Insights from Winston & Strawn

Last week, the SEC sent a message to the private equity industry regarding unregistered broker-dealer activity. The SEC charged an SEC-registered investment adviser to a private equity fund and its principal with violating Section 15(a) of the Securities Exchange Act for providing brokerage services and receiving transaction-based compensation in connection with the purchase and sale of portfolio companies while not being registered as a broker-dealer. Notably, the title used by the SEC for its press release was “SEC: Private Equity Fund Adviser Acted as Unregistered Broker,” even though the SEC also charged the adviser with three violations of the Investment Advisers Act. A copy of the press release can be found here and a copy of the SEC’s order for In the Matter of Blackstreet Capital Management, LLC can be found here.  

The issue of whether or not private equity fund advisers are engaging in unregistered broker-dealer activity received national attention when it was highlighted in a speech given in April 2013 by David Blass, then chief counsel in the SEC’s Division of Trading and Markets, to the American Bar Association. The Dodd-Frank Act required most private fund advisers to register with the SEC as investment advisers. The SEC had been examining the newly registered advisers and Mr. Blass’ comments were based on reports by the examination staff that private fund advisers and individuals associated therewith were receiving transaction-based compensation for providing investment banking and other brokerage services to portfolio companies. The prospect of losing substantial revenue from providing services to portfolio companies was a major concern for many private equity fund advisers in the buyout space and the source of significant debate among legal practitioners. For a few years after the speech, the industry was confronted with minor developments on this issue, some of which were confusing and/or unhelpful. Mr. Blass gave another speech where he appeared to have backed away somewhat from his initial position, the American Bar Association and industry associations reached out to the SEC a number of times for clarity but with little progress, and, in response to a request from a small group of practicing attorneys, the SEC issued a no-action letter for “M&A Brokers” in January 2014, which is available here. Since that time, the SEC has focused on a number of other issues in the private equity industry, while the legal community debated whether various service and fee arrangements between private equity fund advisers and portfolio companies should result in the adviser improperly engaging in unregistered broker-dealer activity.  

In the present case, Blackstreet Capital Management was the adviser to two private equity funds (although each was comprised of two funds, one for accredited investors and one for qualified purchasers, I will refer to all of the funds as the “funds”). Both funds invested in leveraged buyouts of businesses with revenue between $20 million and $100 million. Notably, the limited partnership agreements for the funds expressly permitted Blackstreet Capital to charge transaction or brokerage fees. Blackstreet Capital was registered with the SEC as an investment adviser but not as a broker-dealer.  

According to the SEC, “rather than employing investment banks or broker-dealers to provide brokerage services with respect to the acquisition or disposition of portfolio companies,” Blackstreet chose to perform the services “in-house.” The SEC noted that Blackstreet engaged in the following activities: “soliciting deals, identifying buyers or sellers, negotiating and structuring transactions, arranging financing and executing the transactions.” Blackstreet received approximately $1.8 million in transaction- based compensation for providing these services.  

The SEC charged Blackstreet with violating Section 15(a)(1) of the Exchange Act, which makes it unlawful for a broker to effect transactions in securities unless registered with the SEC under Section 15(b). Section 3(a)(4) of the Exchange Act generally defines a “broker” as any person engaged in the business of effecting transactions in securities for customers. Blackstreet also was found to have engaged in a number of violations of the Advisers Act that are unrelated to the broker-dealer charge. In total, Blackstreet was ordered to pay disgorgement of approximately $2.3 million, prejudgment interest of $283,787, and a civil money penalty of $500,000. The SEC took into account the remedial actions of Blackstreet and its principal.  

