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FINRA levies $15 million fine for software flaw that increased mutual-fund prices
On June 2, the Financial Industry Regulatory Authority (FINRA) announced it had entered into a Letter of Acceptance, Waiver, and Consent (AWC), which ordered a New York-based member brokerage firm to pay more than $15.2 million in restitution and interest to customers who were steered by a software flaw in its automated system into purchasing higher-priced mutual fund shares when other shares were available at substantially lower costs. According to FINRA, the firm’s system, which is designed to restrict a customer’s purchase of Class C shares when lower cost Class A shares are available, allegedly “failed to correctly identify and implement applicable purchase limits on Class C shares,” thus causing thousands of customers to purchase Class C shares and incur fees and charges. The firm neither admitted nor denied the findings set forth in the AWC agreement but accepted and consented to the entry of FINRA’s findings and agreed to convert shares where applicable. FINRA stated that it “did not impose a fine due to the firm’s extraordinary cooperation and substantial assistance with the investigation.”
SEC publishes final rule requiring certain electronic filings
On June 3, the SEC announced a final rule requiring certain forms to be filed or submitted electronically. The final rule also amends forms to require structured data reporting and remove outdated references. According to the SEC, the final rule is “intended to promote efficiency, transparency, and operational resiliency by modernizing how information is filed or submitted to the Commission and disclosed to the public.” The SEC also noted that electronic filings will be more accessible and available on the SEC website in searchable formats. The public comment period will be open for 30 days after publication in the Federal Register. The SEC released a Fact Sheet providing information on the amendments to electronic filing requirements. According to a statement released by SEC Chair Gary Gensler, the final rule “will modernize and increase the efficiency of the filing process—for filers, investors, and the SEC.”
SEC charges broker-dealer with SAR violations
On May 20, the SEC announced charges against the broker-dealer affiliate of a national bank for allegedly failing to file Suspicious Activity Reports (SARs) in a timely manner in violation of the Securities Exchange Act and Rule 17a-8. According to the SEC’s order, the broker-dealer’s internal anti-money laundering (AML) transaction monitoring and alert system allegedly failed to reconcile the different country codes used to monitor foreign wire transfers due to an alleged failure to test a new version of the system. The broker-dealer also allegedly did not timely file SARs related to suspicious transactions in its customers’ brokerage accounts involving the wire transfers to or from foreign countries that it determined to be at a high or moderate risk for money laundering, terrorist financing, or other illegal money movements. Additionally, in April 2017, the broker-dealer allegedly failed to timely file additional SARs due to a failure to appropriately process wire transfer data into its AML transaction monitoring system in certain other situations. In addition to the $7 million penalty, the institution, without admitting or denying the SEC’s findings, agreed to a censure and a cease-and-desist order.
SEC awards whistleblowers $3.5 million
On May 6, the SEC announced awards totaling nearly $3.5 million to four whistleblowers whose information and assistance led to successful SEC enforcement actions. According to the redacted order, three joint whistleblowers provided SEC staff with information that led to the opening of a new investigation, which resulted in a successful enforcement action. These joint whistleblowers’ information also caused another agency to open an investigation and led to a separate successful action. Another whistleblower provided insights based on an independent analysis of information that focused the staff’s attention on allegations that were not previously known to staff that advanced the investigation. The SEC has awarded approximately $1.3 billion to 273 individuals since issuing its first award in 2012.
SEC advises companies on Ukraine-related disclosure obligations
On May 3, the SEC Division of Corporation Finance released a sample letter advising companies that they should provide “detailed disclosure[s]” if they have direct or indirect operations in Russia, Belarus or Ukraine or if they trade securities in Russia or are affected by financial sanctions imposed on Russia. Companies should also report any other related uncertainties caused by the conflict in Ukraine, and disclose supply chain disruptions, cybersecurity risks, and volatility related to commodity trading prices. Additionally, companies should report whether they rely on goods or services sourced in Russia or Ukraine (or in certain cases, countries supporting Russia) as well as any business relationships or assets based in Russia, Belarus, or Ukraine. “The sample comments do not constitute an exhaustive list of the issues that companies should consider,” the Division said. “As always, companies should evaluate whether they have experienced or been impacted by matters characterized as potential risks and, if so, update disclosures accordingly.”
