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.

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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.

 

 

In the hectic world of financial services, registered representatives and investment adviser representatives are always looking to increase their assets under management. At what cost? Are there situations where you would be better off just saying no to accepting that one additional client?

In my many years of defending representatives and advisers from customer complaints, the unqualified answer is yes; there are situations when you are better off just saying no. Any good risk avoidance program will provide for the proper screening/selection of prospective clients. I have addressed this very issue in a risk avoidance handbook.whistle

The key to this screening process is being able to sniff out the types of clients that you do not want to accept. For example, are you the fourth adviser that this client has come to in the last four years? Does the client profile not fit your personal/company investment philosophy? Does the client have unrealistic expectations on what she is expecting you to deliver?

If the answer to any of these questions is in the affirmative, there should be a huge stoplight in front of you flashing red. Any client who fits any of these descriptions is also the client most likely to bring a claim against an adviser.

So before you take on any client with a little money, be cautious. Are there red flags coming into the relationship? If so, just say no.

 

The SEC has repeatedly included issues around social media in its annual exam priorities for investment advisers. With the SEC’s recent release of a final rule on the subject, the SEC has taken that “exam priority” to the next level.

Under this new rule, investment advisers will have to complete an additional component to their annual Form ADV filed with the SEC. In doing so, investment advisers will have to disclose their addresses for Twitter, Facebook and LinkedIn. So what’s the point?

By requiring this disclosure, the SEC can better focus on each examined firm’s use of social media. Undoubtedly, the SEC will use this information when framing its examination of individual firms.

The SEC can also use this information on an ongoing basis to assess what firms are putting out there on social media. The industry has to assume that the SEC will be doing more with this information than just tucking it away for examination purposes.Core Values

This new rule should incentivize you to review your social media policy, assuming that you have one. If you do not have one, you need to have one prepared.

You should also monitor the information that your firm is putting out there on social media. Does it confirm with SEC rules? Rest assured. If you are not minding the store, the SEC will.

Back in April, the Securities and Exchange Commission sought public comments on modernizing certain business and financial disclosure requirements in Regulation S-K.  In their Concept Release, the SEC noted that some investors and interest groups have “expressed a desire for greater disclosure of a variety of public policy and sustainability matters, stating that these matters are of increasing significance to voting and investment decisions.”

48936020 - man pointing at the brown picture of oil industry components and green eco energy arranged in circle, earth in the centre, concept of environmentIn response to the SEC’s request for comment, numerous environmental groups pressed the SEC to require disclosure of environmental, social, and governance risks in companies’ public filings.  According to Law360’s Juan Carlos Rodriguez, last week the Sierra Club, Greenpeace, Friends of the Earth and several other groups urged the SEC to create uniform environmental, social, and governance (“ESG”) disclosure requirements for companies, which would enable investors to identify companies that reflect their values.

However, as Rodriguez noted in his article, there were others who cautioned the SEC against going too far with ESG disclosures.  For example, the American Fuel & Petrochemical Manufacturers advised the SEC that “Such supplemental discussion beyond the bounds of mandated disclosure enriches the public discussion of ESG issues, but may not be material and should not be conflated with disclosures made pursuant to Regulation S-K according to the longstanding principles of financial relevance and materiality upon which the securities markets rely.”

The takeaway here is that the SEC will likely begin to require ESG disclosures from companies in their public filings.  Rodriguez explained that the SEC’s investor advisory committee has noticed a “significant and growing” number of investors who rely on sustainability and other public policy disclosures to better understand a company’s long-term risk profile.  Thus, while it is unclear what those ESG disclosure requirements will be, it is likely that some additional regulations and disclosures will be forthcoming, so plan accordingly.

To read more, please visit: http://www.law360.com/environmental/articles/820522

The SEC recently created a new position associated with cybersecurity; senior adviser to the chair for cybersecurity (Christopher R. Hetner). Mr. Hetner has an extensive background in information technology and, in particular, cybersecurity.

