Mon, Apr 27, 2020
US Securities and Exchange Commission Update - First Quarter 2020
The Compliance and Regulatory Consulting practice outlines the SEC’s recent updates, announcements, proposed amendments, observations, examination priorities and enforcement matters from the first quarter of 2020.
SEC Postpones National Compliance Outreach Seminar for Investment Companies and Investment Advisers
On February 25, 2020 the SEC announced the event, originally scheduled on April 21, 2020, has been postponed and if appropriate, will be rescheduled at a time later this year. The event is intended to help chief compliance officers (CCOs) and other senior personnel at investment companies and investment advisory firms enhance their compliance programs for the protection of investors.
Read more here.
SEC Proposes Amendments to Modernize and Enhance Financial Disclosures
The SEC announced on January 30, 2020 that it has “voted to propose amendments to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. The proposed amendments would eliminate duplicative disclosures and modernize and enhance Management's Discussion and Analysis disclosures for the benefit of investors, while simplifying compliance efforts for companies. The Commission also announced that it is providing guidance on key performance indicators and metrics in Management's Discussion and Analysis.”1
Read more here.
SEC Office of Compliance Inspections and Examinations Publishes Observations on Cyber Security and Resiliency Practices
The Securities and Exchange Commission Commission's Office of Compliance Inspections and Examinations (OCIE) issued on January 27, 2020 examination observations related to cyber security and operational resiliency practices taken by market participants.
“The observations highlight certain approaches taken by market participants in the areas of governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness. The observations highlight specific examples of cyber security and operational resiliency practices and controls that organizations have taken to potentially safeguard against threats and respond in the event of an incident.”2
Read more here.
SEC Proposes Improvements to Governance of Market Data Plans
On January 8, 2020 the SEC announced they are “seeking public comment on a proposed order to modernize the governance of National Market System (NMS) plans that produce public consolidated equity market data and disseminate trade and quote data from trading venues.”
“The proposed order would direct the equities exchanges and FINRA to file with the Commission a new NMS plan designed to increase transparency and address conflicts of interest and other issues presented by the current governance structure of the existing NMS plans. The proposed order describes the specific proposed governance provisions that the Commission preliminarily believes would address these issues. If the Commission decides to issue an order after considering public input, the NMS plan participants would be required to submit a new plan, which would then be published for public comment before the Commission takes any definitive action on a new plan. Until the Commission takes such action, the current plans will continue to govern.”4
Read more here.
SEC Office of Compliance Inspections and Examinations Announces 2020 Examination Priorities
“The OCIE publishes its examination priorities annually to enhance the transparency of its examination program and to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.”5
Released on January 7, 2020 the OCIE’s 2020 examination priorities are: retail investors, including seniors and those saving for retirement; market infrastructure; information security; focus areas relating to investment advisers, investment companies, broker dealers and municipal advisors; anti-money laundering programs; FinTech, including digital assets and electronic investment advice; and FINRA and MSRB.
Read more here.
Enforcement Matters
Jury Finds Investment Adviser and its Owner Liable for Fraud
On March 16, 2020 jurors in the federal court returned a verdict in the SEC’s favor against an investment adviser and its owner in New Haven, Connecticut.
The jury found that a Connecticut-based investment advisory firm and its owner repeatedly purchased securities at their clients’ expense that generated significant undisclosed compensations, enriching themselves, thus defrauding their advisory clients.
“The court previously granted partial summary judgment, holding that, in violation of 206(2) and 206(3) of the Investment Advisers Act”, the investment adviser and its owner failed to disclose their conflicts of interest and made unauthorized principal transactions. “The court reserved for trial whether defendants acted intentionally, knowingly or recklessly under the antifraud provisions of Section 206(1) of the Advisers Act, and whether defendants acted wilfully under the antifraud provisions of Advisers Act Section 207.”6
Read more here.
