SEC

SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Financial Professionals

 

The U.S. Securities and Exchange Commission (SEC) adopted and clarified a number of rules intended to improve the relationships between retail investors, investor advisers and broker-investors, while also maintaining retail investors’ access to investment services and products. Under Regulation Best Interest, broker-dealers must act in the best interest of a retail customer when recommending any securities transaction or investment strategy. The Form CRS Relationship Summary requires registered investment advisers and broker-dealers to provide retail investors with easily comprehensible information about their relationship with their financial professional. Lastly, the SEC clarified investment advisers’ fiduciary duties and the activities that trigger a broker-dealer to be considered an investor adviser under the Advisers Act. Press Release. For further detail on the subject, read an analysis from Orrick’s Securities Litigation team here.

SEC Obtains Emergency Order Halting Alleged Diamond-Related ICO Scheme Targeting Hundreds of Investors

 

On May 21, the Securities and Exchange Commission (SEC) announced that it obtained a court order halting an ongoing $30 million Ponzi Scheme. The SEC complaint charged a cryptocurrency business and its principal with using investor funds to run a Ponzi Scheme. Release.

SEC Extends Compliance Deadline for Certain Aspects of Liquidity Risk Management Programs Under the Investment Company Act

On February 22, 2018, the Securities and Exchange Commission (“SEC“) announced that it is adopting an interim final rule that provides a six-month extension for compliance with certain requirements of Rule 22e-4 regarding a fund’s liquidity risk management program, including the portfolio classification, highly liquid investment minimum, and board approval requirements, as well as related reporting requirements under Part D of Form N-LIQUID and liquidity disclosures on Form N-PORT under the Investment Company Act of 1940.  The interim final rule extends the compliance deadline for small entities from June 1, 2019 to December 1, 2019 and for larger entities from December 1, 2018, to June 1, 2019.  The SEC also issued guidance to assist (i) funds that will not classify their full portfolio prior to the revised compliance date and (ii) In-Kind ETFs in identifying illiquid investments for purposes of complying with the 15% illiquid investment limit under Rule 22e-4. Release.

Looking Out for Main Street: SEC Focuses on Retail, Cybersecurity and Cryptocurrency

 

The Commissioners and senior officials of the Securities and Exchange Commission (“SEC” or “Commission“) addressed the public on February 23-24 at the annual “SEC Speaks” conference in Washington, D.C. Throughout the conference, many speakers referred to the new energy that SEC Chairman Jay Clayton had brought to the Commission since his confirmation in May 2017. The speakers also seemed relieved that the SEC was finally operating with a full set of commissioners since the recent additions of Robert J. Jackson, Jr. and Hester M. Peirce. Clayton’s address introduced the main refrain of the conference: that the SEC under his leadership is focused on the long-term interests of Main Street investors. Other oft-repeated themes included the challenges presented by cybersecurity and the fast-paced developments in cryptocurrency and blockchain. To address these shifts in focus, the Enforcement division plans to add more resources to the retail, cybersecurity and cryptocurrency spaces. To view the article, click here.

SEC Adopts Statement and Interpretive Guidance on Public Company Cybersecurity Disclosures

 

On February 20, the SEC approved a statement and interpretive guidance to assist public companies in preparing disclosure about cybersecurity risks and incidents. The guidance provides the SEC’s views about public companies’ disclosure obligations under existing law with respect to matters involving cybersecurity risk and incidents. Press release. Guidance.

SEC OCIE Examinations Announces 2018 Examination Priorities

 

On February 7, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2018 examination priorities. OCIE publishes its exam priorities annually “to improve compliance, prevent fraud, monitor risk, and inform policy.”

