A Bright Future
The fourth quarter of 2021 was monumental in Greyline’s ascension as the preeminent regulatory consulting firm in the industry. The acquisition by IQ-EQ provides us with substantially more resources to grow our service offerings and technology, and pairs us with two of our most respected peers: Constellation and Blue River.
While it will not happen overnight, we are working toward complete integration under the IQ-EQ brand, combining the best attributes from each legacy firm into one cohesive entity. Our key priorities during this process will be client and employee satisfaction – two cornerstones of Greyline’s philosophy since inception. We have always invested in our people – both professional and personally – and we will continue to fuel that growth in hopes of making us better as a whole. Continuity and retention are paramount.
In this edition of Greyline Insights, we offer guidance into several “hot takes” from the SEC, ranging from the new marketing rule to observations of registered fund practices to robo-adviser examinations. We move on to address the SEC’s continued focus on fee and expense practices, highlight several instances of enforcement-worthy compliance violations and address a recent insider trading case involving a notable global consulting firm.
Sean Wilke
Partner & Head of Growth Strategy
Social Media & The SEC’s New Marketing Rule
Social media is everywhere, and it seems there is a new social platform every day.
We have seen investment advisers embrace this innovation as they look to social media to build their brand and, in some cases, drive business. There are so many ways to connect with followers – live videos, traditional posts, real-time feeds, disappearing acts, short videos, community-based platforms such as Public.com and Reddit, and discussion rooms on Clubhouse.
But with the wide adoption of social media comes regulatory scrutiny. Advisers are at a crossroads with the compliance date of the SEC’s new marketing rule set for November 2022. The current advertising rule was adopted by the SEC in 1961 – 60-plus years ago – when computers were unheard of and the internet didn’t exist. Will the SEC’s new marketing rule set us up for another 60+ years? Or will ever-evolving technology push the SEC to act faster? Will social media someday be replaced by alternate reality (AR), virtual reality (VR), the metaverse and web3? Only time will tell.
In the meantime, here are some key points advisers should consider on their usage of social media with the impending new marketing rule:
- Presently, advisers may choose to adopt the new marketing rule entirely, but may not cherry pick what works for them under the new marketing rule and pair it with elements of the old advertising rule.
- With pages like /wallstreetbets going strong, the SEC commissioner signaled that the agency’s focus is on fraud, misleading other investors and manipulation of the markets – not free speech. Social media communication has also given rise to advisers conducting data scraping or purchasing data obtained from social media platforms.
- Live and oral communications are excluded under the new marketing rule, but scripted remarks are included. If the adviser reposts a recording and the content offers investment advisory services, then the post would bring these in scope.
- Branded content and general market commentary that don’t offer advisory services are not considered marketing.
- If an influencer or other third-party posts about the adviser on their social media account, it will be considered the adviser’s marketing if the adviser was involved in preparing the content (entanglement), or if the adviser explicitly or implicitly endorsed or approved the content (adoption). Both entanglement and adoption concepts are a ‘facts and circumstances’ determination.
- Merely permitting the use of “like,” “share” or “endorse” features on social media platforms would not implicate the rule. However, if the adviser does things like edit the comments, prepare the comments or modify the presentation of comments so that positive comments are prioritized, then the comments will be attributed to the adviser.
- Advisers are accountable for third-party content linked by the adviser’s social media page.
- Implement a ‘neutral’ policy based on pre-established, objective criteria to remove inappropriate content.
- Posts made by employees on personal social media accounts will not be considered the adviser’s marketing if the adviser adopted policies and procedures prohibiting such communications, conducted periodic training, and reviewed content on personal social media pages.
- Testimonials and endorsements are allowed under certain conditions. Advisers compensating influencers or bloggers, for example, will need to reevaluate their agreements with such “promoters,” confirm the required disclosures are included, and that these promoters are not “bad actors” subject to disqualification.
- Archive social media pages for monitoring and comply with record retention requirements.
