The Securities and Exchange Commission today charged Mizuho Securities USA LLC for its failure to safeguard information pertaining to stock buybacks by its issuer customers. Mizuho failed to maintain and enforce policies and procedures aimed at preventing the misuse of material nonpublic information, including maintaining effective information barriers between different trading desks and requiring employees to keep client information confidential. Mizuho agreed to settle the charges and will pay a $1.25 million penalty.
According to the SEC’s order, during a two-year period, Mizuho traders regularly disclosed material nonpublic customer buyback information to other traders and Mizuho’s hedge fund clients. That information included the identity of the party placing the order, the order size, limit price, and indications that the orders were buyback orders. Such information was routinely communicated across trading desks, notwithstanding that during the relevant period Mizuho executed over 99.8 percent of all buyback orders by using algorithms, rather than through trader-negotiated open market trades.
“Confidential information concerning issuer stock buybacks can be material to institutional investors, particularly when such trading comprises a significant portion of the daily trading volume in the stock being repurchased,” said Antonia Chion, Associate Director of the SEC Division of Enforcement. “Broker-dealers must be attentive to their responsibilities to maintain and enforce policies and procedures to prevent the misuse of such information.”
The SEC’s order finds that Mizuho willfully violated Section 15(g) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, Mizuho consented to the order imposing a $1.25 million penalty, a censure, and ordering it to cease and desist from committing or causing any future violations.
The SEC’s investigation was conducted by Drew M. Dorman, Greg Hillson, and Kevin Gershfeld. The case was supervised by Yuri B. Zelinsky and Ms. Chion. Assisting in the investigation were Chyhe Becker and Cathy Niden in the SEC’s Division of Economic and Risk Analysis and Sarah Heaton Concannon in the Enforcement Division’s Trial Unit.
The Securities and Exchange Commission today announced that Julie K. Lutz, the Regional Director of the SEC’s Denver Regional Office, will leave the agency at the end of this month after more than 40 years of service.
Ms. Lutz has served at the helm of the SEC’s Denver office since November 2013, overseeing the agency’s enforcement and examinations in a seven-state region. Before her appointment to regional director, Ms. Lutz supervised the enforcement program in the Denver office as an associate director, and managed the Denver trial unit as regional trial counsel. She joined the SEC staff in 1977 and worked in San Francisco and Washington D.C. before moving to the Denver office in 1996.
“For the last 40 years, Julie has worked hard every day to serve America’s investors, particularly Main Street investors across the West and Midwest,” said Chairman Jay Clayton. “Julie has been and will remain a role model for all of us at the Commission.”
“Julie has been a dedicated public servant who has contributed greatly to the SEC’s mission,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “Under Julie’s leadership, the Denver office has led many creative and high-impact actions that have protected investors and our markets.”
“Julie leaves behind a legacy of accomplishments in Denver,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Her experience, long-term perspective, and willingness to provide counsel to all who seek her advice have tremendously benefited the agency and the Denver office.”
“Julie has maintained an unwavering focus on the protection of investors throughout her career, and we will miss her thoughtfulness and leadership in the national examination program,” said Peter B. Driscoll, Director of the SEC’s Office of Compliance Inspections and Examinations.
Ms. Lutz added, “It has been a privilege to work at the SEC, most recently alongside the talented and dedicated staff of the DRO. I have been very fortunate to work on behalf of public investors on varied and challenging enforcement cases, and with a robust and effective examination program. I look forward to following the Denver office’s continuing achievements in the years to come.”
During Ms. Lutz’s tenure, the SEC’s Denver office has been involved in dozens of enforcement matters involving a variety of securities law violations, including charges against:
AgFeed Industries Inc. and its top executives for allegedly conducting a massive accounting fraud on investors in which they repeatedly reported fake revenues from their China operations in order to meet financial targets and prop up the stock price
Alpine Securities Corp. related to its alleged practice of clearing transactions for microcap stocks that were used in manipulative schemes to harm retail investors
Two Israeli traders who allegedly used brokerage accounts in the U.S. to reap nearly $5 million in trading profits in advance of the March 13, 2017, announcement that Intel Corp. had agreed to acquire Israel-based Mobileye N.V.
Also during Ms. Lutz’s tenure, the examination program in the Denver office designed and executed several highly effective examination initiatives, including one focused on mutual fund share class selection that contributed to the office’s Asset Management Unit leading a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors. In addition, the number of examinations conducted by Denver examination staff nearly doubled and resulted in significant enforcement actions.
The Securities and Exchange Commission today announced that two U.S.-based subsidiaries of Deutsche Bank AG will pay nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).
The case stems from a continuing SEC investigation into abuses involving pre-released ADRs. In proceedings against Deutsche Bank Trust Co. Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.
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. Information about ADRs is available in an SEC Investor Bulletin.
In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares. The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.
“The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. “Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity. The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”
Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total. DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty. The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.
The SEC’s continuing industry-wide investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph Ceglio, Richard Hong, and Adam Grace of the New York Regional Office and supervised by Mr. Wadhwa.
The Securities and Exchange Commission today charged a Connecticut-based investment advisory firm and its chief executive officer with putting $19 million of investor money, including elderly investors’ retirement savings and pension plans, in risky investments and secretly pocketing hefty commissions from those investments.
The SEC’s complaint alleges that Temenos Advisory Inc. and George L. Taylor steered advisory clients and other investors, including senior citizens and individuals approaching retirement, into four risky, illiquid private offerings. While Temenos and Taylor charged advisory fees for unbiased financial advice, they allegedly concealed from their clients the high commissions they were pocketing from these risky and unsuitable investment recommendations, including cash and ownership stakes in the private companies they recommended, and fraudulently misled clients about the risks and prospects of the investments. The SEC also alleges that Temenos and Taylor grossly overbilled some of their advisory clients.
“Investment advisers must put clients’ interests ahead of their own,” said Paul Levenson, Director of the SEC’s Boston Regional Office. “Temenos violated that duty by placing clients in risky private placements while downplaying the risk of those investments and concealing the financial conflicts that motivated the recommendations.”
The SEC’s complaint, filed in federal court in Connecticut, charges the defendants with violating the anti-fraud and registration provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.
The case is being handled by Dawn Edick, Marc Jones, Rua Kelly, Patrick Noone, and Amy Gwiazda. The SEC examination that led to the investigation was conducted by Maria Viana, Kenneth Leung, and Mayeti Gametchu of the Boston office.
The Securities and Exchange Commission today announced it has voted to adopt amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange.
“I applaud the staff’s retrospective review of our regulation of ATSs. I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives,” said SEC Chairman Jay Clayton.
Certain ATSs will be required to file detailed public disclosures on new Form ATS-N. These disclosures are designed to allow market participants to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates. The disclosures will also inform market participants about how the ATS operates, including order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.
Forms ATS-N will be made publicly available on the Commission’s website via the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The amendments also provide a process for the Commission to review Form ATS-N filings and, after notice and opportunity for hearing and upon certain findings, declare a Form ATS-N ineffective.
In addition, all ATSs will be required to have written safeguards and procedures to protect subscribers’ confidential trading information.
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SEC Open Meeting
July 18, 2018
The Securities and Exchange Commission adopted new Form ATS-N and amendments to Regulation ATS and Exchange Act Rule 3a1-1 to enhance transparency and oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange (NMS Stock ATSs). The amendments will require NMS Stock ATSs to publicly disclose detailed information about their operations and the ATS-related activities of their broker-dealer operators.
