This post continues our discussion of the 2018 examination priorities and guiding principles published by the SEC’s Office of Compliance Inspections and Examination (“OCIE”) on February 7. Continue Reading
Ask and Ye Shall Receive: OCIE’s 2018 Examination Priorities – Part 1 of 2
Industry professionals have noted that the SEC’s Office of Compliance Inspections and Examination (“OCIE”) was tardy in releasing their priorities list, although recent speeches from SEC officials have provided a preview of the issues in OCIE’s crosshairs. The full priority list was released on February 7.
The SEC’s examination priorities identify practices, products and services that reflect potentially heightened risks to investors and capital markets. As in prior years, the SEC’s priorities are thematic, covering: retail investors, including seniors and retirement savers; compliance and critical market infrastructure; FINRA and MSRB activities; cybersecurity; and anti-money laundering. The first of these priority areas is summarized below. Continue Reading
SEC Investment Management, Rulemaking and Enforcement Staff Outline Road Ahead
This post summarizes significant statements made by the staff of the Securities and Exchange Commission (SEC) at the December 7, 2017, ICI Securities Law Developments Conference. In her keynote address to the Conference, the Director of the SEC’s Division of Investment Management (the “Division”), Dalia Blass, revealed that the Division plans to take a fresh look at the “investor experience” and what the SEC “asks of fund boards.”
Family Offices and the Madness of Crowdsales
Recently, I have had an opportunity to review many “tokens” that can be transferred over the Ethereum blockchain and used for various “smart contracts.” Depending on their facts and circumstances, certain kinds of tokens being sold in so-called “initial coin offerings” were the subject of a recent SEC Section 21(a) report. I have also seen correspondence from family offices seeking to participate in these token offerings, in some cases before the developer has fully worked out the token. This raises a concern that a family office may wound itself trying to get in on the “cutting edge” of this new way to disseminate technology. Continue Reading
SEC Offers More Guidance on Cybersecurity Best Practices and Pitfalls – Part 2 of 2
This post continues our discussion of the Risk Alert released on August 7, 2017, by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) regarding conclusions drawn from its yearlong review of the cybersecurity practices of 75 asset management firms and funds. The sweep, deemed OCIE’s Cybersecurity 2 Initiative, covered broker-dealer, investment adviser, and investment company practices during the period from October 2014 through September 2015. Continue Reading
SEC Offers More Guidance on Cybersecurity Best Practices and Pitfalls – Part 1 of 2
On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a Risk Alert summarizing its conclusions from a year-long review of the cybersecurity practices of a 75 firms — including broker-dealers, investment advisers and investment companies. The sweep, OCIE’s Cybersecurity 2 Initiative, ran from September 2015 to June 2016 and covered the review period from October 2014 through September 2015. It follows OCIE’s 2014 Cybersecurity 1 Initiative, during which the staff examined a different group of firms from January 2013 to June 2014. The Risk Alert that followed the first sweep was released in early 2015.
The focus of OCIE’s second sweep was asset management firms’ written cybersecurity policies and procedures and, critically, their implementation. While the Risk Alert acknowledges that cybersecurity preparedness has improved across the industry since the first sweep exam, it emphasizes that significant deficiencies persist. The Risk Alert identifies common elements of policies and procedures that the staff regards as robust controls. The Risk Alert also stresses that, going forward, OCIE will increase its review of firms’ implementation of appropriately-tailored policies; merely having well‑drafted policies “on the books” but not applied will not suffice. Continue Reading
The Financial Choice Act Aims to Help Angel Investors
The proper treatment of angel investing groups under the Federal securities laws can be a vexing question. If it were appropriate to describe the angel investing group as a “company” as defined in Section 2(a)(8) of the Investment Company Act of 1940, and if the “company” were appropriately viewed as issuing interests or shares, then the angel investing group would have to seek to rely on Sections 3(c)(1) or 3(c)(7) of the Investment Company Act and comply with the requirements of Regulation D under the Securities Act of 1933. Yet these views seem to beg the questions of who is giving investment advice to the “company” and who is acting as a broker in offering and selling interests in the “company.” Continue Reading
Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Conclusion)
This series of posts has examined the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940 (the “1940 Act”). The previous posts discussed the problems with the current process and why Section 848 of the pending Financial Choice Act of 2017 would make matters much worse. This concluding post considers the possibility that Section 848 may not accomplish anything and then discusses other possible reforms to the exemptive process that may prove more fruitful. Continue Reading
Section 848 of the Financial Choice Act 2017: Unwise at any Speed (Part 4)
This series of posts examines the misguided efforts of the House Financial Services Committee to reform the existing process for issuing exemptive orders pursuant to Section 6(c) of the Investment Company Act of 1940 (the “1940 Act”). My first three posts discussed the current exemptive process and some of its significant shortcomings. This post discusses the changes to the process proposed in Section 848 of the pending Financial Choice Act of 2017 and why these proposed changes would undermine investor protections provided by the 1940 Act. It is difficult to overstate what bad public policy Section 848 represents.
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Distribution in Guise Settlement Orders Reinforce Need for Better Compliance, Contracting, and Disclosure Practices (Part 2)
This post continues our discussion of the settlement orders that the SEC recently entered into with investment advisory firms based in Chicago (the “First Order”) and Maryland (the “Second Order”). These cases illustrate that the SEC remains focused on mutual fund distribution issues and teach some hard lessons about the importance of compliance oversight, contracting, and disclosure around distribution and sub-transfer agency (“sub-TA”) payments.
The improper payments detailed in the First Order were discovered by the firm during an internal review conducted after it knew that the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) would be examining its intermediary payments. According to the First Order, “After identifying the payment errors, [the adviser] promptly notified the Board, reimbursed the Funds with interest, and supplemented its practices of providing oversight of payments to financial intermediaries.”
But these two recent distribution in guise enforcement cases, together with the first one brought in connection with OCIE’s sweep exam that was settled in 2015, show that liability may be present even where mitigating factors exist, such as a firm and fund board undertaking due diligence and reviewing and/or remediating misclassified payments. Moreover, while press reports suggest that the First Order and the Second Order may represent the end of enforcement follow-up from the distribution in guise sweep exam, distribution and intermediary payments continue to be an OCIE priority. An ounce of prevention is worth a pound of cure when it comes to mutual fund distribution payments, and the following are some observations that can be drawn from the Orders for best practices going forward. Continue Reading
