Final Rules

SEC adopts final rules to modernize information reported by registered investment companies. The SEC approved final rules that will require registered investment companies, including mutual funds and exchange-traded funds, to report their monthly portfolio holdings and certain annual census information in a structured data format; include additional, standardized disclosures in financial statements that are required in fund registration statements and shareholder reports; and make disclosures regarding securities lending activities in their fund registration statements. The final rules will become effective 60 days after publication in the Federal Register. (10/13/2016) SEC press release. SEC Commissioner Michael S. Piwowar dissented because the final rules did not include a provision that would have permitted the delivery of fund shareholder reports via investment companies’ websites. See also supporting statements by SEC Chair Mary Jo White and SEC Commissioner Kara M. Stein.

SEC approves final rules on liquidity risk management programs for open-end funds. The SEC voted to adopt final rules that will require mutual funds and other open-end management investment companies, including ETFs, to establish liquidity risk management programs. Among other things, the final rules require funds to classify each of the investments in their portfolios into one of four liquidity categories; determine a minimum percentage of their net assets that must be invested in highly liquid investments; and gain approval of their liquidity risk management programs by their boards. The final rules will become effective 60 days after publication in the Federal Register. (10/13/2016) SEC press release.SEC Commissioner Kara M. Stein called the rule “an important step toward improving fund resiliency.”

SEC authorizes use of swing pricing by some investment companies. The SEC adopted rule amendments that will allow certain registered open-end management investment companies to use “swing pricing,” which is the process of adjusting the fund’s net asset value per share to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. The final rules will become effective two years after publication in the Federal Register. (10/13/2016) SEC press release. Commissioner Piwowar dissented, raising the concern that funds could use swing pricing “to conceal from investors the true costs they will incur upon the purchase and sale of their fund shares.”


Corporation Finance revises Rule 701 C&DIs. The SEC’s Division of Corporation Finance issued new and revised Compliance and Disclosure Interpretations on Securities Act Rule 701’s exemption for securities offered by private companies pursuant to compensatory benefit plans and contracts. Revised C&DI 271.014; new C&DI 271.24. (10/19/2016)

Revised C&DI addresses holding period for securities issued under individually negotiated employment agreements. The SEC’s Division of Corporation Finance issued a revised C&DI on Securities Act Rule 144(d)’s holding period for restricted securities that explains how the rule applies to restricted securities issued as part of an individually negotiated employment agreement. (10/19/2016) C&DI 532.06.

Corporation Finance publishes new C&DIs on pay ratio disclosure. The SEC’s Division of Corporation Finance issued five new C&DIs on new requirements under Regulation S-K for a public company to disclose the pay ratio of its chief executive officer to the median compensation of its employees. The new C&DIs address the identification of the median employee, including questions concerning alternative consistently applied compensation measures, furloughed employees, and independent contractors. (10/18/2016) Regulation S-K C&DIs.

Selected Enforcement Actions

SEC brings charges against board member for trading on nonpublic information during board meeting. The SEC charged a member of the board of directors of a financial services firm with insider trading. The SEC alleged that he learned confidential details about the company’s planned acquisition of another firm during a board executive committee meeting and proceeded to place his first order to purchase shares of the target company’s stock while that executive committee meeting was still in progress. The SEC alleged that the board member reaped illegal profits of more than US$56,000. The board member will also face charges in a parallel criminal proceeding. (10/21/2016) SEC press release.

Former CEO of brokerage firm settles charges of violating AML rules. The SEC announced charges against the former president and CEO of a brokerage firm for supervisory failures that led to the firm’s violations of anti-money laundering rules. The SEC alleged that the CEO permitted foreign corporate entities to execute securities transactions through a brokerage account opened by a foreign bank affiliated with the brokerage firm without verifying the identities of the non-US citizens who beneficially owned them as required by the customer identification program. Without admitting or denying the allegations, the CEO settled the charges by consenting to the entry of a cease-and-desist order and a one-year supervisory suspension. The CEO will also pay a civil penalty of US$50,000. (10/19/2016) In the Matter of Lia Yaffar-Pena, SEC Release No. 34-79124.

Investment adviser charged with fair valuation and disclosure failures. A mutual fund adviser has settled charges that it improperly fair valued certain fund holdings and failed to disclose important aspects of its attempt to correct the resulting harm. The SEC alleged that the adviser improperly valued certain securities held by mutual funds that it advised, which caused the mutual funds to be priced at an incorrect net asset value. The adviser took steps to remedy the problems caused by the improper valuations, paying US$27 million to the mutual funds and their shareholders; however, the adviser failed to disclose that it based the remediation on incorrect calculations of the funds’ losses by failing to follow the funds’ NAV correction procedures or that it compensated shareholders differently based on whether they invested directly or through an intermediary. Without admitting or denying the allegations, the adviser settled the charges by consenting to the entry of cease-and-desist and censure orders, agreeing to undertake a self-administered distribution to affected shareholders, and paying a US$3.9 million civil penalty. (10/18/2016) In the Matter of Calvert Investment Management, Inc., SEC Release No. IA-4554.

