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CFTC announces a $500,000 fine for swap dealer
On October 14, the CFTC announced a $500,000 settlement with a non-U.S. provisionally registered swap dealer to resolve claims that it failed to comply with certain swap dealer recordkeeping requirements. Among other things, the institution allegedly failed to retain certain audio recordings for the time required under CFTC regulations. In addition to the civil monetary penalty, the institution must cease and desist from further violations of the CFTC regulations and must continue its remediation efforts.
SEC issues whistleblower awards totaling $40 million
On October 15, the SEC announced awards totaling approximately $40 million to two whistleblowers who provided information and assistance leading to a successful SEC enforcement action. According to the redacted order, the SEC paid one of the whistleblowers roughly $32 million for providing substantial assistance to enforcement staff, identifying witnesses, and helping staff understand complex fact patterns. The SEC noted that the whistleblower’s tip was the initial source of the underlying investigation, and that without the individual’s information, the abuses would have been difficult to detect. The second whistleblower—who delayed reporting to the SEC for several years—provided helpful information during the course of the investigation that gave enforcement staff a more complete picture of events, and was awarded approximately $8 million.
The SEC has awarded approximately $1.1 billion to 218 individuals since issuing its first award in 2012.
SEC reopens comment period on listing standards for recovery of erroneously awarded compensation
On October 14, the SEC reopened the comment period on proposed rules for listing standards for the recovery of erroneously awarded compensation. According to the notice, the reopened comment period allows for the submission of comments and data on rule amendments first proposed in 2015, and requests comments in response to questions being raised by the SEC now in its reopening release. Among other things, the proposed rules would prohibit national security exchanges and national securities associations to list any issuer of any security unless the issuer adopts a compensation recovery policy that meets certain standards applicable to recovering incentive-based compensation awards based on erroneously reported financial results that are later restated to correct material errors to previously issued financial statements. According to a statement in support of the re-opened comment period on the Dodd-Frank Act rule regarding clawbacks of erroneously awarded incentive-based compensation, SEC Chair Gary Gensler stated that this is “an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.” Comments are due 30 days after publication in the Federal Register.
SEC announces final rule for filing fee disclosure and payment methods modernization
On October 13, the SEC announced a final rule to adopt amendments to modernize filing fee disclosure and payment methods, which is intended to improve filing fee preparation and payment processing. Operating companies and investment companies (funds) pay filing fees when participating in some transactions, which include registered securities offerings, tender offers, and mergers and acquisitions. According to the SEC, the amendments revise most fee-bearing forms, schedules, and associated rules to require that companies and funds include all required information for filing fee calculation in a structured format. The amendments also create new options for ACH and debit and credit card payment of filing fees and remove options for filing fee payment by paper checks and money orders that are infrequently used. According to a statement by SEC Chair Gary Gensler, these amendments, “will make the filing process faster, less expensive, and more efficient for SEC staff and market participants.” The final rule is effective January 31, 2022, except for certain amendments that are effective May 31, 2022.
SEC enforcement director says admissions increase accountability
On October 13, the SEC Director of the Division of Enforcement, Gurbir Grewal, indicated that the agency will require admissions in cases “where heightened accountability and acceptance of responsibility are in the public interest.” Speaking before the Practising Law Institute’s SEC Speaks conference, Grewal discussed the link between repeated lapses by large businesses, gatekeepers, and other market participants and the decline in investor confidence. Addressing perceptions that regulators are failing to appropriately hold these businesses, including financial institutions, accountable and that there are two sets of rules—one for powerful companies and one for everyone else—Grewal discussed the need to sharpen enforcement efforts to reestablish trust. This includes emphasizing corporate responsibility, providing timely and accurate disclosures, focusing on gatekeeper accountability, and crafting appropriate remedies, particularly prophylactic ones. “When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law,” Grewal stated. “Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.” He also discussed the importance of officer and director bars, adding that “if there is egregious conduct and a chance the person could have the opportunity to serve at the highest levels of a public company, we may well seek an officer and director bar to keep that person from being in a position to harm investors again.”
