Securities and Exchange Commission announces enforcement initiative directed at reporting violations by public company insiders

The increasing importance of the index industry to the financial marketplace has drawn the attention of the US Securities and Exchange Commission (SEC). The use of custom, foreign, and narrow-based indexes and self-indexing has generated regulatory concerns, including possibilities of improper index selection procedures, misleading index descriptions, inadequate or misleading custom index disclosures, and self-dealing. Suggested remedies include requiring index providers to register with the SEC as investment advisers under the Investment Advisers Act of 1940 (act). Historically, index providers have relied on an exclusion from registration under the act; this proposal queries their entitlement to rely on the exclusion. If index providers are required to register, it is unlikely that regulation under the act would prove useful. Rather, enhanced disclosure and the application of existing securities laws, including those dealing with disclosure and antifraud concerns, and current SEC investigative and enforcement activities in appropriate cases should be sufficient to deal with the SEC’s concerns. <b>TOPICS:</b>Mutual funds/passive investing/indexing, information providers/credit ratings, legal/regulatory/public policy <b>Key Findings</b> ▪ Regulatory concerns are focused on possible abuses occurring in connection with custom, foreign, and narrow-based financial indexes, as well as self-indexing procedures, used by ETFs. These abuses include improper index component selection procedures, index manipulation, misleading index descriptions, inadequate or misleading custom index disclosures, self-dealing and blurred functions between ETF advisers and third-party index providers when creating custom indexes. ▪ One suggested remedy is to deem index providers “investment advisers” under the Investment Advisers Act of 1940 (act). This result would deprive index providers of their current ability to rely on the act’s “Publisher’s Exclusion” and, therefore, require their registration with the US Securities and Exchange Commission (SEC), as well as subject them to the act’s regulatory provisions, including its fiduciary duties and obligations. ▪ It is likely that index provider regulation under the act would not provide satisfactory solutions to the SEC’s concerns but, instead, would cause disruptive effects in the current financial index ecosystem, such as increased investor costs and diminished product innovation. Rather, the application and enforcement of existing securities laws, especially those dealing with disclosure and antifraud concerns and current SEC investigative and enforcement activities, where warranted, should be sufficient to deal with the SEC’s concerns.

PurposeTo explain a February 20, 2019 US Securities and Exchange Commission (SEC) settled enforcement action against Gladius Network LLC for failing to register an initial coin offering (ICO) under the federal securities laws, in which Gladius was able to avoid a civil penalty by self-reporting the violation and cooperating with the SEC enforcement staff.Design/methodology/approachExplains Gladius’ self-reporting, cooperation and remedial steps; why the SEC imposed no civil penalty on Gladius; and two similar cases the SEC instituted in July 2018 against companies that conducted unregistered ICOs, did not self-report, and were penalized. Provides analysis and conclusions.FindingsThe Gladius case offers important insight into how the SEC and its staff think about cooperation credit in resolving SEC enforcement actions and sends a clear message that self-reporting to the SEC can result in meaningful cooperation credit. In three recent cases, the Commission has made clear that once it put the industry on notice that ICOs could be securities that must be registered under the federal securities laws, a party risks enforcement action by failing to do so.Originality/valueExpert analysis and guidance from an experienced securities lawyer who counsels clients on all manner of SEC enforcement, examination and regulatory policy matters.

Purpose To analyze how the US Securities and Exchange Commission (SEC) has sanctioned broker-dealers (BDs) and registered investment advisers (RIAs) when cybersecurity breaches have occurred and to discuss whether the SEC is imposing a strict liability approach. Design/methodology/approach Describes the cyber-attack of a small RIA, the remedial steps the RIA took after the attack, the SEC’s enforcement action, why this particular case is noteworthy, and the case’s implications for RIAs and BDs. Findings RIAs and perhaps BDs may face strict liability from the SEC if they are victims of cybersecurity attacks. Practical implications Firms may want to address the likelihood of an SEC enforcement action if a breach occurs by reviewing recent enforcement actions, SEC reports and statements, and FINRA reports and statements. Originality/value Discusses the possible future of SEC enforcement actions regarding cybersecurity breaches.

