Regulatory Actions

DDR submits amended SDR application. 

The SEC is seeking comments on an amended application filed by DTCC Data Repository LLC for registration as a security-based swap data repository (SDR). Comments are due on or before August 30, 2017. (8/3/2017) SEC Release No. 34-81302. 

Reports  GAO: SEC’s cybersecurity systems are still deficient. 

The Government Accountability assessed the SEC’s progress in implementing recommended improvements to the security controls over its key financial systems and information. The GAO found that the SEC had not fully implemented 11 recommendations. In addition, the GAO identified 15 new deficiencies that resulted from the SEC’s failure to fully implement key elements of its information security program. (7/27/2017) GAO report. 

Some digital currencies are securities and subject to regulation. 

The SEC published the report of investigation prepared by the Division of Enforcement in connection with its investigation of digital assets offered and sold by virtual organization The DAO. The report found that the tokens offered by The DAO were securities and subject to registration requirements under federal securities laws. The report concluded that the determination of whether similar offerings involve a sale of a security will depend on the facts and circumstances of the transaction.  (7/25/2017) SEC press release. See also a joint statement by the Divisions of Corporation Finance and Enforcement and the SEC’s investor bulletin on initial coin offerings. 

Guidance Filing and Amending a Form D Notice. 

The SEC updated its Filing and Amending a Form D Notice, a compliance guide for small entities and others. (8/4/2017)

Selected Enforcement Actions  Advisory firm settles charges of violations related to mutual fund share classes. 

The SEC announced charges against a registered investment adviser and broker-dealer for failing to disclose conflicts of interest arising from the receipt of 12b-1 fees, marketing support payments, and prepaid advisory fees. The SEC alleged that the firm received at least US$1.93 million in 12b-1 fees for investing clients in higher-fee mutual fund share classes instead of lower-fee share classes of the same funds that did not  charge the fees, a practice that was also inconsistent with the firm’s duty to seek best execution for its clients. The firm allegedly received US$235,000 in marketing support fees from two mutual fund complexes for investing its advisory clients in mutual fund share classes that charged 12b-1 fees rather than lower-fee share classes. The firm also failed to refund prepaid advisory fees to clients who terminated their relationship with the firm before it earned all of the prepaid fees. Without admitting or denying the allegations, the firm settled the charges by consenting to the entry of cease-and-desist and censure orders and agreeing to pay over US$3 million in disgorgement, interest, and civil penalties. (8/1/2017) In the Matter of Cadaret, Grant & Co, Inc., SEC Release No. 34-81274. 

Broker-dealer settles charges of engaging in gatekeeper failures.

 The SEC announced that it reached a settlement with a broker-dealer in connection with charges related to gatekeeper failures in the firm’s penny stock liquidation business. The SEC alleged that the firm failed to file Suspicious Activity Reports for at least US$24.8 million in potentially illegal stock sale transactions by customers in its penny stock liquidation business. Despite numerous red flags surrounding the transactions, the firm allegedly failed to conduct a reasonable inquiry. The firm’s former chief compliance officer and anti-money laundering officer settled related charges in June. Without admitting or denying the allegations, the firm settled the charges by consenting to the entry of cease-and-desist and censure orders and agreeing to pay a US$200,000 civil penalty. The firm also agreed not to accept deposits of securities valued at less than US$5.00 and to retain an independent compliance consultant to review and monitor its AML program. (7/28/2017) In the Matter of Windsor Street Capital, L.P. (f/k/a  Meyers Associates, L.P.) and John David Telfer, SEC Release No. 33-10392. 

SEC brings charges against investment adviser for disclosure failures. 

