On Oct. 5, 2016, the SEC announced that a large financial institution agreed to pay a $90 million penalty and admit wrongdoing to settle charges that it misrepresented how it determined a key performance metric of its wealth management business. In addition, the former chief operating officer also agreed, on a neither admit nor deny basis, to settle charges that he was a cause of the company’s violations and pay an $80,000 penalty.
The SEC found that this institution deviated from its publicly disclosed methodology for determining net new assets, or NNA, a metric used by investors to measure a financial institution’s success in attracting new business. This company had disclosed that it determined NNA based on individual assessments of each client’s intentions and objectives. However, the SEC determined that the company sometimes used an undisclosed, results-driven approach to determine NNA in order to meet senior management’s targets. Andrew J. Ceresney, Director of the SEC’s Enforcement Division stated that the institution’s “failure to disclose this results-driven approach deprived investors of the opportunity to fairly judge the firm’s success in attracting new money.”
Notably, this financial institution was not required by rule or regulation to disclose NNA and the methodology for its calculation. By doing so, however, the company effectively determined that NNA is important to investors and material to assessing the company’s performance. Consequently, by failing to disclose a change in the company’s methodology for determining NNA, the SEC found the company’s disclosure misleading.
For any company that discloses a performance metric relevant to an investor’s assessment of the company’s business, this SEC enforcement action makes clear that any change to the calculation of that metric must be disclosed in order to avoid being misleading.
Company Agrees to Pay $500,000 Penalty in SEC Whistleblower Retaliation Case
In its second whistleblower retaliation case (and first ever stand-alone retaliation case) since Dodd-Frank, the SEC found that a company employee was removed from significant work assignments within weeks of reporting to senior management, the company’s internal hotline, and to the SEC, that the company’s financial statements might be in violation of the whistleblower employment anti-retaliation provisions of Section 21F(h) of the Securities Exchange Act of 1934. Section 21F(h) prohibits an employer from discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner discriminating against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in providing information regarding potential violations of the securities laws to the SEC.
The employee/whistleblower, who allegedly had received positive performance reviews for several years and had been ranked as a “high-potential” employee, was terminated approximately three months after he raised his concerns.
According to the SEC’s Order, the company conducted an internal investigation into allegations made by the whistleblower, who did not oversee the company’s accounting functions, and determined its reported financial statements contained no misstatements given that the company had a process to reconcile the costs in question.
Without admitting or denying the SEC’s findings, the company agreed to pay a $500,000 penalty and to cease and desist from committing or causing any further violations of Section 21F(h).