SEC Brings Charges in Edgar Hacking Case

The Securities and Exchange Commission today announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015 (see here, here and here).

The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.

SEC v. Ieremenko, et al.: Summary of Defendants’ Trading Profits

“International computer hacking schemes like the one we charged today pose an ever-present risk to organizations that possess valuable information,” said Enforcement Division Co-Director Stephanie Avakian. “Today’s action shows the SEC’s commitment and ability to unravel these schemes and identify the perpetrators even when they operate from outside our borders.”

“The trader defendants charged today are alleged to have taken multiple steps to conceal their fraud, including using an offshore entity and nominee accounts to place trades,” said Enforcement Division Co-Director Steven Peikin. “Our staff’s sophisticated analysis of the defendants’ trading exposed the common element behind their success, providing overwhelming evidence that each of them traded based on information hacked from EDGAR.”

The SEC’s complaint alleges that Ieremenko circumvented EDGAR controls that require user authentication and then navigated within the EDGAR system. Ieremenko obtained nonpublic “test files,” which issuers can elect to submit in advance of making their official filings to help make sure EDGAR will process the filings as intended. Issuers sometimes elected to include nonpublic information in test filings, such as actual quarterly earnings results not yet released to the public. Ieremenko extracted nonpublic test files from SEC servers, and then passed the information to different groups of traders.

The SEC’s complaint alleges that the following traders received and traded on the basis of the hacked EDGAR information:

• Sungjin Cho, Los Angeles, California
• David Kwon, Los Angeles, California
• Igor Sabodakha, Ukraine
• Victoria Vorochek, Ukraine
• Ivan Olefir, Ukraine
• Andrey Sarafanov, Russia
• Capyield Systems, Ltd. (owned by Olefir)
• Spirit Trade Ltd.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced related criminal charges.

The SEC’s complaint charges each of the defendants with violating the federal securities antifraud laws and related SEC antifraud rules and seeks a final judgment ordering the defendants to pay penalties, return their ill-gotten gains with prejudgment interest, and enjoining them from committing future violations of the antifraud laws. The SEC also named and is seeking relief from four relief defendants who profited from the scheme when defendants used the relief defendants’ brokerage accounts to place illicit trades.

The SEC’s investigation, which is ongoing, was conducted by Market Abuse Unit and Cyber Unit staff David Bennett, Arsen Ablaev, Michael Baker, Jason Burt, Laura D’Allaird, Adam Gottlieb, James Scoggins, David Snyder, Jonathan Warner, Darren Boerner, and John Rymas, and IT Forensics staff Ken Zavos, Douglas Bond, Stephen Haupt, Gi Nguyen, and Jennifer Ross. The Division of Economic and Risk Analysis and the Office of Information Technology provided substantial assistance. The investigation was supervised by Robert Cohen, Joseph Sansone, and Carolyn Welshhans. Cheryl Crumpton and Stephan Schlegelmilch are leading the SEC’s litigation. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the U.S. Secret Service.

SEC Press Release

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JPMorgan to Pay More Than $135 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. 

The SEC’s order found that JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring. 

This is the eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices.  Information about ADRs is available in an SEC Investor Bulletin.

“With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million.  The SEC’s order acknowledges JPMorgan’s cooperation in the investigation and remedial acts.

The SEC’s continuing investigation is being conducted by Philip A. Fortino, William Martin, Andrew Dean, Elzbieta Wraga, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office, and is being supervised by Mr. Wadhwa. 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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Agencies Invite Comment on a Proposal to Exclude Community Banks from the Volcker Rule

Five federal financial regulatory agencies on Friday invited public comment on a proposal that would exclude certain community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity funds.  The agencies are jointly proposing to exclude community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets from the restrictions of the Volcker Rule.

Additionally, consistent with EGRRCPA, the proposal would, under certain circumstances, permit a hedge fund or private equity fund to share the same name or a variation of the same name with an investment adviser that is not an insured depository institution, company that controls an insured depository institution, or bank holding company.

