a 10-year statute of limitations.
- S. 484 / H.R. 1366 - U.S. Territories Investor Protection Act of 2017. This legislation will amend the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States.
- S. 488 / H.R. 1343 - Encouraging Employee Ownership Act. This legislation will increase the threshold for disclosures required by the SEC relating to compensatory benefit plans.
H.R. 1312 - The Small Business Capital Formation Enhancement Act. The House Financial Services Committee also approved a sixth bill, which seeks to amend the Small Business Investment Inventive Act of 1980 to require an annual review by the SEC of any findings set forth in the annual government-business forum on capital formation.
DOJ Fraud Section Unveils New Guidelines on Corporate Compliance Programs
The DOJ’s Fraud Section recently published an “Evaluation of Corporate Compliance Programs.” The guidelines were released on February 8 without a formal announcement. Their stated purpose is to provide a list of “some important topics and sample questions that the Fraud Section has frequently found relevant in evaluating a corporate compliance program.” The guidelines are divided into 11 broad topics that include dozens of questions. The topics are:
- Analysis and Remediation of Underlying Conduct
- Senior and Middle Management
- Autonomy and Resources
- Policies and Procedures
- Risk Assessment
- Training and Communications
- Confidential Reporting and Investigation
- Incentives and Disciplinary Measures
- Continuous Improvement, Periodic Testing and Review
- Third Party Management
- Mergers & Acquisitions
According to the Fraud Section, many of the topics also appear in, among other sources, the United States Attorney’s Manual, United States Sentencing Guidelines, and FCPA Resource Guide published in November 2012 by the DOJ and SEC. While the content of the guidelines is not particularly groundbreaking, it is nonetheless noteworthy as the first formal guidance issued by the Fraud Section under the Trump administration and new Attorney General Jeff Sessions. By consolidating in one source and making transparent at least some of the factors that the Fraud Section considers when weighing the adequacy of a compliance program, the guidelines are a useful tool for companies and their compliance officers to understand how the Fraud Section and others at the DOJ may proceed in the coming months and years.
However, while the guidelines may give some indication of what the DOJ views as a best practices compliance program, they caution that the Fraud Section “does not use any rigid formula to assess the effectiveness of corporate compliance programs,” recognizes that “each company’s risk profile and solutions to reduce its risks warrant particularized evaluation,” and makes “an individualized determination in each case.”
SEC Settles Fraud Charges in Investment Scheme, Issues Fine of Over a Half-Million Dollars
On February 14, the SEC announced a settlement with a real estate investment manager based in Arizona over allegations that he defrauded investors. According to the complaint, the investment manager allegedly told investors he would make personal investments in real estate projects which he failed to do, instructed some investors to “falsely state that they were ‘accredited investors’” to avoid registration requirements for the offerings, and falsely represented that he would personally manage the projects when, instead, he entrusted management to a real estate broker who was later imprisoned for other crimes. The settlement requires the investment manager to disgorge $51,358 plus interest of $4,893.98 and pay a penalty of $450,000.
Former Hungarian Telecommunications Executive Settles with SEC
On February 8th, a former executive of a Hungarian telecommunications company settled a 2011 civil complaint filed by the SEC. The trial of the remaining co-defendants is scheduled for May 8. As part of the settlement, the former executive agreed to pay a $60,000 civil penalty and did not admit or deny the SEC’s allegations. The former executive also admitted that U.S. courts had jurisdiction over the case. The issue of jurisdiction had been contested; in 2013, the court denied the defendants’ motion to dismiss for lack of personal jurisdiction.
The SEC’s complaint alleged that the former executive, along with two other co-defendants, authorized bribes to Macedonian government officials and others. In 2014, the SEC dropped allegations regarding payments to government officials in Montenegro, substantially narrowing the allegations in the case. The company and its parent settled allegations regarding payments to government officials in Macedonia and Montenegro with the SEC and DOJ in 2011. Prior Scorecard coverage of the company’s investigation can be found here.
This outcome of this lengthy case illustrates that individual defendants can still achieve relatively favorable outcomes when they choose to litigate FCPA cases, even after the corporate defendants have reached a resolution.
Japanese Multinational Electronics Corporation Discloses FCPA Investigation
On February 2, a Japanese multinational electronics corporation disclosed that its U.S. subsidiary was being investigated by the DOJ and SEC for possible violations of the FCPA and other related laws. According to its press release, the company is cooperating in the investigation and recently began settlement discussions with both agencies. The countries at issue in the investigation have not been disclosed.
Although the company had not spoken publicly about the probe until this week, the Wall Street Journal first reported the investigation in 2013. The subsidiary company makes in-flight entertainment and communication systems for airlines.