SEC Chairman Clayton Invites Main Street Investors to ‘Tell Us’ About Their Investor Experience

Securities and Exchange Commission Chairman Jay Clayton is inviting Main Street investors from around the country to ‘Tell Us’ about their investor experience through roundtable discussions in several cities. In these roundtables, Main Street investors will be able to speak directly with Chairman Jay Clayton and senior SEC staff about our efforts to enhance retail investor protection and promote choice and access to a variety of investment services and products.

“It has been incredibly informative and gratifying to talk with investors in their own backyards about their expectations regarding relationships with their investment professionals,” said Chairman Clayton.  “Our proposed rules are intended to match our rules with investor expectations and it is crucial that we hear directly from the investors themselves on how we can best ensure that result.”

Already, roundtable discussions about a recently proposed rule regarding the obligations of financial professionals to investors have taken place in Houston and Atlanta.  The next roundtables will take place in July in Miami, Washington, D.C., Philadelphia, and Denver. Investors who are unable to attend one of the roundtables in-person are invited to share their insights with the SEC by going to sec.gov/Tell-Us.

Details about the upcoming investor roundtables, including dates, times, and RSVP information, can found below. Attendees should be retail investors who work with a financial professional and have no affiliation with the financial services industry. Please note that space is limited.

• [+]Miami | Monday, July 9, 2018

  Location: The University of Miami, Founders Hall, 1550 Brescia Ave., Coral Gables, FL 33146
  Time: 2:00 PM-3:30 PM (EDT)
  RSVP: Angela Cruz at axi204@miami.edu or at (305) 284-6554

• [+]Washington, D.C. | Thursday, July 12, 2018

  Location: U.S. Securities and Exchange Commission, 100 F St., NE, Room 10000, Washington, DC 20549
  Time: 10:30 AM-11:30 AM (EDT)
  RSVP: Suzanne McGovern at at outreach@sec.gov or at 202-551-6459

• [+]Philadelphia | Tuesday, July 17, 2018

  Location: U.S. Securities and Exchange Commission, Philadelphia Regional Office, 1617 John F Kennedy Blvd., Suite 520, Philadelphia, PA 19103
  Time: 11:00 AM-12:00 PM (EDT)
  RSVP: Suzanne McGovern at at outreach@sec.gov or at 202-551-6459

• [+]Denver | Wednesday, July 25, 2018

  Location: U.S. Securities and Exchange Commission, Denver Regional Office, Byron G. Rogers Federal Building,11961 Stout St., Suite 1700, Denver, CO 80294-1961
  Time: 10:00 AM-11:30 (EDT)
  RSVP: Suzanne McGovern at at outreach@sec.gov or at 202-551-6459

The roundtable discussions provide an opportunity for the Chairman and staff to hear first-hand from those who will be directly impacted by the Commission’s rules. They also provide a chance for retail investors to share their views on key questions about their relationship with their investment professional that will help inform the disclosure outlined in the proposed rules.

In advance of each roundtable, participants are provided with documents to help inform the discussion: “Which Type of Account is Right for You – Brokerage, Investment Advisory or Both?”; and a feedback form that asks what they think about the summary that describes their relationship with their investment professional. Attendees are retail investors who work with an investment professional and have no affiliation with the financial services industry.

Please note: some roundtables will take place in SEC buildings. To gain entry into these buildings, please bring a valid driver’s license or other government-issued photo identification. The security process includes placing bags, phones, and other items through X-ray equipment. It is advisable to arrive 20 minutes before the start of the roundtable in order to go through security.

Background

On April 18, 2018, the Commission voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.  For additional information, see the Commission’s press release, fact sheet and proposed Regulation Best Interest rule here. 

On April 24, 2018, Chairman Clayton issued a statement announcing that he had asked SEC staff to put together a series of roundtables focused on the retail investor to be held in different cities across the country.  The roundtables are intended to gather information directly from those most affected by the Commission’s rulemaking.

For general information about the investor roundtables, contact Suzanne McGovern from the SEC’s Office of Investor Education and Advocacy at outreach@sec.gov.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Morgan Stanley in Connection With Failure to Detect or Prevent Misappropriation of Client Funds

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney (MSSB) has agreed to pay a $3.6 million penalty and to accept certain undertakings for its failure to protect against its personnel misusing or misappropriating funds from client accounts. 

The SEC’s order finds that MSSB failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts.  The order further finds that although MSSB’s policies provided for certain reviews of disbursement requests, the reviews were not reasonably designed to detect or prevent such potential misconduct. 

According to the SEC’s order, MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent one of its advisory representatives, Barry F. Connell, from misusing or misappropriating approximately $7 million out of four advisory clients’ accounts in approximately 110 unauthorized transactions occurring over a period of nearly a year.   

“Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Today’s order finds that Morgan Stanley fell short of its obligations in this regard.”

Without admitting or denying the findings, MSSB consented to the SEC’s order, which includes a $3.6 million penalty, a censure, a cease-and-desist order, and undertakings related to the firm’s policies and procedures.  Morgan Stanley previously repaid the four advisory clients in full plus interest. 

The SEC previously filed fraud charges against Barry Connell, who was also criminally charged by the U.S. Attorney’s Office for the Southern District of New York.  Both sets of charges as to Connell remain pending.

The SEC’s investigation has been conducted by Jonathan Grant and Wendy Tepperman, with assistance from George O’Kane and Dugan Bliss, and has been supervised by Mr. Wadhwa. 

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges New York-Based Firm and Supervisors for Failing to Supervise Brokers Who Defrauded Customers

The Securities and Exchange Commission today charged New York-based broker-dealer Alexander Capital L.P. and two of its managers for failing to supervise three brokers who made unsuitable recommendations to investors, “churned” accounts, and made unauthorized trades that resulted in substantial losses to the firm’s customers while generating large commissions for the brokers.

 

Today’s actions find that Alexander Capital failed to reasonably supervise William C. Gennity, Rocco Roveccio, and Laurence M. Torres, brokers who were previously charged with fraud in September 2017.  According to the order, Alexander Capital lacked reasonable supervisory policies and procedures and systems to implement them, and if these systems were in place, Alexander Capital likely would have prevented and detected the brokers’ wrongdoing.

In separate orders, the SEC finds that supervisors Philip A. Noto II and Barry T. Eisenberg ignored red flags indicating excessive trading and failed to supervise brokers with a view to preventing and detecting their securities-law violations.  The SEC’s order against Noto finds that he failed to supervise two brokers and its order against Eisenberg finds that he failed to supervise one broker.

“Broker-dealers must protect their customers from excessive and unauthorized trading, as well as unsuitable recommendations,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Alexander Capital’s supervisory system – and its personnel – failed its customers, and today’s actions reflect our continuing efforts to protect retail customers by holding firms and supervisors responsible for such failures.”

