The SEC has recently issued an Investor Alert regarding commentary provided about investors from what appear to be independent sources. It turns out, many of those independent sources are not independent at all. Instead, they are paid shills.

The SEC has instituted enforcement actions against such companies for generating deceptive articles on investment websites. Among other things, these companies:

  1. Failed to disclose that they received payment even though companies had paid them directly or indirectly.
  2. Used different pseudonyms to publish multiple articles the promoted the same stock.

    24752961 - grunge rubber stamp with text disclosure,vector illustration
    24752961 – grunge rubber stamp with text disclosure,vector illustration
  3. Falsified their credentials; misrepresenting themselves as accountants or a fund manager, for example.

So where does that leave firms that rely upon commentaries for the sale of stock. For one, if you pay for it, you had better disclose that you paid for it. If you did no pay for it, do a little digging to make sure that the commenter is legitimate. If not, stay away lest the SEC pay a visit.

The SEC recently published its latest investor bulletin. The SEC publishes these from time to time to bring awareness to the investing public on certain issues.

The current bulletin notes that the investor.gov web page provides a number of resources for the investing public, which include:

  1. The ability to check on an investment professional.
  2. Self-education about various products.
  3. To learn about online tools to make investing a simpler process.
  4. To learn how to avoid investment fraud.
  5. To stay current with SEC resources.
  6. To start researching public companies.
  7. To consider fees associated with investing.
  8. To gain an understanding of how the market works.
  9. To plan for retirement.
  10. To find SEC contact information.Core Values

For investment professionals, you should be asking yourself why the SEC has issued such guidance. I think that the easy answer requires you to look yourself in the mirror. Apparently, the SEC does not think you are doing a good enough job educating your clients.

The fact that the SEC thinks these are important areas of interest should be notice to you to make sure your own house is in order. Are you doing enough to educate your clients on most of these topics? If not, you may want to revisit your customer service before the SEC does it for you.

Last week, the Securities and Exchange Commission proposed Rule Amendments to Improve Municipal Securities Disclosures.  According to the SEC, these rule amendments are intended to “improve investor protection and enhance transparency in the municipal securities market”.  24752961 - grunge rubber stamp with text disclosure,vector illustrationRule 15c2-12 would be amended to add two new event notices:

– Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

– Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

Currently, Rule 15c2-12 under the ’34 Act requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine, among other things, that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (MSRB) timely notice of certain events.  The proposed amendments are aimed to “provide timely access to important information regarding certain financial obligations incurred by issuers and obligated persons that could impact such entities’ liquidity and overall creditworthiness.”

There is a 60 day comment period, so firms that are affected by these new rules and wish to comment should consult with counsel as to the most effective way to provide feedback to the SEC.

The SEC recently issued regulatory guidance for robo-advisors. This guidance focuses on what robo-advisors must do to meet their disclosure obligations.

Among other things, the SEC has recommended robust disclosures in the following areas:

  1. The use of algorithms, overrides, third parties, fees and client information.
  2. The limits on use of the robo-advisor model to ensure adequate disclosures.
  3. Adequate and clear investment questionnaires to ensure suitability of investments.

Robo-advisors are a growing trend. Thus, it is only logical that the SEC would provide such guidance. Now that the SEC has spoken, it is on you to ensure that you take the message to heart; or learn the hard way.

The Office of Compliance Inspections and Examinations (or OCIE) recently issued a Risk Alert that identified the five most frequent compliance topics that arising from OCIE examinations. These compliance topics include the following:

  1. Deficient compliance programs,
  2. Late or insufficient filings,
  3. Violations of the custody rule,
  4. Code of Ethics compliance deficiencies, and
  5. Books and records.

Among other things, OCIE noted that it continues to see untailored “off-the-shelf” manuals, deficient or non-existent annual reviews, as well as the systemic failure to follow procedures. So what does this all mean?Core Values

It would certainly appear from OCIE’s analysis that firms continue to take the easy way out when it comes to compliance. There is nothing per se wrong with an “off-the-shelf” compliance manual. The impropriety comes when the firm does nothing to modify that manual to conform to its business model. Not conforming a compliance manual to your individual circumstances is no different from not having a manual.

Equally problematic are the lack of meaningful annual reviews. Any annual review must be meaningful to have any regulatory significance. A meaningful review can look differently from firm to firm, but there are a few components were noting.

First, everyone at the firm must participate in the review process. Compliance comes from the tone at the top. Second, the firm should employ a checklist of required elements, and those that may be firm specific. Third, correct any deficiencies found through this process.

Compliance is not easy. But don’t take the easy way out. Having a robust compliance program takes hard work. Do it now, or pay the SEC later.