The proposal was issued by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.  Comments will be accepted for 30 days after publication in the Federal Register. 

# # #

Media Contacts: 

Federal Reserve Board

Eric Kollig

202-452-2955

CFTC

Donna Faulk-White

202-418-5080

FDIC

Julianne Breitbeil

202-898-6895

OCC

Bryan Hubbard

202-649-6870

SEC

Office of Public Affairs

202-551-4120

SEC Press Release

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Martha Miller Named Advocate for Small Business Capital Formation

The Securities and Exchange Commission today announced that Martha Legg Miller has been named as the first Advocate for Small Business Capital Formation.

The position and the new Office of the Advocate for Small Business Capital Formation were created pursuant to the bipartisan SEC Small Business Advocate Act of 2016. As the Advocate for Small Business Capital Formation, Ms. Miller will oversee the office dedicated to continuing to advance the interests of small businesses and their investors at the SEC and in our capital markets. The office will, among other things, provide assistance to small businesses, conduct outreach to better understand the obstacles small businesses face when attempting to access the capital markets, and recommend improvements to the regulatory environment to help facilitate capital formation. Ms. Miller will report directly to the Commission and will work collaboratively with the many staff across the agency focused on helping small businesses access our capital markets in an efficient and cost-effective manner.

Ms. Miller, currently a partner at the Birmingham, Alabama, firm Balch & Bingham LLP, will assume her new role in January 2019. Ms. Miller has been at Balch & Bingham since 2012, where she represents private companies and investors across a spectrum of corporate transactions, including matters related to the financing of small- and medium-sized businesses. She also serves as an adviser for several organizations dedicated to helping start-ups, entrepreneurs, and small businesses, including several focused on women- and minority-owned companies and their investors. Ms. Miller has served these organizations in a variety of ways, including as a board member of an incubator and legal counsel to an angel investor network.

Chairman Jay Clayton and Commissioners Kara Stein, Robert Jackson, Hester Peirce, and Elad Roisman said, “We are excited for Martha to take on this new and important role. Martha’s extensive experience working with a diverse set of companies, entrepreneurs and investors – including in communities away from the coasts – will allow her to serve as a direct link to, and advocate for, the many small businesses around the country that drive our local and national economies for the benefit of Main Street investors.”

“Having spent my career working closely with a variety of businesses and their investors, I have a deep appreciation for the needs they face at different phases of their growth,” said Ms. Miller. “I am truly honored to have the opportunity to serve as the first Advocate for Small Business Capital Formation, where I will work alongside the many talented professionals at the SEC to encourage capital access for privately-held and smaller public companies. I look forward to the work ahead crafting solutions that meet the needs of businesses across the country.”

Ms. Miller holds bachelor’s degrees in Cognitive Neuroscience and Communication Studies from Vanderbilt University and a J.D. from the Georgetown University Law Center. 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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Two Advisory Firms, CEO Charged With Mutual Fund Share Class Disclosure Violations

The Securities and Exchange Commission today announced settled charges against two New York-based investment advisers and the CEO of one of the advisers who selected mutual fund share classes inconsistent with their disclosures to clients. The firms and the CEO will collectively pay more than $1.8 million, which will be returned to harmed investors.

According to the SEC’s orders, American Portfolios Advisers Inc., PPS Advisors Inc., and PPS’s Chief Executive Officer and Chief Investment Officer, Lawrence Nicholas Passaretti, invested advisory clients in mutual fund share classes that paid 12b-1 fees to the firms’ investment adviser representatives (IARs), even though less expensive share classes of the same funds were available. The orders find that American Portfolios and PPS failed to disclose conflicts of interest, violated their duty to seek best execution, and failed to implement policies and procedures designed to prevent violations of federal securities laws in connection with their mutual fund share class selection practices.  In particular, in disclosures to clients, American Portfolios incorrectly stated that its IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable, while PPS incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients and only where less expensive share classes of the same fund were unavailable.