The following is a list of action items that CCOs can complete to prepare for the compliance deadline:
- Conduct a thorough review of the firm’s marketing and investor relations efforts. For example, mapping out direct vs. indirect; existing vs. prospective clients; clients vs. private fund investors; existing services vs. offering of new advisory services; one-on-one vs. more than one; contains hypothetical performance or not; oral vs. written; the medium utilized for marketing; materials used; how materials are disseminated; etc.
- Refine policies and procedures to incorporate additional compliance measures where applicable, and provide specific training to the marketing team.
- Meet with the marketing team to determine the social media platforms in use (e.g. Facebook, LinkedIn, blogs, Twitter, Instagram, Clubhouse, etc.), understand content creation and distribution of content on applicable platforms, identify third-parties involved in content creation and dissemination of material, and ensure requirements are being met by content creators and the marketing team.
- Work closely with the marketing team to develop social media guidelines for the firm and its employees.
Greyline is ready to assist clients on implementing the new marketing rule. For questions related to your compliance program, please reach out to your Greyline representative.
Table of Contents
Q4 2021 Regulatory Updates
Table of Contents
Q4 2021 Regulatory Updates
Greyline Employee Spotlight: Darren Mooney
Greyline Employee Spotlight: Darren MooneyDarren Mooney is a Partner and Co-Head of Business Development at Greyline. He joined the company almost two years ago in San Francisco, and today he works out of the Boston office.
Q. What is your favorite thing about working for Greyline?
A. The diversity of our call of duty. As consultants, we’re sometimes teachers, sometimes auditors and always business partners with our clients.
Q. What made you decide to work in the compliance field?
A. As a licensed attorney, I sought a nexus between the practice of law and investment management – financial services compliance hit the mark.
Q. How would you explain what you do to a 5-year-old?
A. We help investors run their businesses better, and I especially focus on trying to keep them out of time out.
Q. What are your hobbies outside of work?
A. Park trips with my fetch-obsessed dog and two-year old son, and I like to lift things up and put them down at any Iron Paradise.
Q. Favorite flavor of ice cream?
A. The forever underrated mint chocolate chip.
Announcements
Listen Up: The first two episodes of Greyline’s podcast, Between the Lines, are now available!
Shortlisted: Greyline has been shortlisted for a Fund Intelligence Operations and Services Award in the Best Compliance Advisory Firm category. The award ceremony will take place on Feb. 23 in New York City.
Shortlisted: Greyline’s gVue has been shortlisted for a HFM U.S. Tech Award in the Best RegTech Solution category. The awards ceremony will take place on Feb. 24 in New York City.
Regulatory Updates
Investment Adviser and Broker-Dealer Compliance
SEC Charges Investment Adviser, Affiliated Broker-Dealer, Their President for False and Misleading Statements
On Oct. 1, the Securities and Exchange Commission (“SEC”) charged TCFG Investment Advisors, LLC (“TCFG”), its affiliated broker-dealer TCFG Wealth Management, LLC (“TCFG Wealth”), and their CEO, president and managing member Richard James Roberts with making false and misleading statements and omissions related to fee markups charged to TCFG advisory clients.
The SEC says that between June 2014 and April 2020, TCFG and Roberts disclosed that TCFG Wealth “may” receive portions of fees charged to TCFG accounts by its unaffiliated clearing and custody firm; however, Roberts had directed said firm to charge TCFG clients significant markup fees paid to TCFG Wealth. At a later point, TCFG and Roberts disclosed the markups, but continued to mislead by saying they were imposed “in some limited instances” when in fact the clearing and custody firm’s ticket charges were marked up about 60% of the time.
In addition, TCFG allegedly failed to implement written policies and procedures reasonably designed to prevent the sorts of disclosure and conflict-of-interest violations that arose from these practices.
The SEC is seeking permanent injunctions, disgorgement with prejudgment interest and civil penalties.