Alexander Capital agreed to be censured and pay $193,775 of allegedly ill-gotten gains, $23,437 in interest, and a $193,775 penalty, which will be placed in a Fair Fund to be returned to harmed retail customers.  Alexander Capital also agreed to hire an independent consultant to review its policies and procedures and the systems to implement them.  Noto agreed to a permanent supervisory bar and to pay a $20,000 penalty and Eisenberg agreed to a five-year supervisory bar and to pay a $15,000 penalty.  These penalties will be paid to harmed retail customers.  Alexander Capital, Noto and Eisenberg agreed to settle today’s charges without admitting or denying the findings in the SEC’s orders.

The SEC’s Office of Investor Education and Advocacy and Broker-Dealer Task Force previously issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts.

The SEC’s investigation has been conducted by David Oliwenstein, David Stoelting, Roseann Daniello, and Steven G. Rawlings, and supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Shereion Clarke, Margaret Lett, and Jennifer Grumbrecht.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Office of the Montana State Auditor, Commissioner of Securities and Insurance. 

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Approves Final and Proposed Rules in Latest Open Meeting

The Securities and Exchange Commission today voted on several final rules and rule proposals that together represent material progress toward many Commission priorities.

“Over the past year, I have been increasingly impressed by the breadth of expertise at the SEC, and the diversity of topics the Commission considered today is proof of that,” said Chairman Clayton.  “Commission staff is actively working on issues that touch all corners of our marketplace, including, importantly, our Main Street investors.  I am pleased that we are making steady, thoughtful progress on many of the Commission initiatives detailed on our regulatory flexibility agenda.  I cannot thank the staff enough for their dedication.  Our capital markets are ever changing and the staff is committed to taking action to ensure that, as they have been for the past 80 years, they remain the best markets for investors, issuers, and our economy.”

The Commission today approved:

1. Adoption of amendments to modernize the definition of “smaller reporting company,” which was established in 2008.  The full release on these amendments can be found here.
    
2. Adoption of amendments to require the use of the Inline XBRL format in certain filings, which were proposed in 2017 and has been under study for many years.  The full release on these amendments can be found here.
    
3. A proposal that would permit certain exchange-traded funds to operate without first obtaining a fund-specific exemptive order from the Commission, which is a process that has not changed since the first ETF was approved in 1992.  The full release on this proposal can be found here.
    
4. Adoption of amendments related to disclosures of liquidity risk management for open-end funds, which were proposed earlier this year.  The full release on these amendments can be found here.
    
5. A proposal to amend rules that govern the Commission’s whistleblower program.  It has been seven years since these rules were adopted.  The full release on this proposal can be found here.

An archived webcast of the meeting will be available on sec.gov.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Proposes Whistleblower Rule Amendments

The Securities and Exchange Commission today voted to propose amendments to the rules governing its whistleblower program.  The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the Commission and help the agency detect wrongdoing and better protect investors and the marketplace.

The Commission’s whistleblower program has made significant contributions to the effectiveness of the agency’s enforcement of the federal securities laws.  Original information provided by whistleblowers has led to enforcement actions in which the Commission has ordered over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.

After nearly seven years of experience administering the whistleblower program, the SEC has identified various ways in which the program might benefit from additional rulemaking.  The proposed rules would, among other things, provide the Commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.   

“Whistleblowers have made significant contributions to the SEC’s enforcement efforts, and the value of our whistleblower program is clear,” said SEC Chairman Jay Clayton.  “The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.  I look forward to public feedback and encourage everyone with an interest to give us their ideas on the proposed rules.”

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

FACT SHEET
SEC Open Meeting
June 28, 2018

Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions.  Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected.  Congress established a separate fund at the Treasury Department, called the Investor Protection Fund (IPF), from which whistleblower awards are paid.  Since the program’s inception, the Commission has ordered over $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly, whose information and cooperation assisted the Commission in bringing successful enforcement actions.

The proposed whistleblower rule amendments would make certain modifications and clarifications to the existing rules, as well as several technical amendments.

Highlights

Additional Tools in Award Determinations

• Allowing awards based on deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into by the U.S. Department of Justice (“DOJ”) or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws:  This proposed amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission, DOJ, or a state attorney general acting in a criminal case may elect to pursue.  Currently, the Commission’s whistleblower rules do not address whether the Commission may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding.  Under the proposed amendment, the Commission would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.
   
• Additional considerations for small and exceedingly large awards: 
   
  • Historically, over 60% of the awards given out in our whistleblower program have been less than $2 million.  In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million.   In exercising its discretion to increase an award under this provision, the Commission would consider whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award. 
     
  • The proposing release also includes a general inquiry for public comment regarding whether the Commission could establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly available information, or where the monetary sanctions collected are de minimis.
     
  • Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.[1]  In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.  However, in no event would the award be adjusted below $30 million.  This proposed amendment is intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.
     
• Elimination of potential double recovery under the current definition of “related action”:  This proposed amendment would prevent the irrational result that could occur if a whistleblower could receive multiple recoveries for the same information from different whistleblower programs.  The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a “related action” if the Commission determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action. 

Uniform Definition of “Whistleblower”

In addition to the foregoing recommendations, the Commission proposes rule amendments in response to the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers.  In that decision, the Court held that the whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the Commission in order to qualify for protection against employment retaliation under Section 21F.  The Court thus invalidated the Commission’s rule interpreting Section 21F’s anti-retaliation protections to apply in cases of internal reports. 

The proposed rules would modify Rule 21F-2 so that it comports with the Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F—i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections.  For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing”.  To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the Commission’s online tips portal would remain in place.

Increased Efficiency in Claims Review Process

Two further proposed changes are designed to help increase the Commission’s efficiency in processing whistleblower award applications.

• Proposed new subparagraph (e) to Exchange Act Rule 21F-8 would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the Commission, as well as to afford the Commission with the ability to bar individuals who repeatedly make frivolous award claims in Commission actions.  To prevent repeat submitters from abusing the award application process, the proposed rule would permit the Commission to permanently bar any applicant from seeking an award after the Commission determines that the applicant has abused the process by submitting three frivolous award applications.  
   
• Proposed new Exchange Act Rule 21F-18 would afford the Commission with a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the Commission in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation.  The proposed summary disposition procedures would help facilitate a more timely resolution of such relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims.  As under current rules, Claimants would have an opportunity to contest a preliminary denial of their claim before the Commission makes its final determination.

Clarification and Enhancement of Certain Policies and Procedures 

The proposed amendments would clarify and enhance certain policies, practices, and procedures in implementing the program.  These recommendations include the items listed below.

• Proposed revisions to Exchange Act Rule 21F-4(e) to clarify the definition of “monetary sanctions” so that it codifies the Commission’s current understanding and application of that term.
   
• Proposed revisions to Exchange Act Rule 21F-9 to provide the Commission with additional flexibility to modify the manner in which individuals may submit Form TCR (Tip, Complaint or Referral). 
   
• Proposed revisions to Exchange Act Rule 21F-8 to provide the Commission with additional flexibility regarding the forms used in connection with the whistleblower program. 
   
