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  • SEC issues multiple whistleblower awards

    Securities

    On January 10, the SEC announced that it awarded whistleblowers nearly $4 million for providing information and assistance in two separate investigations. According to the first redacted order, the whistleblower, who reported internally prior to reporting to the SEC, provided significant new information during an existing investigation that alerted the SEC to misconduct occurring overseas and permitted SEC staff to develop an efficient investigative plan to discover the full extent of the violations. The whistleblower received approximately $2.6 million. In the second redacted order, the SEC issued approximately $1.5 million to joint whistleblowers for providing substantial ongoing assistance throughout the investigation, such as by consulting telephonically with SEC staff and providing information about key witnesses, which led to the success of the investigation.

    Earlier on January 6, the SEC announced that it awarded a whistleblower nearly $13 million for providing information and assistance that led to an investigation and successful SEC enforcement action. According to the redacted order, the whistleblower voluntarily provided original information to the Commission by meeting in person and helping SEC staff understand the mechanics of the fraudulent scheme, which enabled the Commission to stop an ongoing fraud, minimize investor losses, and return tens of millions of dollars to harmed investors.

    The SEC has awarded approximately $1.2 billion to 241 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement Investigations

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  • SEC proposes rules connected to security-based swaps transactions

    Securities

    On December 15, the SEC announced that the Commission voted to propose three rules under the Exchange Act “to prevent fraud, manipulation and deception in connection with security-based swaps, to prevent undue influence over the chief compliance officer of security-based swap dealers and major security-based swap participants, and to require any person with a large security-based swap position to publicly report certain information related to the position.” According to the proposed rules, Rule 9j-1 would be “designed to prevent fraud, manipulation, and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security-based swap.” Rule 15Fh-4(c) “would make it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer or major security-based swap participant, or any person acting under such person’s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the security-based swap dealer’s or major security-based swap participant’s CCO in the performance of their duties under the Federal securities laws or the rules and regulations thereunder.” Rule 10B-1 would require any individual “with a security-based swap position that exceeds a certain threshold to promptly file with the Commission a schedule disclosing among other things: (1) the applicable security-based swap position; (2) positions in any security or loan underlying the security-based swap position; and (3) any other instrument relating to the underlying security or loan, or group or index of securities or loans.” Additionally, Rule 10B-1 “includes different reporting thresholds for security-based swaps tied to debt securities and security-based swaps tied to equity securities.” Comments are due 45 days after publication in the Federal Register.

    Securities Agency Rule-Making & Guidance Swaps SEC

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  • SEC settles with company distributing unregistered shares

    Securities

    On December 15, the SEC announced a settlement with a California-based broker-dealer for allegedly unlawfully distributing nearly 100 million unregistered shares of over 50 different low-priced microcap companies, and for the company’s failure to file suspicious activity reports (SARs) regarding those transactions. According to the SEC’s order, the company violated Sections 5(a) and 5(c) of the Securities Act, which “make it unlawful for any person, directly or indirectly, to offer or sell securities by any means or instruments of transportation or communication in interstate commerce unless a registration statement has been filed with the Commission with respect to Section 5(c) and is in effect with respect to Section 5(a),” by engaging in unregistered offers and sales of large blocks of low-priced securities by an offshore customer from January 2017 through September 2018. The order also noted that the company could not rely on an exemption under Section 4(a)(4) of the Securities Act, which would apply to the company “only if, after conducting a reasonable inquiry into the facts surrounding the sales at issue, [the company] was not aware of facts indicating that its offshore customer was engaging in an unlawful distribution of securities,” since the company allegedly failed to conduct a reasonable inquiry. Additionally, the company violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder by failing to file SARs for certain suspicious transactions that it executed on behalf of its offshore customer. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $1,000,000, a total of $173,508.40 in disgorgement, and $34,332.16 in prejudgment interest. The order also directs the company to engage an independent compliance consultant “to conduct a comprehensive review of, and to report and make recommendations as to, the effectiveness, construction and implementation of [the company’s] supervisory, compliance, and other policies and procedures reasonably designed to prevent violations of the federal securities laws by [the company] and its employees.” The order provides that the company will “cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act and Section 17(a) of the Exchange Act and Rule 17a-8 promulgated thereunder.”