SEC chair discusses digital analytics in finance
On October 12, SEC Chair Gary Gensler stated that the agency is reviewing conflicts of interest and other risk concerns that may be associated with digital engagement practices (DEPs) employed by online brokerages and advisers. Speaking before the Practising Law Institute’s SEC Speaks conference, Gensler discussed the use of digital analytics in finance and warned attendees that DEPs used by finance platforms to tailor products to individual investors could be “transformative” and may increase access and choice, but may also introduce conflicts of interest, bias, and systemic risks if they are not closely monitored. “These modern features go beyond game-like elements, or what is sometimes called ‘gamification,’” Gensler stated. “They encompass the underlying predictive data analytics, as well as a variety of differential marketing practices, pricing, and behavioral prompts.” Use of predictive data analytics by finance platforms could raise issues with those platforms’ legal duties, he added, noting that finance platforms have an obligation “to comply with investor protections through specific duties—things like fiduciary duty, duty of care, duty of loyalty, best execution and best interest.” Using DEPs in a way that optimizes a platform’s own revenue may present a potential conflict of interest, Gensler emphasized. Gensler’s remarks follow a recent SEC request for information and public comments on the use of DEPs. As previously covered by InfoBytes, the SEC is seeking comments to better understand “what conflicts of interest may arise from optimization practices and whether those optimization practices affect the determination of whether DEPs are making a recommendation or providing investment advice.”
SEC Division of Enforcement says firms should take proactive compliance measures
On October 6, the SEC Director of the Division of Enforcement, Gurbir Grewal, discussed the agency’s mission to maintain market integrity and improve public confidence in the securities market. While Grewal noted that enforcement actions taken over the past few years have helped to significantly animate the idea that the SEC “will pursue potential violations by any market participant,” he stressed the need for joint coordination to promote better conduct among market participants. According to Grewal, this includes firms examining ways their specific business models and products interact with both emerging risks and enforcement priorities and tailoring compliance practices and policies accordingly. He stressed that market participants should take “proactive” compliance measures, including enhancing recordkeeping requirements, and anticipate emerging challenges instead of waiting for an enforcement action to implement the appropriate policies and procedures. Grewal also discussed the key role market participants play in identifying and addressing emerging risks. This could include ensuring proactive compliance efforts continue even after violative conduct has occurred, cooperating with SEC investigations, and voluntarily self-reporting potential violations “before the violation is about to be publicly announced." Grewal also noted that the SEC is currently evaluating its approach to enforcement action penalties to better assess whether past penalties have sufficiently deterred misconduct.
SEC charges hemp company with misrepresentations
On October 5, the SEC filed a civil fraud complaint against a Canadian-based hemp company and its two co-founders (collectively, “defendants”), alleging that they fraudulently raised over $15 million from investors, and that they misappropriated a significant portion of the funds for personal and other unrelated uses. The SEC claims that the defendants made misrepresentations, including that the company was a fully integrated company that was processing hemp from its own farm. However, the SEC alleges that the company did not process any of its hemp, instead using products supplied by third parties. The complaint further contends that the financial information given to investors “misstated historical revenue numbers and included baseless projections about future revenue that were unsupported by the [c]ompany’s own internal forecasts.”
The SEC’s complaint, which was filed in U.S. District Court for the Southern District of New York, charges the defendants with violating antifraud provisions of federal securities laws. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director and penny stock ban against the co-founders. In addition, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against the co-founders in a parallel action.
SEC bans two individuals from whistleblower program
On September 28, the SEC announced that it permanently barred two individuals, pursuant to the 2020 amendments to the Whistleblower Program Rules, from the SEC's whistleblower award program due to filing hundreds of frivolous award applications. According to both orders (see here and here), the individuals submitted award applications to the Commission that had no relation to the enforcement action for which they were applying, and refused to stop submitting the filings after repeatedly warned to do so. According to the SEC, the filing of the applications took considerable time and resources from Commission staff, hindered the effective operation of the program, and did not lead to any enforcement action. The permanent bars imposed in these matters pertain to pending award applications from the individuals, and to all future award applications submitted by the individuals.
SEC charges Florida payday lender with making fraudulent misrepresentations in offering
On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.