Unfortunately, the disclosures contained in the SEC’s order provide very little guidance regarding the details of the case (which is typical), so we are left with a number of unanswered questions. We know that Blackstreet disclosed (presumably in the fee section of the limited partnership agreement) that it was going to engage in broker-dealer activity and would receive a fee for doing so and in fact engaged in those activities and received fees that the SEC labeled as “transaction-based compensation.” (The SEC has been focusing generally on the fees and expenses charged by private equity fund advisers to their clients and the adequacy of the related disclosures) There is no mention in the order that Blackstreet offset these deal fees against the management fees and/or carried interest it was earning from the funds (although based on the other allegations in the Order, most likely there was no full or partial offset of fees). The SEC noted that some of the transactions involved securities transactions, which means that Blackstreet presumably worked on a number of asset deals. Therefore, we don’t know if Blackstreet provided investment banking services in connection with the purchase or sale of most of its portfolio companies, less than 50 percent, or simply one. Arguably, the SEC can take the position that even one deal meets the requirement that a person is “in the business” of effecting transactions in securities.  

It’s no secret that the SEC has always looked askance at any activity that looks like brokerage services, especially when combined with a transaction-specific fee. Prior to Mr. Blass’ speech, the SEC had already been pruning the so-called “finders exemption” until, practically speaking, it no longer exists. Likewise, the M&A Broker no-action letter is generally not available to most private equity fund advisers. With this recent order against Blackstreet, the SEC clearly has not changed course and advisers to private equity funds are well advised to be careful when engaging in activities that involve transaction-related compensation and, therefore, may lead to a characterization as an unregistered broker.

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


OCC Releases CRA Evaluations for 21 National Banks and Federal Savings Associations

On June 2nd, the OCC released a list of Community Reinvestment Act performance evaluations that became public during the period of May 1, 2016 through May 31, 2016. Of the 21 evaluations made public this month, five are rated outstanding, 15 are rated satisfactory and one is rated needs to improve.

OCC to Host Compliance and Operational Risk Workshops in South Dakota

On June 1st, the OCC announced that it will host two workshops (Compliance Risk and Operational Risk) in Sioux Falls, S.D., at the Sheraton Sioux Falls & Convention Center, July 19-20, for directors of national community banks and federal savings associations supervised by the OCC.

OCC Issues Third Quarter 2016 CRA Evaluation Schedule

On June 1st, the OCC released its schedule of Community Reinvestment Act evaluations to be conducted in the third quarter of 2016.

OCC to Host California Workshop for Bank Directors

On May 25th, the OCC announced that it will be hosting a Building Blocks for Directors workshop in Santa Ana, Calif., at the DoubleTree Santa Ana-Orange County Airport Hotel, July 11-13, for directors of national community banks and federal savings associations supervised by the OCC. The workshop will include lectures, discussion, and exercises to provide practical information on the roles and responsibilities of board participation for both new and experienced directors.


Mobile Banking Can Help Underserved Consumers, Per FDIC Report

On May 25th, the FDIC released a report, Opportunities for Mobile Financial Services to Engage Underserved Customers, which found that mobile banking can help underserved consumers obtain more control over their finances and increase access to mainstream banking. FDIC Press Release.

FDIC Extends Comment Period on Deposit Account Recordkeeping Proposal

On May 20th, the FDIC announced that it is extending the comment period for proposed recordkeeping requirements for FDIC-insured institutions with a large number of deposit accounts. The proposed recordkeeping requirements, which are designed to facilitate rapid payment of insured deposits to customers if large institutions were to fail, were published in the Federal Register on February 26th with a 90-day comment period. All comments must now be received on or before June 25th. The 30-day extension will allow commenters additional time to consider the proposal as well as the issues and questions posed for comment, particularly those related to the estimated cost of compliance. To assist commenters, the FDIC has published a report prepared for the agency on the estimated cost of compliance.

Federal Reserve

Federal Reserve Board Announces Schedule for Results from Dodd-Frank Act Stress Tests and CCAR

On June 2nd, the Federal Reserve Board announced that results from the latest supervisory stress tests conducted as part of the Dodd-Frank Act will be released on June 23rd, and the related results from the Comprehensive Capital Analysis and Review (“CCAR”) will be released on June 29th.