SEC Chair Gensler Speaks Before House Financial Services Committee
On Oct. 5, SEC Chair Gary Gensler spoke before the U.S. House of Representatives Committee on Financial Services about several market and investing themes. Among other topics, Gensler discussed potential reforms the SEC is exploring in the funds and investment management space, including: ensuring that the public has enough information to understand investment choices claiming they’re “green,” “sustainable,” “low-carbon,” etc.; developing a proposal for the SEC’s consideration on cybersecurity risk governance that could address cyber hygiene, incident reporting and other cyber issues; enhancing disclosures around conflicts of interests of private fund managers; and improving resiliency of money market funds and open-end bond funds.
Observations From Examinations of Advisers that Provide Robo-Advisory Services
On Nov. 9, the SEC Division of Examinations released observations from examinations of advisers that provide electronic investment advice (robo-advisory services).
“Nearly all of the examined advisers received a deficiency letter, with observations most often noted in the areas of: (1) compliance programs, including policies, procedures, and testing; (2) portfolio management, including, but not limited to, an adviser’s fiduciary obligation to provide advice that is in each client’s best interest; and (3) marketing/performance advertising, including misleading statements and missing or inadequate disclosure,” the Division says.
The Division noted that most advisers had inadequate compliance programs; were not testing the investment advice generated by their platforms to clients’ stated or platform-determined investment objectives; and inaccurate or incomplete disclosures in Form ADV filings; advertising-related deficiencies. It also said nearly half of the advisers claiming reliance on the Internet adviser exemption were ineligible to rely on the exemption; many of these were otherwise not eligible for SEC registration.
The Division also observed that:
- Advisers recommending programs commonly provided the same or similar investment advice on a discretionary basis to a large number of advisory clients, frequently using asset allocation portfolios that they, an affiliate or a third party created;
- Did not comply with provisions requiring sponsors or another person designated by the sponsor to obtain information from each client regarding the client’s financial situation and investment objectives, and to inquire about whether the client wants to impose any reasonable restrictions on account management;
- Did not comply with provisions requiring advisers to contact each client at least annually to update the client’s financial situation or investment objectives, and determine whether the client wants to modify any existing restrictions on account management.
Observations From Investment Advisers’ Fee Calculations
On Nov. 10, the SEC Division of Examinations released observations from its review of investment advisers’ fee practices, the adequacy of fee disclosures and accuracy of fee calculations.
“While investment advisers continue to have assorted advisory fee arrangements and use a wide variety of calculation methodologies, the staff observed that the typical examined adviser: (1) had a standard fee schedule with tiered fee levels based on assets under management; (2) quarterly assessed its advisory fees; (3) deducted advisory fees directly from clients’ accounts; (4) calculated fees based on the account value at the beginning or ending date of the billing period; (5) used software or third-party service providers to calculate fees; (6) documented advisory fees with clients through written advisory agreements or contracts; and (7) combined family account values when such actions resulted in lower fees (i.e., householding of accounts),” the SEC said.
Among the Division’s observations:
Several advisers charged advisory fees inaccurately due to a variety of errors, including inaccurate percentages in calculations, double-billing, householding of client accounts not being correctly calculated, and the use of incorrect client account valuations.
Some advisers either did not refund prepaid fees on terminated accounts or did not assess fees on a pro-rata basis for new accounts.
Several advisers had a range of issues regarding disclosures, including about topics such as cash flows and their effect on fees, timing of advisory fee billing, valuations for fee calculations, as well as minimum fees, extra fees and discounts.
Many examined advisers did not maintain written policies and procedures addressing advisory fee billing, monitoring of fee calculations and billing, or both.
Several examined advisers’ financial statements included issues or inaccuracies with respect to advisory fees.
Division staff also observed examples of policies and practices that could assist advisers with compliance. For instance, advisers can adopt and implement written policies and procedures addressing advisory fee billing processes and validating fee calculations; centralize the fee billing process and confirm that fees charged to clients are consistent with compliance procedures, advisory contracts and disclosures; and ensure resources and tools established for reviewing fee calculations are utilized.