Highlights of the Adopted Amendments
Detailed Disclosure of the Operations of NMS Stock ATSs
Form ATS-N will require an NMS Stock ATS to publicly disclose on Form ATS-N information about its manner of operations and the ATS-related activities of the broker-dealer that operates the ATS (“broker-dealer operator”) and its affiliates. These public disclosures will allow market participants to understand how their orders will interact, match, and execute in the NMS Stock ATS. The disclosures will also inform market participants about differences that may exist in the treatment of subscribers and the broker-dealer operator (and its affiliates) on the ATS, and allow them to assess potential conflicts of interest and risks of information leakage. The enhanced disclosures are also designed to enable market participants to compare an NMS Stock ATS to other trading venues and better evaluate the ATS as a potential destination for their orders.
Specifically, Form ATS-N will require an NMS Stock ATS to disclose information regarding:
• Information about its broker-dealer operator, including identifying information and ownership.
• ATS-related activities of its broker-dealer operator, and the broker-dealer operator’s affiliates, including:
o the trading activities of the broker-dealer operator and its affiliates on the ATS;
o whether subscribers to the ATS can opt out from interacting with orders and trading interest of the broker dealer operator and its affiliates;
o arrangements between the broker-dealer operator or its affiliates and trading centers to access the ATS services;
o products and services offered to ATS subscribers by the broker-dealer operator and its affiliates;
o the activities of service providers to the broker-dealer operator and its affiliates; and
o safeguards and procedures established to protect the confidential trading information of subscribers.
• The manner of operations of the NMS Stock ATS, including:
o types of subscribers, the criteria for eligibility for ATS services, and conditions for excluding subscribers from ATS services;
o means of entry for orders and trading interest;
o connectivity and co-location procedures;
o order types, attributes, and order size requirements and procedures;
o use of and terms and conditions governing conditional orders and indications of interest;
o hours of operation, opening, reopening, and closing processes, and procedures for trading outside of regular trading hours;
o trading services, facilities, and rules of the ATS;
o arrangements with any subscriber or the broker-dealer operator to provide liquidity;
o segmentation of orders and trading interest and the provision of notice regarding segmentation;
o counter-party selection;
o display of orders and other trading interest;
o outbound routing from the ATS;
o procedures for stopping or suspending trading;
o procedures regarding trade reporting, clearance, and settlement;
o sources and uses of market data;
o as applicable, information about an NMS Stock ATS’s obligations related to order display and execution access pursuant to Rule 301(b)(3) of Regulation ATS and fair access pursuant to Rule 301(b)(5) of Regulation ATS; and
o aggregate platform-wide order flow and execution statistics provided by the NMS Stock ATS to one or more subscribers.
Public Availability of Form ATS-N
The Commission, through the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, will make public an NMS Stock ATS’s Form ATS-N when it becomes effective, as well as amendments to an effective Form ATS-N. In addition, each NMS Stock ATS will be required to make public on its website a direct URL hyperlink to the Commission’s website where these documents are located.
Commission Review of Form ATS-N Filings
The amendments to Regulation ATS establish a process for the Commission to review Form ATS-N filings. Among other things:
• An NMS Stock ATS’s initial Form ATS-N will become effective, unless declared ineffective, upon the earlier of: (1) the completion of the Commission’s review and publication via posting on the Commission’s website, or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period.
• An NMS Stock ATS will be required to file amendments to its Form ATS-N, which includes filing of material amendments. Material amendments must be filed 30 calendar days prior to the implementation of the change and are made public upon the expiration of the 30 calendar day period, although a brief summary of the change will be made public upon filing.
• The amendments to Regulation ATS will provide a process for the Commission to review all Form ATS-N filings and, after notice and opportunity for hearing, and upon certain findings, declare, by order, an NMS Stock ATS’s Form ATS-N ineffective.
Safeguards and Procedures for Protecting Subscriber’s Confidential Trading Information
The amendments to Regulation ATS will require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, and written procedures to ensure that those safeguards and procedures are followed.
In 1998, the Commission adopted Regulation ATS, which established a new regulatory framework designed to encourage market innovation, while ensuring basic investor protections. It gave securities markets a choice to register as a national securities exchange, or operate as an alternative trading system.
Since the adoption of Regulation ATS, the equity markets have evolved substantially and ATSs have become a significant source of liquidity in NMS stocks, accounting for approximately 11.4 percent of total share trading volume (11.5 percent of total dollar volume) in NMS stocks. NMS Stock ATSs have grown in complexity and sophistication, and some NMS Stock ATSs now offer features similar to registered national securities exchanges, which applicable laws and regulations require to be transparent trading venues.
Despite the important role of NMS Stock ATSs in the U.S. equity markets, prior to these amendments to Regulation ATS, inconsistent information was available to market participants about NMS Stock ATS’s manner of operations and the relationship between NMS Stock ATSs and the other business interests of their broker-dealer operators.
The amendments 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. An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019. As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.
The Securities and Exchange Commission today issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements. As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the amendment increases from $5 million to $10 million the threshold in excess of which the issuer is required to deliver additional disclosures to investors.
In addition, the Commission is soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.
“The rule as amended, and the concept release, are responsive to the fact that the American economy is rapidly evolving, including through the development of both new compensatory instruments and novel worker relationships – often referred to as the ‘gig economy.’ We must do all we can to ensure our regulatory framework reflects changes in our marketplace, including our labor markets,” said SEC Chairman Jay Clayton.
The public comment period will remain open for 60 days following publication of the concept release in the Federal Register.
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SEC Open Meeting
July 18, 2018
As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Commission adopted final rules to revise Rule 701(e) to increase from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors.
In addition, the Commission issued a Concept Release seeking public comment on ways to modernize compensatory securities offerings and sales.
Equity compensation can be an important component of the employment relationship. In addition to preserving cash for the company’s operations, equity compensation can align the incentives of employees with the success of the enterprise and facilitate recruitment and retention. Securities Act Rule 701 allows non-reporting companies to sell securities to their employees without the need to register the offer and sale of such securities. Securities Act Form S-8 provides a simplified registration form for companies to use to issue securities pursuant to employee stock purchase plans. The Commission is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8, consistent with investor protection. The Concept Release solicits comment on:
• “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;
• Whether the Commission should further revise the disclosure content and timing requirements of Rule 701(e); and
• Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.
The revision to Rule 701(e) will become effective on the date the Adopting Release is published in the Federal Register.
The Concept Release will be posted on the Commission’s website and published in the Federal Register. The comment period will remain open for 60 days after publication in the Federal Register.
The Securities and Exchange Commission today announced that New York-based broker-dealer BGC Financial has agreed to pay a $1.25 million penalty to settle charges that it failed to preserve audio files sought by the SEC and inaccurately recorded travel, entertainment, and other expenses.
The SEC’s order finds that after receiving document requests in 2014 from the SEC’s Division of Enforcement, BGC deleted audio files for the recorded telephone lines of eight brokers that were responsive to the document requests. According to the order, the department responsible for maintaining voice recordings was unaware of the SEC’s request and deleted the files in keeping with the firm’s policy of not maintaining them after one year.
