Category Archives: Securities and Exchange Commission (SEC)

Court Upholds SEC Authority and Finds Broker-Dealer Liable for Thousands of Suspicious Activity Reporting Violations

by H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, David S. HuntingtonBrad S. Karp, Raphael M. Russo, Richard S. Elliott, Rachel M. Fiorill, Karen R. King, Anand Sithian, and Katherine S. Stewart

Decision Provides Rare Judicial Guidance on SAR Filing Requirements

On December 11, 2018, the Securities and Exchange Commission (SEC) obtained a victory in its enforcement action against Alpine Securities Corporation, a broker that cleared transactions for microcap securities that were allegedly used in manipulative schemes to harm investors.[1] Judge Cote of the U.S. District Court for the Southern District of New York issued a 100-page opinion partially granting the SEC’s motion for summary judgment and finding Alpine liable for thousands of violations of its obligation to file Suspicious Activity Reports (SARs).[2]

Because most SAR-related enforcement actions are resolved without litigation, this decision is a rare instance of a court’s detailed examination of SAR filing requirements.  The decision began by rejecting—for a second time[3]—Alpine’s argument that the SEC lacks authority to pursue SAR violations.  The court then engaged in a number of line-drawing exercises, finding that various pieces of information, as a matter of law, triggered Alpine’s SAR filing obligations and should have been included in the SAR narratives.  This mode of analysis, which applies the SAR rules under the traditional summary judgment standard, may appear to contrast with regulatory guidance recognizing that SARs involve subjective, discretionary judgments.[4]

Although the decision has particular relevance in the microcap context, all broker-dealers—and potentially other entities subject to SAR filing requirements—may wish to review the court’s reasoning for insight on a number of SAR issues, including the adequacy of SAR narratives and the inclusion of “red flag” information. Among other cautions, the decision illustrates the dangers of relying on SAR “template narratives”[5] that lack adequate detail.

More broadly, the SEC’s action against Alpine is another indicator of heightened federal interest in ensuring broker-dealer compliance with Bank Secrecy Act (BSA) requirements. For example, last month the U.S. Attorney for the Southern District of New York brought the first-ever criminal BSA charge against a broker-dealer, noting that this charge “makes clear that all actors governed by the Bank Secrecy Act—not only banks—must uphold their obligations.”[6] Continue reading

SEC Adopts Disclosure Rules on Hedging Policies

by Heather L. Coleman, Matthew M. Friestedt, and Marc Treviño

Requires Description of any Hedging Policies or Practices Adopted, Not Specified Transactions; Will Apply to Most Companies Beginning in 2020

SUMMARY

On December 18, 2018, the SEC adopted rules requiring disclosure of policies and practices regarding hedging for directors, officers and employees of U.S. public companies.  These rules require public companies to describe, in any proxy or information statement relating to director elections, any practices or policies they have adopted regarding the ability of its directors, officers or employees to engage in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities of the public company or its affiliates. The rules cover both equity securities granted as part of compensation and those otherwise held directly or indirectly.

The final rules do not require any company to prohibit hedging transactions or to otherwise adopt hedging policies and do not require disclosure of any particular hedging transactions.

These rules will generally apply to proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019, although there is a one-year transition period for emerging growth companies and smaller reporting companies. Continue reading

SEC’s First “Red Flags” Enforcement Case Focuses on Board’s Role

by Craig A. Newman

A little-noticed consent decree entered into by the U.S. Securities and Exchange Commission earlier this year should be setting off alarm bells for financial firms and their boards of directors.

In a cease and desist order against Voya Financial Advisors, the investment advisory unit of Voya Financial, the SEC – for the first time – enforced its “Identity Theft Red Flags Rule” in punishing the firm for allegedly lackluster data security practices. The SEC charged that hackers were able to access sensitive client information including Social Security Numbers, account balances and even details of client investment accounts. The commission called out the company’s board of directors for failing to “administer and oversee” compliance with the rule. Continue reading

Sustainable Finance and ESG reporting – EU pushing ahead, SEC cautious

by Dr. Katja Langenbucher

The market for “sustainable finance” has grown exponentially over the last few years.  The term usually denotes investment approaches that consider environmental, social and governance factors (“ESG”) in portfolio selection and management.  Following up on the Paris Agreement of 2016, the European Union has ambitious plans to mobilize private capital for contribution to sustainability concerns such as climate change and pollution.

In January 2018, the EU High-Level Expert Group on Sustainable Finance published its final report. [1]  It suggests focusing on common taxonomy and standards, investor duties, transparency of asset managers, governance of companies, and enhanced powers of the European Supervisory Authorities.  In March 2018, the European Commission went ahead with an action plan, announcing a number of short and long-term legislative steps that should be taken. Continue reading

Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report

by Nowell Bamberger, Robin Bergen, and Emily Michael

On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (PDF: 1.95 MB) (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting.  The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year.  While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement.  Continue reading

SEC Debuts Roadmap for Resolving Illegal ICOs

by Joseph A. Hall, Michael Kaplan, Edmund Polubinski III, Byron B. Rooney, and Ryan Johansen 

In a pair of settled enforcement actions announced on November 16 in which it concluded that initial coin offerings conducted by Paragon Coin, Inc. (PDF: 232 KB) and AirFox (PDF: 223 KB) were illegal unregistered securities offerings, the SEC imposed an agreed-upon remedy that it will likely seek to use as the template for resolving its backlog of investigations into recent ICOs. Significantly, both ICOs took place after the SEC issued its July 2017 Section 21(a) report (PDF: 168 KB) addressing a crypto-token offering by The DAO, where the SEC warned the market (PDF: 169 KB) that some ICOs may violate the federal securities laws.

