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FINRA fines firm $2.3 million for misusing customer funds and charging unreasonable fees
On March 22, a decision was entered in a disciplinary proceeding between FINRA’s Department of Enforcement and a securities firm over whether the firm engaged in unauthorized trading and misused customer funds in response to mounting financial challenges in 2018. FINRA’s extended hearing panel alleged that the firm, in light of declining profits, informed customers that it would stop carrying retail accounts and levied “unreasonable and unnecessary” fees in a discriminatory manner on retail customers who did not close their accounts—including a $5,000 monthly account fee—without providing proper notice. According to the panel, the monthly fee was applied in a discriminatory manner, wherein the fee was waived for profitable accounts and certain customers. Other customers were required to pay a portion or all of the monthly fee in order to regain possession of other holdings. Moreover, the panel claimed that in most instances, “customers were not even aware of the $5,000 monthly account fee, let alone that the firm was taking their cash and securities to cover it.”
The firm argued that the monthly fee should be considered reasonable because it resulted from an “arm’s-length agreement” between the firm and its customers, but the panel rejected the firm’s defense, pointing out that customers did not agree to the fee “as part of a contract freely negotiated at arm’s length between sophisticated parties with equal bargaining power.” The panel further asserted that, among other things, the firm also allegedly charged customers unfair prices in securities transactions, moved securities from customer accounts to firm accounts without authorization, and executed an unauthorized capital withdrawal disguised as a payment.
In issuing its decision, the panel found no mitigating factors but identified several aggravating factors, including that the firm “continued a disturbing pattern of misconduct” after a temporary cease and desist order was issued. The firm is ordered to pay more than $2.3 million in restitution and must permanently cease and desist from converting or misusing customer funds or securities, effecting unauthorized transactions in customer accounts, charging unreasonable or discriminatory fees, or causing harm to investors, among others. The panel cautioned that it was “highly likely” that the firm’s misconduct would recur if it remained a FINRA member firm and stressed that expulsion was “the only alternative for protecting the investing public.” The firm denied all allegations.
CFTC awards $625,000 to whistleblowers
On March 28, the CFTC announced approximately $625,000 in awards to four whistleblowers whose information led the agency to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants “provided the Commission with original information,” and “each provided ongoing cooperation and assistance to Division staff, which significantly contributed to the success of the Covered Action.” One claimant received a higher award percentage to recognize that he or she provided the highest level of ongoing assistance and cooperation.
The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping prosecute enforcement actions leading to more than $3 billion in monetary sanctions.
SEC awards $1.25 million to whistleblower
On March 25, the SEC announced that it awarded a whistleblower $1.25 million for providing specific and credible information that prompted SEC staff to begin an investigation that resulted in a successful SEC covered action. According to the redacted order, the whistleblower voluntarily provided original information and participated extensively in assisting SEC staff through identifying witnesses, explaining critical documents, and helping focus the investigation on key issues, which saved SEC time and resources.
The SEC has awarded approximately $1.2 billion to 256 individuals since issuing its first award in 2012.
SEC proposes climate risk disclosures
On March 21, the SEC announced a proposed rule to require registrants to disclose certain climate-related information in their registration statements and periodic reports. According to the proposed rule, a registrant must disclose, among other things, information regarding its direct and certain indirect emissions of greenhouse gas (GHG). The GHG emissions disclosure proposals “would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks.”
The proposed rule also establishes that accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering certain emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors. The proposed rule further noted additional disclosure requirements for registrants that have made a so-called net-zero commitment or adopted a plan to reduce their GHG footprint or exposures.
The same day, the SEC released a Fact Sheet on the proposed rule, which summarized the content of the proposed disclosure and presentation and attestation requirements, among other things. According to a statement released by SEC Chair Gary Gensler, the proposed rule will “provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.” However, a statement released by SEC Commissioner Hester M. Peirce took a different view, stating that the proposed amendments would “turn[] the disclosure regime on its head” and noting that some elements are “missing,” such as “[a] credible rationale for such a prescriptive framework when our existing disclosure requirements already capture material risks relating to climate change;[a] materiality limitation; [and] [a] compelling explanation of how the proposal will generate comparable, consistent, and reliable disclosures.” Treasury Secretary Janet L. Yellen also released a statement commending the proposal and the SEC, calling the effort “an important step to protect investors and strengthen the overall resilience of the financial system.”
