On February 20, SEC Chair Mary Jo White delivered remarks regarding the agency’s 2014 accomplishments, including transformative rulemakings and enforcement, and its 2015 objectives. With respect to rulemaking, White outlined three specific areas that the SEC intends to enhance in 2015: (i) reforming market structure; (ii) risk monitoring of the asset manager industry; and (iii) raising capital for smaller companies. She stated the SEC is reviewing the current market structure and operations of the U.S. equity markets and working to “enhance the transparency of alternative trading system operations, expand investor understanding of broker routing decisions, address the regulatory status of active proprietary traders, and mitigate market stability concerns through a targeted anti-disruptive trading rule.” White described the SEC’s current asset management industry as “increasingly complex,” and noted that the SEC is reviewing three sets of recommendations to address this complexity and is paying “particular attention to the activities of asset managers.” Finally, White stated that the SEC will focus on implementing Regulation A+ and crowdfunding, both mandates of the JOBS Act, to assist smaller issuers with raising capital.
On February 24, the SEC announced charges against a global manufacturer for alleged violations of the FCPA involving bribes paid by its African subsidiaries in order to make sales in Kenya and Angola. Over the course of a four-year period, the manufacturer allegedly failed to detect more than $3.2 million in bribes paid in cash to employees of private companies, government-owned entities, and other local authorities, including police or city council officials. According to the SEC Order, the manufacturer maintained “inadequate FCPA compliance controls,” allowing improper payments to be recorded as legitimate business expenses, which violated the books, records, and internal control provisions of the Securities Exchange Act of 1934. Under the terms of the settlement, the manufacturer will pay over $16 million to settle the SEC’s allegations and report its FCPA remediation efforts to the SEC for three years.
On February 9, the SEC issued a proposed rule implementing Section 955 of the Dodd-Frank Act. The rule would require directors, officers, and other employees of public companies to disclose in proxy and information statements whether they use derivatives and other financial instruments to offset or “hedge” against the decline in equity securities granted by the company as compensation, or held, directly or indirectly, by employees or directors. The proposed rule would apply to equity securities of a public company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered with the SEC under Section 12 of the Exchange Act. Public comments will be accepted for 60 days following publication in the Federal Register.
On February 11, the SEC named Heather Seidel as Chief Counsel of the Division of Trading and Markets, effective immediately. Seidel will oversee the Office of Chief Counsel, which provides legal and policy advice to the Commission, issues interpretations on matters arising under the Securities Exchange Act of 1934, and manages the division’s enforcement liaison functions. She previously served as an Associate Director within the division’s Office of Market Supervision.
On February 3, the SEC released a set of publications – a Risk Alert and an Investor Bulletin – assessing the level of cybersecurity at broker-dealers and advisory firms and highlighting best practices that allow investors to help protect their online accounts. The Risk Alert contains observations based on examinations of more than 100 broker-dealers and investment advisers. The examinations focused on how the firms (i) identify cybersecurity risks; (ii) establish cybersecurity policies, procedures, and oversight processes; (iii) protect their networks and information; (iv) identify and address risks associated with remote access to client information, funds transfer requests, and third-party vendors; and (v) detect unauthorized activity.
BuckleySandler hosted a webinar, Individual Liability: Financial Crimes Professionals in the Spotlight, on January 22, 2015 as part of its ongoing FinCrimes Webinar Series. Panelists included Polly Greenberg, Chief, Major Economic Crimes Bureau at the New York County District Attorney’s Office, Richard Small, Senior Vice President for Enterprise-Wide AML, Anti-Corruption and International Regulatory Compliance at American Express, and Michael Zeldin, Special Counsel at BuckleySandler. The following is a summary of the guided conversation moderated by Jamie Parkinson, Partner at BuckleySandler, and key take-aways you can implement in your company.
Best Practice Tips and Take-Aways:
- Be completely transparent with senior management and your board of directors when escalating issues and concerns. Document your requests for program enhancements and management responses.
- Assure yourself that your team is up to the task at hand, adequately resourced and knows that they can escalate anything that concerns them to compliance and/or senior management/the Board.
- When considering the quality of your compliance program, be sure that your program is tested internally by your compliance function, tested again by your organization’s internal audit team, and in addition is examined every few years by external counsel/consultant.
- If confronted with management unwillingness to commit adequate headcount and resources necessary to the compliance program, serious consideration has to be given to resigning and/or reporting these deficiencies.
On January 27, FinCEN fined a New York securities broker-dealer firm $20 million for violating the BSA. According to the press release, the firm failed to (i) establish an adequate anti-money laundering program; (ii) conduct proper due diligence on a foreign correspondent account; and (iii) comply with Section 311 of the USA Patriot Act. These failures resulted in customers engaging in suspicious trading, including prohibited third-party activity and illegal penny stock trading, without it being detected or reported. The firm must pay $10 million of the $20 million penalty to the US Department of the Treasury. The remaining $10 million will be paid to the SEC to settle a parallel enforcement action.
