June and July 2021 Financial Services Regulatory Developments

Below are summaries of June and July 2021 regulatory developments that may be of interest to investment advisers, broker-dealers, public companies, and other securities market participants. Topics include SEC staffing, an overhaul of the PCAOB, SEC rulemaking, SEC Risk Alerts, and SEC enforcement activity.

Send any comments or questions to mscanlon@mpslgl.com or call me at 410.624.5744.

SEC Staffing

SEC Announces 4 New Division Directors (2 Acting), 1 New Office Director, and Other Key Appointments.

Gurbir S. Grewal, a former federal prosecutor who most recently was New Jersey’s Attorney General, is the new Director of the Enforcement Division.[i] Renee Jones, a corporate and securities lawyer who most recently was a law professor at Boston College, is the new Director of the Corporation Finance Division.[ii] She replaced John Coates, who is now SEC General Counsel.

David Saltiel, a former MSRB Chief Economist, is the new Acting Director of the Trading and Markets Division.[iii] He replaces Christian Sabella, who left the agency in June. Daniel Kahl, formerly an attorney at the Investment Adviser Association and most recently Deputy Director of the SEC’s Division of Examinations, became Acting Director of the Division after current Director Peter Driscoll left the agency in mid-August.[iv]

YJ Fischer is the new Director of the Office of International Affairs, effective August 2.[v] She is a former State Department Official who most recently was global head of YouTube product policy at Google. Also, in June and July, the SEC announced the following members of Chair Gensler’s Executive Staff and Policy Team:[vi]

PCAOB Overhaul

In June, the SEC removed the PCAOB Chair and began seeking candidates for an entirely new board.

On June 4, the SEC removed William Duhnke III as Chair of the Public Company Accounting Oversight Board (PCAOB), appointed current board member Duane DesParte as Acting Chair, and began seeking candidates for all five PCAOB board positions.[vii] Less than two weeks earlier, Senator Elizabeth Warren (D-MA) and Senator Bernie Sanders (I-VT) sent Chair Gensler a letter urging the SEC to replace the PCAOB board and saying the PCAOB was a troubled agency that had failed to ensure the integrity of public company audit reports.[viii]

The Sarbanes-Oxley Act of 2002 established the PCAOB as an SEC-overseen nonprofit corporation to set auditing standards and register and inspect public accounting firms that prepare audit reports for public companies and broker-dealers. The PCAOB, which has about 800 employees, also has enforcement authority.[ix]

In a press release announcing the changes, Chair Gensler said he sought to set the PCAOB on a path to better protect investors. Its relatively short history has featured dysfunction and misconduct, including a 2015-2017 scandal involving employee theft of confidential inspection information and tipping of an accounting firm about upcoming inspections.[x] Also, Senators Warren and Sanders and others have expressed concern about lax auditor oversight by the PCAOB and a further weakening of the PCAOB under the prior administration.

In a separate statement, Commissioners Peirce and Roisman expressed concern, saying they feared the changes may undermine the PCAOB’s mission by suggesting it is subject to the vicissitudes of politics.[xi]

SEC Rulemaking

The SEC announced a no-enforcement position on, and reconsideration of, controversial 2020 rule amendments subjecting proxy voting advice provided by proxy advisory firms to new requirements under the 1934 Act Proxy Rules.

The SEC announced its 2021 rulemaking agenda, which includes ESG, the custody rule, money market funds, private funds, SPACs and other topics. The agenda also appears to reopen certain items the SEC addressed under Chair Clayton.

Proxy Voting Advice. At Chair Gensler’s direction, the SEC Division of Corporation Finance announced on June 1 it was considering whether to recommend the SEC revisit 2020 amendments to the 1934 Act Proxy Rules and would not recommend enforcement action based on the amendments (or related 2019 guidance) while the SEC was considering further regulatory action in this area.[xii]

The 2020 amendments provide that proxy voting advice is a “solicitation” subject to the Proxy Rules and require proxy advisory firms to share their voting advice with public companies no later than when they share the advice with their clients. The amendments (which have a mandatory compliance date of December 1, 2021) also require proxy advisory firms to provide mechanisms through which company managements can communicate with these clients about the advice prior to proxy votes, and are viewed by some as likely to chill independent proxy voting advice and inhibit shareholder democracy unless reversed by the SEC.

