Securities Law

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On November 14, 2023, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced its enforcement results for fiscal year (“FY”) 2023, which ended on September 30, 2023.  The SEC’s FY 2023 results continued to reflect an aggressive approach to enforcement, reaching record highs in multiple enforcement metrics.  Specifically, the SEC announced that it brought 784 total enforcement actions, obtained orders totaling nearly $5 billion in financial remedies, and distributed nearly $1 billion to harmed investors.

SEC Chair Gary Gensler referred to the SEC’s Division of Enforcement as a “cop on the beat” that provided benefits to the investing public, while applauding the Division of Enforcement’s “effectiveness” during FY 2023.  Director of the Division of Enforcement Gurbir Grewal noted that the Division achieved results by “leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors.” Continue Reading SEC Releases Enforcement Highlights for Fiscal Year 2023

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On September 11, 2023, the SEC announced the settlement of administrative proceedings brought against nine registered investment advisers for disseminating hypothetical performance returns on their public websites without adopting required policies and procedures required by Rule 206(4)-1 under the Investment Advisers Act of 1940, known as the Marketing Rule.

Among other things, the Marketing Rule prohibits advisers from using hypothetical performance information in advertising material unless they have adopted and implemented policies and procedures to ensure that the information is relevant to the likely financial situation and investment objectives of the advertisement’s intended audience. Hypothetical performance information includes the performance of model portfolios and backtested performance returns derived from applying a strategy to historical data from periods when the strategy was not actually employed. In addition, Rule 204-2(a)(11) under the Advisers Act requires advisers to maintain copies of all advertising material disseminated directly or indirectly. The SEC alleged that all nine advisers failed to adopt and implement the requisite policies and procedures, resulting in the dissemination of hypothetical performance information to mass audiences through their websites. In addition, the SEC alleged that two of the advisers failed to maintain the required copies of their advertising material.Continue Reading SEC Settles Enforcement Proceedings Against Nine Advisers for Alleged Marketing Rule Violations

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A divided SEC adopted numerous reforms for private fund managers on August 23, 2023. These reforms represent the largest regulatory change for private fund managers since Dodd-Frank. The SEC’s stated purpose is to bring “transparency” to the operation of private funds by, among other things, restricting or requiring disclosure of preferential terms such as those…

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On August 8, 2023, the United States Securities and Exchange Commission (the “SEC” or the “Commission”) announced that 11 Wall Street firms (10 broker-dealer firms and one dually-registered investment adviser) agreed to settle charges for failing to properly maintain and preserve electronic communications relating to firm business. This included text messages and other messages sent through applications contained on personal devices of employees and not subject to firm record retention systems (referred to as “off-channel communications”). The announcement underscores that regulatory scrutiny of recordkeeping obligations remains a high priority for the SEC’s Division of Enforcement. Specifically, the SEC continues to focus on holding registered entities accountable for failing to maintain and preserve off-channel communications pursuant to statutory requirements. As part of the settlements, the firms agreed to pay combined penalties of $289 million, admit liability, and implement improvements to their respective compliance policies and procedures.Continue Reading Regulatory Scrutiny of “Off-Channel” Communications Continues: 11 Wall Street Firms Agree to Pay the SEC $289 Million in Civil Money Penalties for Recordkeeping Violations

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On June 2, 2023, the United States Securities and Exchange Commission (“SEC”) dismissed 42 administrative enforcement actions and vacated 48 collateral industry bars because its Division of Enforcement (“Enforcement”) staff improperly had access to memoranda prepared to assist SEC Commissioners in deciding those matters.

The SEC investigates potential violations of the federal securities laws and is authorized by law to prosecute civil enforcement actions in its own in-house administrative courts or in federal court. The investigative and prosecutorial responsibilities are carried out by Enforcement staff and are required to be kept separate from the SEC’s in-house adjudication function.  However, on April 5, 2022, the SEC issued a statement disclosing that it identified a “control deficiency” in which certain SEC databases improperly allowed Enforcement staff to have access to memoranda prepared by the Office of the General Counsel Adjudication Group (“Adjudication Group”) to advise Commissioners in making decisions in administrative proceedings. Continue Reading SEC Dismisses 42 Enforcement Actions Because of Its Own Internal Control Deficiencies

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On May 5, 2023, the SEC announced its first enforcement actions under Rule 22e-4 under the Investment Company Act of 1940, the SEC’s liquidity rule, specifically in the form of a lawsuit filed in federal court and a settled administrative proceeding—both of which stem from the same underlying violations of the rule by a registered mutual fund.  These actions provide important insight into the SEC’s commitment to enforcing new rules, and also send a broader message about board oversight responsibilities

The SEC’s Allegations

According to the SEC’s complaint filed on May 5, 2023 in the U.S. District Court for the Northern District of New York, between June 1, 2019, which was the compliance date for relevant aspects of the liquidity rule for smaller entities such as the fund in question, and at least June 16, 2020, approximately 21% to more than 26% of the fund’s net assets were invested in shares of a private medical device company. The SEC stated that the shares were not listed on any securities exchange or traded in any over-the-counter market and bore additional sale restrictions imposed by the subscription agreements pursuant to which they were acquired and by the issuing company’s operating agreement. The fund’s shareholder reports and financial statements identified the shares as illiquid and indicated that market quotations were not readily available for the shares both before and after the effective date of the liquidity rule. However, the securities were classified as “less liquid” for purposes of the liquidity rule. The SEC alleged that during this time, the fund’s president (who also served as the fund’s portfolio manager) and its chief compliance officer, chief financial officer, vice president and treasurer, as well as its two independent trustees (by virtue of their service on the valuation and audit committees), were aware of the illiquid nature of the shares.

The SEC alleged that, in the period leading up to the compliance date for the liquidity rule, both the fund’s external auditors and the outside attorney serving as fund counsel expressed concerns about the fund’s concentration in the restricted shares and the impending need to comply with the liquidity rule. Additionally, the complaint indicates that the fund’s investment in the restricted shares had been subject to scrutiny by the staff of the SEC’s Division of Investment Management, who in connection with reviews of the fund’s public disclosure had raised questions about the investment that remained unresolved as of the liquidity rule’s compliance date.Continue Reading SEC Brings First Liquidity Rule        Enforcement Action

By: Matthew A. Rossi and Eleanor Hudson Callaway

On Friday, April 14, 2023, the Supreme Court cleared the way for respondents in Federal Trade Commission (“FTC”) and Securities and Exchange Commission (“SEC”) administrative proceedings to challenge the constitutionality of those proceedings in federal district court while the administrative process is ongoing.  Typically, as required by…

OnFebruary 9, 2023, the SEC Charged Payward Ventures, Inc. and Payward Trading Ltd. (d/b/a Kraken) (collectively, “Kraken”) with violating Sections 5(a) and 5(c) of the Securities Act for operating a crypto asset “staking-as-a-service program” without properly completing the registration process.  According to the SEC, a staking program allows investors to lock up “their crypto tokens…