Welcome to the Regulatory Roundup. Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.
The US Supreme Court Curtails the SEC’s Use of Administrative Law Judges
On June 27, the US Supreme Court held that when the SEC seeks civil penalties, the defendant is entitled to a jury trial under the Seventh Amendment. Consequently, the SEC must bring such cases to federal court instead of using its internal administrative proceedings.
The Supreme Court’s decision could impact how the SEC and other regulatory agencies handle enforcement actions, potentially leading to more SEC enforcement cases being tried in federal courts.
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The US Supreme Court Strikes Down the Chevron Doctrine
On June 28, the US Supreme Court overruled the Chevron deference doctrine. Established in 1984, this doctrine allowed federal agencies significant interpretive authority by mandating that courts defer to an agency’s reasonable interpretation of an ambiguous statute it administers.
As a result of the Supreme Court’s decision, courts must exercise “independent judgment” to decide relevant questions of law, interpret statutory provisions and determine the meaning or applicability of agency actions. The Supreme Court’s decision potentially has far-reaching implications for federal agencies, including the Securities and Exchange Commission.
Further coverage of the Supreme Court’s decision can be found here.
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FinCEN Issues Proposed Rule to Strengthen and Modernize Financial Institutions’ AML/CFT Programs
On June 28, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking to strengthen and modernize financial institutions’ Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) programs (the Proposed Rule). The hallmark of the Proposed Rule would be a new, uniform requirement that financial institutions’ (which includes broker-dealers, banks, insurance companies, etc.) AML/CFT programs be “effective, risk-based, and reasonably designed.”
The proposed requirement that an AML/CFT program be “risk-based” carries through each element of the Proposed Rule, including the appointment of an AML/CFT officer (or officers), training, testing, policies and procedures and documentation.
The comment period on the Proposed Rule closes on September 3, 2024.
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The SEC Releases its Spring 2024 Reg Flex Agenda
On July 8, the Office of Management and Budget’s Office of Information and Regulatory Affairs released the SEC’s Spring 2024 Reg Flex Agenda (the Agenda). While the semi-annual regulatory agenda is not binding and the SEC is not obligated to follow through on any of the listed items or associated timelines detailed on the Agenda, it does describe ongoing and anticipated regulatory actions and serves as an important signal of the SEC’s current priorities.
The Agenda notes the following proposed rules that are relevant to dual registrants as marked for final action by October 2024: (1) Cybersecurity Risk Management Rules for Broker-Dealers and Investment Advisers, (2) Regulation Best Execution, (3) Outsourcing by Investment Advisers, and (4) Enhanced Disclosures by Investment Advisers and Investment Companies about ESG Practices. The Agenda notes that the SEC is seeking to re-propose the following rules October 2024: (1) the Predictive Data Analytics Rule, and (2) the Safeguarding Advisory Client Assets Rule.
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FINRA Offers Guidance on Form BR Submissions for New Residential Supervisory Locations
On July 18, FINRA announced updates to the functionality of Form BR and changes related to Residential Supervisory Locations (RSLs). Notably, firms can now opt out of selecting FINRA when submitting an initial Form BR for a new location designated as an RSL that requires registration or notice filing with a state, the New York Stock Exchange or both, as a branch office.
FINRA has updated its FAQs on RSLs to reflect these changes and other ongoing updates to Form BR.
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SEC Stays Approval of Proposed Amendments to FINRA Rule 2210
On July 19, the SEC’s Division of Trading and Markets, pursuant to delegated authority, published an Order approving a proposed rule change to FINRA Rule 2210 that would permit projections of performance in institutional communications and specified communications to qualified purchasers and knowledgeable employees.
FINRA Rule 2210 generally prohibits a FINRA member firm’s communications from predicting or projecting performance, implying that past performance will recur or making exaggerated or unwarranted claims, opinions, or forecasts. The proposed rule change would create an exception to this general rule to permit the communication of projected performance or targeted returns in certain narrowly defined circumstances.
On July 26, the Commission stayed the Division of Trading and Markets’ Order approving the amendments, indicating that it intends to review the delegated action.
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FINRA Provides Data Regarding Participation in the Remote Inspections Pilot Program
On July 24, FINRA announced in a blog post that a total of 741 firms, or 22% of all FINRA member firms, volunteered to participate in FINRA’s Remote Inspections Pilot Program, which began on July 1, 2024. Participation rates are highest among large firms (500 registered representatives or more), with a participation rate of 60% in this category. Participant firms collectively cover 67% of all registered representatives and 53% of registered branches.
FINRA touts these numbers as a “strong response to the remote inspection pilot program” and reminds firms that the deadline to opt-in to participate for Year 2 of the pilot is December 27, 2024.
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Texas Federal District Courts Stay the Effective Date of the Department of Labor’s New Fiduciary Rule
On July 25 and July 26, two federal courts in Texas separately ordered stays delaying the effective date of the DOL’s amended fiduciary definition and the amendments to several Prohibited Transaction Class Exemptions (PTEs), including PTEs 84-24 and 2020-02. The Eastern District of Texas noted in its order that “Plaintiffs are likely to succeed on the merits of their claim because the [new fiduciary rule] conflicts with ERISA in several ways . . .” while the Northern District of Texas noted that “Plaintiffs are virtually certain to succeed on the merits.”
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