“Advisers must be vigilant in disclosing all conflicts of interest arising from compensation received based on investment decisions made for clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit. “The documents these advisers provided to clients were incorrect and investors were harmed.  We are continuing our efforts to stop these violations and return money to harmed investors as quickly as possible.”

The SEC’s orders find that American Portfolios and PPS violated the antifraud and compliance provisions of federal securities laws, and that Passaretti caused PPS’s violations. Without admitting or denying the findings, American Portfolios, PPS, and Passaretti consented to cease-and-desist orders, and American Portfolios and PPS consented to censures. American Portfolios agreed to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000. PPS and Passaretti agreed to pay $631,746 in disgorgement and prejudgment interest and a civil penalty of $75,000. Collectively, the firms and Passaretti will pay more than $1.8 million, which will be distributed to harmed clients through Fair Funds.

American Portfolios and PPS were not eligible to self-report pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February because the Division contacted them about the disclosure violations before the initiative was announced.

The SEC’s investigation was conducted by Vincent T. Hull and John Farinacci of the Asset Management Unit and Richard Hong of the New York Regional Office, with support from Cristina Giangrande, Karen Karakaya, Rachel Lavery, Gerard Sansobrino, and Dawn Blankenship of the Office of Compliance Inspections and Examinations of the New York Regional Office. The case was supervised by Panayiota K. Bougiamas of the Asset Management Unit.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Charges Audit Firm and Suspends Accountants for Deficient Audits

The Securities and Exchange Commission today filed settled charges against national audit firm Crowe LLP, two of its partners, and two partners of a now-defunct audit firm for their significant failures in audits of Corporate Resource Services Inc., which went bankrupt in 2015 after the discovery of approximately $100 million in unpaid federal payroll tax liabilities. 

The SEC’s order against Crowe finds that its audit team identified pervasive fraud risks in connection with its 2013 audit of Corporate Resource Services yet failed to:

  • Include procedures designed to detect the company’s undisclosed payroll tax obligations;
  • Properly identify and audit the company’s related-party transactions;
  • Obtain sufficient appropriate audit evidence to respond to these fraud risks, support recognition of revenue, and otherwise support the audit opinion; 
  • Evaluate substantial doubt about the  company’s ability to continue as a going concern; and 
  • Conduct a proper engagement quality review.

The order also finds that Crowe was not independent as a result of an ongoing direct business relationship with Corporate Resource Services. According to the order, the audit deficiencies occurred despite the involvement of Crowe’s national office, which was aware of the high-risk nature of the engagement and the inability to obtain appropriate evidence. The order also finds that Crowe’s engagement partner, Joseph C. Macina, and engagement quality reviewer, Kevin V. Wydra, caused Crowe’s audit failures.

A related order finds that Mitchell J. Rubin and Michael Bernstein, former partners at Rosen, Seymour, Shapps, Martin & Co., LLP, engaged in fraud and performed a highly deficient audit of Corporate Resource Services’ 2012 financial statements, which amounted to no audit at all, and that Bernstein caused the firm to lack the required independence when he failed to comply with partner rotation requirements.

“The audit standards are designed to ensure that public accounting firms have reasonable procedures to identify and respond to illegality and issues that pose material risks to the integrity of an issuer’s financial statements,” said Anita B. Bandy, Associate Director in the Division of Enforcement. “As set out in our order, the pervasive audit failures of Crowe and these accountants left investors with a misleading picture of Corporate Resource Services’ financial condition.”

The SEC’s orders find that Crowe violated the audit requirement and accountant reporting provisions of the federal securities laws and that Macina and Wydra caused those violations. The orders find that Rubin and Bernstein violated the antifraud provisions and caused violations of the audit requirement and accountant reporting provisions of the federal securities laws. The orders also find that Crowe, Macina, Wydra, Rubin, and Bernstein caused Corporate Resource Services to violate the issuer reporting provisions of the federal securities laws. Additionally, the orders find that Crowe, Macina, Wydra, Rubin, and Bernstein engaged in improper professional conduct.