According to the Press Release publishing the examination priorities, “of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.”  Orrick believes that the focus on “developments in cryptocurrency, initial coin offerings, and secondary trading market” is significant. READ MORE

Securities and Exchange Commission Adopts Final Rule That Provides New Exemptions From Investment Adviser Registration for Advisers to Small Business Investment Companies

On January 5, 2018, the SEC adopted amendments to Rule 203(l)-1 under the Investment Advisers Act of 1940 (the “Advisers Act“) that defines a “venture capital fund” and Rule 203(m)-1 under the Advisers Act that implements the private fund adviser exemption under the Advisers Act. These amendments were adopted to reflect changes made by title LXXIV, sections 74001 and 74002 of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act“). That legislation amended sections 203(l) and 203(m) of the Advisers Act. The amendments are effective on March 12, 2018.

In particular, Title LXXIV, section 74001 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to one or more “venture capital funds” in Advisers Act section 203(l) by deeming “small business investment companies” to be “venture capital funds” for purposes of the exemption. Accordingly, the SEC amended the definition of a “venture capital fund” in Rule 203(l)-1 to include “small business investment companies.”

Title LXXIV, section 74002 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to “private funds” with less than $150 million in assets under management in Advisers Act section 203(m) by excluding the assets of “small business investment companies” when calculating “private fund assets” towards the registration threshold of $150 million. Accordingly, the SEC amended the definition of “assets under management” in Rule 203(m) to exclude the assets of “small business investment companies.”

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 Issues No-Action Letter Regarding Relief from Registration under Advisers Act for Adviser to Affiliated Foundation

On December 8, 2016, the Chief Counsel’s Office of the Division of Investment Management of the Securities and Exchange Commission (“Commission“) provided “no‑action letter” assurance to CenturyLink Investment Management Company, an investment adviser registered as such under the Investment Advisers Act of 1940 (“Adviser“), that it would not recommend enforcement action to the Commission if it were to withdraw its registration. Adviser is an indirect wholly owned subsidiary of CenturyLink, Inc., a telecommunications firm (“Parent“), that was established, and has been operated, for the sole purpose of providing investment advisory services to (i) the employee benefit plans sponsored by the Parent (the “Plans“), which were established solely for the benefit of current and previous employees of the Parent, its predecessors and affiliates, and comprise retirement and health and welfare employee benefit plans, including both qualified and nonqualified plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA“); and (ii) the CenturyLink – Clarke M. Williams Foundation (the “Foundation“), a charitable foundation organized as a Colorado nonprofit corporation by a predecessor company of the Parent for charitable and educational purposes.

The response of the staff is consistent with other no-action letters issued to wholly owned subsidiaries of a parent that satisfy comparable conditions, except with respect to the Foundation. The significance of this letter is that it extends the application of these principles to advisory services provided to a charitable foundation under the circumstances presented.

In providing its response, the staff stated that its position is based particularly on representations that:

  • Adviser is an indirect wholly owned subsidiary of the Parent and has been established, and has been operated, for the sole purpose of providing investment advisory services to the Plans and the Foundation;
  • Adviser does not hold itself out to the public as an investment adviser, provides investment advice only to the Plans and the Foundation, and will not in the future provide investment advisory services to any third party;
  • The Plans are established solely for the benefit of current and previous employees of the Parent, its predecessors and affiliates, and comprise employee benefit plans governed by ERISA;
  • The Foundation is a charitable foundation organized as a Colorado nonprofit corporation by the Parent for charitable and educational purposes, and its beneficiaries are charitable and educational organizations; the Parent is the sole voting member of the Foundation, has rights with respect to the management of the Foundation and, since 2012, is its sole contributor;
  • The only amounts received by the Parent in connection with the Plans are reimbursements that are subject to the restrictions imposed by ERISA;
  • The only amounts received in connection with Adviser’s advisory services to the Foundation are reimbursements to the Parent from the Foundation for Adviser’s expenses associated with such advisory services; and
  • Neither the Plans nor the Foundation is required to register as an investment company under the Investment Company Act of 1940.

Events

 

On November 14, 2016, the SEC hosted a Fintech Forum at its headquarters in Washington, D.C. to explore the securities law disclosure, investor protection, capital formation and other implications of robo-advising, distributed ledger technology and blockchain, crowd funding and marketplace lending.

To learn more, please visit Orrick’s Website for our webinar reviewing the matters discussed at the Forum.