JPMorgan Admits to Widespread Recordkeeping Failures, Will Pay $125 Million to Settle SEC Charges
On Dec. 17, the SEC announced that J.P. Morgan Securities LLC (JPMS), a broker-dealer subsidiary of JPMorgan Chase & Co., agreed to pay a $125 million penalty to settle charges of widespread and longstanding failures by the firm and its employees to maintain and preserve written communications.
The SEC says that, from at least January 2018 through November 2020, its employees often communicated about securities-business matters via text, WhatsApp and personal email accessed on their personal devices. None of these records were preserved as required by federal securities laws. JPMS also admitted that these failures were firm-wide and not hidden – even managing directors and other senior supervisors used personal devices to communicate about the business.
The SEC also says that in responding to various subpoenas and requests, JPMS frequently did not search for relevant records contained on employees’ personal devices. These actions meaningfully impacted the SEC’s ability to investigate potential violations of the federal securities laws.
JPMS was ordered to pay a $125 million penalty and to cease and desist from future violations of the charged provisions. It also was censured. JPMS agreed to retain a compliance consultant to conduct a comprehensive review of its policies and procedures relating to retaining electronic communications found on personal devices, as well as JPMS’s framework for addressing noncompliance.
SEC Charges Private Equity Fund Adviser With Fee and Expense Disclosure Failures
On Dec. 20, registered investment adviser Global Infrastructure Management, LLC, agreed to pay a $4.5 million penalty to settle charges that it failed to properly offset management fees and for making misleading statements about fees and expenses it charged.
The SEC says that Global was required to offset certain portfolio company fees against management fees charged to clients but failed to do so, causing clients to overpay millions in additional fees. It also says Global provided inconsistent statements about how Global would calculate management fees, and that its violations were caused by deficiencies in its compliance program.
Global did not admit nor deny the SEC’s filings but agreed to a cease-and-desist order and the $4.5 million penalty. It also voluntarily repaid $5.4 million to affected private fund clients.
Registered Fund Compliance
Observations From Examinations in the Registered Investment Company Initiatives
On Oct. 26, the SEC Division of Examinations (the “Division”) released observations from a series of examinations that focused on mutual funds and exchange-traded funds to assess industry practices and regulatory compliance in certain areas that could impact retail investors.
The examinations focused on funds, or their advisors, that fell into one or more of the following six categories:
- Index funds that track custom-built indexes
- Smaller ETFs and/or ETFs with little secondary market trading volume
- Mutual funds with higher allocations to certain securitized investments
- Mutual funds with aberrational underperformance relative to their peer groups
- Mutual funds managed by advisers that are relatively new to managing such funds
- Advisers that provide advice to both mutual funds and private funds, both of which have similar strategies and/or are managed by the same portfolio managers
SEC staff observed that funds and their advisers did not establish, maintain, update, follow and/or appropriately tailor their compliance programs to address various business practices, including portfolio management, valuation, trading, conflicts of interest, fees and expenses, and advertising.
Funds also had inaccurate, incomplete and/or omitted disclosures in their filings, pertaining to a variety of advertising and sales literature-related topics, such as investment strategies and portfolio holdings, differences in investment objectives between predecessor and successor funds, inception dates and more.
The Division did note some helpful practices, such as compliance programs that provided for the review of policies and procedures for consistency with practices, conducting periodic testing and reviews for compliance with disclosures, and ensuring compliance programs adequately address the oversight of key vendors.
SEC Proposes Amendments to Money Market Fund Rules
On Dec. 15, the SEC voted to propose amendments to certain rules governing money market funds under the Investment Company Act of 1940.
The proposed amendments would increase liquidity requirements for money market funds to provide a better liquidity buffer in the event of rapid redemptions. They also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund’s liquidity drops below an identified threshold.