2021 Rulemaking Agenda. On June 3, the SEC announced its 2021 rulemaking agenda.[xiii] In the press release, Chair Gensler said “the SEC has a lot of regulatory work ahead . . .” and he looked forward to proposing and finalizing rules that will strengthen markets, increase transparency, and safeguard investors. The agenda reflects an intent to revisit and potentially undo certain rulemakings the SEC adopted under Chair Clayton over the dissent of the SEC’s Democrat commissioners, including the above-noted Proxy Rule amendments.

Topics on which the SEC plans to propose rules within the next 12 months include the Custody Rule (for investment advisers), ESG rules for investment advisers and funds, cybersecurity risk guidance, Form PF amendments, investment company cross trading, and money market fund reform. Also, the SEC added short sale, securities-based swap and stock loan transparency and SPACs to the agenda, and removed the following items: an amendment (proposed in 2020) increasing the Form 13F filing threshold, amendments to the Advisers Act’s family office rule, and investment company disclosure modernization.

Commissioners Peirce and Roisman issued a separate statement saying the agenda included important and timely items but omitted important rules, including rules to provide clarity for digital assets, and regrettably sought to undo certain “freshly minted” rules the SEC had adopted under Chair Clayton.[xiv]

SEC Risk Alerts

On July 21, the SEC Division of Examinations issued two Risk Alerts relating to Advisers Act compliance, one

addressing wrap fee programs and the other fixed income principal trades and cross trades. Related compliance

takeaways are set forth below.

In each Risk Alert, the SEC Division of Examinations describes compliance deficiencies and weaknesses its Staff observed while conducting examinations of investment advisers.[xv] Each Risk Alert also describes effective practices the Staff observed, and encourages investment advisers to review the content and implementation of their compliance policies and procedures to ensure compliance with relevant requirements.

Wrap Fee Programs. These are investment advisory programs in which clients pay asset-based fees (i.e., fees based on account value) instead of trade-by-trade commissions for trade execution services provided by the program’s sponsor or a designated broker.[xvi] The asset-based fees may also cover other services, such as advisory services provided by the sponsor and/or another investment adviser (e.g., an account’s portfolio manager). Alternatively, separate fees may be charged for these other services.

The Risk Alert says the SEC Staff observed room for improvement in many investment advisers’ compliance programs with respect to wrap fee programs, and identifies common deficiencies in the following areas:

• Wrap Fee Account Recommendations. SEC Staff observed initial and ongoing failures to assess, or adequately assess, whether wrap fee accounts were in the best interests of clients to whom they were recommended – contrary to the fiduciary duty of care. The most common such failure was failure to monitor “trading away” from the sponsor or designated broker and the separate fees charged to accounts as a result (in addition to wrap fees). Infrequent trading was also a concern.

• documentation of initial determinations that a recommended wrap fee account is in a client’s best interest (documentation such as a completed objectives/risk tolerance/financial situation questionnaire enables an investment adviser to demonstrate compliance to SEC examiners and can also offer protection against certain claims by dissatisfied clients, particularly if the documentation or its substance is “played back” to the client at or soon after inception of the account);
• periodic written reminders to clients (e.g., on account statements) to report changes to personal and financial situations and objectives;[xvii]
• periodic reviews of trading away, trading frequency, and client-provided information, to ensure a wrap fee account continues to be in client’s best interest – the frequency of these non-initial reviews should be determined by reference to the scope of the agreed-upon investment advisory services and should be disclosed in the investment adviser’s Form ADV brochure;[xviii] and
• appropriate action when a wrap account may no longer be in a client’s best interest.

• Disclosures. SEC Staff found many investment advisers omitted or provided inadequate disclosures, including (i) inconsistent fee and expense disclosures across client agreements and sponsor and portfolio manager Form ADV brochures, (ii) inadequate disclosure of fees not included in the wrap fee (e.g., fixed income mark-ups, tradeaway fees, separate portfolio manager fees), and (iii) disclosed discounts or rebates that were not applied, resulting in overbilling.SEC Staff also found conflict of interest disclosures describing recommendation-related financial incentives were often omitted or inadequately stated. Situations involving such incentives include:

• where investment adviser personnel will incur costs, such as ticket charges and account transfer fees, if they recommend a wrap fee account alternative; and
• where an investment adviser will profit more from a recommended wrap fee account than a less costly alternative, due to factors such as infrequent trading, high cash balances, and/or significant fixed income weightings.