• Proposed amendment to Exchange Act Rule 21F-12 to clarify the list of materials that the Commission may rely upon in making an award determination. 
   
• Proposed amendment to Rule 21F-13 to clarify the materials that may comprise the administrative record for purposes of judicial review.

Interpretive Guidance

In addition to the foregoing proposed rule amendments, the Commission is publishing proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications.  Under the proposed guidance, in order to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.   

What’s Next?

The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program.  After careful review of the comments, the Commission will consider what further action to take on the proposal.

 

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[1] Whenever the reserve in the Commission’s Investor Protection Fund (“IPF”) falls below $300 million, the Commission by law must replenish the IPF with any collected monetary sanctions that are not paid to the victims of the violations.  These funds otherwise would be directed to the United States Treasury, where they could be made available for use in funding other valuable public programs.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Adopts Targeted Changes to Public Liquidity Risk Management Disclosure

The Securities and Exchange Commission today adopted amendments to public liquidity-related disclosure requirements for certain open-end funds.  Under the amendments, funds would discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management programs.  This requirement replaces a pending requirement that funds publicly provide a quantitative end-of-period snapshot of historic aggregate liquidity classification data for their portfolios on Form N-PORT. 

The Commission adopted the open-end fund liquidity rule in October 2016 in an effort to promote effective liquidity risk management programs in the fund industry.  Management of liquidity risk is important to funds’ ability to meet their statutory obligation — and their investors’ expectations — regarding redeemability of their shares.  Since adoption of the 2016 rule, staff has engaged in extensive outreach to identify potential issues associated with the effective implementation of the rule.

This outreach resulted in a series of actions taken by the Commission.  In addition to today’s adoption, the Commission previously adopted a rule that extends by six months the compliance date for the classification and classification-related elements of the liquidity rule and related reporting requirements.  In addition, the staff has issued guidance intended to assist funds in complying with the liquidity rule’s requirements.  These actions are aimed at providing investors with accessible and useful information about liquidity risk management of the funds they hold while providing sufficient time for funds to implement the requirement to classify their holdings in an efficient and effective manner.   

“The amendments will require funds to make information on a key aspect of effective portfolio management available to investors.  This additional information should enhance investor-specific evaluation and decision making.  Funds vary widely in portfolio management and I encourage funds to develop disclosure practices that best inform our Main Street investors of the fund’s approach to liquidity management, including, if appropriate, using quantitative metrics,” said Chairman Clayton. “As we move forward, the SEC staff will review quantitative liquidity disclosures and evaluate whether there are common quantitative metrics that allow for comparison across similarly situated funds that can and should be disclosed to investors and the market.  I look forward to the staff’s analysis.”

These amendments will become effective sixty days after they are published in the Federal Register.

FACT SHEET
Adoption of Amendments to Public Liquidity Risk Management Disclosure
SEC Open Meeting
June 28, 2018

The Securities and Exchange Commission is adopting amendments to public liquidity-related disclosure requirements for open-end funds.  These actions are meant to help provide investors with accessible and useful information about the liquidity risk management practices of the funds they hold.

Highlights

Improved Liquidity Disclosure

Under the amendments, funds would discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management program, replacing a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT. 

Enhanced N-PORT Classification Reporting

The amendments to Form N-PORT (the form that funds will file each month with portfolio holdings information) will provide funds the flexibility to split their portfolio holdings into more than one classification category in three specified circumstances when split reporting equally or more accurately reflects the liquidity of the investment or eases cost burdens.  Finally, Form N-PORT will require that funds disclose their holdings of cash and cash equivalents not reported elsewhere on the Form.

What’s Next?

The effective date for the form amendments will be 60 days after publication in the Federal Register.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Proposes New Approval Process for Certain Exchange-Traded Funds

The Securities and Exchange Commission today voted to propose a new rule and form amendments intended to modernize the regulatory framework for exchange-traded funds (ETFs), by establishing a clear and consistent framework for the vast majority of ETFs operating today.  ETFs that satisfy certain conditions would be able to operate within the scope of the Investment Company Act of 1940 and to come to market without applying for individual exemptive orders.  The proposal would therefore facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors.    

ETFs are hybrid investment products not originally provided for by the U.S. securities laws.  Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to redeem directly from the fund.  Since 1992, the Commission has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act.  ETFs have grown substantially in that period, and today the over 1,900 ETFs represent nearly 15% of total investment company assets.  Investors use ETFs for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and for hedging portfolios.

“Many Main Street investors now use ETF investments to meet their financial goals. This proposal is an important step in moving a substantial portion of the $3.4 trillion ETF market under a rules-based framework that continues to provide the oversight and protections investors expect,” said Chairman Jay Clayton.  “The development of ETFs has given investors options that can more effectively meet their goals.  We should embrace such innovation and ensure that our regulatory framework allows for it, while being unwaveringly true to our investor protection mission.  We will continue to monitor this market, including in consultation with our Investor Advisory Committee and our Fixed Income Market Structure Advisory Committee, and welcome public comment.”

ETFs relying on the rule would have to comply with certain conditions designed to protect investors, including conditions on transparency and disclosure.  The SEC will seek public comment on the proposal for 60 days.

FACT SHEET
Exchange-Traded Funds
SEC Open Meeting
June 28, 2018

Highlights

The Commission is proposing a new rule and amendments to forms designed to modernize the regulatory framework for exchange-traded funds (“ETFs”).  Proposed rule 6c-11 would permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (the “Act”), and come directly to market without the cost and delay of obtaining an exemptive order.  This should facilitate greater competition and innovation in the ETF marketplace by lowering barriers to entry.  The proposal would replace hundreds of individualized exemptive orders with a single rule subject to public notice and comment.  The proposed rule’s standardized conditions are designed to level the playing field among most ETFs and protect ETF investors, while proposed disclosure amendments would provide investors who purchase and sell ETF shares on the secondary market with new information.

Scope of Proposed Rule 6c-11

Proposed rule 6c-11 would be available to ETFs organized as open-end funds, the structure for the vast majority of ETFs today.  ETFs organized as a unit investment trusts, ETFs structured as a share class of a multi-class fund, and leveraged or inverse ETFs would not be able to rely on the proposed rule.

Conditions for Reliance on Proposed Rule 6c-11

Proposed rule 6c-11 would provide certain exemptions from the Act and also impose certain conditions.  The proposed conditions include the following:

• Transparency.  Under proposed rule 6c-11, an ETF would be required to provide daily portfolio transparency on its website.
   
• Custom basket policies and procedures.  An ETF relying on proposed rule 6c-11 would be permitted to use baskets that do not reflect a pro-rata representation of the fund’s portfolio or that differ from other baskets used in transactions on the same business day (“custom baskets”) if the ETF adopts written policies and procedures setting forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders.  The proposed rule also would require an ETF to comply with certain recordkeeping requirements.
   
