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The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

OCIE Publishes 2019 Enforcement Priorities

Posted in Broker-Dealer Regulation, Fund Regulation, Investment Adviser Regulation, SEC Enforcement

The SEC’s Office of Compliance Inspections and Examinations (OCIE) published its 2019 examination priorities on December 20, 2018. Although OCIE’s published priorities “provide a preview of key areas where OCIE intends to focus its limited resources,” registrants should be aware that OCIE will proactively seek insight into evolving markets “including changes in risks to markets and investors,” and that its examination program will continue to be refined based on its evaluation of such risks. Registered investment advisers, registered funds, and broker-dealers should carefully review OCIE’s examination priorities to ensure that their related compliance policies and procedures are well-established, monitored, and enforced.

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First SEC Enforcement Action Against Unregistered Digital Token Exchange

Posted in Enforcement, SEC Enforcement

Until yesterday, the enforcement actions of the U.S. Securities and Exchange Commission (SEC) in the digital token (aka cryptocurrency) space have primarily focused on the primary issuances of tokens. However, on November 8, 2018, the SEC announced in an order (the “Order”) that it had settled charges against Zachary Coburn, the founder of the digital token exchange EtherDelta, marking the first time that the SEC has brought an enforcement action against an online digital token platform for operating as an unregistered national securities exchange.

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SEC Staff Allows Fund Boards to Rely on CCO Reports

Posted in Enforcement, SEC Enforcement

On October 12, 2018, the staff of the SEC’s Division of Investment Management issued a no-action letter to the Independent Directors Council (“IDC”) agreeing that the staff will not recommend enforcement if, in lieu of making certain determinations under Rule 10f-3, 17a-7 and 17e-1 (the “Exemptive Rules”) under the Investment Company Act of 1940 (the “1940 Act”), a fund’s board instead receives from its Chief Compliance Officer (“CCO”) a written representation that transactions entered into reliance on any of the Exemptive Rules were affected in compliance with the related procedures adopted by the board.

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SEC Sanctions Adviser and Portfolio Manager for Improper Cross Trades and Failure to Seek Best Execution

Posted in Enforcement, SEC Enforcement

In a recently settled enforcement matter, the SEC imposed a $1 million penalty on an investment adviser based on findings that the adviser violated the Investment Advisers Act of 1940 (the “Advisers Act”) and caused violations of the Investment Company Act of 1940 (the “Investment Company Act”). The charges stemmed from inappropriate cross trading and the adviser’s failure to: (i) disclose the resulting favorable treatment of certain advisory clients; (ii) seek to obtain the best price and execution for certain of its clients; and (iii) have in place an adequate compliance program.

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Broker-Dealer Settles Record Keeping Charges for $1.25 Million

Posted in Broker-Dealer Regulation, SEC Enforcement

On July 17, 2018, the SEC announced that it had entered into a settlement with a broker-dealer charged with failure to preserve certain records and inaccurately recording travel, entertainment, and other expenses. The broker-dealer agreed to pay a $1.25 million penalty to settle the charges.

The SEC found that after receiving document requests from the SEC’s Division of Enforcement, the broker-dealer deleted audio files for certain recorded telephone lines that were responsive to the document requests. According to the SEC, the files were deleted in accordance with the firm’s records policy after an unrelated litigation hold was lifted. Although the broker-dealer had issued a separate litigation hold notice after receiving the SEC staff’s document request, it did not ensure that this litigation hold notice was distributed to the technicians in the department responsible for maintaining voice recordings.

The SEC also found that the broker-dealer failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts. For example, the SEC found that the broker-dealer provided a high-performing broker with season tickets worth more than $600,000 per year and did not record the cost of the tickets as compensation in its general ledger. The SEC also found that the broker-dealer reimbursed certain brokers for expenses associated with travel and other personal expenses without a sufficiently documented business purpose, and that the broker-dealer recorded certain gifts to customers as entertainment rather than gifts.

According to the SEC staff, the “failure to preserve and produce responsive documents undermines the Commission’s ability to provide effective oversight of registrants and to carry out its mission to protect investors.” The broker-dealer settled the charges without admitting or denying the SEC’s findings.

Our Take

Broker-dealers and other registrants need to ensure that their policies and procedures include policies designed to ensure compliance with applicable record keeping obligations. Although record keeping violations will often appear as secondary deficiencies or violations, they are grounds for separate SEC enforcement action, as this broker-dealer found out the hard way.

OCIE Risk Alert Identifies Common Best Execution Deficiencies

Posted in Investment Adviser Regulation

On July 11, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a Risk Alert identifying the most common deficiencies that its staff observed in recent examinations of registered investment advisers’ best execution practices. As with prior OCIE Risk Alerts, investment advisers should carefully examine their compliance policies and procedures in light of the issues identified by OCIE and make improvements where necessary.

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FINRA Asks Members: What Are You Doing with Digital Assets?

Posted in FINRA Enforcement

In a July 2018 regulatory notice (Regulatory Notice 18-20, available here: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-18-20.pdf), FINRA has requested that members notify it if they engage, or intend to engage, in any activities related to digital assets, such as cryptocurrencies. In addition, until July 31, 2019, FINRA requests that firms notify their point of contact with FINRA, their regulatory coordinators, if they begin to engage in new activities of this type. Relevant activities include, among other things:

  • transactions in or advice regarding digital assets;
  • transactions in or advice regarding pooled assets investing in digital assets;
  • transactions in derivatives, such as futures and options, and perhaps structured products that are linked to digital assets;
  • offerings of digital assets, such as initial coin offerings;
  • accepting payment from customers in the form of cryptocurrencies; and
  • mining cryptocurrencies.

The above non-exclusive list does not include activities relating to companies that are engaged in the digital asset sector, such as participating in equity offerings of companies that are engaged in digital asset technology. Although absent from this list, broker-dealers have to be mindful of their investor suitability, due diligence, and other obligations in participating in offerings relating to new and potentially volatile industries.

It is premature to determine whether any new rules or regulations or guidance will emerge. First, FINRA needs to understand the asset class better, learn about broker-dealer activities in the area, and whether there are potential risks for investors as a result of these activities.