Compliance Takeaways: Wrap fee program sponsors and other investment advisers that recommend or participate in wrap fee programs should make sure program-related disclosures (e.g., Form ADV brochures, client agreements, marketing material) are consistent and reflect actual practice, particularly with respect to fees, expenses, and which services are and are not covered by the wrap fee – disclosure failures in these areas can be costly.[xix]

Investment advisers should also prepare and regularly update an inventory of conflicts of interest that could affect their recommendations of, or services they provide to, wrap fee accounts and make sure they adequately disclose the conflicts and address them in their compliance policies and procedures – see below. Particular attention should be paid to the disclosure of compensation-related conflicts, a topic on which the SEC Staff has published helpful FAQ guidance.[xx]

• Policies and Procedures. SEC Staff frequently observed weak or ineffective written compliance policies and procedures relating to wrap fee programs. Observed deficiencies included (i) not having policies or procedures for key business functions and risk areas, including policies and procedures requiring initial and ongoing best interest reviews of recommended wrap fee accounts, (ii) having inadequate policies and procedures, and (iii) failing to implement, or inconsistently implementing or enforcing, policies and procedures.

Cited reasons for policy and procedure inadequacy include failure to tailor them to the facts of the investment adviser’s business and failure to fully address risks in areas such as (i) reviewing trading activity for tradeaway practices and costs, (ii) best-interest determinations for wrap fee accounts, (iii) best execution analysis, and (iv) disclosure document delivery.

Compliance Takeaways: To assure compliance with Rule 206(4)-7 under the Advisers Act (the “Compliance Program Rule”), an investment adviser’s wrap fee program-related compliance policies and procedures should be tailored to the facts of its business.

Also, at least annually, investment advisers should review their policies and procedures and disclosures and seek to identify applicable conflicts of interest and compliance risks, and promptly make any changes needed to ensure these conflicts and risks are adequately addressed (i.e., consistent with fiduciary duties). Finally, advisers should make sure to actually implement and enforce their policies and procedures – or promptly amend them if changes are needed.

The SEC has focused on wrap fee programs in examinations and enforcement actions because of the continued growth of retail investor assets in these programs and the related conflicts and disclosure practices its Staff has observed in prior examinations. The Risk Alert signals that this focus likely will continue.

Fixed Income Principal and Cross Trades. The Risk Alert pertaining to these types of trades is a follow-up to a Risk Alert the Division of Examinations (then the“Office of Compliance, Inspections and Examinations”) issued in 2019, and is based on more than 20 examinations the SEC Staff conducted as part of its FIX Initiative, which focused on firms that engaged in principal trades and cross trades involving fixed income securities.[xxi]

A principal trade is a trade an investment adviser effects between its own account, or the account of an affiliate, and the account of a client (as opposed to purchasing or selling in a secondary market). Section 206(3) of the Advisers Act prohibits a principal trade unless the trade and the capacity in which the adviser is acting are disclosed in writing, prior to the trade’s completion, to each client involved and each client consents. A cross trade is a trade an investment adviser effects between two or more of its advisory clients.

For both principal trades and cross trades, an investment adviser needs to fully and fairly disclose the actual and potential conflicts of interest involved in order to ensure compliance with its fiduciary duty under Sections 206(1) and (2) of the Advisers Act. This disclosure obligation is in addition to Section 206(3)’s requirements for principal trades – see above. Also, for both principal trades and cross trades, additional requirements apply under other laws if a registered investment company or ERISA plan client is involved.[xxii]

The Risk Alert says nearly two-thirds of the investment advisers examined as part of the FIX Initiative received deficiency letters and the “vast majority” of the deficiencies related to compliance program issues, conflicts of interest, and disclosures. The deficiencies described in the Risk Alert are summarized below:

• Policies and Procedures – Lack of Sufficient Detail. SEC Staff found some policies and procedures not specific enough to assure compliance with principal/cross trade requirements. For example, one investment adviser’s cross trading procedures did not specify factors to consider in determining whether a cross trade was in clients’ best interests. Also, some advisers that agreed to manage portfolios in compliance with ERISA had no guidance in their policies and procedures on what needed to be done to comply with ERISA restrictions on principal trades and cross trades.