Under the proposed rule, institutional prime and institutional tax-exempt money market funds must implement swing pricing policies and procedures that would require redeeming investors, in some circumstances, to bear the liquidity costs of their redemptions. And it also would amend certain reporting requirements to improve the availability of information about money market funds and enhance the SEC’s monitoring and analysis of these funds.
These proposed amendments come in the wake of large outflows from prime and tax-exempt money market funds amid 2020’s economic distress in the face of the growing COVID threat.
Securities Fraud
SEC Charges Webcast Host in Market Manipulation Scheme
On Oct. 1, the SEC announced charges against stock trading webcast host Mark Melnick, accusing him of spreading more than 100 false rumors about publicly traded companies to generate illicit profits.
The SEC says Melnick received advance notice of companies about which another participant in the scheme planned to spread false rumors, then shared those names with subscribers in his online trading room and said he had taken positions in the companies. The subscribers then spread the false rumors through chat rooms, message boards and other means. Melnick generated more than $374,000 in illicit profits; other scheme participants generated profits, too.
Melnick consented to the entry of a judgment that, with court approval, will permanently enjoin him from violating the antifraud provisions of the federal securities laws. He would be required to pay disgorgement of $374,835 plus prejudgment interest, as well as a civil penalty in an amount to be determined later. Melnick also agreed to a penny stock bar and to be barred from the securities industry.
SEC Obtains Asset Freeze, Other Relief, in Twitter Penny Stock Scheme
On Oct. 26, the SEC filed an emergency action and obtained an injunction and asset freeze against Steven M. Gallagher for allegedly committing securities fraud via a long-running stock-manipulation scheme on Twitter.
The SEC alleges that, since at least December 2019, Gallagher tweeted thousands of times from his Twitter handle, @Alexdelarge6553, to encourage his many followers to buy stocks in which Gallagher had secretly amassed holdings. Gallagher would then sell those stocks at inflated prices, but rather than disclose that he was selling, he continued to recommend them.
The SEC is seeking a permanent injunction, disgorgement, prejudgment interest and civil penalties, as well as the asset freeze granted by the court. The SEC encourages victims of the alleged fraud to contact AlexDelarge6553Victims@sec.gov.
Hedge Fund Adviser Found Liable for Securities Fraud
On Nov. 5, the SEC announced that a federal court jury found Gregory Lemelson and Massachusetts-based Lemelson Capital Management LLC liable for fraudulent misrepresentations about San Diego-based Ligand Pharmaceuticals Inc. (NASDAQ:LGND) that resulted in more than $1.3 million in illegal profits.
The SEC said that Lemelson established a short position in Ligand through his hedge fund, then made a series of false statements about Ligand to lower its stock price and increase the value of his position. Lemelson asserted that Ligand’s investor relations firm had agreed that Ligand’s most profitable drug was on the brink of obsolescence and that Ligand had entered into a sham transaction with an unaudited shell company to pad its balance sheet. The SEC also provided evidence showing that Lemelson boasted about bringing down Ligand’s stock price.
The court will determine remedies at a later date.
Exchange-Traded Product, GP, Charged With Disclosure Failures
On Nov. 8, the SEC charged United States Oil Fund LP (NYSEARCA:USO), an exchange-traded product (ETP), and its general partner United States Commodity Funds LLC (USCF) for misleading statements about limitations imposed by its sole futures commission merchant and broker.
The USO’s investment objective is to track changes in spot oil prices, as measured by the changes in prices of certain oil futures contracts. However, in April 2020, in the midst of oil-market turmoil and negative futures prices, USO’s sole futures broker told the fund it would not execute any new oil futures positions for USO. USO was thus unable to invest the proceeds generated by the future sale of newly created shares in oil future contracts, creating the risk that USO couldn’t meet its stated investment objective.
The SEC says USO did not fully disclose the character and nature of the limitation until a month after the limit was first imposed.
USO and USCF did not admit nor deny the SEC’s findings, but agreed to pay a $2.5 million penalty, which will be offset by up to $1.25 million paid in a parallel proceeding with the Commodity Futures Trading Commission.
SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps
On Dec. 15, the SEC voted to propose a number of rules dealing with security-based swaps transactions.
Proposed Rule 9j-1 would prohibit fraudulent, deceptive or manipulative conduct in connection with all transactions in security-based swaps, including misconduct with respect to the exercise of any right or performance of any obligation thereunder.
Proposed Rule 15Fh-4(c) would prohibit personnel of a security-based swap dealer or major security-based swap participant (SBS Entity) from taking any action to coerce, mislead or otherwise interfere with the SBS Entity’s chief compliance officer (CCO).
Proposed Rule 10B-1 would require any person, or group of persons, who owns a security-based swap position that exceeds the threshold amount set by the rule to promptly file with the SEC a statement containing the information required by Schedule 10B on the SEC’s EDGAR filing system.
Nikola Corp. to Pay $125 Million to Settle Fraud Charges
On Dec. 21, the SEC announced that Nikola Corp. (NASDAQ:NKLA) agreed to pay $125 million to settle charges that it defrauded investors.
The SEC says that Nikola CEO Trevor Milton embarked on a public relations campaign aimed at inflating Nikola’s stock price. Before Nikola had produced a single commercial product, Milton falsely gave investors the impression that Nikola had reached certain product and technological milestones. The SEC’s order found that Milton misled investors about Nikola’s technological advancements, in-house production capabilities, hydrogen production, truck reservations and orders, and financial outlook. It also found that Nikola misled investors by misrepresenting or omitting material facts about the refueling time of its prototype vehicles, the status of its headquarters’ hydrogen station, the anticipated cost of and sources of electricity for its planned hydrogen production, and the economic risks and benefits associated with its possible partnership with a leading automaker.
Nikola agreed to a $125 million penalty, to cease and desist from future violations of the charged provisions, and to certain voluntary undertakings. The order also establishes a Fair Fund to return penalty proceeds to victim investors.
Venture Capital / Private Equity
SEC Commissioner Lee Discusses Private Markets, Impact on Investors and the Economy, at SEC Speaks
Also on Oct. 12, SEC Commissioner Allison Herren Lee discussed the growth of the private markets, how certain parts of the U.S. economy are “going dark,” and the SEC’s role in addressing this reduced transparency.
Going Dark: Lee notes that the expansion of private markets hasn’t been the natural result of the evolution of “free market” forces, but rather the result of Congress and the SEC relaxing restrictions around private markets. She notes that private offerings accounted for roughly 70% of new capital raised in 2019, and that given the vast capital available and relaxed legal restrictions, companies can remain in the private markets “nearly indefinitely.” So-called unicorns, which are private companies with estimated values of more than $1 billion, have jumped from 39 worldwide in 2013 to roughly 900 today.
However, Lee said, there is still little public information available about their activities because they are subject to so few information disclosure rules. This has an outsized impact on private company employees, who have little to no negotiating power to obtain needed information, despite the fact that major decisions – including whether to quit – are in fact investing decisions, too. It also impacts retirement savers who indirectly access private markets through institutional investors such as mutual funds.
History Repeats: Lee said we’ve been here before: “[c]oncern over adequate transparency in the securities markets was the driving force behind the advent of federal securities laws.” Weaknesses in the markets led to widespread unemployment, and the dislocation of trade, transportation and industry, leading to Congress’s passage of the Securities Act of 1933 and followed it up with the Securities Exchange Act of 1934.
The new provisions applied only to listed companies, not OTC markets, which made sense at the time, given the concentration of money on the largest listed companies. But growth in the OTC markets forced regulators to reassess, resulting in Section 12(g) of the Exchange Act and the JOBS Act, forcing companies with a certain number of shareholders of record to be subject to periodic reporting.
However, the landscape has shifted once again – one in which it’s rare that someone holds shares in record name, even in the largest and most widely traded issuers. That has made these periodic reports increasingly optional.