CFPB Proposes Rule to End Payday Debt Traps

On June 2nd, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule aimed at ending payday debt traps by requiring lenders to take steps to make sure consumers have the ability to repay their loans. In addition, the proposed rule would cut off repeated debit attempts that rack up fees. The proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB is also launching an inquiry into other products and practices that may harm consumers facing cash shortfalls. Comments on the proposal are due on Sept. 14, 2016.

Treasury Department Developments


Treasury Takes Actions To Further Restrict North Korea's Access to The U.S. Financial System

On June 1st, the U.S. Department of the Treasury announced a Notice of Finding that the Democratic People’s Republic of Korea is a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act.  The Treasury, through its Financial Crimes Enforcement Network (“FinCEN”), also released a notice of proposed rulemaking recommending a special measure to further isolate North Korea from the international financial system by prohibiting covered U.S. financial institutions from opening or maintaining correspondent accounts with North Korean financial institutions, and prohibiting the use of U.S. correspondent accounts to process transactions for North Korean financial institutions.

Securities and Exchange Commission

Final Rules

SEC Rule Exempting Broker-Dealers from Prohibition on Retail Forex Transactions Will Expire

The Securities and Exchange Commission (“SEC”) provided notice on May 20th that Rule 15b12-1 under the Securities Exchange Act, which permits broker-dealers registered with the SEC to engage in retail forex transactions, will expire on July 31, 2016. After the rule expires, any broker or dealer, including a broker-dealer that is dually registered as a futures commission merchant, will be prohibited from offering or entering into retail forex transactions pursuant to Section 2(c)(2)(E) of the Commodity Exchange Act (“CEA”). SEC Release No. 34-77874.

Interim Final Rules and Requests for Comment

SEC Implements FAST Act Amendment to Form 10-K

The SEC published an interim final rule on June 1st implementing an amendment to Form 10-K, as provided by the FAST Act, that expressly allows registrants to include a summary of business and financial information in the Form 10-K and requires each item in the summary to be hyperlinked to the related, more detailed disclosure in the annual report. The interim rule will be effective upon publication in the Federal Register. The SEC also requested comments on the interim final rule; comments should be submitted within 30 days of publication in the Federal Register. SEC Press Release.


SEC Offers Guidance to Small Entities on JOBS Act Amendments to Registration Thresholds

On May 24th, the SEC’s Division of Corporation Finance published a small entity compliance guide on recent changes to requirements under Section 12(g) of the Securities Exchange Act for the registration, termination of registration, and suspension of reporting thresholds, as provided by the JOBS Act and FAST Act.  The guide provides an overview of the rule changes and links to additional resources including the adopting release. SEC Small Entity Compliance Guide.

Division of Investment Management Provides Answers to New Money Market Reform FAQs

SEC’s Division of Investment Management updated its 2014 Money Market Fund Reform Frequently Asked Question on May 23rd. Among other things, the revised guidance offers new information regarding the disclosure format for multi-fund advertisements, the compliance date for money market funds subject to the floating NAV requirement, insurance separate accounts, and the treatment of underlying assets for the purposes of the definition of a government money market fund. Money Market Reform FAQs.

Speeches and Statements

White Highlights SEC’s Work on Equity Market Structure in Speech to SEC Historical Society

In remarks to the SEC Historical Society on June 2nd, SEC Chair Mary Jo White reviewed the SEC’s work on equity market structure, emphasizing the need for the SEC to keep pace with technological advances to understand the evolving marketplace. White Remarks.

Other Developments

Staff Announcements

The SEC announced on June 3rd that Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement, will depart the agency later in June. According to an announcement by the SEC on June 2nd,Christopher R. Hetner, the current Cybersecurity Lead within the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), will serve as the Senior Advisor to the Chair for Cybersecurity Policy. In his new role, Hetner will advise SEC Chair Mary Jo White on all cybersecurity policy matters.

