Proposed Rules

SEC proposal would require new disclosures by dark pools. The SEC voted unanimously to propose rules that would amend Regulation ATS to require additional disclosures by alternative trading systems (ATSs). The proposed rule would require ATSs that trade stocks listed on a national securities exchange (NMS stocks) to file new Form ATS-N, which would require disclosures regarding the activities of an ATS’s broker-dealer operator and affiliates as well as their operations, including information regarding trading services, the use of market data, and market quality statistics they may provide to certain subscribers. ATSs would be required to provide a link to Form ATS-N on their websites, which will be publicly available on the SEC website and subject to SEC review for compliance. Comments on the proposed rules are due within 60 days of publication in the Federal Register. SEC press release. Commissioners Luis Aguilar and Kara Stein supported the proposal, but expressed concern that the proposed rules do not apply to platforms that trade in government and other fixed income securities. Chair Mary Jo White noted that the proposal reflects an incremental approach that addresses the need to implement rules that account for “the significant differences between the equity markets and fixed income markets.” See Commissioner Michael S. Piwowar’s statement (supporting the proposal). (11/18/2015)


New Volcker rule FAQs. The federal financial regulators published new answers to frequently asked questions regarding the Volcker rule that address the treatment of residual market-making positions if a banking entity terminates market-making activity and the applicability of restrictions on covered transactions with covered funds. (11/20/2015) See, e.g., CFTC Guidance. See also SEC Volcker Rule FAQs (containing all SEC staff guidance on the Volcker rule). 

Division of Investment Management elucidates terms in no-action letter regarding non-ERISA 403(b) plans communications. The SEC’s Division of Investment Management issued a no-action letter clarifying certain statements in its previous no-action letter issued February 18, 2015, in which it agreed to treat Department of Labor (DOL) Required Investment Information furnished by a plan administrator to non-Employee Retirement Income Security Act (Non-ERISA) 403(b) Plans as if it were a communication that satisfies the requirements of Rule 482 under the Securities Act. (11/16/2015)

Exemptive Orders and No-Action Letters

No relief for investment management company requesting to exclude climate change shareholder proposal. The SEC’s Division of Corporation Finance responded to a no-action request filed by global investment management company Franklin Resources, Inc. in which it sought to exclude a shareholder proposal that would require the company to issue a report noting incongruities between its proxy voting practices and its policy positions on climate change from its 2016 Proxy Materials. The Division declined to concur with Franklin’s position that the proposal could be excluded under the ordinary business exclusion under Securities Exchange Act Rule 14a-8(i)(7), noting that the proposal focuses on a significant policy issue. (11/24/2015) SEC response. 

SEC issues exemption from immediate confirmation requirements for institutional prime money market fund transactions. The SEC granted a conditional exemption to broker-dealers from the immediate confirmation requirements of Rule 10b-10 of the Securities Exchange Act for transactions effected in shares of institutional prime money market funds. Broker-dealers effecting qualifying transactions may provide transaction information to money market shareholders on a monthly basis provided they notify customers of their ability to request immediate confirmation, they do not receive such a request, and they comply with the provisions of Rule 10b-10(b)(2) and Rule 10b-10(b)(3). (11/19/2015) SEC Release No. 34-76480.

Selected Enforcement Actions

SEC brings charges in spoofing and order mismarking options trading schemes. The SEC announced that it filed charges in an administrative proceeding against three traders who engaged in two fraudulent options trading schemes. The SEC accused the traders of conducting the schemes to skirt market structure rules to take advantage of execution priority, lower fees, and liquidity rebates they were not entitled to receive. The first scheme involved an arrangement in which the traders alternated their trading on options exchanges between two accounts on a quarterly basis to take advantage of options exchange rules for “customer” orders, which gave their orders execution priority, higher rebates, and lower fees than orders marked “professional.” The second scheme employed “spoofing” to take advantage of an options exchange’s maker-taker program. The SEC has charged the respondents with violating Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5. (12/3/2015) In the Matter of Behruz Afshar, Shahryar Afshar, Richard F. Kenny, IV, Fineline Trading Group LLC, and Makino Capital LLC, SEC Release No. 33-9983.

