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SEC levies $18 million fine for mishandling MNPI
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.
District Court partially grants SEC’s motion in confidentiality agreements case
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.
SEC awards $15 million to whistleblowers
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.
SEC approves PCAOB Rule under the Holding Foreign Companies Accountable Act
On November 5, the SEC announced it approved the Public Company Accounting Oversight Board’s (PCAOB) Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which establishes a framework for the PCAOB’s determinations under that act “that the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.” According to the Commission order, PCAOB Rule 6100 establishes, among other things: (i) the factors the PCAOB will evaluate and the information the PCAOB will consider when assessing if a determination is warranted; (ii) the form, public availability, effective date, and duration of such determinations; and (iii) the process by which the board will reaffirm, modify, or vacate any such determinations. According to a statement released by SEC Chair Gary Gensler, the rule is an “important step to protect U.S. investors,“ and it is “critical that the Commission and the PCAOB work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by the same rules.”
SEC proposes amendments to electronic filing requirements
On November 4, the SEC announced two proposed amendments (Updating EDGAR Filing Requirements and Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F), which update electronic filing requirements. These proposed amendments are intended to increase efficiency, transparency, and operational resiliency by modernizing how information is submitted to the SEC and disclosed. The proposed rule and form amendments would require, among other things, certain forms to be filed or submitted electronically and would make technical amendments to certain forms to require structured data reporting and eliminate outdated references. According to the SEC, the Commission currently allows, and at times requires, certain forms to be filed or submitted in paper format. The SEC also noted that publicly filed electronic submissions would be more readily accessible to the public and would be available in a searchable format on the SEC’s website. The public comment period will be open for 30 days after publication in the Federal Register.
The same day, the SEC published a fact sheet clarifying, among other things, how the rule applies and what is required under the proposed amendments. According to a statement released by SEC Chair Gary Gensler, “just as we are hoping to update our rules for market participants in the face of rapidly changing technology, it’s also important that we update our rules to make filing obligations more efficient.”
District Court grants SEC motion for default judgment
On November 2, the U.S. District Court for the Middle District of Georgia granted the SEC’s motion for default judgement in its suit accusing a Georgia-based investment firm and three of its officers of defrauding investors out of approximately $3 million. In July, the SEC filed a complaint against the defendants for allegedly defrauding investors through a prime bank scheme by falsely promising that their funds would remain in a purported escrow account and earn lucrative returns without any risk of loss, which violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In its memorandum of law in support of its motion for default judgment, the SEC alleged that none of the defendants filed answers or responsive pleadings with the district court and had “engaged in egregious misconduct, acted with scienter, failed to admit their wrongdoing, were thoroughly dishonest with authorities, and have not demonstrated their financial means.” The district court granted the motion, approved permanent injunctions barring the defendants from committing future violations of securities laws, and required the defendants to return the investors' money with interest, in addition to the profits obtained through the alleged scheme. According to the order, the defendants are required to pay approximately $2.7 million total in disgorgement, exclusive of prejudgment interest, and pay a civil penalty of approximately $192,000.
SEC awards $2 million to whistleblower
On October 29, the SEC announced that it awarded a whistleblower more than $2 million for providing information and assistance leading to a successful SEC enforcement action, as well as an action by the DOJ. According to the redacted order, the whistleblower voluntarily provided the same original information to the SEC and the DOJ, which prompted the opening of the investigations, as well as extensive ongoing assistance throughout the investigations. According to the SEC, the whistleblower had previously received an award for contributing to an SEC enforcement action based on the same information that supported the award for the related action, and was eligible for this award as a result of the recent amendments clarifying the types of actions that may be considered “related” under the whistleblower rules.
The SEC has awarded approximately $1.1 billion to 224 individuals since issuing its first award in 2012.
CFTC awards $200 million to whistleblower
On October 21, the CFTC announced an approximately $200 million whistleblower award to a claimant who reported “specific, credible, and timely” information that contributed to an already open investigation, which led to a successful Commodity Exchange Act (CEA) enforcement action, as well as to the success of two related actions by a U.S. federal regulator and a foreign regulator. The associated order notes that the claimant voluntarily provided original information that led the CFTC to important, direct evidence of wrongdoing. According to the announcement, “to qualify for an award, a whistleblower who significantly contributed to the success of an enforcement action must demonstrate that there is a ‘meaningful nexus’ between the information provided and the CFTC’s ability to successfully complete its investigation, and to either obtain a settlement or prevail in a litigated proceeding.” The Commission determined the whistleblower met this standard. However, because the whistleblower’s information was never shared with the state regulator, the claim associated with a third related action by the state regulator was denied. In a statement released by CFTC Commissioner Dawn D. Stump, the Commissioner expressed her disagreement with the Commission’s award to the claimant with respect to the foreign regulator’s action. She concluded that there needs to be “an especially close look at cases where a whistleblower asks the Commission to tap its limited Customer Protection Fund for an award relating to an action by a foreign futures authority to address harm outside the United States.”
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.
Fed announces new rules for staff securities trading
On October 21, the Federal Reserve Board announced new rules to prohibit the purchase of individual securities, restrict active trading, and increase the timeliness of reporting and public disclosure. According to the announcement, the new rules apply to the Reserve Bank and Board policymakers and senior staff. Among other things, the rules require that Fed policymakers and senior staff provide 45 days’ advance notice and obtain approval before purchasing or selling approved securities. In addition, they will be required to hold investments for a minimum of one year.
European banks resolve Mozambican bond offerings matter
On October 19, multiple agencies—the DOJ, SEC and UK’s FCA—announced a coordinated resolution with a European bank related to debt offerings for entities in Mozambique. (See here and here.) In total, fines to U.S. and U.K. authorities reached almost $475 million, and the institution also agreed to forgive $200 million of the debt.
In a related action, a London-based subsidiary of a Russian bank (bank) separately agreed to pay over $6 million to settle SEC charges related to its role in a second 2016 bond offering. According to the SEC’s order, the second offering as structured by the bank and reespondent permitted investors “to exchange their loan participation notes (LPNs) for a direct sovereign bond issued by the Republic of Mozambique” in an earlier bond offering. However, the SEC alleged that the offering materials distributed and marketed by the respondent and bank “failed to disclose the full nature of Mozambique’s indebtedness and, relatedly, its risk of default on the notes.” Furthermore, the SEC alleged that proceeds from the financing from the respondent and bank were supposed to be used exclusively for maritime projects, but in reality, without the bank’s knowledge, only a portion of the loan proceeds was applied towards maritime projects while the rest was diverted to pay kickbacks and make improper payments to Mozambican government officials. Mozambique later defaulted on the financings after the full extent of “secret” debt was revealed.