Requests for Comment
SEC designates longer period to consider IEX’s registration, requests comments on amendments. The SEC instituted proceedings to determine whether to grant or deny Investors Exchange LLC’s application for registration as a national securities exchange, designating June 18, 2016, as the date by which it will determine whether to grant or deny IEX’s application. The SEC also requested comments on several amendments to IEX’s Form 1, which include changes to IEX’s approach to outbound routing. Comments are due within 21 days of publication in the Federal Register. (3/18/2016) SEC Release No. 34-77406.
SEC proposes updated interpretation of “automated quotation” under Regulation NMS. The SEC requested comments on a proposed interpretation of “automated quotation” under Rule 600(b)(3) of Regulation NMS that would interpret “immediate” to include response time delays at trading centers that arede minimis, whether intentional or not, when determining whether a trading center maintains an “automated quotation” for the purposes of Rule 611. Comments are due within 21 days of publication in the Federal Register. (3/18/2016) SEC Release No. 77407.
Division of Investment Management publishes updated Money Market Fund Reform FAQs. The SEC’s Division of Investment Management updated its money market fund reform frequently asked questions to include additional guidance concerning the information funds must include on Form N-MFP. (3/18/2016) Money Market Fund Reform FAQs.
Division of Corporation Finance issues revised Financial Reporting Manual. The SEC’s Division of Corporation Finance revised its Financial Reporting Manual to include updated guidance on significance testing for equity method investments, revisions to conform to the Fixing America’s Surface Transportation Act, and additional guidance relating to the implementation of accounting standards that address the recognition of revenue from contracts with customers. (3/17/2016) Financial Reporting Manual.
Investment Management offers guidance on reflecting current market conditions in fund risk disclosures. The SEC’s Division of Investment Management issued new guidance for mutual funds, exchange traded funds, and other registered investment companies that highlights the importance of including changing market conditions in their fund risk disclosures. (3/9/2016) IM Guidance Update 2016-02.
Exemptive Orders and No-Action Relief
SEC grants no-action relief to China National Chemical Corporation in acquisition of Syngenta. The SEC’s Division of Corporation Finance granted an exemption from Rule 14d-11(e) to China National Chemical Corporation and CNAC Saturn (NL) B.V. in their tender offer for all publicly-held and American Depository Shares of Syngenta AG. Under the exemption, the purchaser will be permitted to pay for the tendered securities, in accordance with Swiss law and practice, after the expiration of the Subsequent Offer Period, even if payment occurs more than 20 US business days after the date of tender. (3/21/2016) SEC no-action letter.
SEC grants temporary exemption from compliance with SDR rules. The SEC issued an order granting a temporary exemption from compliance with Rules 13n-1 to 13n-12 under the Securities Exchange Act, which govern security-based swap data repositories, until June 30, 2016. In addition, the order extends relief previously granted to SDRs from certain sections of the Exchange Act in the Dodd-Frank Act Effective Date Order so that the relief will expire on the earlier of the date the SEC grants registration to an SDR and June 30, 2016. (3/18/2016) SEC Release. No. 34-77400.
Division of Corporation Finance letter clarifies application of Rule 144 holding period to REIT common stock acquired through exchange of partnership units.The SEC’s Division of Corporation Finance released an interpretive letter clarifying the application of Rule 144 to the exchange of operating partnership units for shares of real estate investment trust common stock. The letter determined that, for purposes of Rule 144(d)(1), the holding period for the shares of REIT Common Stock began when the OP Units were acquired. (3/14/2016) SEC no-action letter.
Division of Corporation Finance resolves conflict in US and Finnish laws by granting exemption from tender offer rules. The SEC’s Division of Corporation and Finance granted Acorda Therapeutics, Inc.’s request for exemptions from provisions of Securities Exchange Act Rules 14e-1 and 14d-11 in its tender offer for Finnish company Biotie Therapies Oy, to reconcile conflicts between US securities laws and Finnish law and market practice. (3/8/2016) SEC no-action letter.
Selected Enforcement Actions
SEC brings first case against municipal advisor under Dodd-Frank for breach of fiduciary duty. In the first action to enforce the fiduciary duty requirement for municipal advisors under the Dodd-Frank Act, the SEC announced charges against a municipal advisor, its CEO, and two employees for failing to disclose a conflict of interest in breach of their fiduciary duty to their municipal client. The SEC alleged that the firm served as the municipal advisor for a municipal entity for bond offerings in 2011. Two firm employees, in consultation with the CEO, arranged for the offerings to be underwritten by a broker-dealer where all three worked as registered representatives. The firm collected municipal advisor fees from its client as well as 90 percent of the underwriting fees from the broker-dealer serving as the underwriter for the offerings. In addition, the employees received commissions for the municipal advisor and underwriting services they performed. The municipal advisor failed to disclose to its client the conflict of interest created by its relationship to the underwriter and the financial benefit it gained by serving in dual roles. Without admitting or denying the allegations, the respondents agreed to settle the SEC’s charges by consenting to the entry of cease-and-desist orders and to the payment of civil penalties ranging from US$17,500 to US$85,000. The municipal advisor also agreed to pay US$289,827.80 in disgorgement and prejudgment interest. The two employees each agreed to bars from the financial services industry for a minimum of one to two years. The CEO agreed to a six-month suspension from serving in a supervisory capacity with any broker-dealer, investment adviser, or municipal advisor. (3/15/2016) In the Matter of Central States Capital Markets, LLC, Mark R. Detter, David K. Malone, and John D. Stepp, SEC Release No. 34-77369.