SEC Asks Court to Defer to Its Interpretation of Dodd-Frank Whistleblower Anti-Retaliation Protections

The SEC filed an amicus curiae brief on May 25th in a wrongful termination lawsuit. In the brief, the SEC asked the court to defer to the interpretation of the Dodd-Frank whistleblower anti-retaliation protections that the SEC adopted in Securities Exchange Act Rule 21F-2(b)(1), which extends the anti-retaliation protections  to whistleblowers who report suspected violations internally or to government authorities other than the SEC. The SEC argued that its interpretation of the rule is reasonable because it resolves statutory ambiguity, supports the overall objective of the whistleblower rule, and strengthens the SEC’s ability to deter employers from taking adverse employment actions against people who report potential violations internally. SEC Amicus Curiae Brief.

Investor Advocate Claims Privacy Act Restrictions Would Make the SEC Appear ‘Weak’

SEC Investor Advocate Rick A. Fleming urged ranking members of the Senate Judiciary Committee to consider amending the Electronic Communications Privacy Act Amendments Act of 2015 to give the SEC and other civil enforcement agencies the ability to obtain electronic communications from internet service providers through a process subject to judicial review and approval. In a letter dated May 25th, Fleming argued that requiring agencies to obtain criminal warrants to seek such evidence would constrain the SEC’s investigative abilities and contribute to a perception that the SEC is “weak,” which would undermine investor confidence in the capital markets. SEC Investor Advocate Letter.

OIG Is Examining SEC’s Coordination of Enforcement Investigations

The SEC’s Office of Inspector General (“OIG”) published its Semiannual Report to Congress on May 24th. According to an article in Law360, the OIG is conducting audits of the SEC’s process for coordinating enforcement investigations internally, reviewing self-regulatory organizations’ proposals for rule changes, and implementing information security programs that comply with guidance from other government agencies. OIG Semiannual Report.

Investor Advocate Opposes House Plan to Exempt Small Companies from Auditor Attestation Requirements

In a letter to U.S. House of Representatives leadership on May 23rd, SEC Investor Advocate Rick A. Fleming registered his objections to H.R. 4139, or the “Fostering Innovation Act of 2015,” which would exempt smaller companies from complying with the Sarbanes-Oxley Act’s auditor attestation requirements for ten years after an initial public offering.  Fleming maintained that the bill would weaken important investor protections and further complicate reporting requirements by creating a new category of issuers. SEC Investor Advocate Letter.

Two Individuals Will Share $450,000 Whistleblower Award

Two whistleblowers will share an award of $450,000 for providing a tip that prompted the SEC to open a corporate accounting investigation, according to an announcement by the SEC on May 20th. After providing the initial tip, the whistleblowers also offered the SEC valuable assistance throughout the investigation. SEC Press Release.

Commodity Futures Trading Commission

CFTC Proposes to Exempt Certain Federal Reserve Banks From CEA Sections 4d and 22

On June 2nd, the U.S. Commodity Futures Trading Commission (“CFTC”) proposed to exempt Federal Reserve Banks that provide customer accounts and other services to systemically important derivatives clearing organizations from Sections 4d and 22 of the CEA. Comments must be received by July 5, 2016.

DCR Issues No-Action Letter for Shanghai Clearing House

On May 31st, the CFTC’s Division of Clearing and Risk (“DCR”) issued a time-limited no-action letter stating that it will not recommend that the CFTC take enforcement action against Shanghai Clearing House (“SHCH”) for failing to register as a derivatives clearing organization pursuant to the CEA. The no-action relief applies to swaps accepted for clearing by SHCH and subject by the People’s Bank of China to mandatory clearing in the People’s Republic of China, including certain interest rate swaps denominated in renminbi. CFTC Press Release.

