Posts by: Editorial Board

SEC Disapproves the Listing and Trading of Nine Bitcoin Related Exchange Traded Products

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On August 22, 2018, the SEC released three Orders, acting through authority delegated to the Division of Trading and Markets, that disapproved: (i) a proposed rule change application by NYSE Acra, Inc. that would have permitted it to list and trade the shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF; (ii) a proposed rule change application by NYSE Acra, Inc. that would have permitted it to list and trade shares of five exchange-traded products of the Direxion Shares ETF Trust II; and (iii) a proposed rule change application by the Cboe BZX Exchange, Inc. that would have permitted it to list and trade two classes of shares of funds of the GraniteShares ETP Trust. READ MORE →

FINRA Requests Comment on Financial Technology Innovation in the Broker-Dealer Industry

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On July 30, 2018, the Financial Industry Regulatory Authority (“FINRA“) published a Special Notice, in response to requests from the public, “seeking comments on how FINRA can support fintech development consistent with [its] mission.” In addition, FINRA requested “specific comment on certain fintech areas, including the provision of data aggregation services, supervisory processes concerning the use of artificial intelligence, and the development of a taxonomy-based machine-readable rulebook.” READ MORE →

SEC Overrules Proposed Rule Change by BZX to List and Trade Shares of the Winklevoss Bitcoin Trust

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On July 26, 2018, the Securities and Exchange Commission (“SEC“), over the objection of Commissioner Peirce, disapproved a proposed rule change application by the Bats BZX Exchange, Inc. (“BZX“) that would have permitted it to list and trade shares of the Winklevoss Bitcoin Trust. This Order, effectively, reaffirmed and superseded the action taken by the SEC on March 10, 2017, acting through authority delegated to the Division of Trading and Markets, that denied a similar application. In issuing its July 26 Order, the SEC determined that BZX had “not met its burden under the [Securities Exchange of 1934] and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”

SEC Adopts Rules to Enhance Transparency and Oversight of Alternative Trading Systems

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On July 18, 2018, the Securities and Exchange Commission (“SEC“) voted to adopt amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (“ATSs”) that trade stocks listed on a national securities exchange.

Certain ATSs will be required to file detailed public disclosures on new Form ATS-N. According to the SEC: “these disclosures are designed to allow market participants to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates.” Secondarily, the disclosures are intended to inform market participants about how the ATS operates, including order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.

According to the Fact Sheet published with its Press Release, the SEC stated:

The enhanced disclosures are also designed to enable market participants to compare an NMS Stock ATS to other trading venues and better evaluate the ATS as a potential destination for their orders.

Specifically, Form ATS-N will require an NMS Stock ATS to disclose information regarding:

  • Information about its broker-dealer operator, including identifying information and ownership.
  • ATS-related activities of its broker-dealer operator, and the broker-dealer operator’s affiliates.
  • The manner of operations of the NMS Stock ATS.

The amendments will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register. An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019. As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.

OCIE Issues Alert Regarding Compliance Issues Related to Best Execution by Investment Advisers

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On July 11, 2018, the Office of Compliance Inspections and Examinations (“OCIE“) of the Securities and Exchange Commission issued a Risk Alert regarding the most frequent best execution issues cited in adviser exams “to provide investment advisers (“advisers“), investors and other market participants with information concerning many of the most common deficiencies that the staff has cited in recent examinations of advisers’ compliance with their best execution obligations under the Investment Advisers Act of 1940.”

The following is a summary list of the examples provided by OCIE of the most common deficiencies associated with advisers’ best execution obligations.

  • Not performing best execution reviews.
  • Not considering materially relevant factors during best execution reviews.
  • Not seeking comparisons from other broker-dealers.
  • Not fully disclosing best execution practices.
  • Not disclosing soft dollar arrangements.
  • Not properly administering mixed use allocations.
  • Inadequate policies and procedures relating to best execution.
  • Not following best execution policies and procedures.

According to OCIE, the examinations within the scope of this review resulted in a range of actions, including advisers electing to amend their disclosures regarding best execution or soft dollar arrangements, revising their compliance policies and procedures, or otherwise changing their practices regarding best execution or soft dollar arrangements. To read the full text, click here.