• Website disclosure.  The proposed rule and form amendments would require ETFs to disclose certain information on their websites, including historical information regarding premiums and discounts and bid-ask spread information.  These disclosures are intended to inform investors about the efficiency of an ETF’s arbitrage process.  Additionally, the proposal would require an ETF to post on its website information regarding a published basket at the beginning of each business day.

Rescission of Certain ETF Exemptive Relief

To help create a consistent ETF regulatory framework, the proposal recommends rescinding exemptive relief previously granted to ETFs that would be able to rely on the rule.  The proposal also recommends rescinding exemptive relief permitting ETFs to operate in a master-feeder structure, which very few ETFs currently utilize.  However, the proposal recommends grandfathering existing master-feeder arrangements involving ETF feeder funds, but preventing the formation of new ones, by amending relevant exemptive orders. Additionally, the proposal does not recommend rescinding exemptive relief that permits ETF fund of funds arrangements.

Proposed Amendments to Form N-1A and Form N-8B-2

The Commission is proposing several amendments to Form N-1A – the form ETFs structured as open-end funds must use to register under the Act and to offer their securities under the Securities Act – to provide more useful, ETF-specific information to investors who purchase ETF shares on an exchange.  The Commission also is proposing that ETFs organized as UITs provide the same information to investors on Form N-8B-2 – the form ETFs structured as UITs must use to register under the Act.

What’s Next?

The comment period for the proposed rule and form amendments will be 60 days after publication in the Federal Register.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Adopts Inline XBRL for Tagged Data

The Securities and Exchange Commission today voted to adopt amendments to eXtensible Business Reporting Language (XBRL) requirements for operating companies and funds.  The amendments are intended to improve the quality and accessibility of XBRL data. 

The amendments, which will go into effect in phases, require the use of Inline XBRL for financial statement information and risk/return summaries.  Inline XBRL has the potential to benefit investors and other market participants while decreasing, over time, the cost of preparing information for submission to the Commission.  The amendments also eliminate the requirements for operating companies and funds to post XBRL data on their websites.   

“The amendments are part of the Commission’s continued efforts to modernize reporting and to improve the accessibility and usefulness of disclosures to investors, including our Main Street investors.  The Commission will continue to monitor industry practices and market developments in disclosure technologies and ensure our rules adapt with the times,” said Chairman Jay Clayton.  “The amendments reflect the Commission’s effort to use developments in structured disclosure technology to lower costs borne by filers and investors.  I want to particularly thank Commissioners Stein and Piwowar who, over their tenures and in the interests of investor protection and efficient markets, have worked to ensure that information can be disseminated more quickly and more broadly through many historic and new channels.”
 

FACT SHEET
Inline XBRL Filing of Tagged Data
SEC Open Meeting
June 28, 2018

Highlights

The amendments require the use of the Inline eXtensible Business Reporting Language (“XBRL”) format for the submission of operating company financial statement information and fund risk/return summary information and make related changes.  Inline XBRL involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable. 

The amendments are intended to improve the data’s usefulness, timeliness, and quality, benefiting investors, other market participants, and other data users.  The amendments are also intended to decrease, over time, the cost of preparing the data for submission to the Commission. 

While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements.

Inline XBRL for operating companies

• Operating companies that are currently required to submit financial statement information in XBRL will be required, on a phased basis, to transition to Inline XBRL.
• Phase-in:
  • Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.
  • Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.
  • All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021.
  • Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.

Inline XBRL for funds

• Funds that are currently required to submit risk/return summary information in XBRL will be required, on a phased basis, to transition to Inline XBRL. 
• The amendments also eliminate the 15 business day filing period for risk/return summary XBRL data, so that the data will be more timely available to the public.
• Phase-in:
  • Large fund groups (net assets of $1 billion or more as of the end of their most recent fiscal year) will be required to comply two years after the effective date of the amendments.
  • All other funds will be required to comply three years after the effective date of the amendments.

Website posting requirement elimination

• The requirement for operating companies and funds to post XBRL data on their websites will be eliminated upon the effective date of the amendments.

Benefits of the Inline XBRL Technology

• Among the potential benefits, Inline XBRL:
  • Is expected to reduce, over time, XBRL preparation time and effort by eliminating duplication and facilitating the review of XBRL data.  
  • Gives the preparer full control over the presentation of XBRL disclosures within the HTML filing.
  • Is expected to reduce the likelihood of inconsistencies between HTML and XBRL filings and improve the quality of XBRL data. 
  • Enhances the usability of structured disclosures for investors through greater accessibility and transparency of the data and enhanced capabilities for data users, who would no longer have to view the XBRL data separately from the text of the documents. 
• In addition, tools like the open source Inline XBRL Viewer (more information; download) can be used by filers and the public to review and analyze the XBRL data more efficiently. 
• For fund investors, the benefits of Inline XBRL are expected to be enhanced by the more timely availability of risk/return summary XBRL data due to the elimination of the 15 business day XBRL filing period.
• For funds, the amendments also will facilitate efficiencies in the filing process by permitting the concurrent submission of XBRL data files with certain post-effective amendment filings.

SEC Press Release

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SEC Expands the Scope of Smaller Public Companies that Qualify for Scaled Disclosures

The Securities and Exchange Commission today voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations.

“I want our public capital markets to be a place where smaller companies can thrive and thereby provide our Main Street investors with more access to investing options where our public company disclosure rules and protections apply,” said SEC Chairman Jay Clayton.  “Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all.  These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.  Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.”

The new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition.  The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million.  This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues.  The rules will become effective 60 days after publication in the Federal Register.

The amendments do not change the threshold in the “accelerated filer” definition that requires, among other things, that filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting.  However, Chairman Clayton has directed the staff, and the staff has begun, to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers in order to further reduce compliance costs for those companies.

FACT SHEET
Amendments to the
Smaller Reporting Company Definition
SEC Open Meeting
June 28, 2018

Background

Today the Commission approved amendments to raise the thresholds in the smaller reporting company definition, thereby expanding the number of smaller companies eligible to comply with our current scaled disclosure requirements.  These amendments are intended to promote capital formation and reduce compliance costs for smaller companies while maintaining appropriate investor protections.

The Commission established the smaller reporting company (“SRC”) category of companies in 2008 in an effort to provide general regulatory relief for smaller companies.  SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X.  Under the previous definition, SRCs generally were companies with less than $75 million in public float.  Companies with no public float − because they have no public equity outstanding or no market price for their public equity − were considered SRCs if they had less than $50 million in annual revenues. 

Amendments to the Smaller Reporting Company Definition

Under the amendments, companies with a public float of less than $250 million will qualify as SRCs.  A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year. 

The following table summarizes the amendments to the SRC definition.

Criteria	Previous SRC Definition	Revised SRC Definition
Public Float	Public float of less than $75 million	Public float of less than $250 million
Revenues	Less than $50 million of annual revenues and no public float	Less than $100 million of annual revenues and no public float, or public float of less than $700 million

Consistent with the previous definition, under the amendments, a company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds.  The subsequent qualification thresholds, set forth in the table below, are set at 80% of the initial qualification thresholds.   
 