Crowe has agreed to pay a penalty of $1.5 million, be censured, and retain an independent compliance consultant to review its audit policies and procedures. Macina, Rubin, and Bernstein each agreed to pay a penalty of $25,000, and Wydra has agreed to pay a penalty of $15,000. Macina, Wydra, Rubin, and Bernstein agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Macina and Wydra to apply for reinstatement after three years and one year, respectively. Crowe, Macina, Wydra, Rubin, and Bernstein, who settled without admitting or denying the findings, also were ordered to cease and desist from future violations.

The SEC’s investigation, which is continuing, has been conducted by Sharan K.S. Custer, Ernesto Amparo, Regina Barrett, and Kam Lee, and supervised by Ms. Bandy and Kristen Dieter.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Staff Encourages Continued Engagement on Impact of MiFID II Research Provisions

Earlier this year, significant new rules relating to research became effective in the European Union (EU).  In an effort to assist market participants regarding their U.S.-regulated activities as they engage in efforts to comply with the EU’s Markets in Financial Instruments Directive (MiFID II), the staff of the U.S. Securities and Exchange Commission issued three related no-action letters. One letter, from the SEC’s Division of Investment Management, provided temporary no-action assurances under the Investment Advisers Act of 1940 to broker-dealers that receive payments in hard dollars or through MiFID-governed research payment accounts from MiFID-affected clients. These assurances expire on July 3, 2020.

In the year since MiFID II became effective, broker-dealers, investment advisers, issuers and other market participants have had an opportunity to observe the effects of MiFID II’s research provisions. During this time, SEC staff has also been monitoring and assessing the impact on the research marketplace and affected participants, including investment advisers and broker-dealers. As part of this effort, SEC staff continues to conduct industry outreach and engage with other regulators, including European authorities.  

“As the staff evaluates possible recommendations, it is invaluable to hear from a diverse group of market participants,” said SEC Chairman Jay Clayton. “In particular, it is important to have data and other information about how MiFID II’s research provisions are affecting broker-dealers, investors and small, medium, and large issuers, including whether research availability has been adversely affected. Thank you to all who have been engaging with us on these issues.” 

We continue to encourage members of the public to provide data and other information relating to the effects of MiFID II’s research provisions. 

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to:IMMiFIDII@sec.gov

Comments would be appreciated by Jan. 31, 2019 so that they can be of greatest value in the staff’s evaluation of possible recommendations. In particular, data and information covering the period from MiFID II’s implementation to a recent date would be particularly useful.  

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Charges Two Robo-Advisers With False Disclosures

The Securities and Exchange Commission today instituted settled proceedings against two robo-advisers for making false statements about investment products and publishing misleading advertising.  The proceedings are the SEC’s first enforcement actions against robo-advisers, which provide automated, software-based portfolio management services.

An SEC order found that Redwood City, California-based Wealthfront Advisers LLC (formerly known as Wealthfront Inc.), a robo-adviser with over $11 billion in client assets under management, made false statements about a tax-loss harvesting strategy it offered to clients.  Wealthfront disclosed to clients employing its tax-loss harvesting strategy that it would monitor all client accounts for any transactions that might trigger a wash sale – which can diminish the benefits of the harvesting strategy – but failed to do so. Over a period of more than three years during which it made this disclosure, wash sales occurred in at least 31 percent of accounts enrolled in Wealthfront’s tax loss harvesting strategy. The SEC’s order also found that Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

A separate SEC order found that New York City-based Hedgeable Inc., a robo adviser which had approximately $81 million in client assets under management, made a series of misleading statements about its investment performance.  According to the order, from 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgable’s clients with those of two robo-adviser competitors.  The performance comparisons were misleading because Hedgeable included less than 4 percent of its client accounts, which had higher-than-average returns.  Hedgable compared this with rates of return that were not based on competitors’ actual trading models.  The SEC’s order also found that Hedgeable failed to maintain required documentation and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit.  “Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.”  A bulletin published by SEC’s Office of Investor Education and Advocacy contains additional information about robo-advisers.