The SEC order also finds that BGC failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts. BGC provided a high performing broker with season tickets for a New York-area sports team that cost more than $600,000 per year, and failed to record the payments for the tickets as compensation in its general ledger. BGC also reimbursed this same broker for more than $100,000 of expenses associated with an international trip for his birthday and other foreign travel that lacked a sufficiently documented business purpose. BGC inaccurately recorded these items in its books and records as selling and promotion. BGC also reimbursed a different broker for thousands of dollars of personal expenses spent on his birthday party, his bachelor party, and two separate trips to Las Vegas for his friends’ bachelor parties.
“The federal securities laws require broker-dealers to maintain accurate books and records and promptly provide records requested by SEC staff,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “The failure to preserve and produce responsive documents undermines the Commission’s ability to provide effective oversight of registrants and to carry out its mission to protect investors.”
The SEC order finds that BGC violated books and records provisions of the federal securities laws and related SEC rules. Without admitting or denying the SEC’s findings, BGC agreed to a cease-and-desist order, a censure, and a $1.25 million penalty.
The SEC’s investigation was conducted by Shannon Keyes, Christopher Dunnigan, Kenneth Gottlieb, and Charles D. Riely of the New York Regional Office and supervised by Sanjay Wadhwa.
The Securities and Exchange Commission today charged the former CEO of Energy XXI Ltd. with hiding more than $10 million in personal loans that he obtained from company vendors and a candidate for Energy XXI’s board. At the time of the alleged misconduct, Energy XXI was NASDAQ-listed and one of the largest oil and gas producers on the Gulf of Mexico shelf.
According to the SEC’s complaint, CEO John D. Schiller Jr. maintained an extravagant lifestyle by using a highly leveraged margin account secured by his Energy XXI stock. The complaint alleges that in 2014, when faced with significant margin calls, Schiller extracted more than $7.5 million in undisclosed personal loans from company vendors in exchange for business contracts with Energy XXI.
Schiller also is alleged to have obtained a $3 million loan from Norman Louie, a portfolio manager at Energy XXI’s largest shareholder Mount Kellett Capital Management LP. Louie was appointed to Energy XXI’s board just weeks later. The SEC alleges that Schiller did not disclose the vendor loans or the Louie loan to Energy XXI.
“Executives of public companies have a duty to act in the best interests of investors,” said Anita B. Bandy, an Assistant Director in the SEC’s Division of Enforcement. “Secret backroom deals for the benefit of corporate insiders violate those duties and deprive investors of important information.”
The complaint also alleges Schiller received undisclosed compensation and perks in the form of lavish social events, first-class travel, a shopping spree, donations to Schiller-preferred charities, legal expenses for personal matters, and an office bar stocked with high-end liquor and cigars. As a result, Energy XXI failed to report at least $1 million in excess compensation in its executive compensation disclosures over a five-year period.
Schiller consented, without admitting or denying the SEC’s charges, to a permanent injunction that enjoins him from violating anti-fraud and reporting provisions of the federal securities laws, imposes a $180,000 penalty, and bars him from serving as an officer or director of a public company for five years.
The SEC also charged Louie for his role in hiding his loan to Schiller, and Mount Kellett is charged with failing to disclose its activist plan to place Louie on Energy XXI’s board. Louie and Mount Kellett consented, without admitting or denying the findings, to an SEC order that they cease and desist from committing or causing any violations or any future violations of certain reporting and disclosure provisions of the federal securities laws. Louie must pay a $100,000 penalty and Mount Kellett, which is an SEC-registered investment adviser, must pay a $160,000 penalty.
The SEC’s investigation, which is continuing, has been conducted by Nicholas A. Brady and Asset Management Unit member Janene M. Smith with assistance from litigation counsel Charles D. Stodghill. The case has been supervised by Ms. Bandy.
The Securities and Exchange Commission has charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.
According to the SEC’s complaint filed in federal court in southern California on July 6, stock promoter Gannon Giguiere took control of a purported medical device company. Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share. Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness. According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.” According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.
The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company. The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.
“As alleged in our complaint, these stock traders hijacked companies and manipulated the market to enrich themselves at the expense of the investing public. Law enforcement is committed to rooting out microcap fraud and exposing it no matter how encrypted or complex such schemes may be,” said Marc P. Berger, Director of the SEC’s New York Office.
The U.S. Attorney’s Office for the Southern District of California today announced criminal charges.
The SEC’s investigation, which is continuing, has been conducted by John O. Enright, Joseph P. Ceglio, Diego Brucculeri, and Sheldon L. Pollock of the New York office. The SEC’s litigation will be handled by Messrs. Enright and Ceglio. The case is being supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the FBI, U.S. Attorney’s Office for the Southern District of California, and Financial Industry Regulatory Authority.
The Securities and Exchange Commission today released the agenda for the July 16 meeting of the Fixed Income Market Structure Advisory Committee. The Commission established the advisory committee to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.
The meeting will be held at the SEC’s headquarters at 100 F Street, NE, Washington, DC, and is open to the public. The meeting will be webcast live on the SEC’s website and archived on the website for later viewing.
Members of the public who wish to provide their views on the matters to be considered by the Fixed Income Market Structure Advisory Committee may submit comments either electronically or on paper, as described below. Please submit comments using one method only. Information that is submitted will become part of the public record of the meeting.
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SEC Fixed Income Market Structure Advisory Committee
July 16, 2018
9:30 a.m. Remarks by Commissioners; Division of Trading and Markets Director Brett Redfearn; and Committee Chairman Michael Heaney
10:00 a.m. Pre-Trade Transparency under MiFID II
Neil Hamburger, JP Morgan Chase
Miranda Morad, MarketAxess
Michael Surowiecki, PIMCO
Mark Yallop, FICC Markets Standards Board
11:00 a.m. Break
11:15 a.m. Current State of Pre-Trade Transparency in the U.S. Corporate Bond Market
Jon Klein, Bank of America Merrill Lynch
Ben Macdonald, Bloomberg
Tim Morbelli, Alliance Bernstein
Steve Shaw, BondSavvy
Thomas Urano, Sage Advisory Services
Chris White, Viable Markets and BondCliQ
12:30 p.m. Lunch Break
1:30 p.m. Current State of Pre-Trade Transparency in the U.S. Municipal Securities Market
The Securities and Exchange Commission today filed fraud charges against a second defendant in connection with a scheme to manipulate the price of Fitbit securities through false regulatory filings.
According to the SEC's complaint, Mark E. Burns purchased Fitbit call options just minutes before he and his co-conspirator, Robert W. Murray, filed a fake tender offer on the SEC's EDGAR system purporting to acquire Fitbit's shares at a substantial premium. The SEC charged Murray last year and he recently was sentenced to prison in a parallel criminal case. The false tender offer was made in the name of ABM Capital LTD – a nonexistent company for which the defendants created an EDGAR account. Fitbit's stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Burns sold all of his options for a 350 percent profit of approximately $13,000.
"We allege that Burns and Murray tried to camouflage their identities and their affiliation with an EDGAR account by using disguised IP and e-mail addresses," said Robert A. Cohen, Chief of the Cyber Unit. "Despite their sophisticated efforts to avoid detection, we stopped their alleged abuse of our filing system and charged them with being responsible for this manipulation."
The SEC's complaint charges Burns with violating antifraud provisions of the federal securities laws. Murray has agreed to settle the SEC's charges against him. The settlement is subject to court approval.