Looking Forward: Lee believes it’s time to consider recalibrating how issuers must count shareholders of record to align more closely with the original intent of Congress and the SEC.
As this is re-examined, Lee suggests the SEC must better understand the issues of disclosure arbitrage and deregistering and how the growing lack of transparency is affecting ordinary investors; and should analyze how shares are held in the private markets.
Insider Trading
Global Consulting Firm Partner Charged With Insider Trading
On Nov. 10, the SEC charged Puneet Dikshit, a partner at a global management consulting firm, with illegally trading in advance of a corporate acquisition by one of the firm’s clients in September.
The SEC alleges that while providing consulting services, Dikshit learned highly confidential information concerning The Goldman Sachs Group Inc.’s impending acquisition of consumer loan fintech platform GreenSky Inc. It says in the days leading up to the acquisition announcement, Dikshit bought out-of-the-money GreenSky call options set to expire just days after the announcement.
The SEC also says that Dikshit violated his firm’s policies by failing to pre-clear these options purchases, which he sold on the day of the acquisition announcement to make more than $450,000 in illicit profits.
The SEC is seeking a permanent injunction and a civil penalty.
The U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Dikshit in a parallel action.
McKinsey Affiliate to Pay $18 Million for Compliance Failures in Handling of Nonpublic Information
On Nov. 19, the SEC announced that an affiliate of McKinsey & Company agreed to pay an $18 million penalty related to compliance failures.
The SEC says McKinsey affiliate MIO Partners Inc., which offers investment advice exclusively to current and former McKinsey partners and employees, maintained inadequate policies and procedures to prevent McKinsey partners from misusing material nonpublic information they obtained as consultants to public companies and other McKinsey clients while they were simultaneously overseeing the affiliate’s investment decisions.
The SEC says MIO Partners was investing hundreds of millions of dollars in companies that McKinsey was advising; several McKinsey partners who oversaw MIO’s choices were routinely privy to confidential information such as financial results, planned bankruptcy filings, product pipelines and more. However, MIO was not able to properly address the dual roles for these McKinsey consultants; in one instance, a McKinsey partner’s access to confidential information about MIO’s investments in a company created a risk that one of McKinsey’s units could influence the company’s Chapter 11 reorganization plan in a way that favored MIO’s investment.
MIO did not admit nor deny the findings but agreed to pay an $18 million penalty and consented to the entry of a cease-and-desist order and a censure.
SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures
On Dec. 15, 2021, the SEC proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 to enhance disclosure requirements and investor protections against insider trading. The proposal would update Rule 10b5-1(c), which provides an affirmative defense to insider trading for parties that frequently have access to material nonpublic information, including corporate officers, directors and issuers.
The proposed amendments would update requirements for the affirmative defense. That would including imposing a cooling off period before trading could commence under a plan, prohibiting overlapping trading plans and limiting single-trade plans to one trading plan per 12-month period. The rules also would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans and expand the existing good faith requirement for trading under Rule 10b5-1 plans.
The amendments also would create more comprehensive disclosure about policies and procedures related to insider trading, and issuer practices around the timing of options grants and the release of material nonpublic information. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the material non-public information was disclosed. Insiders that report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan. Gifts of securities previously permitted to be reported on Form 5 would be required to be reported on Form 4.
Market Manipulation
SEC Staff Releases Report on Equity and Options Market Structure Conditions in Early 2021
On Oct. 18, the SEC published a report on equity and options market structure conditions in early 2021, focused on the January 2021 trading activity of GameStop Corp. (NYSE:GME).
So-called meme stocks including GameStop experienced a dramatic increase in share prices in January 2021 as social media was bombarded by bullish messages from individual investors. The new highs realized in these stocks garnered increased attention. But near the end of January, several retail broker-dealers temporarily prohibited certain activity in some of these stocks and options.
The staff identified areas of market structure and regulatory framework that potentially should be studied and considered. These include forces that may cause a brokerage to restrict trading; digital engagement practices and payment for order flow; trading in dark pools and wholesalers; and the market dynamics of short selling.