SEC Proposes FAIR Act Rules to Promote Research Reports on Investment Funds

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On May 23, 2018, the Securities and Exchange Commission (“SEC“) proposed rules and amendments intended to promote research on mutual funds, exchange traded funds, registered closed-end funds, business development companies, and similar covered investment funds.

The Commission believes that the proposal would reduce obstacles to providing research on investment funds by harmonizing the treatment of such research with research on other public entities.

If adopted, the proposal would generally establish a safe harbor for a broker or dealer to publish or distribute research reports on investment funds under certain conditions. This proposed safe harbor is similar to a regulatory safe harbor that currently exists for research reports about other public entities.

The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register. Release.

Economic Growth, Regulatory Relief and Consumer Protection Act

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The “Economic Growth, Regulatory Relief and Consumer Protection Act,” signed by the President on May 24, amends Section 3(c)(1) of the Investment Company Act of 1940 to provide that a “qualifying venture capital fund’ may have as many as 250 beneficial holders of its securities – an increase from 100 beneficial holders.

A “qualifying venture capital fund” is defined to mean “a venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital, with such dollar amount to be indexed for inflation once every 5 years by the [Securities and Exchange] Commission, beginning from a measurement made by the Commission on a date selected by the Commission, rounded to the nearest $1,000,000.”

The definition of “venture capital fund” set forth in Rule 203(l)-1 under the Investment Advisers Act of 1940 has not been amended. Click here to view the definition.

The following is the text of the relevant amendment.

SEC. 504. SUPPORTING AMERICA’S INNOVATORS.

Section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)(1)) is amended—(1) in the matter preceding subparagraph (A), by inserting ”(or, in the case of a qualifying venture capital fund, 250 persons)” after ”one hundred persons”; and (2) by adding at the end the following: ”(C)(i) The term ‘qualifying venture capital fund’ means a venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital, with such dollar amount to be indexed for inflation once every 5 years by the Commission, beginning from a measurement made by the Commission on a date selected by the Commission, rounded to the nearest $1,000,000.'(ii) The term ‘venture capital fund’ has the meaning given the term in section 275.203(l)–1 of title 17, Code of Federal Regulations, or any successor regulation.”

The public law has not been printed yet and so is not available online. The foregoing excerpt is from the attached enrolled version which will become the public law. Release.

Division of Investment Management of the SEC Issues No-Action Letter to SSB

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On May 8, 2018, the Chief Counsel’s Office of the Division of Investment Management (“IM“) of the Securities and Exchange Commission (the “Commission“) issued a “no-action” letter to South State Bank (“SSB“) with respect to its request that the Staff of IM not recommend enforcement action to the Commission under the anti-fraud provisions of the Investment Advisers Act of 1940, and the rules thereunder, if SSB effected an internal restructuring whereby one of its advisory subsidiaries would be merged into another (the “Surviving Entity”). The merged entity would continue to operate as an operating division of the Surviving Entity (the “Division”) and would continue to use its performance track record to the same extent as it could had the restructuring not occurred.

The grant of relief was based upon representations that: (i) the Division would continue to operate as a separate business division of the Surviving Entity operating under its existing brand; and (ii) the same management team that managed the merged entity would manage the Division and the investment committee of the merged entity would continue to have responsibility for the Division’s investment decisions and recommendations.

A copy of the request and “no-action” letter response can be found here.

SEC Unveils Public Service Announcement to Promote Background Checks on Investor.gov

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On April 16, the Securities and Exchange Commission (“SEC“) unveiled a public service announcement (“PSA“) to encourage investors to check the background of their investment professional by using the free search tool on Investor.gov before investing. Chairman Clayton stated that:

“Investor education is an important line of defense against fraud and is critical to our efforts to both protect Main Street investors and improve their financial decision making. Through public service announcements, investor alerts and bulletins, and direct outreach, the SEC will continue to focus on empowering investors.” Press Release.

SEC Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

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On March 7, 2018, the Divisions of Enforcement and Trading and Markets of the Securities and Exchange Commission released a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets.”

The Statement noted that: “Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings ….”  The Statement then strongly warned that: “A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.” On this basis, the Statement set out a list of some questions investors should ask before they decide to trade digital assets on an online trading platform.