Neither Paragon nor AirFox agreed to conduct a “rescission offer” whereby the company would offer to repurchase the illegally offered tokens and any investor who declined the offer would retain freely tradable tokens (a remedy that Google undertook shortly after its IPO in order to resolve claims that certain pre-IPO compensatory equity grants were made in violation of the registration provisions of the Securities Act of 1933). Instead, each company agreed to distribute a “claim form” to all token purchasers offering return of the consideration paid, plus interest, in exchange for tender of the tokens, or offering damages to token purchasers who no longer hold their tokens. Purchasers of tokens located outside the United States are apparently not excluded from participation. Each company was also fined $250,000 and required to register its token as a security and become an SEC-reporting company for at least one year. Continue reading

SEC Charges “ICO Superstore” as Unregistered Broker-Dealer

by John J. Sikora, Jr., Stephen Wink, Douglas K. Yatter, and Naim Culhaci

The settled order is the first SEC action charging a seller of digital tokens as an unregistered broker-dealer.

On September 11, 2018, the U.S. Securities and Exchange Commission (SEC) announced a settled order instituting cease-and-desist proceedings and imposing remedial sanctions against TokenLot LLC (TokenLot), a self-described “ICO Superstore,” and its owners in connection with their sales of digital tokens to the general public through a website.[1] The SEC found that TokenLot and its owners acted as unregistered broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and engaged in unregistered securities offerings in violation of Section 5 of the Securities Act of 1933 (Securities Act). Continue reading

SEC Issues Report of Investigation on Cyber-Related Frauds Perpetrated Against Public Companies

by Robert W. Downes, John Evangelakos, Nader A. Mousavi, Nicole Friedlander, and Sarah M. Cravens

Public Companies Should Implement Sufficient Internal Controls to Avoid Becoming Victims of Cyber-Related Frauds and to Comply With the Exchange Act

Summary

On October 16, the SEC issued a report on an investigation into whether nine public issuers that were victims of cyber-related frauds may have violated Sections 13(b)(2)(B)(i) and (iii) of the Exchange Act by failing to have a sufficient system of internal accounting controls to provide reasonable assurances that those frauds were detected and prevented.

The issuers, which the SEC stated represent a variety of industries, were victims of two types of “business email compromise” scams that resulted in mostly unrecovered losses ranging from $1 million to over $45 million.

While the SEC determined not to pursue enforcement actions against the issuers under investigation, it issued its report of investigation to make issuers aware that the cyber-related threats exist and concluded that all companies should reassess the sufficiency not only of existing internal controls, but also of policies and procedures that ensure employee compliance with controls. Continue reading

Rulemaking Commenters Debate the SEC’s Proposed Changes to Its Whistleblower Program

by Gerald Hodgkins, Arlo Devlin-Brown, David Kornblau, and Jenny Park

Over 3,000 commenters submitted letters to the Securities and Exchange Commission (“SEC”) concerning the agency’s recently proposed amendments to its whistleblower rules.[1] This response reflects the perceived importance of the SEC’s proposal to companies and employees.

The most controversial of the proposed amendments would allow the SEC discretion to decrease the size of an award if it determines that the award would otherwise be too large to advance the goals of the whistleblower program.[2] Under current rules, if a whistleblower qualifies for an award, the SEC determines the size of the award by considering a number of specified factors that can increase or decrease the award amount within the range of 10 to 30 percent of the monetary sanctions recovered.[3] To decrease the amount of an award, the SEC can consider only the culpability of the whistleblower; whether the whistleblower unreasonably delayed reporting the misconduct to the SEC; and whether the whistleblower interfered with the company’s internal compliance and reporting systems.[4] Continue reading

CFTC Announces Two Significant Awards By Whistleblower Program

by Breon S. Peace, Nowell D. Bamberger, and Patrick C. Swiber

On July 12 and 16, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) announced two awards to whistleblowers, one its largest-ever award, approximately $30 million, and another its first award to a whistleblower living in a foreign country.[1]  These awards—along with recent proposed changes meant to bolster the Securities and Exchange Commission’s (“SEC” or “Commission”) own whistleblower regime—demonstrate that such programs likely will continue to be significant parts of the enforcement programs of both agencies and necessarily help shape their enforcement agendas in the coming years.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorized the CFTC to pay awards of between 10 and 30 percent to whistleblowers who voluntarily provide original information to the CFTC leading to the successful enforcement of an action resulting in monetary sanctions exceeding $1 million.[2]  Following the introduction of implementing rules, the CFTC’s program became effective in October 2011.  Over the next six-and-a-half years, the CFTC has paid whistleblower bounties on only four prior occasions, with awards ranging from $50,000 to $10 million.  The $30 million award announced last week, thus, reflects a significant increase.  This week’s award to a foreign whistleblower also represents another first for the CFTC’s program and reflects the global scope of the program. Continue reading