DMO to Hold Public Roundtable on Regulation AT

On May 27th, the Division of Market Oversight (“DMO”) announced that it will be holding a public roundtable meeting on Friday, June 10th at 9:00 a.m. at the CFTC headquarters to discuss certain elements of the CFTC’s notice of proposed rulemaking (“NPRM”) regarding Regulation Automated Trading (“Regulation AT”). The Regulation AT NPRM was published in the Federal Register on December 17, 2015. On June 2nd, the CFTC announced that it will reopen the comment period for Regulation AT as of June 10, 2016, and will close the comment period on June 24, 2016, to accept comments on items in the agenda and that arise during the roundtable.

CFTC Approves Supplement to Position Limits Proposal to Allow Exchanges to Recognize Non-enumerated Bona Fide Hedges

On May 26th, the CFTC voted unanimously to issue for public comment a supplement to its December 2013 position limits proposal that will modify the procedures proposed for persons seeking exemptions from speculative position limits for non-enumerated bona fide hedging. CFTC Press Release.

CFTC Issues Final Cross-Border Margin Rule

On May 24th, the CFTC adopted a rule implementing a cross-border approach to its margin requirements for uncleared swaps. Published in January 2016, the CFTC’s margin rule applies to CFTC-registered swap dealers and major swap participants for which there is no Prudential Regulator (“covered swap entities” or “CSEs”). The final rule generally requires CSEs to comply with the CFTC’s margin requirements for all uncleared swaps in cross-border transactions, with a limited exclusion for certain non-U.S. CSEs. The exclusion is not available to non-U.S. CSEs that are consolidated with a U.S. parent. CFTC Press ReleaseFact SheetChairman Massad StatementCommissioner Bowen Concurring StatementCommissioner Giancarlo Statement of Dissent.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Chicago Board Option Exchange

CFE Proposes to Extend Reporting Time for TAS Transactions

On June 1st, the SEC requested comments on a proposed rule change filed by CBOE Futures Exchange, LLC (“CFE”) related to the reporting time for Exchange of Contract for Related Position (“ECRP”) transactions and Block Trades that involve Trade at Settlement (“TAS”) transactions. Under the proposal, the trading hours for transactions that involve TAS transactions would be extended from 3:12 p.m. to 3:13 p.m. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 6, 2016. SEC Release no. 34-77956.

Financial Industry Regulatory Authority

FINRA Prepares Firms for New OATS Requirements to Identify Non-FINRA Member Broker-Dealers

The Financial Industry Regulatory Authority (“FINRA”) published a Regulatory Notice on May 27th concerning recent amendments to the Order Audit Trail System (“OATS”) approved by the SEC that will require reporting firms to identify non-FINRA member broker-dealers on their reports. The amendments, which will become effective on August 1, 2016, will require firms to include the identity of U.S.-registered broker-dealers that are not FINRA members and broker-dealers that are not registered in the U.S. but have an SRO-assigned identifier. Firms may report either the SRO-assigned identifier or the broker-dealer’s Central Registration Depository number. FINRA Regulatory Notice 16-20.

FINRA Offers Guidance on the Use of Stop Orders During Market Volatility

FINRA published a Regulatory Notice on May 26th that provides guidance to firms on the use of stop orders during volatile market conditions. In the Notice, FINRA encouraged firms to review their practices regarding stop orders and emphasize educating investors regarding the benefits and risks of stop orders, particularly during volatile market conditions. FINRA urged firms to train their representatives regarding the risks associated with stop orders, provide clear and comprehensive disclosures to customers that enter stop orders directly online, and consider implementing systemic safeguards. FINRA Regulatory Notice 16-19.

FINRA Will Maintain Focus on Firm Culture, Ketchum Says

On May 23rd, ThinkAdvisor summarized the remarks of FINRA CEO Richard Ketchum at the 2016 FINRA Annual Conference.  In his remarks, Ketchum indicated that FINRA will continue to emphasize firm culture as it conducts examinations and considers enforcement actions against firms. Ketchum also said that FINRA will use information derived from its ongoing review of firm culture and data analytics to develop “formalized review procedures” for exams and address compliance failures indicative of poor firm culture. Ketchum Remarks.