Investment adviser fails to emphasize hypothetical nature of advertised performance data. The SEC instituted settled administrative proceedings against an investment adviser, its principal, and its former vice president and business development director for misleading its current and prospective clients by failing to disclose sufficiently that the advertised performance data for one of its investment strategies was hypothetical rather than based on actual returns. The respondents agreed to settle the charges without admitting or denying the SEC’s allegations. The investment adviser and its principal agreed to cease and desist and censure orders as well as the payment of a US$250,000 civil penalty on a joint and several basis. The investment adviser also agreed to enlist the services of an independent compliance consultant. Separately, the vice president and business development director agreed to cease and desist from further violations of the relevant provisions of the Securities Exchange Act and Investment Advisers Act, to be censured, and to pay a US$25,000 civil penalty. (11/30/2015) In the Matter of Alpha Fiduciary, Inc., and Arthur T. Doglione, SEC Release No. IA-4283.

Political intelligence firm admits to compliance failures surrounding the acquisition and release of material nonpublic information. The SEC announced charges against a political intelligence firm for compliance failures stemming from the dissemination of material nonpublic information obtained by its analysts from government employees. The SEC alleged that the political intelligence firm, also a registered broker-dealer, encouraged its analysts to maintain relationships with government employees to gather content for research notes containing regulatory updates and analysis about potential timing and developments for future government actions or rulemaking decisions, increasing the likelihood that the firm’s analysts could acquire material nonpublic information from government employees. The firm’s analysts failed to follow the firm’s written policies and procedures, which required employees to bring information obtained from government employees to the attention of its compliance department so it could be vetted for material nonpublic information. Instead, the firm drafted research notes based on the information and distributed them directly to hedge funds and other clients, allowing those clients to use any material nonpublic information to inform their securities trading decisions. The firm reached a settlement with the SEC in the administrative proceeding in which it admitted to the SEC’s allegations. Under the terms of the settlement, the firm agreed to the entry of a cease and desist order, to pay a civil penalty of US$375,000, and to retain the services of an independent compliance consultant. In the Matter of Marwood Group Research, LLC, SEC Release No. 34-76512.

Investment adviser settles charges of multiple breaches of fiduciary duty. The SEC brought charges in a settled administrative proceeding against an investment adviser for several breaches of fiduciary duty to private equity funds it advised. The SEC alleged that the adviser created potential conflicts of interest by loaning US$62 million to the funds’ portfolio companies. In some instances, the loans caused the adviser and its principals to obtain interests in the portfolio companies that were senior to the funds’ equity interests. The adviser also caused multiple funds to invest in the same portfolio company at different valuations, which had the potential to favor one fund client over another. The adviser failed to disclose these conflicts of interests to the funds. The adviser settled the charges without admitting or denying the allegations by agreeing to the entry of cease and desist and censure orders and to the payment of a US$225,000 civil penalty. (11/23/2015) In the Matter of JH Partners, LLC, SEC Release No. IA-4276.

Repeat offenders agree to pay US$1 million penalty to settle charges of custody rule violations. The SEC announced that it has reached a settlement with an investment advisory firm, its two owners, and its former chief compliance officer for repeated violations of the custody rule following an enforcement action alleging custody rule violations a few years before. Without admitting or denying the charges, the firm and its owners agreed to the entry of a cease and desist order, to engage the services of an independent compliance monitor for three years, and to be suspended from raising money from new or existing investors for one year. They also agreed to pay a civil penalty of US$1 million. Separately, the former chief compliance officer agreed to cease and desist from future violations of the custody rule, to be suspended from serving as a chief compliance officer and practicing as an attorney before the Commission, and to pay a US$60,000 civil penalty. (11/19/2015) In the Matter of Sands Brothers Asset Management LLC, Martin Sands, Steven Sands, and Christopher Kelly, SEC Release No. IA-4273.

Mutual fund adviser settles charges it misled investors by advertising false performance claims. The SEC announced that it instituted settled administrative proceedings against an investment management firm for misleading mutual fund investors by including false historical performance data about an exchange-traded fund portfolio strategy in its advertisements in violation of the Investment Advisers and Investment Company Acts. Without admitting or denying the SEC’s findings, the firm settled the charges by consenting to the entry of cease and desist and censure orders as well as agreeing to enlist the services of an independent compliance consultant. The firm also agreed to pay US$13.4 million in disgorgement, US$1.1 million in prejudgment interest, and a US$2 million civil penalty. (11/16/2015) In the Matter of Virtus Investment Advisers, Inc., SEC Release No. IA-4266.

