On June 28, 2018, the Securities and Exchange Commission (“SEC“) approved amendments to its definition of “smaller reporting company” to enable more companies to be eligible for reduced disclosure requirements. Release.
SEC
Merrill Lynch Settles SEC RMBS Fraud Claims for $16M
On June 12, 2018, the United States Securities and Exchange Commission (“SEC“) issued an Order instituting administrative proceedings, making findings, and imposing remedial sanctions against Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch“), a subsidiary of Bank of America Corporation, pursuant to Section 15(b) of the Securities Exchange Act of 1934. The SEC alleged that personnel of Merrill Lynch, acting as broker-dealers engaged in secondary market trading of non-agency RMBS, made false or misleading statements to customers between June 2009 and December 2012 that led customers to accept less or pay more for securities than they otherwise might have accepted or paid. Merrill Lynch agreed to settle the claims for approximately $16 million without admitting or denying the allegations. Order.
SEC Proposes FAIR Act Rules to Promote Research Reports on Investment Funds
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.
Division of Investment Management of the SEC Issues No-Action Letter to SSB
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
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 Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Investment Professionals
On April 18, the Securities and Exchange Commission (“SEC“) voted to propose a package of rulemakings and interpretations consisting of more than 900 pages that are “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.”
As stated in the Commission’s Press Release announcing this action: “Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.”
The Commission also proposed an interpretation to reaffirm and, in some cases, clarify its views of the fiduciary duty that investment advisers owe to their clients.
In addition, the Commission proposed to help address “investor confusion” regarding the nature of their relationships with investment professionals through a new short-form disclosure document dubbed “a customer or client relationship summary” (a “CRS“). The Commission stated that it believes that Form CRS would provide retail investors with “simple, easy-to-understand information” about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.
Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.
In proposing these new regulations the Commission added that: “Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest. The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.
The public comment period will remain open for 90 days following publication of the documents in the Federal Register.
Proposed Rules: Regulation Best Interest. Form CRS Relationship Summary.
Proposed Interpretation: Standard Conduct for Investment Advisers.
SEC Proposes Transaction Fee Pilot for NMS Stocks
On March 14, 2018, the Securities and Exchange Commission (“SEC“) issued a proposed rule that “subject[s] stock exchange transaction fee pricing … to new temporary pricing restrictions across three test groups, and require the exchanges to prepare and publicly post data.” Once published in the Federal Register, the public comment period will last for 60 days. Release. Proposed Rule.
SEC Proposes Targeted Changes to Public Liquidity Risk Management Disclosure
On March 14, 2018, the Securities and Exchange Commission (“SEC“) “proposed amendments to public liquidity-related disclosure requirements for certain open-end investment management companies.” The proposed amendments, and other related actions, were designed to give investors improved information while providing the companies sufficient time to comply. Release. Proposed Rule.
SEC Division of Investment Management Letter on Cryptocurrency Related Investment Products; Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions
On January 18, 2018, in a letter to the Investment Company Institute and SIFMA, Dalia Blass, Director of the SEC’s Division of Investment Management, warned market participants against the risks of creating and marketing investment products to retail investors that hold “substantial amounts” in “cryptocurrencies and related products.” The risks/concerns posed by cryptocurrency ETFs and funds, including transparency of information, trading, valuation and custody, were highlighted.
Also, on January 19, 2018, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald issued the following Statement:
“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.” Release.
SEC Chairman Statement on Cryptocurrencies and Initial Coin Offerings
On December 11, SEC Chairman Jay Clayton issued his own statement (“Statement”) concerning cryptocurrencies and “initial coin offerings” (“ICOs”). The Statement provides a thorough review of the primary securities regulatory issues and urges caution on the part of issuers and market participants. To view the full statement, click here.