An investment adviser and two of its principals have agreed to settle charges that they failed to disclose conflicts of interest to investors in an investment fund they managed and failed to comply with the SEC’s investment adviser custody rule. The SEC alleged that the firm and its principals failed to disclose that the fund they managed made substantial investments in a second investment fund that loaned the money back to the adviser. In addition, the firm allegedly violated the SEC’s investment adviser custody rule because it hired an auditor not qualified under the rule to audit the funds’ financial statements and failed to timely distribute audited financial statements to fund investors. Without admitting or denying the allegations, the firm and its principals consented to the entry of cease-and-desist and censure orders and agreed to pay civil penalties ranging in amounts from US$25,000 to US$80,000. The firm also agreed to retain an independent consultant to review its compliance policies and procedures. (7/27/2017) In the Matter of Columbia River Advisors, LLC, Benjamin J. Addink and Donald A. Foy, SEC Release No. IA-4734. 

SEC charges two firms and their CCO with Investment Advisers Act violations. 

The SEC instituted settled administrative proceedings against two investment advisers and their owner for several violations of the Investment Advisers Act. The SEC alleged that the owner, who also served as the firms’ chief compliance officer, formed one firm to serve as the sole adviser to a private fund in an effort to save expenses and avoid requirements to comply with certain Investment Advisers Act rules. However, the fund adviser did not qualify as an exempt reporting adviser because it was under common control and shared its principal office and place of business with another firm, which was a registered investment adviser.  In addition, the private fund adviser allegedly provided statements to investors that reflected inflated values for investments held in two private funds that it advised, which it also included on the Forms ADV filed with the SEC. The SEC also alleged that both firms failed to comply with the Advisers Act’s custody and compliance rules and improperly used fund assets to pay legal fees. Without admitting or denying the allegations, the two firms and their owner settled the charges by consenting to the entry of cease-and-desist orders and agreeing to pay a civil penalty of US$150,000 on a joint-and-several basis. The two advisers also agreed to be censured and the owner consented to a three-year bar from serving as a chief compliance officer. (7/25/2017) In the Matter of Brian Kimball Case, Bradway Financial, LLC, and Bradway Capital Management, LLC, SEC Release No. IA-4733. 

Research firm, CEO settle charges of scalping and anti-touting violations. 

The SEC announced charges against a penny stock research company and its CEO for engaging in scalping and anti-touting violations of the securities laws. The SEC alleged that the CEO and his firm, in exchange for either cash or securities, drafted and published penny stock research reports that included “buy” recommendations and price targets for the covered issuers that were above current market prices at the time of publication. On several occasions, the CEO and his firm allegedly sold shares of certain issuers on the same day that the firm published a “buy” recommendation and price target in excess of the current market price without disclosing that they were selling contrary to the reports’ recommendations and price targets. In addition, the CEO and his firm failed to disclose the amount of compensation they received from each issuer for research coverage. The SEC also charged the CEO, who served on the board of directors of another company, with failing to timely report his stock ownership in the company while serving on its board. Without admitting or denying the charges, the CEO and the firm agreed to a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling approximately US$75,000. (7/25/2017) In the Matter of Joey Giamichael and Umbrella Research, LLC, SEC Release No. 33-10391. 

Speeches and Statements  Clayton highlights need for regulators and industry to communicate.

SEC Chairman Jay Clayton stressed the importance of coordination and open communication—both among regulators and between regulators and the industries they regulate—at the National Compliance Outreach Program for Broker-Dealers. (7/27/2017) Clayton remarks. 

Piwowar calls DOL Fiduciary Rule “misguided” in comment letter. 

SEC Commissioner Michael S. Piwowar sent a letter to the Department of Labor asking the agency to reconsider its Fiduciary Rule on the grounds that the rule fails to consider the effectiveness of conflict of interest disclosure, fails to adequately distinguish “selling” activities from “advice” activities, and may disrupt the broker-client relationship. (7/25/2017) Piwowar letter. 

Other Developments 

OCIE Risk Alert highlights observations from cybersecurity examinations.

 The SEC’s Office of Compliance Inspections and Examinations published a Risk Alert that summarizes its observations from examinations of registered broker-dealers, investment advisers, and investment companies to assess industry practices and legal and compliance issues associated with cybersecurity preparedness. The Risk Alert identifies several elements included in the policies and procedures of firms that had implemented robust controls. (8/7/2017) OCIE Risk Alert.