Compliance Takeaways: To ensure that compliance policies and procedures are reasonably designed to assure compliance with principal/cross trade requirements (and thereby comply with the Compliance Program Rule), the policies and procedures should (i) clearly define principal trades and cross trades, (ii) indicate whether these types of trades are prohibited or permitted, and (iii) if permitted, clearly describe all processes that need to be followed and all conditions that need to be satisfied, including ERISA and 1940 Act requirements if such trades are permitted for ERISA plan and registered investment company clients. Policies and procedures should also require documentation of such trades, so compliance can be demonstrated to SEC examiners.[xxiii]

• Policies and Procedures – Noncompliance. SEC Staff found noncompliance with policies and procedures relating to principal trades and cross trades, including (i) noncompliance with prohibitions of these trades, (ii) failure to obtain compliance pre-approval where required, and (iii) cross trades not executed at independent market prices, as required by policies and procedures.

Compliance Takeaways: Obviously, an investment adviser needs to follow its written compliance policies and procedures, and these must be reasonably designed to assure compliance with legal requirements – see above. Compliance will be more likely if policies and procedures are clear and comprehensive and written in plain English. Regular (ideally, at least annual) interactive training of relevant personnel, including portfolio managers and trading and operations personnel, on policy and procedure requirements in these areas should also make compliance more likely.

• Policies and Procedures – Ineffective Testing. SEC staff found that “many” examined investment advisers did not effectively test the implementation of their policies and procedures for principal and cross trades, such as by analyzing trade blotters to identify unreported principal trades and/or cross trades. This resulted in investment advisers being unaware of that these trades were taking place and failing to ensure the trades complied with applicable legal requirements.

Compliance Takeaways: Thoughtful compliance testing is a key part of investment adviser compliance in these areas – it can support compliance with the Compliance Program Rule’s at-least-annual-review requirement and help a firm determine if it needs to devote more attention to compliance in particular areas. Accordingly, policies and procedures should provide for meaningful compliance testing, and this testing should be performed and the results documented.

• Cross Trading Disclosures. The Risk Alert says that over one third of cross trading-related deficiencies related to disclosure, including (i) omitting information about cross trading from Form ADV, and (ii) omitting descriptions of material conflicts of interest (e.g., a potential incentive to favor one client over another) from Form ADV, client agreements and other communications.

Compliance Takeaways: An investment adviser that engages in, or may engage in, either cross trading or principal trading should disclose this, including associated conflicts of interest it has or may have, in its Form ADV Part brochure(s), client agreements and any documents it sends to clients in connection with the trades. Also, conflict of interest disclosure should be full and fair, consistent with the SEC’s 2018 Fiduciary Duty interpretive release.[xxiv]

Enforcement Wrap-Up

In June and July, SEC enforcement activity targeted a range of misconduct, including misappropriation of client

assets, inadequate SPAC due diligence, undisclosed rollover conflicts of interest, impeding of whistleblowers,

preferential allocation of trades, front running of client trades, and Form CRS failures.

In June and July, the SEC Division of Enforcement targeted securities-related violations in a wide range of areas. Rather than describing everything, I summarize below only some of the more interesting matters.