Criteria	Previous SRC Definition	Revised SRC Definition
Public Float	Public float of less than $50 million	Public float of less than $250 million
Revenues	Less than $40 million of annual revenues and no public float	Less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and Less than $560 million of public float, if it previously had $700 million or more of public float.

Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition.  These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.

Amendments to Rule 3-05 of Regulation S-X

The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X increase the net revenue threshold in that rule from $50 million to $100 million.  As a result, companies may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million.

Amendments to the Accelerated Filer and Large Accelerated Filer Definitions

The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2.  As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.  However, the Chairman has directed the staff, and the staff has begun, to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers in order to promote capital formation by reducing compliance costs for those companies, while maintaining appropriate investor protections.

SEC Press Release

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Former Equifax Manager Charged With Insider Trading

The Securities and Exchange Commission today charged a former Equifax manager with insider trading in advance of the company’s September 2017 announcement of a massive data breach that exposed Social Security numbers and other personal information of approximately 148 million U.S. customers.   This is the second case the SEC has filed arising from the Equifax data breach.  In March, the former chief information officer of Equifax’s U.S. business unit was charged with insider trading. 

In a complaint filed in federal court in Atlanta today, the SEC charged that Equifax software engineering manager Sudhakar Reddy Bonthu traded on confidential information he received while creating a website for consumers impacted by a data breach.

According to the complaint, Bonthu was told the work was being done for an unnamed potential client, but based on information he received, he concluded that Equifax itself was the victim of the breach.  The SEC alleges that Bonthu violated company policy when he traded on the non-public information by purchasing Equifax put options.  Less than a week later, after Equifax publicly announced the data breach and its stock declined nearly 14 percent, Bonthu sold the put options and netted more than $75,000, a return of more than 3,500 percent on his initial investment.

Bonthu, 44, was terminated from Equifax in March after refusing to cooperate with an internal investigation into whether he had violated the company’s insider trading policy.

“As we allege, Bonthu, who was entrusted with confidential information by his employer, misused that information to conclude that his company had suffered a massive data breach and then sought to illegally profit,” said Richard R. Best, Director of the SEC’s Atlanta Regional Office.  “Corporate insiders simply cannot abuse their access to sensitive information and illegally enrich themselves.”

In a parallel proceeding, the U.S. Attorney’s Office for the Northern District of Georgia filed criminal charges against Bonthu.

To settle the SEC’s civil charges, Bonthu has agreed to a permanent injunction and to return his allegedly ill-gotten gains plus interest.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by Elizabeth Skola and Justin Jeffries.  The litigation is being led by Shawn Murnahan and Graham Loomis.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

SEC Press Release

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SEC and CFTC Announce Approval of New MOU

The Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) announced today that the two agencies have approved a Memorandum of Understanding (MOU) that will help ensure continued coordination and information sharing between the two agencies.

The MOU updates and enhances a 2008 MOU to make it more relevant in the current market environment and promote efficiency in rulemaking, regulatory oversight, and enforcement.  For example, the new MOU specifically addresses the regulatory regime for swaps and security-based swaps.  

“Today’s interrelated markets demand that the SEC and CFTC work together to provide a coherent and coordinated approach to regulation, said SEC Chairman Jay Clayton.  “This MOU confirms our agencies’ commitment to working together as partners with distinct missions—all to the benefit of investors, as well as other market participants.”

“Chairman Clayton and I identified these rules and regulations as an area where coordination would enhance our effectiveness,” said CFTC Chairman Christopher Giancarlo.  “Simply put, greater harmonization of our Title VII rules will enhance our oversight efforts and reduce unnecessary complexity, and lessen costs on both regulators and market participants.  This MOU strengthens our joint regulatory response, streamlines our partnership and makes information sharing more seamless and effective.” 

The agencies anticipate that they will continue to cooperate primarily through ongoing informal consultations and meetings. 

SEC Press Release

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SEC Charges Credit Ratings Analyst and Two Friends with Insider Trading

The Securities and Exchange Commission today charged a credit ratings agency employee with tipping two friends about The Sherwin-Williams Co.’s confidential plans to acquire The Valspar Corp., which he learned of through his work.  The SEC also charged the two friends with trading on the illicit tips, which reaped them substantial profits.
 
According to the SEC’s complaint, Sebastian Pinto-Thomaz, an analyst in the credit ratings agency’s New York office, learned of the acquisition when Sherwin-Williams consulted the agency about the potential effect of the transaction on its credit rating.  The SEC alleges that soon after, Pinto-Thomaz tipped his friends, who bought Valspar securities before the merger was announced. Valspar’s shares rose 23 percent on the news and the friends, Abell Oujaddou, a co-owner and co-manager of an upscale New York hair salon, and Jeremy Millul, a New York jeweler, sold their holdings and respectively made approximately $192,000 and $107,000 in profits.
 
“As alleged in our complaint, Pinto-Thomaz’s tips violated his obligations to his employer and allowed his friends to reap nearly $300,000 in illicit trading profits,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Employees of credit ratings agencies often receive confidential corporate information ahead of mergers, acquisitions, and other market-moving events, and, similar to investment bankers, attorneys, and other corporate advisors, must not abuse this access by trading on the information or by tipping others.”
 
The SEC’s complaint, filed in federal district court in Manhattan, charges Pinto Thomaz, Oujaddou, and Millul with fraud and seeks disgorgement of ill-gotten gains, prejudgment interest, penalties, and injunctive relief.  In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Pinto-Thomaz, Oujaddou, and Millul.

The SEC’s investigation, which is continuing, has been conducted by David C. Austin, Melanie A. MacLean, and Simona K. Suh of the Market Abuse Unit and by Debbie Chan of the New York Regional Office, with assistance from John Rymas and Mathew Wong of the unit’s Analysis and Detection Center.  The case has been supervised by Mr. Sansone.  The SEC’s litigation will be led by Mr. Austin, Ms. MacLean, and Ms. Suh.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC Press Release

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Investors, Innovation, and Performance Top SEC's Draft Strategic Plan

The Securities and Exchange Commission today published a draft strategic plan that focuses on investors, innovation, and performance as the top strategic goals in coming years. 
 
The SEC is seeking public comment on the proposed draft that will guide the SEC’s priorities through FY 2022.  The plan highlights the SEC’s commitment to serving the long-term interests of Main Street investors; becoming more innovative, responsive, and resilient to market developments and trends; and leveraging staff expertise, data and analytics to bolster performance.
 
“This plan focuses on the most important goals and initiatives that will best position the SEC to fulfill our mission of protecting investors, ensuring fair, orderly, and efficient markets and facilitating capital formation,” said SEC Chairman Jay Clayton. “We are presenting the plan in a more concise and readable format this year, which we hope will further encourage investors – particularly our Main Street investors – and market participants to share their views on how we can meet and exceed their expectations of our agency.”
 