Oil company and executives failed to adequately evaluate internal controls. The SEC instituted settled administrative proceedings against an oil company, its former chief financial officer, its former chief accounting officer, a former consultant, and a former audit engagement partner for failures in evaluating and maintaining the company’s internal controls over financial reporting. The SEC alleged that due to rapid revenue growth and significant acquisitions, the oil company experienced stresses in its accounting department that caused the company to fail to complete its standard monthly close process in a timely manner. The company’s CFO and its chief accounting officer failed to adequately assess the severity of the internal control problems. A consultant and an audit engagement partner also recognized that inadequate staffing in the accounting department caused the company to have inadequate internal control over financial reporting, but erroneously concluded that the problem did not rise to the level of material weakness. Without admitting or denying the allegations, all of the respondents agreed to settle the charges by consenting to the entry of cease-and-desist orders. The company, the CFO, and the consultant also agreed to pay civil penalties of US$250,000, US$25,000, and US$15,000, respectively. The chief accounting officer and the audit engagement partner also consented to a one-year suspension from practicing before the SEC as accountants. (3/10/2016) SEC press release.
Speeches and Statements
White highlights budget priorities in House testimony. SEC Chair Mary Jo White testified before the US House Appropriations Subcommittee on Financial Services and Central Government to support the SEC’s Fiscal Year 2017 budget request of US$1.781 billion. White emphasized increased examination of investment advisers, development of technology, expansion of the Enforcement Division’s investigative capabilities, and strengthening of the SEC’s economic and risk analysis functions as key priorities for the 2017 budget. (3/22/2016) White testimony.
Staff announcements. Keith E. Cassidy will serve as Deputy of the SEC’s Office of Legislative and Intergovernmental Affairs. Cassidy will succeed Tim Henseler, who was named Office Chief in the Division of Corporation Finance’s Office of Enforcement Liaison. (3/21/2016) SEC press release. The SEC also named Anthony S. Kelly as Co-Chief of the SEC Enforcement Division’s Asset Management Unit (3/10/2016).
OIG report on efficiency of OCIE investment adviser exams. The SEC released the Office of Inspector General’s evaluation the Office of Compliance Inspections and Examinations’ management of investment adviser examination coverage goals, which concluded that OCIE’s use of the percentage of investment advisers examined each year as its performance measure may not provide meaningful information and that the OCIE should adopt the Government Accountability Office’s risk-management framework to support its long-term objectives. (3/16/2016) OIG report.
Money market fund statistics data. The SEC’s Division of Investment Management released money market fund statistics data as of February 29, 2016. (3/14/2016) Money Market Fund Statistics.
SEC questions escalating costs in approving PCAOB’s 2016 budget. At an open meeting, the SEC voted 2-1 to approve the Public Company Accounting Oversight Board’s 2016 budget of $257.7 million, which will be funded primarily by an annual accounting support fee of $253.3 million assessed on issuers and registered broker-dealers. (3/14/2016) SEC press release. SEC Chair Mary Jo Whitesupported the proposed budget, but also urged PCAOB board members “to take a hard look at their funding and expenses…including with respect to compensation.” SEC Commissioner Michael S. Piwowar dissented, objecting to the amount of the accounting support fee and spending projections that “represent a mountain of escalating costs.” See also Stein statement.
SEC issues final rule approving SIPC rule governing SIPC membership supplemental reports. The SEC approved the Securities Investor Protection Corporation’s proposal to adopt SIPC Rule 600, which establishes the form and content of the supplemental report of SIPC membership to replace the requirements currently in Securities Exchange Act Rule 17a-5. The rule will become effective on March 31, 2016. (3/14/2016) SEC Release No. SIPA-175.
SEC will host national compliance outreach seminar for investment companies and advisers. The SEC will hold a compliance outreach seminar for compliance officers at investment companies and investment advisory firms on April 19, 2016, at the SEC’s Washington, D.C. headquarters. (3/9/2016) SEC press release.
Three whistleblowers will receive SEC award of almost US$2 Million. The SEC announced that it will award nearly US$2 million to three whistleblowers for providing information that led to an investigation of misconduct and a successful enforcement action. The whistleblower that provided the original information that initiated the SEC’s investigation will receive US$1.8 million. (3/8/2016) SEC Release No. 34-77322.