19196909_sAccording to the SEC, Mr. Hetner will be responsible for (i) coordinating cybersecurity efforts across the SEC; (ii) engaging with external stakeholders; and (iii) enhancing SEC mechanisms for assessing broad-based market risk. This appointment could have a wide-ranging on the industry.

As we know, the SEC has made cybersecurity an exam priority over the last few years. The SEC is also actively conducting cybersecurity investigations and undertaking enforcement actions where appropriate. According to Chairperson White, the SEC is looking to bolster its risk-based approach. So what does this mean on a day-to-day basis?

Understand that the SEC has just upped the stakes. By retaining an industry expert who is solely focused on data-security related issues, the industry must be prepared for the SEC and FINRA to come after firms regardless if the firm sustains a breach or clients suffer harm as a result. Firms with weak or no data-security programs will surely be targeted.

Are you prepared to handle this even more focused mission of the SEC? If not, you need to more fully review you systems and procedures, both internally and externally facing. Are you testing your systems and procedures on a regular basis? If not, you better start.

The SEC is prepared; are you?

My friend and a legend in the securities regulatory field, Edwin Nordlinger, who served as Deputy Regional Director in the SEC’s New York office for years, was one of the nation’s premier experts on the SEC’s net capital and customer protection rules.  He taught hundreds of SEC staff members and others about these rules over the years.  However, when Ed would begin one of these lectures, he would always introduce himself by saying: “Hello, I am Ed Nordlinger from New York, where you do not go to jail for killing people, but you will go to jail if you violate the net capital or customer protection rules.”  Well, Ed, you continue to be right on point about these rules and their impact.

The SEC’s net capital rule, SEC Exchange Act Rule 15c3-1, requires firms to maintain certain capital so that the firms will be able to meet their financial obligations to customers and other creditors.  Similarly, SEC Exchange Act Rule 15c3-3, the customer protection rule, requires a firm that clears transactions to maintain certain reserve amounts to protect customers in the event of a firm failure.

Recently, the SEC found a firm to have violated the customer protection rule, and settled the matter with the firm whereby the firm agreed to pay a fine of $358 million and a total amount of $415 million.  https://www.sec.gov/news/pressrelease/2016-128.html.  Further, the SEC also charged the firm’s regulatory reporting officer and financial operations principal for aiding and abetting the violations by misleading regulators about the real reason behind certain transactions that caused the violations.  In particular, the SEC claimed that the firm used synthetic securities transactions solely to reduce the reserve calculation and release capital.  The firm also apparently used non-qualifying bank accounts that could be subject to bankruptcy if the firm were to fail.

The real kicker, however, is the SEC’s announcement that it plans to undertake a targeted sweep of firms to find potential violations by other firms of the customer protection rules.  Of course, the SEC also encouraged firms to self-report any potential violations of the customer protection rule.

In short, Ed, after all these years, you are still right.  Firms need to seriously undertake compliance with these rules, or there will be significant consequences.  Accordingly, although the rules may seem technical with no fraud or customer losses, the SEC plans major activity to ensure compliance.

Core ValuesThe SEC recently commenced an enforcement action against an investment advisory firm and its principal in connection with the failure to disclose material conflicts of interest in connection with new mutual funds that the firm recently created and managed. The SEC is seeking disgorgement and an injunction against the firm and its principal.

Clients of the firm paid a fee for investment advice. Initially, the clients were invested in an ETF program. The firm subsequently created its own mutual funds that it managed for a fee.
Without disclosing that it would be paid both an investment advisory fee and fees for managing the mutual funds, the firm moved its clients into the mutual funds, which mirrored the investments in the ETF program. So why did the SEC take issue with this?

For one, the firm did not disclose the conflict of interest associated with this new strategy. The conflict of interest is that the firm is going to be paid two fees for an investment program that was the same as the prior program for which clients were only charged one fee.

Interestingly, the SEC in its complaint does not contend that the charging of two fees is per se improper. Instead, the issue is the fact that the firm did not disclose the conflict to its client before shifting the investment program. So what does this mean?

It all comes down to disclosure. If you disclose all conflicts of interest in sufficient detail, you may be able to avoid these types of enforcement issues.