The draft plan was prepared in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four year period.

To comment on the 2018-2022 Draft Strategic Plan, send an email to PerformancePlanning@sec.gov.

SEC Press Release

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Merrill Lynch Admits to Misleading Customers about Trading Venues

The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith with misleading customers about how it handled their orders.  Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty.

According to the SEC’s order, Merrill Lynch falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers.  Merrill Lynch called this practice “masking.” Masking entailed reprogramming Merrill Lynch’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries.  By masking the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges. 

After Merrill Lynch stopped masking in May 2013, it did not inform customers about its past practices, but instead took additional steps to hide its misconduct.  Altogether, the SEC’s order found that Merrill Lynch falsely told customers that it executed more than 15 million “child” orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers. 

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

“Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, Chief of the Enforcement Division’s Market Abuse Unit.  “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.”         

The SEC’s order censures Merrill Lynch and requires it to pay a $42 million civil penalty.

The SEC’s investigation was conducted by Marc E. Johnson, Colby A. Steele, Ainsley Kerr, and Carolyn M. Welshhans of the SEC Enforcement Division’s Market Abuse and Cyber Units, and Cheryl Crumpton, Supervisory Trial Attorney.  The case was supervised by Robert A. Cohen, Chief of the Cyber Unit, and Mr. Sansone.

The SEC appreciates the assistance of the Office of the New York Attorney General.

SEC Press Release

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Daniel J. Wadley Named as Regional Director of Salt Lake Office

The Securities and Exchange Commission today named Daniel J. Wadley as Regional Director of its Salt Lake office.  Mr. Wadley succeeds Richard R. Best, whom the agency named Regional Director of its Atlanta office in January.

Mr. Wadley, who served as acting Regional Director after Mr. Best’s move to Atlanta, began at the SEC in 2010 as a trial counsel in the Salt Lake office.  He also has served as counsel to the Co-Directors of the Division of Enforcement. 

“Dan possesses excellent judgment and deep institutional knowledge of the Salt Lake office and the Commission that is so critical to this position,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “I am confident of the office’s continued success under his leadership.”

“Dan is well known in the Salt Lake office and region as a tough-but-fair litigator who has a keen mind and sound judgment,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “We are very fortunate to have him lead the Salt Lake office.”

Mr. Wadley said, “I am honored by this appointment and look forward to continuing the Salt Lake office’s strong tradition of enforcement in complex and cutting-edge cases as well as its effective collaboration with the Commission’s law enforcement and regulatory partners.”

 

As a trial counsel in the agency’s Salt Lake office, Mr. Wadley handled an array of litigation including:

• A Utah-based retirement plan administrator who allegedly defrauded investors in self-directed individual retirement accounts (IRAs)
• Two business associates in Chile who allegedly engaged in insider trading on nonpublic information that one of them learned while serving on the board of directors of a pharmaceutical company
• The former chief financial officer of a computer networking device manufacturer who allegedly diverted company funds to cover unauthorized personal and entertainment expenses
• A Utah man and company who allegedly operated a real estate-based Ponzi scheme that bilked $100 million from investors nationwide, against whom the agency prevailed at trial

Before joining the SEC, Mr. Wadley was in private practice in Salt Lake City and in the Washington, D.C. area.  He received his law degree with honors from Georgetown University Law Center in 2000 and his undergraduate degree with honors from Brigham Young University in 1997.

SEC Press Release

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Maurya C. Keating Named an Associate Regional Director for Examinations in New York Regional Office

The Securities and Exchange Commission today announced that Maurya C. Keating has been named an Associate Regional Director for the Investment Adviser and Investment Company examination program in the agency's New York Regional Office. She will join the agency later this month.

Ms. Keating most recently served as a Lead Director/Vice President & Associate General Counsel of AXA Equitable Life Insurance Co., where she spent the past 13 years.  She also served as Investment Advisor Chief Compliance Officer for the firm’s retail platform.  During her tenure at AXA, Ms. Keating focused on securities, investment advisory, and insurance legal matters, had overall responsibility for the firm’s compliance program, and managed its on-site SEC and FINRA examinations.  Prior to joining AXA, Ms. Keating served as Associate General Counsel at New York Life Insurance Co., where she specialized in compliance, legal, and regulatory matters.

"Maurya brings enormous talent, many years of industry experience, and a widely diversified array of accomplishments to the SEC," said Marc P. Berger, Director of the SEC’s New York Regional Office.  "I am excited to have the opportunity to work with her as she applies her substantial skills to help lead New York’s talented and dedicated examination team."

"I am delighted to welcome Maurya to the team," said Pete Driscoll, Director of the Office of Compliance Inspections and Examinations. "The New York region is responsible for more than 2,800 registered investment advisers with more than $18 trillion in assets under management and over 200 investment company complexes.  Maurya's significant industry experience and leadership skills will be an invaluable addition to the National Examination Program."

Ms. Keating added, "I am honored and excited to join the SEC and the New York Regional Office, and to work with the talented and dedicated staff. Having worked in the industry for many years, I have developed a deep respect for the work of the Commission and staff and look forward to contributing to advancing its mission."

Ms. Keating earned her Bachelor of Arts and Master of Arts degrees from The Catholic University of America and her Juris Doctorate degree from St. John’s University School of Law.

SEC Press Release

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SEC Charges Merrill Lynch for Failure to Supervise RMBS Traders

The Securities and Exchange Commission today announced that Merrill Lynch, Pierce, Fenner & Smith Inc. will pay more than $15 million to settle charges that its employees misled customers into overpaying for Residential Mortgage Backed Securities (RMBS).  Merrill Lynch agreed to repay more than $10.5 million to its customers and to pay penalties of approximately $5.2 million.

In its order, the SEC found that Merrill Lynch traders and salespersons convinced the bank’s customers to overpay for RMBS by deceiving them about the price Merrill Lynch paid to acquire the securities.  The order also found that Merrill Lynch’s RMBS traders and salespersons illegally profited from excessive, undisclosed commissions – called “mark-ups” – which in some cases were more than twice the amount the customers should have paid.  According to the SEC’s order, Merrill Lynch failed to have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions to the detriment of its customers.

“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “The Commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”

The SEC’s order found that that the Merrill Lynch traders and salespersons violated antifraud provisions of the federal securities laws in purchasing and selling RMBS and that Merrill Lynch failed to reasonably supervise them.  Without admitting or denying the findings, Merrill Lynch agreed to be censured, pay a penalty of approximately $5.2 million, and pay disgorgement and interest of more than $10.5 million to Merrill Lynch customers that were parties to the transactions that are the subject of the order.

 

The SEC’s investigation was conducted by Melissa Lessenberry, Thomas Silverstein, and Kelly Rock, with assistance from Sharon Bryant, John Worland, and Sarah Concannon, and was supervised by Andrew Sporkin.  The SEC appreciates the assistance of the Special Inspector General for the Troubled Asset Relief Program and the Department of Justice.