    Securities Enforcement SARs SEC

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  • SEC, CFTC settle with national bank’s subsidiary

    Securities

    On December 17, the SEC announced charges against a subsidiary limited liability company of a national bank for Securities Exchange Act violations because the firm and its employees allegedly failed to maintain recordkeeping requirements. According to the order, from at least January 2018 through at least November 2020, the company’s employees communicated about securities business matters on their personal devices, using text messaging applications and personal email accounts. These communications were not maintained or preserved by the company, and some were not able to be furnished promptly to a Commission representative when requested, allegedly in violation of Section 17(a) of the Exchange Act and Rules 17a4(b)(4) and 17a-4(j) thereunder. Additionally, the company’s “widespread failure to implement its policies and procedures which forbid such communications led to its failure to reasonably supervise its employees within the meaning of Section 15(b)(4)(E) of the Exchange Act.” The company received subpoenas for documents and records requests in numerous Commission investigations during the time that it failed to maintain required securities records relating to the business. In its response to the subpoena requests, the bank allegedly did not search for relevant records contained on the personal devices of its employees. The order further noted that because the company’s “recordkeeping failures impacted the Commission’s ability to carry out its regulatory functions and investigate potential violations of the federal securities laws across these investigations, the Commission was often deprived of timely access to evidence and potential sources of information for extended periods of time and, in some instances, permanently.” According to the SEC, the company admitted the facts set forth in the SEC’s order and acknowledged that its conduct violated the federal securities laws, and agreed to: (i) pay a $125 million penalty; (ii) implement robust improvements to its compliance policies and procedures, including retaining “a compliance consultant to, among other things, conduct a comprehensive review of its policies and procedures relating to the retention of electronic communications found on personal devices and [the company’s] framework for addressing non-compliance by its employees with those policies and procedures”; and (iii) cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-4 thereunder.

    The same day, the CFTC announced a $75 million settlement with the company, the national bank, and its public limited company (collectively, “respondents”) for allegedly failing to maintain, preserve, and produce records that were required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters associated with its businesses as CFTC registrants. According to the CFTC order, from at least 2015, the respondents’ employees internally and externally communicated on unapproved channels, and had messages related to the respondents’ businesses as CFTC registrants that were required to be maintained under CFTC-mandated recordkeeping requirements. The order also noted that the written communications were not maintained and preserved by the respondents, and they were not able to be furnished promptly to a CFTC representative when requested. The order further alleged that the widespread use of unauthorized communication methods by the respondents’ employees to conduct firm business violated their own policies and procedures. The respondents also did not maintain adequate internal controls with respect to business-related communications on non-approved communication methods. The order requires the respondents to pay a $75 million civil monetary penalty, to cease and desist from further violations of recordkeeping and supervision requirements, and to engage in specified remedial undertakings.

    Securities SEC Enforcement CFTC Securities Exchange Act

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  • SEC awards $5 million to whistleblower

    Securities

    On December 6, the SEC announced that it awarded a whistleblower nearly $5 million for providing information that led to a successful SEC enforcement action. According to the redacted order, the whistleblower voluntarily provided original information to the Commission, which enabled staff to quickly and efficiently, among other things, develop a case theory, which ultimately led to the enforcement action and the return of millions of dollars to harmed investors.

    The SEC has awarded approximately $1.2 billion to 236 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement Investigations

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  • SEC adopts HFCAA rules

    Securities

    On December 2, the SEC adopted a final rule regarding the submission and disclosure requirements in the Holding Foreign Companies Accountable Act (HFCAA). The final rule applies “to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (PCAOB) is unable to inspect or investigate (Commission-Identified Issuers).” Among other things, the final rule requires: (i) Commission-Identified Issuers to submit documentation to the SEC establishing that they are not owned or controlled by a governmental entity in the public accounting firm’s foreign jurisdiction, if indeed true; and (ii) disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence” on those who register. According to the final rule, the SEC will identify Commission-Identified Issuers for fiscal years starting after December 18, 2020. Additionally, if a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.

    The same day, SEC Chair Gary Gensler released a statement noting that, “[t]he finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the [Public Company Accounting Oversight Board] cannot completely inspect.” The rule is effective on 30 days after publication in the Federal Register.