The SEC's investigation was conducted by David W. Snyder and Assunta Vivolo of the Cyber Unit, with the assistance of Patrick A. McCluskey of the Market Abuse Unit. The case was supervised by Joseph G. Sansone, Kelly L. Gibson, and Mr. Cohen. The litigation will be led by Jennifer C. Barry and Julia C. Green of the Philadelphia Regional Office. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service.
The Securities and Exchange Commission today announced settlements with two former senior executives of ITT Educational Services Inc., which the SEC charged hid its true financial condition from investors. This resolution successfully concludes the SEC’s case, which was scheduled to begin trial on July 9.
Former CEO Kevin Modany and former CFO Daniel Fitzpatrick are barred from holding senior positions at public companies and ordered to pay penalties in the settlements filed in federal court in Indiana.
“Holding individuals accountable – particularly senior executives – is a critical focus of our enforcement program,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “These settlements, entered into on the eve of trial after years of litigation, reflect our commitment to this accountability.”
The SEC charged both Modany and Fitzpatrick in 2015, alleging they fraudulently concealed the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. ITT previously settled fraud charges based on the same alleged conduct. Modany and Fitzpatrick settled to the SEC’s claims charging them as control persons for ITT’s fraud and other violations. The court’s judgments, entered today:
Barred each of them from serving as officers and directors of public companies for five years
Ordered Modany and Fitzpatrick to pay penalties of $200,000 and $100,000, respectively
Enjoined each of them from controlling persons who violate antifraud and periodic reporting provisions of the federal securities laws
Modany and Fitzpatrick also have agreed to be suspended from appearing and practicing before the SEC as accountants. Pursuant to their agreement, they will be permitted to apply for reinstatement after five years.
Modany and Fitzpatrick agreed to the settlements without admitting or denying the allegations in the SEC’s complaint.
The litigation was conducted by Polly Atkinson, Zachary Carlyle, and Nicholas Heinke with assistance from Nicole Nesvig. The case was supervised by Gregory Kasper, Kurt Gottschall, and Daniel Michael.
The Securities and Exchange Commission today announced that Credit Suisse Group AG will pay approximately $30 million to resolve SEC charges that it obtained investment banking business in the Asia-Pacific region by corruptly influencing foreign officials in violation of Foreign Corrupt Practices Act (FCPA).
Credit Suisse also agreed to pay a $47 million criminal penalty to the U.S. Department of Justice.
According to the SEC’s order, several senior Credit Suisse managers in the Asia-Pacific region sought to win business by hiring and promoting individuals connected to government officials as part of a quid pro quo arrangement. While the practice of hiring client referrals bypassed the firm’s normal hiring process, employees in other Credit Suisse subsidiaries and affiliates were aware of it and in some instances approved these “relationship hires” or “referral hires.” The SEC’s order found that in a six-year period, Credit Suisse offered to hire more than 100 individuals referred by or connected to foreign government officials, resulting in millions of dollars of business revenue.
“Bribery can take many forms, including granting employment to friends and relatives of government officials. Credit Suisse’s practice of engaging in these hiring practices violated the law, and it is now being held to account for having done so,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit.
The SEC’s order finds that Credit Suisse violated the anti-bribery and internal accounting controls provisions of the Securities Exchange Act of 1934. Credit Suisse agreed to pay disgorgement of $24.9 million plus $4.8 million in interest to settle the SEC’s case.
The SEC’s investigation was conducted by Eric Heining and Paul G. Block of the FCPA Unit and Rory Alex and Alfred Day of the Boston Regional Office. The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the U.S. Attorney’s Office for the Eastern District of New York, and the Federal Bureau of Investigation.
This version of the press release contains corrections to errors in the prior version.
The Securities and Exchange Commission today charged global engineering and construction company KBR Inc. with inflating a key, non-financial statement performance metric known as work in backlog. KBR agreed to pay a $2.5 million penalty to settle the SEC’s charges.
According to the SEC’s order, KBR’s public disclosures of its work in “backlog” were important to investors because the metric was supposed to represent the amount of revenue that KBR expected to receive in the future from “firm orders” under previously awarded contracts. However, the SEC’s order found that in the second quarter of 2012, KBR improperly included $459 million in its publicly disclosed backlog for a pipe fabrication and modular assembly contract in Canada, even though KBR had not actually received -- and the counterparty was not obligated to provide -- any orders under the contract. By including the full $459 million, KBR misled investors by overstating its work in backlog and violated its internal reporting policies. KBR continued to overstate its backlog for almost two years. The SEC’s order also found that KBR had deficient internal accounting controls and failed to make accurate and reliable estimates of the costs to complete seven Canadian contracts, which led the company to overstate net income. As a result, KBR restated earnings in its consolidated financial statements for the fiscal year ended December 31, 2013 and its unaudited consolidated financial statements for the third quarter of 2013, resulting in charges of $156 million.
“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “To the extent that companies disclose these kinds of metrics, companies must ensure they are accurate and not misleading.”
Without admitting or denying the findings, KBR consented to entry of the SEC’s order, which found that the company violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and the books and records, internal accounting controls, and reporting provisions of the Securities Exchange Act of 1934, and ordered KBR to pay a $2.5 million civil penalty.
The SEC’s investigation was conducted by Keefe Bernstein, Julia Huseman, and Carol Stumbaugh of the Fort Worth Regional Office. The case was supervised by Barbara Gunn and Eric Werner. The SEC appreciates the assistance of the Alberta Securities Commission.
The Securities and Exchange Commission today charged two men alleged to have profited from illegal sales of stock of a company claiming to have a blockchain-related business.
According to the SEC’s complaint, attorney T.J. Jesky and his law firm’s business affairs manager, Mark F. DeStefano, made approximately $1.4 million by selling shares in UBI Blockchain Internet Ltd. over a 10-day period from Dec. 26, 2017 to Jan. 5, 2018. The sales stopped when the SEC temporarily suspended trading in UBI Blockchain stock earlier this year due to concerns about the accuracy of assertions in its SEC filings and unusual and unexplained market activity.
“This case is a prime example of why the SEC has warned retail investors to be cautious before buying stock in companies that suddenly claim to have a blockchain business,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit. “This case involved both a trading suspension and people holding restricted shares who attempted to profit from the dramatic price increase with illegal stock sales that violated the registration statement.”
The SEC’s complaint alleges that Jesky, and DeStefano, both residents of Nevada, received 72,000 restricted shares of UBI Blockchain stock in October 2017 and were permitted to sell the shares at a fixed price of $3.70 per share under the registration statement. Instead, the complaint alleges that Jesky and DeStefano unlawfully sold the shares at much higher market prices – ranging from $21.12 to $48.40 – when UBI Blockchain’s stock experienced an unusual price spike.
The SEC’s complaint, filed in federal court in New York, charges Jesky and DeStefano with violating the registration provisions of the federal securities laws. Without admitting or denying the allegations in the SEC’s complaint, Jesky and DeStefano agreed to return approximately $1.4 million of allegedly ill-gotten gains, pay $188,682 in penalties, and be subject to permanent injunctions. The settlement is subject to the court’s approval.
