This week we move forward with Thanksgiving, reduced by the pandemic, but with light at the end of the tunnel – news of two very effective drug that should be available soon.

Chairman Clayton issued a statement last week noting that he will resign, effective December 31, 2020. His resignation had been expected. The Chairman did participate in rule amendments last week and testified on Capitol Hill to what some observers called mixed reviews. The agency has scheduled consideration of additional rule amendments prior to the Chairman’s departure.

The Commission did not file any new enforcement actions last week.

Be safe and healthy this week


Rules: On November 19, 2020 the Commission adopted amendments to Regulation S-K keyed to the MD&A section of reports. The amendments revised Item 301(a), replacing the current requirement for quarterly tabular disclosure with a principles based requirement; added new Item 303(a) regarding liquidity and capital resources; added new Item 303(a)(4) on critical estimates; replaced Item 303(a)(4) regarding off-balance sheet arrangements; eliminated current Item 303(a)(5) and amend Item 303(b) keyed to interim periods to streamline the disclosures (here). Commissioners Lee and Crenshaw filed a joint statement expressing their disappointment with the amendments regarding certain items eliminated and the failure to address environmental issues, although they noted that point will be addressed in the future (here).

OCIE: The Office issued a Risk Alert titled OCIE Observations: Investment Adviser Compliance Programs, November 19, 2020 (here). The Alert offers observations on issues that tie to inadequate or weak policies and procedures resulting from matters such as insufficient resources, a lack of authority for the CCO, deficient annual reviews and a failure to implement the policies and procedures in writing.

OCIE on ETP: The Office issued a statement on November 16, 2020 stating that it is “critically important” for registered investment advisers and broker-dealers to have “robust” policies and procedures that ensure professionals understand the risk and purpose of Exchange Traded Products such as those involved in the recent enforcement actions discussed below (here).

Dissent: Commissioners Peirce and Roisman dissented from the approval of an enforcement action based on insider trading in the context of a corporate stock buy-back by Andeavor LLC because the chare was based on Exchange Act Section 13(b)(2)(B) regarding internal controls. The two Commissioners argued that the determination was unprecedented and contrary to the purpose of the section (here).

Report on SEC Enforcement

The Cornerstone –NYU Report:Cornerstone Research, in conjunction with the NYU Pollack Center for Law and Business, published its annual report on select SEC enforcement statistics (here). Specifically, the Report centers on SEC enforcement activity related to public companies and their subsidiaries (collectively “public companies”) with few exceptions. Filings for enforcement actions, as well as those involving public companies, were down compared to earlier years. In fiscal 2020 the Report notes that 405 standalone enforcement actions were filed – the same number stated in the Enforcement Division’s Report, discussed in an earlier article (here). This is the lowest number since 2013 when 341 cases were filed. By comparison in 2019 526 cases were filed – a number which includes actions from the Share Class Selection initiative – while in 2018 and 2017 there were 490 for each year.

Only 61 cases were filed in fiscal 2020 involving public companies, again the lowest number in years. Last year saw the lowest number of cases filed since 2013. In 2019, in contrast, there were 95 actions initiated against public companies while in the prior year there were 73 new standalone cases. In fiscal 2020 corporations paid a total of $1.6 billion in monetary settlements to resolve actions initiated by the SEC. That amount is slightly above the $1.5 billion paid in the prior year. It is equal to the average amount paid over the last decade. Finally, the Report states that the majority of public companies cooperated with the Commission – 62%. That number represented a decline from 77% for the prior year. And, a chart shows that only a small fraction of corporate settlements in recent years involved cooperation and no monetary component.

SEC Enforcement – Filed and Settled Actions

The Commission did not file any new civil injunctive actions or administrative proceedings last week, excluding 12j, tag-along-proceedings and other similar matters.

False statements: SEC v. Davis, Civil Action No. 16 cv 00285 (W.D.N.V) is a previously filed action based on alleged violations of Advisers Act Sections 206(1), 206(2) and 206(4). The complaint claimed that Defendant Richard W. Davis raised funds through the unregistered sale of securities. Investors were told that the funds would be used to invest in mineral rights and real estate. Instead, Mr. Davis channeled the money into deals with companies he controlled and suffered losses, contrary to what the investors were told. Previously, Mr. Davis consented to the entry of a permanent injunction but reserved the question of monetary relief. Last week the Court entered an order directing the payment of $653,904 in disgorgement and prejudgment interest. In view of his conviction and sentence to 90 months in prison in a parallel criminal case the Commission dismissed its claim for a penalty. See Lit. Rel. No. 24965 (Nov. 19, 2020).