Comments on the proposal are due 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.
SEC issues $3 million in whistleblower awards
On March 18, the SEC announced whistleblower awards totaling over $3 million to three individuals for providing information and assistance in three separate covered actions. According to the first redacted order, the SEC awarded approximately $1.5 million to a whistleblower for providing information which led to the successful prosecution of an enforcement action. Additionally, the whistleblower assisted the staff throughout the investigation. According to the second redacted order, the SEC awarded over $1 million to an individual who provided information that prompted Commission staff to open an investigation that led to the successful prosecution of an enforcement action. The whistleblower continued to provide assistance by participating in interviews and giving additional documents. In the third redacted order, the SEC awarded over $400,000 to a whistleblower whose comprehensive tip led to an investigation and who provided substantial ongoing cooperation. The whistleblower also raised concerns internally, causing the conduct to cease.
The SEC has awarded approximately $1.2 billion to 254 whistleblowers since issuing its first award in 2012.
CFTC awards $10 million to whistleblower
On March 18, the CFTC announced an approximately $10 million award to a whistleblower whose information led the agency to a successful Commodity Exchange Act enforcement action. According to the CFTC, the claimant voluntarily provided original, “useful information at the earliest stages of the investigation and later provided supplemental information.” The associated order also noted that because of the claimant’s allegations, CFTC staff were able to draft the earliest round of subpoenas.
The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping the CFTC prosecute enforcement actions leading to more than $3 billion in monetary sanctions.
SEC awards $14 million to whistleblower
On March 11, the SEC announced that it awarded a whistleblower nearly $14 million for exposing ongoing fraud by publishing on online report. According to the redacted order, the whistleblower voluntarily provided original information and prompted the opening of an investigation, which resulted in a successful enforcement action against the company and its CEO and the return of millions of dollars to harmed investors.
The SEC has awarded approximately $1.2 billion to 249 individuals since issuing its first award in 2012.
CFTC awards $500,000 to whistleblowers
On March 10, the CFTC announced awards totaling approximately $500,000 to two whistleblowers who “separately provided significant information and substantial assistance” that led to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants voluntarily provided original information, which began an underlying investigation and “significantly contributed to the success” of the enforcement action.
The CFTC has awarded approximately $300 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, and whistleblower information has led to nearly $3 billion in monetary relief.
SEC proposes amendments to cybersecurity risk management
On March 9, the SEC announced proposed amendments to its standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. The proposed amendments would require, among other things, “current reporting about material cybersecurity incidents and periodic reporting to provide updates about previously reported cybersecurity incidents.” Specifically, firms would be required to describe their policies and procedures for the identification and management of cyber risks, provide information about the board’s oversight of and management’s role in cybersecurity risk, and disclose if a member of the board has expertise in cybersecurity. According to the SEC, “[t]he proposed amendments are intended to better inform investors about a registrant's risk management, strategy, and governance and to provide timely notification to investors of material cybersecurity incidents.” Comments are due 60 days after publication in the Federal Register.
The same day, the SEC published a fact sheet clarifying, among other things, how the amendments are applied and what is required. SEC Chair Gary Gensler issued a statement stating he was “pleased to support this proposal because, if adopted, it would strengthen investors’ ability to evaluate public companies’ cybersecurity practices and incident reporting.” According to a dissenting statement issued by SEC Commissioner Hester M. Peirce, the proposed amendments “flirt[] with casting us as the nation’s cybersecurity command center, a role Congress did not give us,” and argued that the “precise disclosure requirements look more like a list of expectations about what issuers’ cybersecurity programs should look like and how they should operate.”
SEC awards $3.5 million to whistleblower
On March 8, the SEC announced that it awarded a whistleblower over $3.5 million for providing “critical” information that led to two successful SEC enforcement actions. According to the redacted order, the whistleblower provided information that prompted SEC staff to further investigate certain potential securities violations, which saved time and resources and helped advance settlement discussions. The SEC has awarded approximately $1.2 billion to 248 individuals since issuing its first whistleblower award in 2012.