The SEC’s investigation, which is ongoing, is being coordinated by the Microcap Fraud Task Force and the Cyber Unit and is being conducted by Michael D. Paley, Kevin P. McGrath, Tracy E. Sivitz, John P. Lucas, and Ricky Tong. The matter is being supervised by Lara S. Mehraban and Mr. Cohen. The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the Mexican Comisi?n Nacional Bancaria y de Valores, and the Panamanian Superintendencia del Mercado de Valores.
Securities and Exchange Commission Chairman Jay Clayton is inviting Main Street investors from around the country to ‘ Tell Us’ about their investor experience through roundtable discussions in several cities. In these roundtables, Main Street investors will be able to speak directly with Chairman Jay Clayton and senior SEC staff about our efforts to enhance retail investor protection and promote choice and access to a variety of investment services and products.
“It has been incredibly informative and gratifying to talk with investors in their own backyards about their expectations regarding relationships with their investment professionals,” said Chairman Clayton. “Our proposed rules are intended to match our rules with investor expectations and it is crucial that we hear directly from the investors themselves on how we can best ensure that result.”
Already, roundtable discussions about a recently proposed rule regarding the obligations of financial professionals to investors have taken place in Houston and Atlanta. The next roundtables will take place in July in Miami, Washington, D.C., Philadelphia, and Denver. Investors who are unable to attend one of the roundtables in-person are invited to share their insights with the SEC by going to sec.gov/Tell-Us.
Details about the upcoming investor roundtables, including dates, times, and RSVP information, can found below. Attendees should be retail investors who work with a financial professional and have no affiliation with the financial services industry. Please note that space is limited.
[+]Miami | Monday, July 9, 2018
Location: The University of Miami, Founders Hall, 1550 Brescia Ave., Coral Gables, FL 33146 Time: 2:00 PM-3:30 PM (EDT) RSVP: Angela Cruz at email@example.com or at (305) 284-6554
[+]Washington, D.C. | Thursday, July 12, 2018
Location: U.S. Securities and Exchange Commission, 100 F St., NE, Room 10000, Washington, DC 20549 Time: 10:30 AM-11:30 AM (EDT) RSVP: Suzanne McGovern at at firstname.lastname@example.org or at 202-551-6459
[+]Philadelphia | Tuesday, July 17, 2018
Location: U.S. Securities and Exchange Commission, Philadelphia Regional Office, 1617 John F Kennedy Blvd., Suite 520, Philadelphia, PA 19103 Time: 11:00 AM-12:00 PM (EDT) RSVP: Suzanne McGovern at at email@example.com or at 202-551-6459
[+]Denver | Wednesday, July 25, 2018
Location: U.S. Securities and Exchange Commission, Denver Regional Office, Byron G. Rogers Federal Building,1961 Stout St., Suite 1700, Denver, CO 80294-1961 Time: 10:00 AM-11:30 (MDT) RSVP: Suzanne McGovern at at firstname.lastname@example.org or at 202-551-6459
The roundtable discussions provide an opportunity for the Chairman and staff to hear first-hand from those who will be directly impacted by the Commission’s rules. They also provide a chance for retail investors to share their views on key questions about their relationship with their investment professional that will help inform the disclosure outlined in the proposed rules.
Please note: some roundtables will take place in SEC buildings. To gain entry into these buildings, please bring a valid driver’s license or other government-issued photo identification. The security process includes placing bags, phones, and other items through X-ray equipment. It is advisable to arrive 20 minutes before the start of the roundtable in order to go through security.
On April 18, 2018, the Commission voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products. For additional information, see the Commission’s press release, fact sheet and proposed Regulation Best Interest rule here.
On April 24, 2018, Chairman Clayton issued a statement announcing that he had asked SEC staff to put together a series of roundtables focused on the retail investor to be held in different cities across the country. The roundtables are intended to gather information directly from those most affected by the Commission’s rulemaking.
For general information about the investor roundtables, contact Suzanne McGovern from the SEC’s Office of Investor Education and Advocacy at email@example.com.
The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney (MSSB) has agreed to pay a $3.6 million penalty and to accept certain undertakings for its failure to protect against its personnel misusing or misappropriating funds from client accounts.
The SEC’s order finds that MSSB failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts. The order further finds that although MSSB’s policies provided for certain reviews of disbursement requests, the reviews were not reasonably designed to detect or prevent such potential misconduct.
According to the SEC’s order, MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent one of its advisory representatives, Barry F. Connell, from misusing or misappropriating approximately $7 million out of four advisory clients’ accounts in approximately 110 unauthorized transactions occurring over a period of nearly a year.
“Investment advisers must view the safeguarding of client assets from misappropriation or misuse by their personnel as a critical aspect of investor protection,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “Today’s order finds that Morgan Stanley fell short of its obligations in this regard.”
Without admitting or denying the findings, MSSB consented to the SEC’s order, which includes a $3.6 million penalty, a censure, a cease-and-desist order, and undertakings related to the firm’s policies and procedures. Morgan Stanley previously repaid the four advisory clients in full plus interest.
The SEC previously filed fraud charges against Barry Connell, who was also criminally charged by the U.S. Attorney’s Office for the Southern District of New York. Both sets of charges as to Connell remain pending.
The SEC’s investigation has been conducted by Jonathan Grant and Wendy Tepperman, with assistance from George O’Kane and Dugan Bliss, and has been supervised by Mr. Wadhwa.
The Securities and Exchange Commission today charged New York-based broker-dealer Alexander Capital L.P. and two of its managers for failing to supervise three brokers who made unsuitable recommendations to investors, “churned” accounts, and made unauthorized trades that resulted in substantial losses to the firm’s customers while generating large commissions for the brokers.
Today’s actions find that Alexander Capital failed to reasonably supervise William C. Gennity, Rocco Roveccio, and Laurence M. Torres, brokers who were previously charged with fraud in September 2017. According to the order, Alexander Capital lacked reasonable supervisory policies and procedures and systems to implement them, and if these systems were in place, Alexander Capital likely would have prevented and detected the brokers’ wrongdoing.
In separate orders, the SEC finds that supervisors Philip A. Noto II and Barry T. Eisenberg ignored red flags indicating excessive trading and failed to supervise brokers with a view to preventing and detecting their securities-law violations. The SEC’s order against Noto finds that he failed to supervise two brokers and its order against Eisenberg finds that he failed to supervise one broker.
“Broker-dealers must protect their customers from excessive and unauthorized trading, as well as unsuitable recommendations,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Alexander Capital’s supervisory system – and its personnel – failed its customers, and today’s actions reflect our continuing efforts to protect retail customers by holding firms and supervisors responsible for such failures.”
Alexander Capital agreed to be censured and pay $193,775 of allegedly ill-gotten gains, $23,437 in interest, and a $193,775 penalty, which will be placed in a Fair Fund to be returned to harmed retail customers. Alexander Capital also agreed to hire an independent consultant to review its policies and procedures and the systems to implement them. Noto agreed to a permanent supervisory bar and to pay a $20,000 penalty and Eisenberg agreed to a five-year supervisory bar and to pay a $15,000 penalty. These penalties will be paid to harmed retail customers. Alexander Capital, Noto and Eisenberg agreed to settle today’s charges without admitting or denying the findings in the SEC’s orders.
The SEC’s Office of Investor Education and Advocacy and Broker-Dealer Task Force previously issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts.