SEC says fantasy stock picking game involved illegal sale of security-based swaps. The SEC announced charges against a New-York based company for illegally offering complex derivatives products to retail investors through fantasy stock picking mobile phone games. The SEC alleged that players of the company’s mobile phone games won points and cash prizes for accurately predicting the order in which 10 securities would perform relative to each other. The company kept 10 percent of the entry fees and obtained a data set about market expectations that it hoped to sell to hedge funds and other investors. The SEC alleged that the company’s agreements with players were security-based swaps because they provided for a payment that was dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities. The SEC charged the company with violating Dodd-Frank Act restrictions on the offer and sale of security-based swaps to investors who do not qualify as “eligible contract participants” and without an effective registration statement covering the offering. Without admitting or denying the allegations, the company settled the charges by consenting to the entry of a cease-and-desist order and agreeing to pay a US$50,000 civil penalty. (10/13/2016) In the Matter of Forcerank LLC, SEC Release No. 33-10232. 

Investment adviser failed to supervise analyst who obtained nonpublic information from tech company. The SEC instituted settled administrative proceedings against an investment adviser and a former senior analyst at the firm for failures related to the misuse of material nonpublic information by the adviser’s employees. The SEC alleged that a research analyst obtained material nonpublic information from a company insider and shared the information with the adviser, which executed timely and profitable trades ahead of public announcement of the information by the company. The analyst shared the information with the senior analyst, who was his supervisor, but the supervisor failed to question the analyst about the source of his information or investigate other red flags that indicated the analyst had obtained the information improperly. According to the SEC, the adviser failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information. Without admitting or denying the allegations, the adviser and the senior analyst settled the charges. The adviser agreed to be censured and to pay disgorgement of US$5,165,862, prejudgment interest of US$1,129,222, and a civil money penalty in the amount of US$2,582,991. The senior analyst agreed to be suspended from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent for 12 months and to pay a civil penalty of US$130,000. (10/13/2016) In the Matter of Artis Capital Management, L.P. and Michael W. Harden, SEC Release No. IA-4550.

Speeches and Statements

White advocates for greater SEC role in regulation of US Treasury market. In an address at The Evolving Structure of the US Treasury Market Second Annual Conference, SEC Chair Mary Jo White indicated that the SEC is considering ways of extending aspects of the securities regulatory framework to US Treasury market intermediaries. (10/24/2016) White remarks.

Piwowar emphasizes importance of economic analysis in regulation. SEC Commissioner Michael S. Piwowar discussed how high-quality, independent economic analysis informs the regulatory process in remarks at the 2016 Conference on Auditing and Capital Markets. (10/21/2016) Piwowar remarks.

OCIE plans to enhance oversight of FINRA. In a speech to the National Society of Compliance Professionals 2016 National Conference, SEC Office of Compliance Inspections and Examinations Director Marc Wyatt indicated that OCIE will increase its oversight of the Financial Industry Regulatory Authority as it relies more heavily on FINRA for examinations of broker-dealers. (10/17/2016) Wyatt remarks.

Ceresney says SEC will continue to focus enforcement efforts on public finance. SEC Division of Enforcement Director Andrew J. Ceresney discussed the SEC’s enforcement efforts in the municipal securities market and public pension funds in speech to the Securities Enforcement Forum 2016. (10/13/2016) Ceresney remarks.

Other Developments

OCIE announces examinations of whistleblower compliance. OCIE announced that it will conduct examinations of registered investment advisers and registered broker-dealers to assess their compliance with key whistleblower rules under Section 21F of the Securities Exchange Act. The examinations will include a review of registrants’ compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether they include provisions pertaining to confidentiality of information and reporting of possible securities law violations that may raise concerns under Rule 21F-17. (10/24/2016) OCIE risk alert.

Staff announcements. The SEC announced that it has appointed John W. Berry to serve as Associate Regional Director for Enforcement in its Los Angeles Regional Office. (10/24/2016) The SEC also announced that Melissa Hodgman has been named Associate Director of the SEC’s Division of Enforcement. (10/14/2016)

EDGAR updates. The SEC published the EDGAR Form N-MFP2 XML Technical Specification (Version 1). (10/14/2016)

SEC announces enforcement results for 2016 fiscal year. The SEC released its enforcement results for fiscal year 2016, which indicate that the agency filed a record number of enforcement actions and increased the number of actions involving financial reporting-related misconduct, investment advisers, and Foreign Corrupt Practices Act violations. (10/11/2016) SEC press release.