SEC to expand crypto asset and cyber unit team
On May 3, the SEC announced it will nearly double the size of its Crypto Assets and Cyber Unit within the Division of Enforcement. “By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity,” SEC Chair Gary Gensler stated. Since the unit’s inception, more than 80 enforcement actions have been brought against actors related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion. The unit has also “brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents.” The expanded unit will focus on investigations related to: crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance platforms, non-fungible tokens, and stablecoins.
SEC awards $6 million to whistleblowers
On April 25, the SEC announced awards totaling nearly $6 million to two groups of whistleblowers whose information and assistance led to a successful SEC enforcement action. According to the redacted order, the first group of whistleblowers provided the SEC with key documents that led the staff to seek additional documents from the respondent, and the second group provided firsthand accounts of the misconduct at issue. Both groups, which consisted of five individuals, provided ongoing assistance throughout the investigation.
The SEC has awarded approximately $1.2 billion to 268 individuals since issuing its first award in 2012.
Idaho defines legal status of digital assets
On March 28, the Idaho governor signed HB 583, amending the Idaho commercial code’s definition and classification of digital assets. The bill classifies digital assets as intangible personal property and general intangibles under the bill. However, the bill makes a distinction between digital securities and virtual currency—both are classified as intangible personal property, but while digital securities qualify as investment property, virtual currency is not considered a security. With respect to the purchase and sale of digital assets, the bill states that digital assets “may be purchased and sold in the same manner and subject to the same laws of this state as other personal property,” and notes that an “action based on a claim of a property right, right to performance, or right of payment may not be asserted against a qualified purchaser.” The bill also addresses provisions related to perfection by possession or control, and specifies that a “person that acquires an interest in and obtains control of a virtual currency without notice of any adverse claim takes the interest in the virtual currency and in any right to payment evidenced by the virtual currency free of any adverse claim.” The bill is effective July 1.
SEC 2022 examination priorities include information security, emerging technologies, and crypto-assets
On March 30, the SEC’s Division of Examinations announced that its 2022 examination priorities will focus on key risk factors related to private funds, environmental, social and governance investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. SEC registrants, including investment advisers, broker-dealers, self-regulatory organizations, clearing firms, and other registrants, are reminded of their obligations to address, manage, and mitigate these key risk areas. The SEC stated that examiners will continue to review whether firms are taking appropriate measures to safeguard customer accounts to prevent intrusions. Firms are expected to implement procedures to respond to incidents, identify and detect red flags for identity theft, and manage operational risk, including oversight of vendors and service providers. With respect to emerging technologies and crypto-assets, the SEC announced it will review whether firms are considering emerging financial technologies when designing their regulatory compliance programs. The SEC will also focus on firms that offer new products and services or employ new practices “to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.” Additionally, examinations of market participants engaged in crypto-assets will continue to focus on custody arrangements for such assets, as well as “the offer, sale, recommendation, advice, and trading of crypto-assets” offered by these participants. The SEC also warned that it will be investigating whether registered investment advisors are “overstating or misrepresenting” environmental, social, and governance factors in their portfolios or disclosures.
SEC seeks investor protections related to SPACs and shell companies
On March 30, the SEC proposed rules and amendments regarding special purpose acquisition companies (SPACs), shell companies, and projections disclosure. The proposed rules are intended to enhance investor protections in initial public offerings (IPOs) by SPACs and in subsequent business combination transactions between SPACs and private operating companies. The proposed rules will also address the treatment under the Securities Act of 1933 of business combination transactions involving a reporting shell company and amend the financial statement requirements for private operating companies applicable to transactions involving shell companies. Additionally, the SEC proposed “specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions.” The SEC issued a corresponding Fact Sheet recognizing that the rapid increase in the number of SPAC IPOs over the past two years has “heightened investor protection concerns” and raised questions as to whether certain SPACs may be investment companies subject to the requirements of the Investment Company Act. The proposed rule also includes a new safe harbor designed to “provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under [the Investment Company Act].”
“[I]f adopted, [the proposed rule] would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chair Gary Gensler said.
Comments on the proposed rule are due 60 days following publication of the proposing release on the SEC’s website or 30 days after publication in the Federal Register, whichever is later.