The SEC’s investigation has been conducted by David Oliwenstein, David Stoelting, Roseann Daniello, and Steven G. Rawlings, and supervised by Sanjay Wadhwa. The examination that led to the investigation was conducted by Shereion Clarke, Margaret Lett, and Jennifer Grumbrecht. The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Office of the Montana State Auditor, Commissioner of Securities and Insurance.
The Securities and Exchange Commission this week concluded its month of special events and guest speakers – at its Washington, D.C. headquarters, as well as in regional offices around the country – in honor of Lesbian, Gay, Bisexual and Transgender (LGBT) Pride Month.
With the help and leadership of the Office of Minority and Women Inclusion (OMWI) and the SEC’s LGBT Employee Affinity Group, the SEC renewed and reflected upon its commitment to diversity and inclusion, while also holding a number of events celebrating the contributions of LGBT Americans to the United States. Highlights included a discussion at the SEC’s Denver Regional Office about hate crimes prevention with Judy and Dennis Shepard, parents of Matthew Shepard, who died from injuries sustained during an anti-gay hate crime in 1998. Additionally, the LGBT Committee and Commissioner Kara Stein also hosted a “Night OUT” event in early June through which interested staff attended a Nationals baseball game as a group in Washington, D.C.
“It is a priority for me to ensure that every man and woman who serves our nation’s investors feels appreciated for their hard work, and that every investor has equal opportunity to participate in our securities markets. During LGBT Pride Month, we celebrate our friends and family who have contributed to our nation over the years, including those who unfortunately were not always afforded those protections and recognitions,” said SEC Chairman Jay Clayton. “The SEC remains committed to recruiting and retaining a workforce that reflects the diversity of our country, including members of the LGBT community, while also protecting all investors, regardless of their family composition.’
Commissioner Kara M. Stein, who serves as Chair of the SEC’s Diversity Council, remarked, “Celebrating LGBT Pride Month allows us to reflect not only on how far we have come, but also on what more we can do. It allows us to renew our commitment to having a diverse and inclusive workplace.”
The SEC’s LGBT Pride Month events spanned the country, including an event on June 20 in the Los Angeles Regional Office featuring Michael Eselun, co-founder of GLIDE – Gays and Lesbians Initiating Dialogue for Equality. Eselun, a chaplain for the Simms/Mann-UCLA Center for Integrative Oncology, spoke to Commission staff about combatting homophobia and anti-LGBT bias. In Philadelphia, Commission staff heard from Evan Thornburg, the first-ever deputy director of the Philadelphia Office of LGBT Affairs.
At the close of the month’s programming, OMWI Director Pamela Gibbs remarked, “As evidenced by our agency’s various LGBT Pride month events and speakers, June is a wonderful reminder that the SEC is a diverse and welcoming employer that seeks to hire and support the best and brightest workers from all backgrounds."
The Securities and Exchange Commission today voted on several final rules and rule proposals that together represent material progress toward many Commission priorities.
“Over the past year, I have been increasingly impressed by the breadth of expertise at the SEC, and the diversity of topics the Commission considered today is proof of that,” said Chairman Clayton. “Commission staff is actively working on issues that touch all corners of our marketplace, including, importantly, our Main Street investors. I am pleased that we are making steady, thoughtful progress on many of the Commission initiatives detailed on our regulatory flexibility agenda. I cannot thank the staff enough for their dedication. Our capital markets are ever changing and the staff is committed to taking action to ensure that, as they have been for the past 80 years, they remain the best markets for investors, issuers, and our economy.”
The Commission today approved:
Adoption of amendments to modernize the definition of “smaller reporting company,” which was established in 2008. The full release on these amendments can be found here.
Adoption of amendments to require the use of the Inline XBRL format in certain filings, which were proposed in 2017 and has been under study for many years. The full release on these amendments can be found here.
A proposal that would permit certain exchange-traded funds to operate without first obtaining a fund-specific exemptive order from the Commission, which is a process that has not changed since the first ETF was approved in 1992. The full release on this proposal can be found here.
Adoption of amendments related to disclosures of liquidity risk management for open-end funds, which were proposed earlier this year. The full release on these amendments can be found here.
A proposal to amend rules that govern the Commission’s whistleblower program. It has been seven years since these rules were adopted. The full release on this proposal can be found here.
An archived webcast of the meeting will be available on sec.gov.
The Securities and Exchange Commission today voted to propose amendments to the rules governing its whistleblower program. The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the Commission and help the agency detect wrongdoing and better protect investors and the marketplace.
The Commission’s whistleblower program has made significant contributions to the effectiveness of the agency’s enforcement of the federal securities laws. Original information provided by whistleblowers has led to enforcement actions in which the Commission has ordered over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.
After nearly seven years of experience administering the whistleblower program, the SEC has identified various ways in which the program might benefit from additional rulemaking. The proposed rules would, among other things, provide the Commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.
“Whistleblowers have made significant contributions to the SEC’s enforcement efforts, and the value of our whistleblower program is clear,” said SEC Chairman Jay Clayton. “The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions. I look forward to public feedback and encourage everyone with an interest to give us their ideas on the proposed rules.”
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
SEC Open Meeting
June 28, 2018
Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program. Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions. Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected. Congress established a separate fund at the Treasury Department, called the Investor Protection Fund (IPF), from which whistleblower awards are paid. Since the program’s inception, the Commission has ordered over $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly, whose information and cooperation assisted the Commission in bringing successful enforcement actions.
The proposed whistleblower rule amendments would make certain modifications and clarifications to the existing rules, as well as several technical amendments.
Additional Tools in Award Determinations
Allowing awards based on deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into by the U.S. Department of Justice (“DOJ”) or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws: This proposed amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission, DOJ, or a state attorney general acting in a criminal case may elect to pursue. Currently, the Commission’s whistleblower rules do not address whether the Commission may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding. Under the proposed amendment, the Commission would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.
Additional considerations for small and exceedingly large awards:
Historically, over 60% of the awards given out in our whistleblower program have been less than $2 million. In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million. In exercising its discretion to increase an award under this provision, the Commission would consider whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.
The proposing release also includes a general inquiry for public comment regarding whether the Commission could establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly available information, or where the monetary sanctions collected are de minimis.
Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.  In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers. However, in no event would the award be adjusted below $30 million. This proposed amendment is intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.
Elimination of potential double recovery under the current definition of “related action”: This proposed amendment would prevent the irrational result that could occur if a whistleblower could receive multiple recoveries for the same information from different whistleblower programs. The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a “related action” if the Commission determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.
Uniform Definition of “Whistleblower”
In addition to the foregoing recommendations, the Commission proposes rule amendments in response to the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers. In that decision, the Court held that the whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the Commission in order to qualify for protection against employment retaliation under Section 21F. The Court thus invalidated the Commission’s rule interpreting Section 21F’s anti-retaliation protections to apply in cases of internal reports.
The proposed rules would modify Rule 21F-2 so that it comports with the Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F—i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections. For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing”. To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the Commission’s online tips portal would remain in place.
Increased Efficiency in Claims Review Process
Two further proposed changes are designed to help increase the Commission’s efficiency in processing whistleblower award applications.
Proposed new subparagraph (e) to Exchange Act Rule 21F-8 would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the Commission, as well as to afford the Commission with the ability to bar individuals who repeatedly make frivolous award claims in Commission actions. To prevent repeat submitters from abusing the award application process, the proposed rule would permit the Commission to permanently bar any applicant from seeking an award after the Commission determines that the applicant has abused the process by submitting three frivolous award applications.