1. Misappropriation of BDC Client’s Assets. On June 4, the SEC settled proceedings against an investment adviser to a BDC and the BDC’s CEO and CFO for causing lending fees owed to the BDC to be retained by the adviser without adequate disclosure to the BDC’s board.[xxv] The SEC charged the CEO and investment adviser with additional violations and required them to pay aggregate disgorgement, interest and penalties of $1,225,056. The SEC imposed a $20,000 penalty on the CFO.
2. SPAC Due Diligence Failures. On July 13, the SEC settled proceedings against a SPAC and its CEO and sponsor for accepting misrepresentations from the SPAC’s intended merger target and unreasonably failing to probe their basis and follow up on red flags.[xxvi] As a result of the alleged misconduct, the SPAC’s SEC filings and presentations to PIPE investors included the misrepresentations and misled investors about material aspects of the target’s business. The SEC imposed penalties of $1 million on the SPAC and $40,000 on its CEO, and the sponsor agreed to give up 250,000 SPAC founders shares.
3. Rollover Recommendations. On July 13, the SEC and the New York AG settled proceedings against an investment adviser for making misleading statements and failing to adequately disclose conflicts of interest in connection with recommendations to roll over plan assets into wrap fee accounts that were costlier than alternatives.[xxvii] The SEC’s order describes an aggressive sales strategy and financial incentives, including potential loss of employment, aimed at spurring the firm’s individual advisory representatives to recommend the wrap fee accounts. The SEC also found the firm failed to implement related polices, and required the firm to pay $97 million in disgorgement, interest and penalties.
4. Whistleblowers. On June 23, the SEC settled proceedings against a broker-dealer, finding it violated Rule 21F-17 under the 1934 Act, which prohibits any person from taking any action to impede an individual from communicating directly with SEC Staff about a possible securities law violation.[xxviii] The firm’s compliance manual prohibited employees from contacting a regulator without prior legal and compliance approval. The SEC imposed a $208,912 penalty on the firm.
5. Front-Running. On July 2, the SEC charged a trader for a Toronto-based investment adviser with a fraudulent front-running scheme in which the trader effected personal trades while knowing about large impending or in-process trades in the same securities for his firm’s clients.[xxix] The SEC alleged the trader engaged in this pattern of trading over 600 times, generating profits of at least $3.6 million.
6. Preferential Trade Allocation. On June 10, the SEC brought fraud charges against an investment adviser and its individual part-owner for allegedly using a single average-price account to purchase securities for client accounts and then, if the securities increased in price during the trading day, allocating the trades to accounts of the part-owner’s relatives.[xxx] The SEC alleged that if the purchased securities declined in price during the trading day, they would be allocated to accounts of other clients.
7. Form CRS Failures. On July 26, the SEC announced that 21 investment advisers and 6 broker-dealers had agreed to settle charges they failed to timely file, and deliver to existing retail clients/customers, their new Form CRS disclosure documents and also to post the documents on their websites, despite reminders from SEC examiners and FINRA.[xxxi] The penalties imposed ranged from $10,000 to $97,523.

Also, during June and July, the SEC continued to bring and settle charges against investment advisers for mutual fund share class selection/disclosure violations, as well as similar charges involving cash sweeps and undisclosed forgivable loans made to an investment adviser’s representatives.[xxxii]

[i] SEC Appoints New Jersey Attorney General Gurbir S. Grewal as Director of Enforcement (Jun. 29, 2021), www.sec.gov/news/press-release/2021-114.

[ii] Renee Jones to Join SEC as Director of Corporation Finance; John Coates Named SEC General Counsel (Jun. 14, 2021), www.sec.gov/news/press-release/2021-101.

[iii] David Saltiel Named SEC Acting Director of Trading and Markets; Christian Sabella Departs the Agency (Jun. 3, 2021), www.sec.gov/news/press-release/2021-92.

[iv] Daniel S. Kahl Appointed Acting Director of the Division of Examinations; Peter B. Driscoll to Depart Agency (Jul. 14, 2021); www.sec.gov/news/press-release/2021-126.

[v] YJ Fischer to Join SEC as Director of the Office of International Affairs (Jul. 22, 2021), www.sec.gov/news/press-release/2021-137.

[vi] Gary Gensler Announces Additions to Executive Staff (Jun. 8, 2021), www.sec.gov/news/press-release/2021-96; Chair Gensler Announces Composition of Policy Team (Jul. 16, 2021), www.sec.gov/news/press-release/2021-129.

[vii] SEC Announces Removal of William D. Duhnke III from the Public Company Accounting Oversight Board; Duane M. DesParte to Serve as Acting Chair (Jun. 4,2021), www.sec.gov/news/press-release/2021-93.

[viii] Letter from United States Senators Elizabeth Warren and Bernard Sanders to SEC Chair Gary Gensler (May 25, 2021), www.warren.senate.gov/imo/media/doc/Letter%20to%20Gensler%20on%20PCAOB.pdf.

[ix] See www.pcaobus.org/about for additional information about the PCAOB.