FINRA Provides Cybersecurity Checklist to Small Firms

On May 23rd, FINRA released a Cybersecurity Checklist to assist small firms in establishing cybersecurity programs. The checklist offers guidance for identifying and assessing cybersecurity threats, protecting assets from cyber threats, planning a response when a compromise occurs, and implementing a plan to recover stolen assets. FINRA Press Release.

ICE Clear

SEC Approves Proposed Changes to ICC’s Stress Testing Framework

On June 2nd, the SEC approved a proposed rule change filed by ICE Clear Credit LLC (“ICC”) that would update and formalize ICC’s stress testing framework, which sets forth the stress testing practices instituted by ICC. SEC Release No. 34-77982.

ICE Clear Europe’s Proposed Additions to Permitted Cover Approved by SEC

On May 27th, the SEC issued an order approving ICE Clear Europe Limited’s (“ICE Clear Europe”) proposed rule change, as modified by an amendment to the proposal, that would permit Clearing Members of ICE Clear Europe to provide additional categories of securities, including treasury bills and floating and inflation-linked government bonds, to ICE Clear Europe to satisfy certain margin and guaranty fund requirements. SEC Release No. 34-77943.

International Swaps and Derivatives Association

ISDA Analyzes Q1 2016 Swaps and Derivatives Trading Activity in Quarterly Review

On June 1st, the International Swaps and Derivatives Association (“ISDA”) published its SwapsInfo Quarterly Review for the first quarter of 2016. The report, which analyzes interest rate derivatives (“IRD”) and credit default swap (“CDS”) index trading activity in the U.S., found that the number of IRD and CDS index trades that cleared during the quarter increased and electronically traded volumes increased dramatically in comparison to the first quarter of 2015. ISDA SwapsInfo Quarterly Review.

ISDA Updates OTC Derivatives Compliance Calendar

On June 1st, the ISDA published an updated version of its OTC Derivatives Compliance Calendar. ISDA OTC Derivatives Compliance Calendar.

ISDA White Paper Offers Clearing Members’ Perspectives on CCP Resolution

On May 24th, the ISDA, in conjunction with The Clearing House, published a white paper that identifies the main issues that regulators should consider when developing a comprehensive resolution framework for systemically important central counterparties (“CCPs”). The paper emphasizes the guidance set out by the Financial Stability Board on effective resolution frameworks for financial institutions in identifying other important considerations from the perspective of clearing participants for developing resolution regimes for systemically important CCPs. ISDA Press Release.

National Futures Association

Swap Dealers Must Complete Margin Questionnaire by June 15

On June 1st, the National Futures Association (“NFA”) issued a Notice to Members informing swap dealers that they must complete and submit a short questionnaire related to their margin requirements for uncleared swaps by June 15, 2016. The questionnaire, which will be available through the NFA’s EasyFile Registration Documentation Submission System, will identify swap dealers that must submit policies and procedures for initial and variation margin requirements as part of the Section 4s Implementing Regulations. NFA Notice I-16-15.


SEC Will Extend Consideration of NYSE Exchange’s Proposed End User Fees

On June 2nd, the SEC designated July 21, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the New York Stock Exchange LLC’s (“NYSE”), NYSE Arca, Inc.’s (“NYSE Arca”), and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals to amend their respective rules to establish fees relating to certain end users, amend the definition of Affiliate, and amend the co-location section of the Fee Schedule or Price List to reflect the changes.

NYSE Updates Guidance on Conduct Policies

NYSE advised members of the policies governing conduct on NYSE premises in an Information Memo published on June 1st. The Information Memo, which supersedes the NYSE’s previous guidance, reviews the procedures for handling violations of the NYSE’s conduct policies including floor conduct and safety guidelines; NYSE’s gambling policy; the prohibition against firearms, illegal weapons, and fireworks; and NYSE’s non-harassment policy. NYSE Information Memo 16-08.