Proposed new Exchange Act Rule 21F-18 would afford the Commission with a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the Commission in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation. The proposed summary disposition procedures would help facilitate a more timely resolution of such relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims. As under current rules, Claimants would have an opportunity to contest a preliminary denial of their claim before the Commission makes its final determination.
Clarification and Enhancement of Certain Policies and Procedures
The proposed amendments would clarify and enhance certain policies, practices, and procedures in implementing the program. These recommendations include the items listed below.
Proposed revisions to Exchange Act Rule 21F-4(e) to clarify the definition of “monetary sanctions” so that it codifies the Commission’s current understanding and application of that term.
Proposed revisions to Exchange Act Rule 21F-9 to provide the Commission with additional flexibility to modify the manner in which individuals may submit Form TCR (Tip, Complaint or Referral).
Proposed revisions to Exchange Act Rule 21F-8 to provide the Commission with additional flexibility regarding the forms used in connection with the whistleblower program.
Proposed amendment to Exchange Act Rule 21F-12 to clarify the list of materials that the Commission may rely upon in making an award determination.
Proposed amendment to Rule 21F-13 to clarify the materials that may comprise the administrative record for purposes of judicial review.
In addition to the foregoing proposed rule amendments, the Commission is publishing proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications. Under the proposed guidance, in order to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.
The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program. After careful review of the comments, the Commission will consider what further action to take on the proposal.
 Whenever the reserve in the Commission’s Investor Protection Fund (“IPF”) falls below $300 million, the Commission by law must replenish the IPF with any collected monetary sanctions that are not paid to the victims of the violations. These funds otherwise would be directed to the United States Treasury, where they could be made available for use in funding other valuable public programs.
The Securities and Exchange Commission today adopted amendments to public liquidity-related disclosure requirements for certain open-end funds. Under the amendments, funds would discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management programs. This requirement replaces a pending requirement that funds publicly provide a quantitative end-of-period snapshot of historic aggregate liquidity classification data for their portfolios on Form N-PORT.
The Commission adopted the open-end fund liquidity rule in October 2016 in an effort to promote effective liquidity risk management programs in the fund industry. Management of liquidity risk is important to funds’ ability to meet their statutory obligation — and their investors’ expectations — regarding redeemability of their shares. Since adoption of the 2016 rule, staff has engaged in extensive outreach to identify potential issues associated with the effective implementation of the rule.
This outreach resulted in a series of actions taken by the Commission. In addition to today’s adoption, the Commission previously adopted a rule that extends by six months the compliance date for the classification and classification-related elements of the liquidity rule and related reporting requirements. In addition, the staff has issued guidance intended to assist funds in complying with the liquidity rule’s requirements. These actions are aimed at providing investors with accessible and useful information about liquidity risk management of the funds they hold while providing sufficient time for funds to implement the requirement to classify their holdings in an efficient and effective manner.
“The amendments will require funds to make information on a key aspect of effective portfolio management available to investors. This additional information should enhance investor-specific evaluation and decision making. Funds vary widely in portfolio management and I encourage funds to develop disclosure practices that best inform our Main Street investors of the fund’s approach to liquidity management, including, if appropriate, using quantitative metrics,” said Chairman Clayton. “As we move forward, the SEC staff will review quantitative liquidity disclosures and evaluate whether there are common quantitative metrics that allow for comparison across similarly situated funds that can and should be disclosed to investors and the market. I look forward to the staff’s analysis.”
These amendments will become effective sixty days after they are published in the Federal Register.
Adoption of Amendments to Public Liquidity Risk Management Disclosure
SEC Open Meeting
June 28, 2018
The Securities and Exchange Commission is adopting amendments to public liquidity-related disclosure requirements for open-end funds. These actions are meant to help provide investors with accessible and useful information about the liquidity risk management practices of the funds they hold.
Improved Liquidity Disclosure
Under the amendments, funds would discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management program, replacing a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT.
Enhanced N-PORT Classification Reporting
The amendments to Form N-PORT (the form that funds will file each month with portfolio holdings information) will provide funds the flexibility to split their portfolio holdings into more than one classification category in three specified circumstances when split reporting equally or more accurately reflects the liquidity of the investment or eases cost burdens. Finally, Form N-PORT will require that funds disclose their holdings of cash and cash equivalents not reported elsewhere on the Form.
The effective date for the form amendments will be 60 days after publication in the Federal Register.
The Securities and Exchange Commission today voted to propose a new rule and form amendments intended to modernize the regulatory framework for exchange-traded funds (ETFs), by establishing a clear and consistent framework for the vast majority of ETFs operating today. ETFs that satisfy certain conditions would be able to operate within the scope of the Investment Company Act of 1940 and to come to market without applying for individual exemptive orders. The proposal would therefore facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors.
ETFs are hybrid investment products not originally provided for by the U.S. securities laws. Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to redeem directly from the fund. Since 1992, the Commission has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act. ETFs have grown substantially in that period, and today the over 1,900 ETFs represent nearly 15% of total investment company assets. Investors use ETFs for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and for hedging portfolios.
“Many Main Street investors now use ETF investments to meet their financial goals. This proposal is an important step in moving a substantial portion of the $3.4 trillion ETF market under a rules-based framework that continues to provide the oversight and protections investors expect,” said Chairman Jay Clayton. “The development of ETFs has given investors options that can more effectively meet their goals. We should embrace such innovation and ensure that our regulatory framework allows for it, while being unwaveringly true to our investor protection mission. We will continue to monitor this market, including in consultation with our Investor Advisory Committee and our Fixed Income Market Structure Advisory Committee, and welcome public comment.”
ETFs relying on the rule would have to comply with certain conditions designed to protect investors, including conditions on transparency and disclosure. The SEC will seek public comment on the proposal for 60 days.
SEC Open Meeting
June 28, 2018
The Commission is proposing a new rule and amendments to forms designed to modernize the regulatory framework for exchange-traded funds (“ETFs”). Proposed rule 6c-11 would permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (the “Act”), and come directly to market without the cost and delay of obtaining an exemptive order. This should facilitate greater competition and innovation in the ETF marketplace by lowering barriers to entry. The proposal would replace hundreds of individualized exemptive orders with a single rule subject to public notice and comment. The proposed rule’s standardized conditions are designed to level the playing field among most ETFs and protect ETF investors, while proposed disclosure amendments would provide investors who purchase and sell ETF shares on the secondary market with new information.
Scope of Proposed Rule 6c-11
Proposed rule 6c-11 would be available to ETFs organized as open-end funds, the structure for the vast majority of ETFs today. ETFs organized as a unit investment trusts, ETFs structured as a share class of a multi-class fund, and leveraged or inverse ETFs would not be able to rely on the proposed rule.
Conditions for Reliance on Proposed Rule 6c-11
Proposed rule 6c-11 would provide certain exemptions from the Act and also impose certain conditions. The proposed conditions include the following:
Transparency. Under proposed rule 6c-11, an ETF would be required to provide daily portfolio transparency on its website.
Custom basket policies and procedures. An ETF relying on proposed rule 6c-11 would be permitted to use baskets that do not reflect a pro-rata representation of the fund’s portfolio or that differ from other baskets used in transactions on the same business day (“custom baskets”) if the ETF adopts written policies and procedures setting forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders. The proposed rule also would require an ETF to comply with certain recordkeeping requirements.