ETP: In the Matter of American Financial Services, Inc., Adm. Proc. File No. 3-20151 (Nov. 13, 2020) is one of four actions filed on November 13, 2020 based on the Commission’s new Exchange Traded Products Initiative. This case is typical of the four actions filed. Here Respondents are American Financial or APFS and American Portfolios Advisors, Inc. or APA, respectively, a registered broker dealer and an investment adviser. The Exchange Traded Product involved is iPath S&P 500 VIX Short-Term Futures ETN or VXX, a complex product which is linked to certain actions taken on the VIN or CBOE regarding commodities. It is suitable for very short term investments in select circumstances such as when the markets are volatile. It was not designed to be a hedge or for the long term. In this case registered representatives began early in 2016 to recommend investors buy and hold the VXX as a part of their overall portfolio. At the time there was a fear that political and other events would cause the market to drop. Many of the clients followed the advice, purchased the VXX and held it for over a year. The VXX was viewed as a kind of hedge that would guard against the feared price drop. In making those recommendations the registered representatives failed to understand that the investments were not suitable for use as a hedge. Yet customers were told the opposite — buy and hold for the long term to protect against downward market risk. No mention was made of what is effectively a monthly reset of the underlying futures positions and the result costs which will accumulate over time. The firms did have policies and procedures regarding complex products that mandated representatives understand the products prior to making a recommended. The policies and procedures were ineffective in preventing the losses incurred by customers here because they were not properly implemented. Supervisory failure also facilitated the client losses. The Order alleges violations of Exchange Act Section 15(b)(4)(E) and Advisers Act Section 206(4) and Rule 206(4)-7. To resolve the matter Respondents took certain remedial efforts. Respondent APA consented to the entry of a cease-and-desist order based on the Advisers Act Section and Rule cited in the Order. APFS consented to the entry of a cease-and-desist order based on the Exchange Act Section cited in the Order. The two firms were censured and will also pay, jointly and severally, a civil monetary penalty of $650,000. A fair fund will be created for the portion of the losses tied to the product.

The other cases filed at the same time are similar. See In the Matter of Benjamin F. Edwards & Co., Inc., Adm. Proc. File No. 3-20153 (Nov. 13, 2020)(action tied to same product; settled with a series of remedial efforts, a consent to the entry of a cease and desist order based on the same Advisers Act Section and Rule, a censure and the payment of disgorgement of $31,417.62, prejudgment interest of $3,716.74 and a penalty of $650,000; $685,134.36 went to a fair fund); In the Matter of Summit Financial Group, Inc., Adm. Proc. File No. 3-20149 (Nov. 13, 2020)(based on same product; resolved with a cease and desist order based on the same Advisers Act Section and Rule and a censure; Respondent will also pay disgorgement of $3,083.59, prejudgment interest of $715.49 and a penalty of $602,799.08; a sum for client losses was paid into a Fair Fund); In the Matter of Securities America Advisors, Inc., Adm. Proc. File No. 3-20150 (Nov. 13, 2020)(based on two similar products; resolved with consent to entry of a cease and desist order based on same Adviser Section and Rule and a censure; payment of disgorgement of $3,399.42, prejudgment interest of $377.40 and a penalty of $600,000; fair fund created); and In the Matter of Royal Alliance Associates, Inc., Adm. Proc. File No. 3-20152 (Nov. 13, 2020)(based on VXX; settled with consent based on same Section and Rule; payment of $1,953.00 in disgorgement, $447.29 in prejudgment interest; and a penalty of $500,000; a fair fund was established). See also In the Matter of Morgan Wilshire Securities, Inc., Adm. Proc. File No. 3-29954 (Sept. 24, 2020)(Action centered on purchasing inverse EFTs without regard to the holding period where firm staff not properly trained).


Due diligence: The regulator, in coordination with the Federal Banking Agencies, clarified the Bank Secrecy Act expectations regarding due diligence for charities and non-profit customers, in a statement issued on November 19, 2020 (here). The statement makes it clear that charities are not viewed as high risk and highlights their need for access to financial services through legitimate and transparent channels, particularly during the current crisis.


Report: The Working Group on Bribery of the Organization for Economic Co-operation and Development issued its Phase 4 Report on the U.S. on November 17, 2020. The Report, part of the peer monitoring process, focused primarily on the U.S. enforcement of the FCPA. It was issued following a year-long review and a series of interviews with government, private sector, academic and civic society experts. It applauded the U.S. for its sustained and outstanding commitment to enforcing its foreign bribery laws (here).


Report: The European regulator issued a report titled EU Derivative Clearing Showed Strong Growth in 2019. The report analyzes the EU’s derivative markets, concluding that there was significant growth in the markets during the period (here).

Hong Kong

Agreement: The Securities and Futures Commission executed a Fintech cooperation agreement with the Israel Securities Authority, according to a November 17, 2020 announcement (here). The purpose is to establish a framework for cooperation on financial technology.


Festival: The Monetary Authority of Singapore and Enterprise Singapore announced that more than 40 global satellite events will take place across the world as part of the Singapore FinTech Festival x Singapore Week of Innovation & technology (SWITCH) 2020 (here).