SEC Press Release

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SEC Names Sarah ten Siethoff Associate Director in the Division of Investment Management’s Rulemaking Office

The Securities and Exchange Commission today announced that Sarah G. ten Siethoff has been named the Associate Director for the Division of Investment Management’s Rulemaking Office.  As Associate Director, Ms. ten Siethoff will develop recommendations for rulemaking and other policy initiatives relating to funds and investment advisers under the federal securities laws.  Ms. ten Siethoff has been a member of the Division of Investment Management in a variety of positions since 2008, serving most recently as Deputy Associate Director in the Rulemaking Office.  

“Sarah is a talented leader who always approaches her work with the long term interests of investors in mind,” said Dalia Blass, Director of the Division of Investment Management.  “Her intellectual curiosity and commitment to developing thoughtful policy recommendations for the benefit of Main Street investors has earned her the respect of her colleagues across the Commission.  I look forward to Sarah’s continued leadership and counsel in her new role.” 

Chairman Jay Clayton added, “I have worked directly with Sarah and I agree with and fully endorse Dalia’s assessment of Sarah’s skills and the decision to promote her to this important role.” 

Ms. ten Siethoff added, “I am honored to lead the Rulemaking Office and continue working with the talented staff in the Division of Investment Management and throughout the Commission to serve American investors and help develop a fair and efficient regulatory framework for funds and investment advisers.”

Prior to her SEC service, Ms. ten Siethoff was an Associate with Cleary Gottlieb Steen and Hamilton LLP.  Ms. ten Siethoff received her law degree from Yale Law School, where she was a Case Notes Editor of the Yale Law Journal.  She also holds a master’s degree in international relations from Yale University, and a bachelor’s degree with highest distinction from the University of Virginia.  

SEC Press Release

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SEC Modernizes the Delivery of Fund Reports and Seeks Public Feedback on Improving Fund Disclosure

Yesterday, the Commission voted to improve the experience of investors who invest in mutual funds, ETFs and other investment funds.  In three related releases, the Commission provided a new, optional “notice and access” method for delivering fund shareholder reports, invited investors and others to share their views on improving fund disclosure and sought feedback on the fees that intermediaries charge for delivering fund reports.  These actions are part of a long-term project, led by the Division of Investment Management, to explore modernization of the design, delivery and content of fund disclosures for the benefit of investors.

“These actions are an important part of the Commission’s effort to better serve Main Street investors in our ever changing marketplace,” said SEC Chairman Jay Clayton.  “The new rule significantly modernizes delivery options for fund information while preserving the right of fund investors to receive information in paper form as they do today.  I look forward to public feedback on next steps, and encourage everyone with an interest in fund disclosure—especially Main Street investors—to give us their ideas on how to improve the design, delivery and content of fund disclosures.”

In the first of three releases, the Commission adopted new rule 30e-3.  The rule creates an optional “notice and access” method for delivering shareholder reports.  Under the rule, a fund may deliver its shareholder reports by making them publicly accessible on a website, free of charge, and sending investors a paper notice of each report’s availability by mail.  Investors who prefer to receive the full reports in paper may—at any time—choose that option free of charge.  Funds may rely on the new rule beginning no earlier than January 1, 2021.  

The Commission is also seeking public comment on additional ways to modernize fund information.  Investors, academics, literacy and design experts, market observers, and fund advisers and boards of directors are invited to visit www.sec.gov/tell-us to provide feedback on how to improve the experience of fund investors.  This input will help inform the Commission on how to modernize the design, delivery and content of fund information, including how to make better use of 21stcentury technology to provide more interactive and personalized disclosure.

Finally, the Commission is seeking comment on the framework for certain processing fees that broker-dealers and other intermediaries charge funds for delivering fund shareholder reports and other materials to investors.

The Commission requests that commenters provide feedback on the requests by October 31, 2018.

###

FACT SHEET

Investment Company Disclosure and Delivery Rulemaking Package
June 5, 2018

The Commission adopted a new rule and related rule and form amendments that provide certain registered investment companies (“funds”) with an optional method to transmit shareholder reports to investors.  The Commission also issued two requests for comment: the first seeking comment from individual investors and others on enhancing fund disclosures to improve the investor experience; and the second seeking comment on the framework for processing fees charged to funds by intermediaries for the forwarding of fund shareholder reports and other materials to investors. These actions are part of the Commission’s larger initiative to improve and modernize the design, delivery, and content of information provided to fund investors.

Highlights

Adoption of an Optional Delivery Method for Fund Shareholder Reports

New rule 30e‑3 under the Investment Company Act provides an optional “notice and access” method to allow funds to satisfy their obligations to transmit shareholder reports.  Subject to conditions in the rule, a fund may make its reports and other required materials publicly accessible at a specified website address, free of charge, and send investors a paper notice of each report’s availability by mail.  Funds will be permitted to satisfy their delivery obligations for shareholder reports by mailing reports in paper, delivering reports electronically to investors who have chosen this method under the Commission’s electronic delivery guidance, providing notice and website accessibility under rule 30e-3, or a combination of the above.

Investors who prefer paper could—at any time—elect to receive all future reports in paper that are sent by the fund complex or forwarded by the financial intermediary, or request to receive particular reports in paper on an ad-hocbasis.  Each notice provided to investors under the rule is required to explain how investors may access the report and request paper copies.  The final rule provides for an extended transition period that is intended to better inform current investors of the coming change and better enable them to easily continue to receive paper reports if they wish.

The conditions of new rule 30e‑3 include:

·      Report accessibility.  The shareholder report and the fund’s most recent prior report must be publicly accessible, free of charge, at a specified website.

·      Availability of quarterly holdings.  Quarterly holdings for the last fiscal year must also be publicly accessible at the website.  These holdings would include those in the shareholder reports, which would cover the second and fourth fiscal quarters, and would also include holdings for the first and third fiscal quarters.

·      Format.  Funds must satisfy conditions designed to ensure accessibility of reports for shareholders, including format and location.

·      Notice.  Investors will receive a notice of the availability of each report that includes a website address where the shareholder report and other required information is posted and instructions for requesting a free paper copy or electing paper transmission in the future.  The notice may include certain additional information, including, (1) instructions by which an investor can elect to receive shareholder reports or other documents by electronic delivery, and (2) additional content from the shareholder report.

·      Print upon request.  Funds must send a free paper copy of any of these materials upon request. 

·      Investor elections to receive reports in paper.  At any time, an investor may elect to receive all future reports in paper by calling a toll-free telephone number or otherwise notifying the fund or intermediary.  Elections to receive reports in paper with respect to one fund will apply to other funds held currently or in the future in the same account with the fund complex or financial intermediary.

·      Extended transition period.  During the extended transition period, the earliest that notices may be transmitted to investors in lieu of paper reports is January 1, 2021.  In general, funds will be required to provide two years of notice to shareholders before relying on the rule, if relying on the rule before January 1, 2022.