The SEC’s order against Wealthfront found that the adviser violated the antifraud, advertising, compliance, and other provisions of the Investment Advisers Act of 1940.  Without admitting or denying the SEC’s findings, Wealthfront consented to the entry of the SEC’s order censuring it, requiring it to cease and desist from further violations, and imposing a $250,000 penalty.

The SEC’s order against Hedgeable found that the adviser violated the antifraud, advertising, compliance, and books and records provisions of the Investment Advisers Act of 1940.  Without admitting or denying the SEC’s findings, Hedgeable consented to the entry of the SEC’s order censuring it, requiring it to cease and desist from further violations, and imposing an $80,000 penalty.

The SEC’s investigation regarding Wealthfront was conducted by Heather Marlow of the Asset Management Unit and Chrissy Filipp of the San Francisco Regional Office, and the case was supervised by Jeremy Pendrey.  The SEC’s investigation regarding Hedgeable was conducted by H. Gregory Baker of the Asset Management Unit, and the case was supervised by Panayiota K. Bougiamas.  Assisting in the Wealthfront matter were Alicia Minyen, Theresa Chalmers, Rhonda Fan, Michael Tomars, and Edward Haddad of the Office of Compliance Inspections and Examinations.  Assisting in the Hedgeable matter were George DeAngelis, Michael Paolo, Xiao Li, and Rachel Lavery of the Office of Compliance Inspections and Examinations. 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Office of Compliance Inspections and Examinations Announces 2019 Examination Priorities

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today announced its 2019 examination priorities. OCIE publishes its exam priorities annually to promote transparency of its examination program and provide insights into the areas it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets. This year, particular emphasis will be on digital assets, cybersecurity, and matters of importance to retail investors, including fees, expenses, and conflicts of interest.   

“OCIE continues to thoughtfully approach its examination program, leveraging technology and the SEC staff’s industry expertise,” said SEC Chairman Jay Clayton.  “As these examination priorities show, OCIE will maintain its focus on critical market infrastructure and Main Street investors in 2019.” 

“OCIE is steadfast in its commitment to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that improve compliance, prevent fraud, monitor risk, and inform policy. We believe our ongoing efforts to improve risk assessment and maintain an open dialogue with market participants advance these goals to the benefit of investors and the U.S. capital markets,” said OCIE Director Pete Driscoll.

This year, OCIE’s examination priorities are broken down into six categories: (1) compliance and risk at registrants responsible for critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) digital assets; (5) cybersecurity; and (6) anti-money laundering programs. 

Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets. OCIE will conduct examinations of these firms which include, among others, clearing agencies, national securities exchanges, and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules. 

Retail Investors, Including Seniors and Those Saving for Retirement – Protecting Main Street investors continues to be a priority in 2019. OCIE will focus examinations on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, broker-dealers entrusted with customer assets, and portfolio management and trading. 

FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also examine MSRB to evaluate the effectiveness of select operations and internal policies, procedures, and controls.

Cybersecurity – Each of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.  

Anti-Money Laundering Programs – Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations. 

The published priorities for 2018 are not exhaustive and will not be the only issues OCIE addresses in its examinations, Risk Alerts, and investor and industry outreach. While the priorities drive OCIE’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of the registrant’s operations, products offered, and other factors.  

The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff, who are uniquely positioned to identify the practices, products, and services that may pose significant risk to investors or the financial markets. OCIE staff also seek advice of the Chairman and Commissioners, staff from other SEC divisions and offices, and the SEC’s fellow regulators.