On January 27, the SEC announced that it will host a roundtable to discuss ways to improve the proxy voting process, focusing most specifically on universal proxy ballots and retail participation in the proxy process. Divided into two panels, the roundtable will focus on (i) “the state of contested director elections and whether changes should be made to the federal proxy rules to facilitate the use of universal proxy ballots by management and proxy contestants;” and (ii) “strategies for advancing retail shareholder participation in the proxy process.” The roundtable is scheduled to take place on February 19 in Washington, D.C.
On January 21, the SEC announced a settlement with a credit rating agency in connection with its rating of certain commercial mortgage-backed securities (CMBS). The ratings agency agreed to pay the SEC more than $58 million for allegedly (i) misrepresenting its conduit fusion CMBS ratings methodology; (ii) publishing a “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress;” and (iii) failing to maintain and enforce internal controls regarding changes to its surveillance criteria. In a separate administrative order, the SEC instituted a litigated administrative proceeding against the former head of the agency’s CMBS Group for “fraudulently misreprent[ing] the manner in which the [ratings agency] calculated a critical aspect of certain CMBS ratings in 2011.”
On January 13, the SEC announced its Office of Compliance Inspections and Examinations’ examination priorities for 2015. The examination priorities cover a wide range of financial institutions and focus on three areas: (i) protecting retail investors, especially those saving for or in retirement; (ii) assessing market-wide risks, including cybersecurity compliance and controls; and, (iii) using data analytics to identify signals of potential illegal activity. As to the risks to retail investors, the SEC noted that such investors are being sold products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products. In addition, financial services firms are offering information, advice, products, and services to help retail investors plan for retirement. The SEC intends to assess the risks to retail investors that can arise from these trends.
On January 14, the SEC adopted new rules for security-based swap data repositories (SDRs), which store swap trading data. The rules require SDRs to register with the SEC and set reporting and public dissemination requirements for security-based swap transaction data. That reporting requirement, known as Regulation SBSR, outlines information that must be reported and publicly shared for each security-based swap transaction. The new rules are designed to increase transparency in the security-based swap market and are anticipated to reduce risks of default, improve price transparency, and hold financial institutions accountable for misconduct. The rules implement mandates under Title VII of the Dodd-Frank Act and will become effective 60 days after publication in the Federal Register. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register.
On January 12, the SEC fined two stock exchanges $14 million dollars for allegedly violating the Exchange Act by failing to accurately describe in their rules the order types being used on the exchanges. In its investigation, the SEC found that while operating under rules that described a single “price sliding” process for handling buy or sell orders, the exchanges actually offered three variations of “price sliding” order types. The SEC found that the “exchanges’ rules did not completely and accurately describe the prices at which those orders would be ranked and executable in certain circumstances, and they also failed to describe the execution priority of the three order types relative to each other and other order types.” Additionally, the SEC found that the exchanges disclosed certain information regarding how the order types operated to only some and not all of their members. The SEC determined that not all market participants were aware of how these order types operated. In addition to the $14 million penalty, the SEC order requires both exchanges, among other things, to (i) create and implement written policies and procedures related to the development of order types, and (ii) provide sufficient resources and regulatory staff to ensure regulatory functions are independent from their commercial interests. This is the SEC’s largest penalty against national securities exchanges.
On December 23, the SEC released its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs). As required by the Dodd-Frank Act, the SEC must examine each NRSRO at least once per year and provide a report summarizing its findings. As a result of the examinations, the staff recommended NRSROs improve a number of areas, including (i) the use of affiliates or third-party contractors in the credit rating process, (ii) management of conflicts of interest related to the rating business operations, and (iii) adherence to policies and procedures for determining or reviewing credit ratings. In addition, the agency issued a separate report to Congress on the state of competition, transparency, and conflicts of interest among NRSROs.
On December 29, pursuant to section 610 of the Regulatory Flexibility Act, the SEC published a list of rules scheduled for review by the agency. The list is intended to invite public comment on whether the rules should be continued, amended, or rescinded to minimize economic impact on small entities. Comments are due by January 28, 2015.
On December 15, the SEC settled charges against a global manufacturer for allegedly violating the FCPA by providing non-business payments and travel expenses to Chinese government officials with the expectation of obtaining business. The SEC investigation revealed that approximately $230,000 in improper payments were allegedly made out of the company’s China-based offices and were falsely recorded as business and marketing expenses in the company’s records. The SEC alleged that insufficient internal controls allowed for the payments to continue and that as a result the company profited $1.7 million in contracts with state-owned entities in China. The company self-reported its misconduct and provided “extensive cooperation” during the SEC’s investigation, and will pay $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.