Website disclosure. The proposed rule and form amendments would require ETFs to disclose certain information on their websites, including historical information regarding premiums and discounts and bid-ask spread information. These disclosures are intended to inform investors about the efficiency of an ETF’s arbitrage process. Additionally, the proposal would require an ETF to post on its website information regarding a published basket at the beginning of each business day.
Rescission of Certain ETF Exemptive Relief
To help create a consistent ETF regulatory framework, the proposal recommends rescinding exemptive relief previously granted to ETFs that would be able to rely on the rule. The proposal also recommends rescinding exemptive relief permitting ETFs to operate in a master-feeder structure, which very few ETFs currently utilize. However, the proposal recommends grandfathering existing master-feeder arrangements involving ETF feeder funds, but preventing the formation of new ones, by amending relevant exemptive orders. Additionally, the proposal does not recommend rescinding exemptive relief that permits ETF fund of funds arrangements.
Proposed Amendments to Form N-1A and Form N-8B-2
The Commission is proposing several amendments to Form N-1A – the form ETFs structured as open-end funds must use to register under the Act and to offer their securities under the Securities Act – to provide more useful, ETF-specific information to investors who purchase ETF shares on an exchange. The Commission also is proposing that ETFs organized as UITs provide the same information to investors on Form N-8B-2 – the form ETFs structured as UITs must use to register under the Act.
The comment period for the proposed rule and form amendments will be 60 days after publication in the Federal Register.
The Securities and Exchange Commission today voted to adopt amendments to eXtensible Business Reporting Language (XBRL) requirements for operating companies and funds. The amendments are intended to improve the quality and accessibility of XBRL data.
The amendments, which will go into effect in phases, require the use of Inline XBRL for financial statement information and risk/return summaries. Inline XBRL has the potential to benefit investors and other market participants while decreasing, over time, the cost of preparing information for submission to the Commission. The amendments also eliminate the requirements for operating companies and funds to post XBRL data on their websites.
“The amendments are part of the Commission’s continued efforts to modernize reporting and to improve the accessibility and usefulness of disclosures to investors, including our Main Street investors. The Commission will continue to monitor industry practices and market developments in disclosure technologies and ensure our rules adapt with the times,” said Chairman Jay Clayton. “The amendments reflect the Commission’s effort to use developments in structured disclosure technology to lower costs borne by filers and investors. I want to particularly thank Commissioners Stein and Piwowar who, over their tenures and in the interests of investor protection and efficient markets, have worked to ensure that information can be disseminated more quickly and more broadly through many historic and new channels.”
Inline XBRL Filing of Tagged Data
SEC Open Meeting
June 28, 2018
The amendments require the use of the Inline eXtensible Business Reporting Language (“XBRL”) format for the submission of operating company financial statement information and fund risk/return summary information and make related changes. Inline XBRL involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable.
The amendments are intended to improve the data’s usefulness, timeliness, and quality, benefiting investors, other market participants, and other data users. The amendments are also intended to decrease, over time, the cost of preparing the data for submission to the Commission.
While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements.
Inline XBRL for operating companies
Operating companies that are currently required to submit financial statement information in XBRL will be required, on a phased basis, to transition to Inline XBRL.
Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.
Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.
All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021.
Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
Inline XBRL for funds
Funds that are currently required to submit risk/return summary information in XBRL will be required, on a phased basis, to transition to Inline XBRL.
The amendments also eliminate the 15 business day filing period for risk/return summary XBRL data, so that the data will be more timely available to the public.
Large fund groups (net assets of $1 billion or more as of the end of their most recent fiscal year) will be required to comply two years after the effective date of the amendments.
All other funds will be required to comply three years after the effective date of the amendments.
Website posting requirement elimination
The requirement for operating companies and funds to post XBRL data on their websites will be eliminated upon the effective date of the amendments.
Benefits of the Inline XBRL Technology
Among the potential benefits, Inline XBRL:
Is expected to reduce, over time, XBRL preparation time and effort by eliminating duplication and facilitating the review of XBRL data.
Gives the preparer full control over the presentation of XBRL disclosures within the HTML filing.
Is expected to reduce the likelihood of inconsistencies between HTML and XBRL filings and improve the quality of XBRL data.
Enhances the usability of structured disclosures for investors through greater accessibility and transparency of the data and enhanced capabilities for data users, who would no longer have to view the XBRL data separately from the text of the documents.
In addition, tools like the open source Inline XBRL Viewer ( more information; download) can be used by filers and the public to review and analyze the XBRL data more efficiently.
For fund investors, the benefits of Inline XBRL are expected to be enhanced by the more timely availability of risk/return summary XBRL data due to the elimination of the 15 business day XBRL filing period.
For funds, the amendments also will facilitate efficiencies in the filing process by permitting the concurrent submission of XBRL data files with certain post-effective amendment filings.
The Securities and Exchange Commission today voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations.
“I want our public capital markets to be a place where smaller companies can thrive and thereby provide our Main Street investors with more access to investing options where our public company disclosure rules and protections apply,” said SEC Chairman Jay Clayton. “Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all. These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets. Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.”
The new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The rules will become effective 60 days after publication in the Federal Register.
The amendments do not change the threshold in the “accelerated filer” definition that requires, among other things, that filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting. However, Chairman Clayton has directed the staff, and the staff has begun, to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers in order to further reduce compliance costs for those companies.
Amendments to the
Smaller Reporting Company Definition
SEC Open Meeting
June 28, 2018
Today the Commission approved amendments to raise the thresholds in the smaller reporting company definition, thereby expanding the number of smaller companies eligible to comply with our current scaled disclosure requirements. These amendments are intended to promote capital formation and reduce compliance costs for smaller companies while maintaining appropriate investor protections.
The Commission established the smaller reporting company (“SRC”) category of companies in 2008 in an effort to provide general regulatory relief for smaller companies. SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X. Under the previous definition, SRCs generally were companies with less than $75 million in public float. Companies with no public float ? because they have no public equity outstanding or no market price for their public equity ? were considered SRCs if they had less than $50 million in annual revenues.
Amendments to the Smaller Reporting Company Definition
Under the amendments, companies with a public float of less than $250 million will qualify as SRCs. A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.
The following table summarizes the amendments to the SRC definition.
Previous SRC Definition
Revised SRC Definition
Public float of less than $75 million
Public float of less than $250 million
Less than $50 million of annual revenues and no public float
Less than $100 million of annual revenues and
no public float, or
public float of less than $700 million
Consistent with the previous definition, under the amendments, a company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80% of the initial qualification thresholds.
Previous SRC Definition
Revised SRC Definition
Public float of less than $50 million
Public float of less than $200 million, if it previously had $250 million or more of public float
Less than $40 million of annual revenues and no public float
Less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and
Less than $560 million of public float, if it previously had $700 million or more of public float.
Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition. These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.
Amendments to Rule 3-05 of Regulation S-X
The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X increase the net revenue threshold in that rule from $50 million to $100 million. As a result, companies may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million.
Amendments to the Accelerated Filer and Large Accelerated Filer Definitions
The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. However, the Chairman has directed the staff, and the staff has begun, to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers in order to promote capital formation by reducing compliance costs for those companies, while maintaining appropriate investor protections.