The US Securities and Exchange Commission (SEC) late last year unanimously adopted revisions to its rules governing oil and natural gas reserves reporting, with those revisions aligned with and incorporating many of the definitions in the Society of Petroleum Engineers (SPE) Petroleum Resources Management System (PRMS). The revised rules will go into effect on January 1, 2010. The SEC oversees US securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. Companies publicly offering securities on US exchanges are required to file regular disclosures to the SEC, concerning their securities and the scope, practices, condition, and risks of their businesses with respect to investors. The changes just adopted by the SEC, announced December 29, 2008, marked the first major revision of the commission's reserves-reporting rules since 1983. "In the more than a quarter century since the SEC last reviewed its rules in this area, there have been significant changes in technology that have increasingly limited the usefulness of current disclosures to the market and investors," said Christopher Cox, then-Chairman of the SEC. "These updates to the SEC rules will help ensure more meaningful and comprehensive disclosure of information that, even though it does not appear on a company's balance sheet, is of significance to investors in making informed investment decisions." Leo Roodhart, 2009 SPE President, praised the commission for modernizing the reporting rules. "The SEC is to be commended for updating the rules on oil and natural gas reserves reporting to reflect changes in technology, and for using the PRMS primarily as the basis for the technical changes," he said. "The updated rules recognize the importance of new technologies in making accurate and reliable estimates of oil and natural gas reserves as the industry develops resources in harsher environments, including ultradeepwater and the Arctic, as well as more unconventional resources." The PRMS was developed by SPE in collaboration with the World Petroleum Council, the American Association of Petroleum Geologists, and the Society of Petroleum Evaluation Engineers (SPEE). "SPE's Oil and Gas Reserves Committee is gratified that our work has served as a foundation for improving the information provided to investors and the public about the reserves controlled by public companies," said Delores Hinkle, SPE Oil and Gas Reserves Committee Chairperson. "The updated rules allow companies the flexibility to provide additional reserve information to the investing public and should result in better reserve estimates, due to the inclusion of the advanced technologies and evaluation practices now in use around the world."

PurposeTo analyze the settled order of the US Securities and Exchange Commission (SEC) against TokenLot LLC (TokenLot), which was the SEC’s first action charging a seller of digital tokens as an unregistered broker-dealer.Design/methodology/approachAnalyzes the SEC’s order within the context of other recent actions by the SEC on cryptocurrencies and digital tokens and discusses future implications of the order in this area.FindingsThe SEC’s order against TokenLot as an unregistered broker-dealer was a logical next step in its enforcement activity in the cryptocurrency and digital token space.The order demonstrates that the SEC expects firms in the cryptocurrency space to use the well-established constructs of federal securities laws to evaluate their business activities to ensure those activities are legally compliant.Originality/valuePractical guidance from experienced securities and financial services lawyers analyzing recent developments in a nascent area of SEC enforcement.

Purpose – The purpose of this study is to examine whether firms subject to an SEC enforcement action experience audit fee premiums in subsequent years.Design/methodology/approach – The paper uses a test sample with firms that are cited in Accounting and Auditing Enforcement Releases (AAERs) by the US Securities and Exchange Commission (SEC) and two different control samples, and conducts empirical tests using cross‐sectional multiple regressions.Findings – It is found that firms subject to SEC enforcement actions pay higher audit fees in subsequent periods. This finding is robust after controlling for restatements and prior material internal control weakness disclosures. Additional analyses show that executive turnover does not mitigate the audit fee premium.Research limitations/implications – This study relies on AAERs; hence, the test sample is limited by the SEC's investigation selection procedures.Practical implications – Findings in this study provide insights about the consequences of an SEC investi...