[x] Bloomberg Businessweek, “Chairman’s Firing is Latest Jolt at Troubled Financial Watchdog, R. Schmidt & B. Bain (Jun. 5, 2021), www.bloomberg.com/news/articles/2021-06-06/scandal-filled-financial-watchdog-pcaob-is-getting-attention-in-washington; SDNY US Attorney’s Office Press Release: “5 Former KPMG Executives and PCAOB Employees Charged in Manhattan Federal Court for Fraudulent Scheme to Steal Valuable and Confidential PCAOB Information and Use That Information to Fraudulently Improve KPMG Inspection Results” (Jan. 23, 2018), www.justice.gov/usao-sdny/pr/5-former-kpmg-executives-and-pcaob-employees-charged-manhattan-federal-court-fraudulent.

[xi] Statement on The Commission’s Actions Regarding the PCAOB (Jun. 4, 2021), www.sec.gov/news/public-statement/peirce-roisman-pcaob-2021-06-04?utm_medium=email&utm_source=govdelivery.

[xii] Statement on Compliance with the Commission’s 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9 (Jun. 1, 2021), www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01.

[xiii] SEC Announces Annual Regulatory Agenda (Jun. 11, 2021), www.sec.gov/news/press-release/2021-99.

[xiv] Moving Forward or Falling Back? Statement on Chair Gensler’s Regulatory Agenda (Jun. 14, 2021), www.sec.gov/news/public-statement/moving-forward-or-falling-back-statement-chair-genslers-regulatory-agenda.

[xv] Observations from Examinations of Investment Advisers Managing Client Accounts That Participate in Wrap Fee Programs (Jul. 21, 2021), www.sec.gov/files/wrap-fee-programs-risk-alert_0.pdf; Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from An Examination Initiative (Jul 21, 2021), www.sec.gov/files/fixed-income-principal-and-cross-trades-risk-alert.pdf.

[xvi] Rule 204-3 under the Advisers Act defines “wrap fee program” as “an advisory program under which a specified fee or fees not based directly upon transactions in a client’s account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of client transactions.”

[xvii] These written reminders need to be delivered to wrap fee programs each quarter for the program to comply with Rule 3a-4 under the 1940 Act. If this is done and other requirements are satisfied, the program will qualify for the Rule’s safe harbor from investment company regulation even though accounts in the program are managed similarly (Rule 3a-4 is also available for SMA programs that do not charge wrap fees).

[xviii] The SEC has brought and settled enforcement actions against wrap fee program sponsors for failing to adopt and implement policies and procedures requiring the tracking and disclosure of tradeaway practices and associated costs so that financial advisors and clients could evaluate the initial and continued suitability of wrap fee accounts. Lockwood Advisors Incorporated (Aug. 14, 2018), www.sec.gov/litigation/admin/2018/ia-4984.pdf; Stifel, Nicolaus & Company, Incorporated (Mar. 13, 2017), www.sec.gov/litigation/admin/2017/ia-4665.pdf.

[xix] The SEC has brought and settled enforcement actions against wrap fee program sponsors and client account managers for tradeaway disclosure-related failures. See e.g., Morgan Stanley Smith Barney LLC (May 12, 2020), www.sec.gov/litigation/admin/2020/34-88856.pdf; Riverfront Investment Group, LLC (Jul. 14, 2016), www.sec.gov/litigation/admin/2016/ia-4453.pdf.

[xx] Frequently Asked Questions Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation (Oct. 18, 2019), www.sec.gov/investment/faq-disclosure-conflicts-investment-adviser-compensation#_ftn10.

[xxi] Investment Adviser Principal and Agency Cross Trading Compliance Issues (Sept. 4, 2019), www.sec.gov/files/OCIE%20Risk%20Alert%20-%20Principal%20and%20Agency%20Cross%20Trading.pdf.

[xxii] If a cross trade involves a registered investment company client, it must comply with Rule 17a-7 under the 1940 Act. If a cross trade involves an ERISA plan or other client account subject to ERISA, it must comply with an exemption from ERISA Section 406(b)(2)’s conflict of interest restrictions – one such exemption is contained in ERISA Section 408(b)(19).