Speeches and Statements

Ceresney emphasizes need for civil agencies to obtain electronic communications from ISPs. Testifying before the US House of Representatives Judiciary Committee, SEC Division of Enforcement Director Andrew Ceresney urged legislators to consider revisions to the provisions of the proposed Email Privacy Act requiring a criminal warrant to access email and other electronic communications from internet service providers to allow civil agencies to subpoena electronic communications from ISPs and allow investigation targets to challenge those subpoenas in judicial proceedings. (12/1/2015) Ceresney testimony.

Aguilar offers advice to new Commissioners. In preparation for his departure from the SEC, Commissioner Luis A. Aguilar offered “helpful tips” to new SEC Commissioners on how to navigate the agency and their new role as SEC Commissioners. (11/30/2015) Aguilar statement.

White testifies to the House Financial Services Committee regarding the SEC’s 2017 priorities. Testifying before the US House of Representatives’ Committee on Financial Services, SEC Chair Mary Jo White outlined the agency’s priorities for Fiscal Year 2017, which include initiatives related to asset manager oversight, equity market structure, and disclosure effectiveness review. (11/18/2015) White testimony. 

Companies must self-report FCPA violations to qualify for DPAs or NPAs. In remarks to the American Conference Institute’s (ACI) 32nd Foreign Corrupt Practices Act (FCPA) Conference, SEC Division of Enforcement Director Andrew Ceresney indicated that the Division of Enforcement will now require companies to self-report misconduct in order for the Division to recommend a deferred prosecution agreement or a non-prosecution agreement to the SEC in an FCPA case. (11/17/2015) Ceresney remarks.

Corporation Finance Director discusses executive compensation initiatives after Dodd-Frank. Addressing the National Institute on Executive Compensation, SEC Division of Corporation Finance Director Keith F. Higgins discussed future rulemaking initiatives by the SEC related to executive compensation, including the examination of the methods companies use to disclose business and financial information in annual and quarterly reports and executive compensation and corporate governance information contained in proxy statements. (11/17/2015) Higgins remarks.

Piwowar takes issue with ‘special interest, non-material’ disclosure rules. In a speech before the 34th Annual Current Financial Reporting Issues Conference, SEC Commissioner Michael S. Piwowar expressed concern regarding the SEC’s recent efforts to improve corporate disclosures, calling recently adopted rules requiring pay ratio and conflict minerals disclosures as a “focus on non-material, special interest disclosure” that distracts the SEC from focusing on material disclosures. (11/16/2015) Piwowar remarks.

Other Developments

Compliance outreach program for municipal advisors. The SEC, FINRA, and the Municipal Securities Rulemaking Board will jointly host a compliance outreach program for municipal advisors on February 3, 2016, which participants may attend in person in Philadelphia or access through a live webcast on the SEC’s website.SEC press release.

Government-Business Forum on Small Business Capital Formation. The SEC’s annual Government-Business Forum on Small Business Capital Formation featured panel presentations on exempt offerings and registered offerings post-JOBS Act implementation, as well as small discussion groups focused on exempt securities offerings, smaller reporting companies, and the proposed amendments to Rules 147 and 504. SEC Chair Mary Jo White highlighted recent regulatory initiatives affecting small businesses and discussed initial observations regarding their impact. In addresses to the forum, SEC Commissioners AguilarPiwowar, and Stein emphasized the importance of the forum in providing the SEC with insights on adapting regulatory initiatives to facilitate capital formation. (11/19/2015)

Aguilar sets departure date from SEC. SEC Commissioner Luis A. Aguilar announced that he will leave the SEC no later than the end of December 2015. (11/16/2015) Aguilar statement.

Agency financial report for fiscal year 2015. The SEC published its Fiscal Year 2015 Agency Financial Report. (11/16/2015)

Draft EDGAR filer manual. The SEC released the Draft EDGAR Filer Manual (Volume I) General Information (Version 24). (11/13/2015)

SEC publishes annual Whistleblower Program report. The SEC’s annual report to Congress on the Dodd-Frank Whistleblower Program noted that whistleblower activity has significantly increased, with the SEC receiving more than 4,000 tips and 120 whistleblower claims as well as paying out more than US$37 million in whistleblower rewards during Fiscal Year 2015. (11/16/2015) OWB report.