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Colorado securities regulator provides temporary relief to securities businesses
On March 20, the Acting Securities Commissioner of Colorado provided temporary regulatory relief to broker-dealers, state-registered investment advisers, federal covered investment advisers, and their registered agents. The relief exempted these professionals from certain registration and filing requirements if, among other things, they are displaced and working from a location outside their jurisdiction of registration or their clients have been displaced from their ordinary state and are now residing in Colorado, and they were properly registered with all required regulators on March 1, 2020.
Alabama Securities Commission provides temporary relief for certain financial professionals
On March 19, the Alabama Securities Commission (ASC) issued an emergency order temporarily exempting certain financial professionals (i.e. broker-dealers, investment advisers, and their registered agents or representatives) who are not registered or notice filed with the ASC and who have been displaced from their ordinary business locations from the registration and filing requirements of the Alabama Securities Act, subject to certain conditions. The emergency order also provides broker-dealers, state registered investment advisors and federal covered investment advisers with relief from the requirement to obtain physical signatures on Forms U4 under the Alabama Securities Act and related regulations, subject to certain conditions. Further, the emergency order permits investment advisors registered with the ASC to perform any of the Form ADV filing, updating and customer delivery requirements set forth by the Alabama Securities Act and related regulations up to 45 days after such action is due to be performed. The emergency order will remain in effect until April 30, 2020, unless extended or rescinded.
FINRA posts FAQs related to regulatory relief during the Covid-19 pandemic
Since March 18, FINRA has been maintaining and updating FAQs related to regulatory relief due to the Covid-19 pandemic. The FAQs discuss questions concerning, among other things, advertising regulation, anti-money laundering, best execution for buying and selling securities, broker-dealer registration, business continuity planning, and filing extensions for certain reports.
SEC settles with investment entities over ETF recommendations
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.
Broker-Dealer settles with SEC for improper handling of ADRs
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.
CFTC Enters into First-Ever Non-Prosecution Deals in Spoofing Investigation
On June 29, the Commodity Futures Trading Commission (CFTC) entered into non-prosecution agreements with three futures traders who admitted to engaging in “spoofing” in the U.S. Treasury futures market between 2011 and 2012 (see non-prosecution agreements here, here, and here). Spoofing involves placing bids or offers with the intent to cancel before execution. Here, the traders placed a small bid or offer on one side of the market and a large bid or offer on the opposite side of the market to be cancelled almost immediately (often in less than one second). The traders used the strategy to get smaller orders filled (and filled more quickly) at favorable prices.
This is the first time the CFTC has used non-prosecution agreements, which the Director of Enforcement called “a powerful tool to reward extraordinary cooperation in the right cases, while providing individual and organizations strong incentives to promptly accept responsibility for their wrong doing and cooperate with the Division’s investigation.” In announcing the agreements, the CFTC lauded the traders’ “timely and substantial cooperation,” noting that their efforts provided assistance in connection with a $25 million settlement with the multinational bank they worked for earlier this year.
SEC Requests Public Comments on Investment Adviser Conduct Rules
On June 2, 2017, Jay Clayton, Chairman of the SEC, requested public input on standards of conduct for investment advisers and broker-dealers. The SEC last solicited input on the regulation of investment advisers in 2013 and Clayton believes that advances in technology and changes in business models have since transformed the market for retail investment advice. Additionally, confusion surrounding investment adviser conflicts of interest, among other things, have prompted the SEC to seek feedback on the standards. Topics touched on in the request include:
- types of advisers providing investment advice and applicable standards of conduct for each;
- conflicts of interest;
- effects of market developments and advances in technology;
- fee-based vs. commission-based investment advice;
- department of Labor’s Fiduciary Rule;
- pros and cons of multiple standards of conduct for advisers;
- effects on particular segments of the market;
- disclosure-based vs. standards-of-conduct-based regulatory action;
- who should be considered “retail investors”;
- how should “investment advice” be defined;
- costs and benefits of different regulatory approaches;
- comparison of U.S. regulation to non-U.S. regulation in this area;
- material changes since last data solicitation in 2013.
Clayton hopes his solicitation will garner “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”
SEC Charges Brokerage Firm with AML Failures
On June 1, the SEC announced that a Wall Street-based brokerage firm agreed to pay a $300,000 penalty to settle charges that it failed to sufficiently evaluate or monitor customers’ trading for suspicious activity and to file suspicious activity reports (SARs) in an alleged willful violation of Section 17(a) of the Exchange Act and Rule 17a-8. The broker-dealer was required to have written AML policies and procedures, which outlined specific examples of suspicious activities that, according to the SEC, “should have triggered internal reviews and, in a number of instances, [(SAR)] filings.” According to the SEC, the broker-dealer failed to file SARs on the following activity: (i) accounts that traded an aberrational percentage of a given stock in a particular day; (ii) accounts of entities that had executives charged with criminal securities fraud; (iii) customer trading that was the subject of grand jury subpoenas and regulatory inquiries; (iv) liquidation of securities followed immediately by large cash transfers; (v) transactions in securities that were subsequently subject to SEC trading suspensions; and (vi) rejections by other broker-dealers of attempts by the firm to transfer customers’ securities. Despite these red flags, the brokerage firm failed to file SARs for more than five years. The case represents the SEC’s first against a firm for solely failing to file SARs.
FinCEN Proposes Imposing BSA Requirements on Crowdfunding Portals
On April 4, FinCEN issued a proposed rule to amend the definitions of “broker or dealer in securities” and “broker-dealer” under the regulations implementing the BSA. Specifically, FinCEN proposed that the definitions be amended to “explicitly include funding portals that are involved in the offering or selling of crowdfunding securities pursuant to section 4(a)(6) of the Securities Act of 1933.” Intended to help prevent money laundering, terrorist financing, and other financial crimes, the amendments would require funding portals to implement policies and procedures reasonably designed to ensure compliance with the BSA requirements currently applicable to brokers or dealers in securities. Comments on the proposal are due by June 3, 2016.
Department of Labor Publishes Final Rule to Define Fiduciary of an Employee Benefit Plan
On April 7, the Department of Labor issued a final rule defining who is a fiduciary investment advisor of an employee benefit plan under the Employee Retirement Income Security Act of 1974. The Final Rule requires financial advisors and brokers handling 401(k) accounts, as well as Individual Retirement Accounts and Annuities (IRAs), to “put their clients’ best interest before their own profits.” The final rule is scheduled to be published in the Federal Register on April 8. Compliance with the rule is not required until April 10, 2017, providing “adequate time” for financial services and other services providers affected by the rule to adjust their statuses from non-fiduciary to fiduciary.