SEC Takes More Time to Consider NYSE’s Proposed Changes to Pre-Opening Indications and Opening Procedures

On May 31st, the SEC designated July 28, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE’s proposed rule change to amend its rules relating to pre-opening indications and opening procedures. SEC Release No. 34-77950.

SEC Designates Longer Period to Contemplate NYSE MKT’s Proposal to Amend Its Pre-Opening Indications and Opening Procedures

On May 31st, the SEC announced that it has designated August 1, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding a proposed rule change filed by NYSE MKT to amend its rules relating to pre-opening indications and opening procedures. SEC Release No. 34-77951.

NYSE Reminds DMMs That Delayed Openings or Trading Halts Must Be Coded Correctly

NYSE issued an Information Memo on May 24th reminding Designated Market Makers (“DMMs”) and DMM units that they are responsible for entering the correct reason code into the Display Book when publishing either an opening price indication or halting a stock. The Memo notes that failing to enter the correct code may result in disciplinary action against the DMM or the member organization operating the DMM unit. NYSE Information Memo 16-07.

Judicial Developments

SEC Can Seek an Injunction from Alleged Ponzi Schemers, but the Agency Is Time-Barred from Seeking Declaratory Relief or Disgorgement

The SEC alleged that the defendants violated federal securities law by selling condominiums that were actually functioning as unregistered securities. The defendants allegedly raised over $300 million from approximately 1,400 investors but failed to pay out the returns that they had guaranteed. On May 26th, the Eleventh Circuit agreed with the district court that the SEC is time-barred from proceeding with its claims for declaratory relief (a penalty) and disgorgement (a forfeiture). The panel, however, remanded for further proceedings on the injunction remedy since it is not considered a penalty. SEC.

Mere Offer to Buy Expensive Dinner for Insider Information Source Is Enough to Satisfy Newman Threshold.

Appellant was accused of offering to buy a golfing buddy an expensive steak dinner in exchange for insider information that the buddy received from a corporate insider. Appellant argued that he did not end up actually buying the dinner, so his buddy could not have received the benefit required. The First Circuit affirmed the conviction on May 26th, determining that although the Second Circuit’s United States v. Newman decision requires tippers to actually receive personal benefits, the allegation that appellant offered to buy his source an expensive steak dinner was enough for the charges to be upheld. Parigian.

Independent Commodity Trading Advisor ‘Had Actual and Apparent Authority’ to Conduct Trades on Investor’s Behalf.

The CFTC determined that an independent commodity trading advisor “had actual and apparent authority” to conduct certain trades of commodities futures on behalf of an investor. On May 25th, the Ninth Circuit denied the investor’s petition for review of the order, holding that the independent commodity trading advisor made no material misrepresentation or omission, that there was no unauthorized trading, and that the record did not support a finding of fraud. The panel noted that the investor was clearly aware of the ongoing trading, having objected to one trade in which a risk manager had placed a stop. CFTC.

Industry News

Banco Santander SA’s U.K. Unit Makes Blockchain Payments Available to its Employees in a Pilot Program

Santander announced that its London-based company has introduced a mobile application for staff that uses blockchain technology for global payments to enable transfers of between 10 pounds and 10,000 pounds. Blockchain systems, basically a verified public ledger of transactions, can be used to buy and sell any asset from currency to stocks and bonds without the need for intermediaries such as banks and governments. On May 26th, Bloomberg reported that Santander plans to make the application available to consumers after it completes its pilot program. Bloomberg.

Bipartisan Bill Would Give Brokers More Say in Stock Market Rules

On May 25th, Bloomberg reported that a bipartisan bill currently under development would weaken stock exchanges’ hold on data feeds, which are now governed by exchanges including the New York Stock Exchange and Nasdaq Stock. If the legislation is passed, it would give brokers a greater voice in overseeing those information sources and other critical features of the stock market. Bloomberg.