Request for comment on enhancing fund disclosure to improve the investor experience

The Commission seeks public input, particularly from individual investors, on enhancing fund disclosures.  This request for comment is the first major step in a long-term initiative, led by the Division of Investment Management, to improve the investor experience by updating the design, delivery, and content of fund disclosure for the benefit of individual investors.  The request for comment investigates whether fund information is presented in a way that works best for individual investors. The release requests feedback directly from individual investors, academics, literacy and design experts, market observers, and fund advisers and boards of directors on the design, delivery, and content of fund disclosure, including shareholder reports as well as prospectuses, advertising, and other types of disclosure.  It also solicits feedback on investor preferences for means of delivery and how to make better use of 21stcentury technology, including how to make disclosure more interactive and personalized.  In order to encourage feedback from individual commenters, the release includes a short Feedback Flier, which includes key questions from the request for comment and can be submitted to www.sec.gov/tell-us.

Request for comment on processing fees intermediaries charge for forwarding fund materials

With the adoption of rule 30e‑3, the Commission believes that it is appropriate to consider more broadly the overall framework for the processing fees that broker-dealers and other intermediaries charge funds.  These fees are charged in connection with forwarding shareholder reports and other materials to beneficial shareholders under current rules of the New York Stock Exchange and other self-regulatory organizations.  The Commission seeks public comment and additional data on the current processing fee framework for fees charged by intermediaries for the distribution of disclosure materials other than proxy materials (e.g., shareholder reports and prospectuses) to fund investors to better understand the potential effects on funds and their investors.  The Commission is requesting comment on topics such as, but not limited to, the assessment of processing fees, transparency of these fees, remittances received by financial intermediaries for delivery of fund documents, whether the structure and level of processing fees should be set by another entity, and the appropriateness of these fees in cases where intermediaries are separately paid shareholder servicing fees from fund assets.  

What’s Next?

New rule 30e-3 and the related amendments to rules and forms will be published on the Commission’s website and in the Federal Register.  Funds will be permitted to rely on the new rule as early as January 1, 2021.  

The Commission will seek public comment on the two requests for comment until October 31, 2018.  These extended comment periods will permit retail investors and other interested parties the opportunity to review the releases, and potentially to gather relevant data for submission in the comment file.

SEC Press Release

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SEC Charges Investment Adviser and Two Former Managers for Misleading Retail Clients

The Securities and Exchange Commission today announced that New York-based investment adviser deVere USA, Inc. has agreed to pay an $8 million civil penalty related to its failure to disclose conflicts of interest to its retail clients. The settlement will result in the establishment of a Fair Fund for distribution of the penalty to affected clients. The SEC also announced the filing of a litigated action against two deVere USA investment adviser representatives, one of whom was the CEO of the firm.  

According to the SEC’s order, deVere USA failed to disclose agreements with overseas product and service providers that resulted in compensation being paid to deVere USA advisers and an overseas affiliate.  The SEC order finds that the undisclosed compensation—including an amount equivalent to 7% of the pension transfer value—created an incentive for deVere USA to recommend a pension transfer and particular product or service providers that were obligated to make payments.  The order also finds that deVere USA made materially misleading statements concerning tax treatment and available investment options. 

The SEC separately filed charges against the former deVere USA CEO, Benjamin Alderson, and a former manager, Bradley Hamilton.  The SEC’s complaint, filed in federal district court in Manhattan, alleges that Alderson and Hamilton misled clients and prospective clients about the benefits of pension transfers while concealing material conflicts of interest, including the substantial compensation that Alderson and Hamilton personally stood to receive. 
 
“Investment advisers have an obligation to disclose direct and indirect financial incentives,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “deVere USA brushed aside this duty while advising retail investors about their retirement assets, and today’s settlement will result in a Fair Fund distribution to deVere USA’s retail clients who were deprived of important information.”

Without admitting or denying the SEC’s findings, deVere USA consented to the SEC’s order, which finds that the firm violated the Investment Advisers Act of 1940, including the antifraud provisions, and imposes remedies that include an $8,000,000 penalty and engaging an independent compliance consultant. The SEC’s complaint against Alderson and Hamilton alleges that they violated the Investment Advisers Act and seeks an injunction, disgorgement plus interest, and civil money penalties.

The SEC’s investigation was conducted by Michael Ellis, Haimavathi Marlier and Wendy Tepperman in the New York office.  Assisting the investigation was Roseann Daniello in the New York office.  The litigation against Alderson and Hamilton will be led by Ms. Marlier and Mr. Ellis, and the case is being supervised by Lara Shalov Mehraban.  The SEC examination that led to the investigation was conducted by Michael Devine, Phillip Ma, Edward Perkins, and Joseph DiMaria of the New York office. The SEC appreciates the assistance of the United Kingdom’s Financial Conduct Authority.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges 13 Private Fund Advisers for Repeated Filing Failures

The Securities and Exchange Commission today announced settlements with 13 registered investment advisers who repeatedly failed to provide required information that the agency uses to monitor risk.

According to the SEC’s orders, the advisers failed to file annual reports on Form PF informing the agency about the private funds they advise, including the amount of assets under management, fund strategy, performance, and use of borrowed money and derivatives.  Private fund advisers managing $150 million or more of assets have been required to make annual filings on Form PF since 2012.  The orders found that the 13 advisers were delinquent in their filings over multi-year periods. 

“These advisers’ repeated reporting failures deprived the SEC of important information they were required by law to provide,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “We encourage investment advisers to take a fresh look at whether they are meeting their reporting obligations and adjust their compliance programs accordingly.”

The SEC uses Form PF data to monitor industry trends, inform rulemaking, identify compliance risks, and target examinations and enforcement investigations.  The SEC publishes quarterly reports with aggregated information and statistics derived from Form PF data to inform the public about the private fund industry.  It also provides Form PF data to the Financial Stability Oversight Council to help it evaluate systemic risks posed by hedge funds and other private funds.

The SEC’s orders find that the advisers violated the reporting requirements of the Investment Advisers Act of 1940.  Without admitting or denying the findings, the advisers agreed to be censured, to cease and desist, and to each pay a $75,000 civil penalty.  During the course of the SEC’s investigation, the advisers also remediated their failures by making the necessary filings. 

The SEC’s investigation was conducted by Oreste P. McClung and Lisa M. Candera of the Enforcement Division’s Asset Management Unit with assistance from the Private Funds Unit in the Office of Compliance Inspections and Examinations and the Analytics Office in the Division of Investment Management.  Brendan P. McGlynn supervised the investigation.

The SEC’s orders are:

Bachrach Asset Management Inc.

Biglari Capital LLC

Brahma Management Ltd.

Bristol Group Inc.

CAI Managers & Co. L.P.

Cherokee Investment Partners LLC

Ecosystem Investment Partners LLC

Elm Partners Management LLC

HEP Management Corp.

Prescott General Partners LLC

RLJ Equity Partners LLC

Rose Park Advisors LLC

Veteri Place Corp.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.