    Securities SEC Federal Register Foreign Banks Of Interest to Non-US Persons Agency Rule-Making & Guidance Holding Foreign Companies Accountable Act

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  • SEC whistleblower awards total $10.4 million

    Securities

    On November 22, the SEC announced awards totaling approximately $10.4 million to several whistleblowers who provided original information and voluntary assistance in three separate SEC enforcement actions. According to the first redacted order, the SEC awarded two whistleblowers roughly $7.5 million for providing original, significant information leading to a successful action and alerting staff to misconduct occurring in different geographic areas. Both whistleblowers’ substantial, ongoing assistance also conserved significant Commission time and resources. Additionally, the first whistleblower received an award for contributing to a related action brought by another agency. In the second redacted order, the SEC awarded more than $2.4 million to two whistleblowers whose information led to a successful enforcement action. According to the SEC, the first whistleblower voluntarily provided information prompting the opening of the investigation and provided significant assistance throughout the investigation by providing key pieces of evidence. The second whistleblower provided new information that significantly contributed to the success of the enforcement action. In the third redacted order, the SEC awarded whistleblowers roughly $435,000. The first whistleblower alerted SEC staff to potentially fraudulent conduct, which helped prompt the opening of the investigation, and provided additional information during the investigation. The second whistleblower met with SEC staff and provided new, highly valuable information early in the investigation that was vital in helping the staff develop its theory of liability.

    The SEC has awarded approximately $1.2 billion to 233 individuals since issuing its first award in 2012.

    Securities Whistleblower Enforcement SEC Investigations

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  • SEC levies $18 million fine for mishandling MNPI

    Securities

    On November 19, the SEC announced that an investment company affiliate of a global consulting firm agreed to pay $18 million to settle alleged compliance failures. The affiliate provided investment services to current and former partners and employees of the consulting firm. The SEC alleged that the affiliate failed to maintain adequate policies and procedures to prevent firm partners from misusing material nonpublic information (MNPI) gained from consulting clients to make investment decisions. The SEC alleged that the affiliate invested hundreds of millions of dollars in companies that the firm was advising. According to the SEC, certain firm partners oversaw these investments and had access to MNPI, such as financial results, planned bankruptcy filings, mergers and acquisitions, among other things, as a result of the consulting work they did for the firm.

    According to the cease-and-desist order, allowing active firm partners, “individuals who had access to MNPI about issuers in which [affiliate] funds were invested, to oversee and monitor [the affiliate’s] investment decisions presented an ongoing risk of misuse of MNPI.” The SEC claimed that the affiliate allegedly violated Sections 204A and 206(4) of the Investment Advisers Act of 1940 (related to the prevention and misuse of MNPI and prohibited investment adviser transactions), as well as Rule 206(4)-7 (concerning compliance policies and procedures). Without admitting or denying the findings, the affiliate consented to the entry of the cease-and-desist order, a censure, and the $18 million penalty.

    Securities SEC Enforcement Compliance Investment Advisers Act

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  • District Court partially grants SEC’s motion in confidentiality agreements case

    Securities

    On November 17, the U.S. District Court for the Southern District of New York partially granted the SEC’s (plaintiff) motion for summary judgment in a case questioning the extent to which confidentiality agreements can prevent communication with the SEC regarding potential violations of securities laws. The court found that the Commission did not exceed its authority on a count of impeding SEC rules that is connected to a broader civil suit accusing an online store and its CEO (collectively, “defendants”) of stealing nearly $6 million from investors. The plaintiff alleged that the defendants impeded “individuals’ communication with the SEC regarding potential securities laws violations by enforcing or threatening to enforce confidentiality agreements that would prevent individuals’ communications thereof,” in violation of Rule 21F-17 of the Exchange Act. According to the order, in its stock purchase agreements, the defendants allegedly required investors to reject communication with “governmental or administrative agencies or enforcement bodies for the purpose of commencing or otherwise prompting investigation or other action.” The defendants allegedly used lawsuits to prevent communications that would violate its confidentiality agreements, and advertised these suits “to chill further communication,” which the court ruled were “undoubtedly ‘action[s] to impede’ communications, especially where the Rule explicitly prohibits ‘enforcing, or threatening to enforce’ such agreements.” The district court also denied the defendants' cross-motion for summary judgment stating that “the Court is still not persuaded that Rule 21F-17 exceeds the SEC’s rulemaking nor that it violates the First Amendment,” and concluded that the defendants’ conduct violated Rule 21F-17.

    Securities SEC Courts Securities Exchange Act

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  • SEC awards $15 million to whistleblowers

    Securities

    On November 10, the SEC announced awards totaling over $15 million to two whistleblowers whose original information and voluntary assistance led to a successful SEC enforcement action. According to the redacted order, the first whistleblower alerted Commission staff to a fraudulent scheme, which prompted the opening of the investigation. While still substantial, the second whistleblower’s information was more limited in nature, and “had less of an impact on the success of the enforcement action,” as reflected in the respective amounts awarded. The SEC has awarded approximately $1.1 billion to 226 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement Investigations

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