Role and Effectiveness of ASIC Compared with the SEC: Shedding Light on Regulation and Enforcement in the United States and Australia

Political Connections, SEC Enforcement and Accounting Quality

Purpose – To explain proposed rules recently issued by the US Securities and Exchange Commission (SEC) that would dramatically expand both public and non-public reporting of portfolios and other data by US registered investment companies. A companion article covers new reports proposed at the same time for investment advisers that file Form ADV with the SEC. Design/methodology/approach – Explains how the proposed rules intend to rescind Form N-Q and adopt a new portfolio holding form, Form N-PORT, which would require expansive monthly portfolio and risk reporting; describes amendments to Regulation S-X which would both enhance and standardize derivatives disclosures in fund financial statements; and details the reporting requirements for a new annual ‘census-style’ reporting form, Form N-CEN, which would replace an obsolete existing SEC form, Form N-SAR. Findings – While it still remains to be seen how the final rules will be written, it is clear that US registered investment companies will be subject to broader reporting requirements. Investment companies are likely to incur increased costs due to the detailed nature of the information being requested and the frequency with which they will be required to file. Access to additional and enhanced information will have consequences for investment companies with respect to SEC examinations and enforcement activity. Practical implications – Senior management and boards of investment companies should understand the basic framework of the proposed requirements. An operations and finance working group may need to be established by companies in order to coordinate the planning and preparation process for the requirements. Firms also should determine whether their service providers have the necessary resources to assist in complying with the proposed filing requirements. Originality/value – Practical guidance from experienced investment funds lawyer.

Purpose – To alert companies and individuals subject to regulation and investigation by the US Securities and Exchange Commission (SEC) of potential arguments to enforce time limits on enforcement actions that have heretofore commonly been ignored. Design/methodology/approach – Analyzes two cases - one recently decided and one pending - in US Courts of Appeals, explains significance of issues at stake. Findings – The Courts of Appeals for District of Columbia Circuit has recently reviewed, and the Court of Appeals for the 11th Circuit will soon decide whether statutory timing provisions effectively remove SEC power to bring enforcement actions past their deadlines, at least in some circumstances. Practical implications – Depending on the outcomes of the cases, companies and individuals may gain a new procedural defense or two against SEC enforcement actions. They may also expect the SEC to respond by more actively seeking tolling agreements, and/or being more cautious in issuing Wells notices. Originality/value – Guidance based on pending decisions interpreting US securities law, may bring regulatory adjustments to agency practice and procedure.

Political connections and SEC enforcement

Measuring the Impact of SEC Enforcement Decisions

The primary goal of the US Securities and Exchange Commission (SEC) is to protect investors by deterring wrongdoing resulting in investor loss. The SEC deters wrongdoing in two ways: by threatening penalties and signalling illegal behaviour. If the SEC does not hold individuals accountable or if it is unclear what actions are illegal, wrongdoing will continue. Consent decrees have become the SEC's enforcement norm. Through negotiation both the defendant and the agency avoid costs and save time, but individuals responsible for wrongdoing have largely avoided personal accountability. Although firms have introduced clawback provisions into executive contracts, evidence shows that boards of directors largely have not activated clawbacks. Boards must hold employees personally responsible; thus boards should design executive contracts that clearly state the rationale for clawbacks and a means by which their amounts - amounts both fair and in the best interests of the corporation - can be established.

Actions speak louder than words: An institutional perspective on the Securities and Exchange Commission

PurposeTo explain the recent determination by the US Securities and Exchange Commission (SEC) with respect to so-called “token sales” or “initial coin offerings” (ICOs) that some tokens may be securities under federal securities laws and to address other recent actions by the SEC with respect to ICOs.Design/methodology/approachReviews the SEC’s determination that some tokens issued in an ICO may be securities under federal securities laws as outlined by the SEC’s Division of Enforcement in a “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO.” Provides overview of SEC Investor Alert, Investor Bulletin, and recent comments and actions of the Staff regarding investment in ICOs and provides guidance to those interested in participating in an ICO as an investor or issuer.FindingsThese actions by the SEC make it clear that the SEC is closely monitoring the market for ICOs, and that it wants potential investors and issuers to be aware that it is watching and may take action if it believes the securities laws have been violated.Originality/valuePractical overview of recent developments and guidance from experienced securities and financial services lawyers.