[xxiii] Failure to adopt and implement reasonably designed compliance policies and procedures violates the Compliance Program Rule and has been a frequent part of SEC enforcement actions against investment advisers that engaged, sometimes unknowingly, in these types of trades, including Palmer Square Capital Management LLC (Sept. 21, 2020) (no policies, procedures or controls in place to identify cross or principal trades), www.sec.gov/litigation/admin/2020/ia-5586.pdf; Putnam Investment Management, LLC and Zachary Harrison (Sept. 27, 2018) (insufficient monitoring to detect cross trades), www.sec.gov/litigation/admin/2018/ia-5050.pdf; Hamlin Capital Management, LLC (Aug. 10, 2018) (lack of oversight control to assess portfolio manager price challenges), www.sec.gov/litigation/admin/2018/ia-4983.pdf; and Western Asset Management Co. (Jan. 27, 2014) (inadequate monitoring and detection efforts for cross trades), www.sec.gov/litigation/admin/2014/ia-3762.pdf.

[xxiv] Commission Interpretation Regarding Standard of Conduct for Investment Advisers (Jun. 5, 2019), www.sec.gov/rules/interp/2019/ia-5248.pdf.

[xxv] SEC Charges Investment Adviser with Taking Unapproved and Undisclosed Fees (Jul. 4, 2021), www.sec.gov/enforce/34-92114-s.

[xxvi] SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination (Jul. 13, 2021), www.sec.gov/news/press-release/2021-124

[xxvii] SEC Announces $97 Million Enforcement Action Against TIAA Subsdiary for Violations in Retirement Rollover Recommendations (Jul. 13, 2021), www.sec.gov/news/press-release/2021-123.

[xxviii] SEC Charges Broker-Dealer for Violating Whistleblower Protection Rule (Jun. 23, 2021), www.sec.gov/enforce/34-92237-s.

[xxix] SEC Charges Hedge Fund Trader in Lucrative Front-Running Scheme (Jul. 2, 2021), www.sec.gov/news/press-release/2021-118.

[xxx] SEC Charges Investment Advisers with Cherry Picking, Obtains Asset Freeze (Jun. 10, 2021), www.sec.gov/litigation/litreleases/2021/lr25119.htm.

[xxxi] SEC Charges 27 Financial Firms for Form CRS Filing and Delivery Failures (Jul. 26, 2021), www.sec.gov/news/press-release/2021-139.

[xxxii] See e.g., Feltl Advisors, LLC (Jun. 11, 2021) (mutual fund share classes and cash sweeps), www.sec.gov/litigation/admin/2021/ia-5750.pdf; SEC Charges Investment Adviser for Failing to Disclose Conflict of Interest (Jun. 7, 2021) (undisclosed forgivable loans), www.sec.gov/enforce/ia-5748-s.

© MPS Legal, 2021.

NOTE: This report is dated August 25, 2021 (FS Spotlight #4), is for informational purposes only, and is or may be attorney advertising. It is not intended as legal advice and should not be relied on as such. The author believes statements of fact are correct as of the report date, but this is not guaranteed and the author has no obligation to update or correct any statement. To save space and enhance readability, the report uses, or may use, the following abbreviations: “1933 Act” is the Securities Act of 1933, as amended; “1934 Act” is the Securities Exchange Act of 1934, as amended; “1940 Act” is the Investment Company Act of 1940, as amended; “Advisers Act” is the Investment Advisers Act of 1940, as amended; “BDC” is business development company; “BSA” is the Bank Secrecy Act, as amended; “CCO” is Chief Compliance Officer; “CEA” is the Commodity Exchange Act of 1954, as amended; “CEO” is Chief Executive Officer; “CFO” is Chief Financial Officer; “CFTC” is the Commodity Futures Trading Commission; “CME” is the Chicago Mercantile Exchange; “ERISA” is the Employee Retirement Income Security Act of 1974, as amended; “ETF” is exchange-traded fund; “FINRA” is the Financial Industry Regulatory Authority; “NFA” is the National Futures Association; “OCC” is the Office of the Comptroller of the Currency; “OFAC” is the Office of Foreign Assets Control; “PCAOB” is the Public Company Accounting Oversight Board; “Reg. 9” is OCC Regulation 9; “SEC” is the Securities and Exchange Commission; and “SPAC” is special purpose acquisition corporation.