On April 28, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against a company and its chief executive officer (“CEO”) for alleged fraud in connection with the company’s stated response to the COVID-19 pandemic. In its complaint, the SEC alleged that the company issued two press releases containing false or misleading statements in which the company purported to be negotiating the sale of N95 masks and then made claims that it was in possession of N95 masks. After regulators inquired about these claims, the SEC alleged that the company issued a third press release a month later that it did not have any N95 masks on hand. The complaint asserts that the company’s stock trading volume and stock price increased significantly as a result of the initial press releases.
Continue Reading SEC Alleges COVID-19 Related Fraud by a Company after Suspending Trading

On March 12, 2020, the U.S. Securities and Exchange Commission announced a settlement with an exempt reporting adviser and its two founders for failure to disclose several conflicts of interest and failure to take measures required by the private fund’s offering documents.

The SEC is examining exempt reporting advisers, and although not subject to all

On December 21, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced enforcement actions against two robo-advisers, Wealthfront Advisors LLC (“Wealthfront”) and Hedgeable Inc. (“Hedgeable”), for making false statements about investment products and publishing misleading advertising. “Robo-advisers” are investment advisers that provide automated, software-based portfolio management services. In a press release related to these actions, the Chief of the SEC Enforcement Division’s Asset Management Unit stated that “[t]echnology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients … [but] [r]egardless of their format … all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.” These enforcement actions, the first by the SEC against robo-advisers, highlight the nuanced risks and requirements for robo-advisers under U.S. securities laws.


Continue Reading SEC Brings First Enforcement Actions against Robo-Advisers

On November 8, the SEC announced an enforcement action charging the founder of a digital “token” trading platform for operating as an unregistered national securities exchange. The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta. Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, commented that “EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption.”

Continue Reading EtherDelta Founder Sanctioned for Operating an Unregistered Securities Exchange

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 Distribution in Guise Settlement Orders Reinforce Need for Better Compliance, Contracting, and Disclosure Practices (Part 2)

In two back-to-back enforcement cases arising from the SEC’s now four-year old distribution sweep exam, a Chicago-based mutual fund adviser has agreed to a $4.5 million civil money penalty and a Maryland-based firm has agreed to pay disgorgement of $17.8 million plus $3.8 million in interest and a $1 million penalty.  Both cases reinforce the importance of compliance oversight, contracting, and disclosure around distribution and sub-transfer agency (“sub-TA”) payments.  This post will review the findings in each case (which the firms neither admitted nor denied). A subsequent post will recommend steps to mitigate the risk of improper distribution payments.
Continue Reading Distribution in Guise Settlement Orders Reinforce Need for Better Compliance, Contracting, and Disclosure Practices (Part 1)

For those eager to learn what direction the SEC will take during the Trump administration, some clues surfaced during the recent nomination hearing of Jay Clayton, President Trump’s pick to head the SEC.  Clayton commented on several important issues confronting the SEC.
Continue Reading SEC Chairman Nominee Jay Clayton Provides Insight on the Future of the SEC (Part 1)

Apparently lost in the news of the impending departure of SEC Chair Mary Jo White is her recent suggestion to expand liability of corporate executives. In a speech on November 18, 2016, Chair White suggested a potential change in federal securities law that would hold executives accountable even if they are not involved in the misconduct and did not know about it. Given recent signals from the new administration in Washington, we believe this potential expansion of liability is unlikely to occur.

Continue Reading SEC Chair’s Suggested Expansion of Executive Liability Unlikely to Occur

Speaking at a compliance workshop sponsored by the Investment Adviser Association held in Atlanta on November 10, 2016, Bill Royer, Associate Director of the SEC examination program in the Atlanta Regional Office of the SEC laid out the priorities that he expected the SEC’s Office of Compliance Inspections and Examination (OCIE) to focus on in the coming year.
Continue Reading SEC Staff and Chair Talk Examination Priorities (For the Time Being At Least)

In June 2013, SEC Chair Mary Jo White announced a new SEC policy requiring admissions as part of settlements in certain types of cases.  The criteria for admission cases, as stated by Chair White and an SEC staff memo, included the following factors:

  • A large number of investors have been harmed or the conduct was otherwise egregious
  • The conduct posed a significant risk to the market
  • Admissions would aid investors in deciding whether to deal with a particular party in the future
  • Disclosing the facts would send an important message to the market
  • Intentional misconduct
  • Obstruction of an investigation

In practice, the SEC has rarely required defendants to make admissions in settlements.


Continue Reading The State of the SEC’s Admissions Policy: Three Years Later