For Investment Advisers:  SEC Actions

  • SEC issues FAQs on Share Class Disclosure Initiative:  I meant what I said and I said what I meant:  Back on February 12, 2018, the SEC Division of Enforcement announced the Share Class Selection Disclosure Initiative (see our blog post for more details), to encourage advisers to self-report failure to disclose the receipt of 12b-1 fees from clients, and to promptly return money to harmed clients. In return for turning themselves in, the Enforcement Division has agreed to recommend “favorable settlement terms.” The deadline to self-report is June 12, 2018.  In response to numerous questions, the Division of Enforcement provided these FAQs, which could be summarized briefly in the words of Horton the elephant, “I meant what said and I said what I meant.”  Advisers have to self-report in order to take advantage of the settlement terms, the settlement terms will not vary from those set forth in the Announcement, the offer only applies to advisers that meet the definition of a “Self-Reporting Adviser” and the SEC makes no promises about other potential consequences arising from self-reporting.  Contributed by Jaqueline M. Hummel, Partner and Managing Director
  •  Your Tax Dollars at Work:  SEC Creates HoweyCoins to Teach Investors about ICO Scams!  Kudos to the team at the SEC that created the “HoweyCoin” website for its creativity, including the tongue-in-cheek reference to the SEC v. Howey, which provided the definition of a “security” still being used today (“a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”).  The site was created as a mock initial coin offering (ICO) using the buzzwords (HODL), celebrity endorsements and promises of high returns.  It even includes an 8-page long “whitepaper”, which seems to be a hallmark of every cryptocurrency offering (coincidentally, bitcoin’s founder Satoshi Nakamoto’s white paper was only 8-pages long).  Once you click on a “buy coins now” button, you are taken to an SEC website that identifies all the red flags in the fake site to help investors spot scams.  According to its press release, the “SEC was able to build the HoweyCoins website in-house in very little time, which demonstrates just how easy it is for someone to create a scam opportunity.”   Contributed by Jaqueline M. Hummel, Partner and Managing Director
  • SEC Launches Public Database Identifying Individuals with SEC Disciplinary History  “Nowhere to run to, baby…” and less places for advisers with disciplinary histories to hide as the SEC launched its SEC Action Lookup for Individuals (SALI) online database in early May.  Intended to help main street investors research advisers, SALI can be used to search for any registered or unregistered individual and the results will include if the individual settled or contested the enforcement action.  At launch, SALI includes actions entered between October 1, 2014 and March 31, 2018, but the SEC indicated that it will periodically refresh the database with more current information and backfill the database over time with older actions.  Keep in mind that the database includes individuals only, and that it excludes individuals whose cases are pending or against whom no judgment or order has been issued.  A Google search for the name of an individual with “SEC” added will return a similar result to SALI.  That said, the launch of SALI reflects a concerted effort by the SEC to improve transparency and provide direct access to disciplinary information for investors.  Contributed by Cari A. Hopfensperger, Compliance Consultant

 For Investment Advisers and Broker Dealers: DOL Actions

  • DOL says it won’t go after Violations of Fiduciary Rule:  The Department of Labor (“DOL”) issued Field Assistance Bulletin 2018-02, stating financial institutions should be allowed to continue to rely upon the temporary enforcement policy set forth in the Fiduciary Rule pending the department’s issuance of additional guidance, expected to be issued “in the future.”  The question some financial professionals may be asking is who cares?  If the Fiduciary Rule is dead, why should I be worried about DOL enforcement?  Unfortunately, this relief is necessary since the Best Interest Contract Exemption (“BICE”) was also struck down along with the Fiduciary Rule.  By complying with BICE, advisers providing advice to retirement plan investors could receive commissions, also known as variable compensation. It is unclear whether firms that complied with BICE and received commissions and other forms of variable compensation would be guilty of engaging in prohibited transactions that apply to fiduciaries under ERISA and the Internal Revenue Code.  Basically, the DOL and the IRS acknowledged that there is a lot of uncertainty about what comes next.  Given that many financial institutions had already committed significant time and resources to comply with the Fiduciary Rule and BICE, the DOL said that as long as investment advice fiduciaries are working diligently and in good faith to comply with the impartial conduct standards (required to comply with BICE), the DOL and IRS will not pursue them for violating the prohibited transaction rules under ERISA and the Internal Revenue Code.   Contributed by Jaqueline M. Hummel, Partner and Managing Director

 For Broker Dealers:  FINRA Actions

  • FINRA Cautions Firms Regarding Unpriced Customer Orders: In March, FINRA released Regulatory Notice 18-11 which provides guidance to firms when recommending and entering unpriced customer orders for “direct listings” at the opening on its first day of trading.   A “direct listing” is an initial listing of shares by an issuer that is not accompanied by a concurrent underwriting.  In such cases, a public market has not been established and a prior public market price does not exist.  Secondary market prices may vary greatly from the opening price, resulting in market orders being filled at prices detrimental to the client.  To mitigate this risk, FINRA recommends that firms consider the appropriateness of limit orders for direct listings.
  • Broker-Dealer Heightened Supervision Procedures: FINRA Notice 18-15 provides guidance on implementing effective heightened supervisory procedures for associated persons with a history of past misconduct.  FINRA encourages firms to adopt the practices that are outlined in the Notice to strengthen their existing supervisory procedures, as appropriate.

For Municipal Advisors and Brokers

  • GASB Accounting Fees Assessed: MSRB member firms who reported municipal securities trades to the MSRB during the first calendar quarter should have received their Governmental Accounting Standards Board (“GASB”) quarterly assessment, payable through WebCRD E-Bill.  Member firms with de minimis assessments (less than $25) will not receive an invoice.  If a firm elects to pass these fees onto its municipal customers, it must ensure proper disclosure of the fees, including, if applicable, the fact that the fee is an estimate and that the firm will most likely may pay more or less than the fee charged to the customer.