OCIE is responsible for conducting examinations of entities registered with the SEC, including more than 13,200 investment advisers, approximately 10,000 mutual funds and exchange traded funds, roughly 3,800 broker-dealers, about 330 transfer agents, seven active clearing agencies, 21 national securities exchanges, nearly 600 municipal advisors, FINRA, the MSRB, the Securities Investor Protection Corporation, and the Public Company Accounting Oversight Board, among others. The results of OCIE’s examinations are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices, and pursue misconduct.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Adopts Transaction Fee Pilot for NMS Stocks

The Securities and Exchange Commission today announced that it has voted to adopt new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks. The pilot is designed to generate data that will help the Commission analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally. Data from the Pilot will be used to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.  

The Transaction Fee Pilot, which will apply to all stock exchanges, will create two test groups with new restrictions on the transaction fees and rebates that exchanges charge or offer to their broker-dealer members. One test group will prohibit exchanges from offering rebates and linked pricing and the other group will test a fee cap of $0.0010.  

“I applaud our staff for their thoughtful approach to the design of the Transaction Fee Pilot,” said SEC Chairman Jay Clayton. “I expect the data provided by the pilot will help us make effective policy assessments that will benefit our markets and our investors. I would also like to thank former Commissioner Mike Piwowar for his contribution to this proposal during his time at the Commission, including while he was Acting Chairman. His work on market structure was extensive, and this pilot is only one example.”

The Commission’s action follows a recommendation from the Equity Market Structure Advisory Committee to conduct a pilot. The pilot will last for up to two years, and the Commission will subsequently announce by notice the commencement dates for data collection and the pilot period. Approximately one month prior to the beginning of the pilot period, the Commission will issue the list of pilot securities.

###

Fact Sheet

Transaction Fee Pilot

Dec. 19, 2018

Action

The Commission adopted new Rule 610T of Regulation NMS to establish a Transaction Fee Pilot in NMS stocks.  The Pilot will study the effects that exchange transaction fee and rebate pricing models may have on order routing behavior, execution quality, and market quality.  Data from the Pilot will be used to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.  

Highlights

The key terms of the Pilot are summarized below.

Transaction Fee Pilot for NMS Stocks

Duration

2 years with an automatic sunset at 1 year unless, 

no later than 30 days prior to that time, the Commission publishes 

a notice that the pilot shall continue for up to 1 additional year; 

plus a 6-month pre-Pilot Period and 6-month  post-Pilot Period

Applicable Trading Centers

Equities exchanges (including maker-taker & taker-maker) 

but not ATSs or other non-exchange trading centers

Pilot Securities

NMS stocks with average daily trading volumes ≥ 30,000 shares with a share price ≥ $2 per share that do not close below $1 per share during the Pilot and that have an unlimited duration or a duration beyond the end of the post-Pilot Period

Group

# of NMS Stocks

Fee Cap

Rebates Permitted?

Pilot Design

Test Group 1

730

$0.0010 fee cap

for removing and providing displayed liquidity 
(no cap on rebates)

Yes

Test Group 2

730
(plus appended Canadian interlisted stocks)

Rule 610(c)$0.0030 cap continues to apply to fees for removing displayed liquidity

No

Rebates and Linked Pricing Prohibited for removing and providing displayed and undisplayed liquidity (except for specified market maker activity)

Control Group

Pilot Securities not in Test Groups 1 or 2

The Rule 610(c) cap continues to apply to fees for removing displayed liquidity (no cap on rebates)

Yes

Pilot Data

  1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
  1. Exchange Transaction Fee Summary 
  1. Order Routing Datasets

The Pilot will require the national securities exchanges to prepare and post on their public websites in standardized XML format transaction fee and rebate data on a monthly basis. Primary listing exchanges also will be required to post on their websites information about the Pilot securities they list and any changes to those securities. In addition, the Pilot will require the national securities exchanges to prepare and provide to the Commission, on a monthly basis, aggregated order routing data. 

What’s Next?

The rule will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register. The Commission will subsequently announce by notice the commencement dates for the pre-Pilot, Pilot, and post-Pilot Periods. Approximately one month prior to the beginning of the Pilot Period, the Commission will issue the List of Pilot Securities, which will include the securities in the Pilot and their Test Group assignments.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com