FOREIGN CORRUPT PRACTICES ACT
Credit Suisse to Pay Nearly $475 Million to U.S., U.K. Authorities to Resolve Fraud Charges
On Oct. 19, Credit Suisse Group AG agreed to pay $475 million to U.S. and U.K. authorities to settle charges that it misled investors and violated the Foreign Corrupt Practices Act (FCPA) in a scheme involving bond offerings and a syndicated loan raising funds on behalf of state-owned entities in Mozambique.
The SEC says transactions amounting to more than $1 billion were used to perpetrate a hidden debt scheme, pay kickbacks to now-indicted former Credit Suisse investment bankers and intermediaries, and bribe corrupt Mozambique government officials. Offering materials created and distributed to investors by Credit Suisse hid the underlying corruption and falsely disclosed that the proceeds would help develop Mozambique’s tuna fishing industry.
The SEC also found that the scheme resulted from deficient internal accounting controls at Credit Suisse.
Credit Suisse agreed to pay disgorgement and interest totaling more than $34 million, as well as a $65 million penalty to the SEC. Credit Suisse also paid $175 million in criminal fines to the U.S. Department of Justice, and it agreed to pay more than $200 million in penalties as part of a settlement with the United Kingdom’s Financial Conduct Authority.
Cybersecurity
SEC Commissioner Roisman Speaks on Cybersecurity
On Oct. 29, SEC Commissioner Elad Roisman spoke to the Los Angeles Bar Association about cybersecurity.
Understanding That You May Be a Victim: Roisman started by noting that while companies are often identified as the targets and victims of cyber crimes, the threat of cyber attacks is so constant and significant for every market participant that it should be considered a substantial likelihood.
Roisman added that it has become increasingly important for market participants to work with counsel and other experts to prepare for potential cyber attacks before they happen, including monitoring threats, responding to potential breaches and understanding when information must be reported outside the company (and to whom).
Cybersecurity and the SEC: Roisman said that the SEC has an important interest in cybersecurity, which affects every part of the SEC’s three-part mission: to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.
“For example, securing investors’ account data is a clear prerequisite for investor protection,” he said. “The market integrity that characterizes fair, orderly, and efficient markets requires, at the very least, reliable clearing and settlement, which relies on secure data. And, of course, security is the foundation on which a stable and growing economy is based.”
Rulemaking: Roisman said that the Commission’s regulatory approach so far has been very targeted in imposing affirmative requirements on certain registrants and certain high-risk areas and that rules have largely been principles-based.
However, Roisman added that “it is time that the Commission consider rules that provide registrants – particularly investment advisers and public issuers – with more of an idea of what we expect of them in today’s marketplace.”
Roisman also said that as the SEC considers any rules for registrants, public issuers, investment advisers, broker-dealers or others, it needs to work with fellow regulators, law enforcement and the national security community to make sure they’re not imposing new requirements that conflict with their mandates.
The commissioner also added that the SEC does already have some well-defined obligations relevant to cybersecurity preparedness and response, and accordingly, some of the SEC’s most important work relating to cybersecurity has been through its Enforcement and Examination programs.
Digital Assets
Promoter Charged With Conducting Cryptocurrency Investment Scams
On Nov. 18, the SEC charged Ryan Ginster of Corona, California, with conducting two unregistered and fraudulent securities offerings that raised more than $3.6 million in cryptocurrency from retail investors.
The SEC says that from 2018 to 2021, Ginster raised money via two online platforms – MyMicroProfits.com and Social Profimatic – that falsely claimed investors could reap astronomical rates of return through purported “cryptocurrency trading and advertising arbitrage,” among other activities. The SEC also alleges that Ginster deceived investors in both offerings about how funds would be used; at least $1 million of the funds were used to pay Ginster’s personal expenses, including tax payments, housing expenses and credit card bills.
The SEC is seeking permanent injunctions, disgorgement with prejudgment interest and civil penalties.