According to Fortune, outgoing Securities and Exchange Commission Chair Mary Jo White is refusing to delay adoption of new rules and regulations.  Senate Republicans–in particular the Senate Banking Committee’s top two Republicans, Chairman Richard Shelby and Mike Crapo–requested White delay adopting new rules until after Trump takes office.  However, as reported by Reuters, White responded to Shelby and Crapo on December 12th, stating that she intends to move forward with derivative reforms mandated by Dodd-Frank, including capital and margin requirements for swap dealers, and a limit on how mutual funds and exchange-traded funds use derivatives to leverage returns.

BoardThere remain obstacles to these rules.  First, because two commissioner positions remain vacant, there are only three remaining commissioners, of which there must be a quorum to pass the new rules.  The other two commissioners, Kara Stein and Michael Piwowar, are democrat and republican, respectively.  Second, Congress could quite easily reverse any new rules within 60 legislative days of becoming final, which the Republican-controlled Congress could very well vote to do.

Thus, the takeaway is that firms must still monitor proposed new rulemaking under White’s SEC for the next few weeks, while also keeping an eye on what Congress will do in response to any new rules promulgated over the next month or so.

Following up on our earlier report that Mary Jo White, the chair of the Securities and Exchange Commission, will step down at the end of the Obama administration, news of other departures within the SEC has begun to spread.  The latest is Keith Higgins, head of the Division of Corporation Finance, who announced his plans to leave the SEC in January.  According to Sarah N. Lynch at Reuters, Higgins was oversaw the adoption of many rules pursuant to the 2012 Jumpstart Our Business Startups (JOBS) Act.

CEO treeOther top SEC officials who have recently announced their planned departures include: Stephen Luparello (Trading and Markets Division Director), Mark Flannery (Chief Economist), Matthew Solomon (Chief Litigation Counsel), and James Schnurr (Chief Accountant).

According to Lynch, Andrew Ceresney (SEC Enforcement Director), who worked alongside White prior to joining the SEC, both in private practice and at the U.S. Attorney’s Office in New York City, declined to comment on any plans to leave the SEC.

As we noted previously, these departures will continue to pave the way for President-Elect Trump to to deregulate the financial sector.

According to Tatyana Shumsky at the Wall Street Journal, the Securities and Exchange Commission has increased efforts to regulate the use of accounting metrics that do not conform to the U.S. Generally Accepted Accounting Principles, known as non-GAAP.  The SEC’s endeavor began through its division of corporation finance, which issued new compliance guidelines and sent more non-compliance letters to companies than it had in the past.  More recently, the SEC’s enforcement division is getting involved and has been probing companies on their non-GAAP financial reporting practices, as reported by the WSJ.  Indeed, according to Michael Maloney, chief accountant of the SEC’s enforcement division is looking into violations of rules governing non-GAAP metrics.  “It is a focus in within the division, we are looking closely at it,” Mr. Maloney told the American Institute of CPAs conference in Washington on Tuesday, as reported by Shumsky.

money and calculatorThe takeaway for companies that use non-GAAP metrics in their financial reporting is that the SEC has signaled their intent to increase regulation and enforcement in this area.  Be sure your compliance team has reviewed your non-GAAP financial reporting practices, particularly in light of the SEC’s division of corporate finance’s new compliance guidelines, which can be found here: https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

The latest post-election domino has fallen.  Mary Jo White, the chair of the Securities and Exchange Commission, will step down at the end of the Obama administration.  White announced her departure on Monday, paving the way for Trump to implement his plan to deregulate the financial sector. In addition to replacing White, Trump will be able to fill two openings on the five-member commission, according to Renae Merle of the Washington Post.  Thus, it is clear that Trump will be able to reshape the direction of the SEC and quickly pursue a path towards deregulating Wall Street.

Board

Financial institutions, firms, brokers, counsel, and investors should all keep a close eye on potential replacements that Trump is considering, as they will have an immediate impact on securities regulation, or lack thereof.  It is now abundantly clear that the regulatory landscape is about to undergo a major shift.  Stay tuned.

Consistent with the ongoing guidance/requirements from the SEC and FINRA, all firms must have and enforce data security policies and procedures.  Even the best policies and procedures may, however, not protect the firm in every instance.  So what do you do if there is a breach?19196909_s

One of the most important things to determine is what law governs.  In other words, if you have clients in all 50 states, it is possible that there are 50 different data breach laws that may be implicated.  Fox Rothschild LLP has a free app, Data Breach 411, which provides an overview of state data breach laws.

Knowing what you need to know is imperative when assessing a data breach.