SEC Charges Russian National for Defrauding Older Investors of Over $26 Million in Phony Certificates of Deposit Scam
The SEC announced on March 13, 2020 charges against a Russian national and entities he controlled for allegedly participating in a fraudulent scheme to lure U.S. investors into buying fictitious certificates of deposit (CDs) promoted through internet advertising and “spoofed” websites that mimic the actual sites of legitimate financial institutions.
According to the SEC’s complaint, the scheme involved purchasing internet ads that targeted investors who were searching for CDs with high rates. The ads allegedly included links to phony websites, which falsely claimed that the firms offering the CDs were members of FINRA and the FDIC, and that deposits were FDIC-insured. When investors called the phone number on the websites, an “account executive” impersonating a real registered representative directed investors to wire funds to so-called “clearing” partners. These alleged clearing partners were entities used by the Russian national to launder and misappropriate investor funds. Since November 2014, the alleged scheme involved spoofing the websites of at least 24 actual financial firms or using at least eight fictitious entities, resulting in over $26 million in known investor losses—with many of those losses from older investors who used their retirement savings.
The SEC seeks permanent injunctive relief and the return of allegedly ill-gotten gains with prejudgment interest and penalties. The complaint also names the Russian national’s wife and the clearing partners as relief defendants.
Read more here.
SEC Obtains Judgment Against Former Chief Compliance Officer of Investment Adviser
According to the litigation release on February 11, 2020, an Illinois federal court entered a final judgment on January 30, 2020 against the former chief compliance officer (CCO) of a registered investment adviser that the SEC previously charged with fraud for misappropriating the value of 15 investment pools.
In an order issued on January 21, 2020, the court found that the former CCO aided and abetted the investment adviser’s violations of the Investment Advisers Act of 1940. The court found that the former CCO “helped commingle investor funds with personal assets, misled investors about the value of their investments, oversaw flawed internal systems and methods for valuing and reporting investments and transferred investor money to companies controlled by his family.”7 The former CCO is ordered to pay a total of $28,935 in disgorgement and prejudgment interest.
Read more here.
SEC Charges Husband and Wife with Nearly $1 Billion Ponzi Scheme
The SEC charged a California-based couple with orchestrating a nearly billion-dollar Ponzi scheme involving alternative energy tax credits.
According to the SEC's complaint filed on January 24, 2020, the couple raised approximately $910 million from 17 investors between 2011 and 2018 by offering securities in the form of investment contracts through their two solar generator companies. The couple allegedly promised investors tax credits, lease payments and profits from the operation of mobile solar generators. The complaint alleges that most of the generators were never manufactured, and most of the purported lease revenue paid to investors in fact came from new investor funds. As part of the scheme, the couple arranged for investors to receive false documents, including financial statements, lease arrangements and generator certifications. Throughout the scheme, the couple allegedly siphoned off investor funds and used at least $140 million of investor money to fund their lavish lifestyle.
The SEC's complaint, filed in Sacramento federal court, charges the couple with violating the antifraud provisions of the federal securities laws and seeks injunctive relief, disgorgement and civil penalties. The defendants have consented to permanent injunctions, with monetary relief to be determined by the court at a later date. The SEC previously charged three other defendants in this matter.
Read more here.
Sources
1 https://www.sec.gov/news/press-release/2020-25
2 https://www.sec.gov/news/press-release/2020-20
3 https://www.sec.gov/news/press-release/2020-7
4 https://www.sec.gov/news/press-release/2020-5
5 https://www.sec.gov/news/press-release/2020-4
6 https://www.sec.gov/news/press-release/2020-65
7 https://www.sec.gov/litigation/litreleases/2020/lr24736.htm
Financial Services Compliance and Regulation
End-to-end governance, advisory and monitorship solutions to detect, mitigate, drive efficiencies and remediate operational, legal, compliance and regulatory risk.
Retained Compliance Support and Managed Services
With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.
Global Regulatory Licensing Services
Kroll's expert compliance consulting team provides regulatory registration and licensing services taking the burden of regulatory requirements off business operators.
Retained Compliance Support and Managed Services
With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.
Retained Compliance Support and Managed Services
With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.
Retained Compliance Support and Managed Services
With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.
