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News & Events

Below are the recent entries for this section - which includes industry news (communiques). articles / whitepapers, SEC exam documents and event categories. You can jump directly to the desired category by clicking the category name in the right hand menu.

FINRA’S Box of Chocolates

in Communiques

February 14, 2019

While we know you prefer a box of chocolates today instead of this industry update on compliance, this one is a gift and hence, will not add to your ever-growing list of compliance duties. Enjoy!

FINRA recently released an interpretive letter to Foreside Fund Services, LLC establishing conditions under which it is permissible for broker-dealers to include pre-inception index performance data in institutional communications concerning passive open-end investment companies. This is an expansion of the 2013 interpretive letter to ALPs Distributors, Inc., which provides similar guidance regarding the use of pre-inception performance (“PIP”) data by the fund, but only as it applies to financial intermediaries. The Foreside letter allows those financial intermediaries to then share the performance with their institutional clients.

The conditions for both scenarios are virtually identical and include:

  1. Any piece of marketing material that includes PIP data will be clearly labeled “For use with institutions only, not for use with retail investors.” If the recipient is a financial intermediary, the recipient will be instructed not to circulate communications containing PIP data to retail investors.
  2. Any PIP data will be used only with respect to the Index, which was created according to a pre-defined set of rules that cannot be altered except under extraordinary market, political or macroeconomic conditions.
  3. PIP data will not be used to market the Fund if the Fund alters its investment strategy to permit active management of the Fund’s securities portfolio.
  4. Any marketing material containing PIP data will include an offer to provide an overview of the methodology of the index upon request and electronic marketing material will include a hyperlink to such information.
  5. The presentation of PIP data will reflect the deduction of fees and charges currently applicable to the Fund.
  6. PIP data will reflect a period of time that includes multiple securities market environments, and at a minimum, ten years of pre-inception data.
  7. PIP data will be current as of the most recently ended calendar quarter.
  8. PIP data will be clearly labeled and shown separately from Fund performance and will be presented along with disclosure of the applicable dates for the PIP data and the dates for actual performance since inception.
  9. As the Fund has been in existence for more than one year, the use of PIP data will be accompanied by the prominent presentation of actual performance of the Fund since inception that reflects the deduction of fees and charges of the Fund.
  10. PIP data will not be inconsistent with information in the prospectus but may be used regardless of whether the fund prospectus contains the data.
  11. PIP data will be accompanied by the following disclosures:
  12. i.The Fund is a relatively new product and any performance prior to the date of inception is hypothetical;
  13. ii. The identity of the entity that performs the calculation and distribution of the PIP data, and the fact that ABR pays this entity to perform those functions;
  14. iii. The fact that PIP data are based on criteria that has been applied retroactively with the benefit of hindsight, and that these criteria cannot account for all financial risk that may affect the actual performance of the Fund;
  15. iv. The actual performance of the Fund may vary significantly from the PIP data; and
  16. v. Reasons (if any) why the PIP data would have differed from actual performance during the period shown (e.g., transaction costs, liquidity, or other market factors).

Perhaps the most notable reiteration in the letter, however, is FINRA’s statement that their current position does not affect FINRA's long standing opinion that the presentation of hypothetical back-tested performance in communications used with retail investors does not comply with the content standards of FINRA rules governing communications with the public.

 

A Motivated Agency: The SEC Closing the Loop on the Edgar System Cyber Breach

in Communiques

January 15, 2019

You may recall after Clayton took the helm as Chairman at the SEC, the agency disclosed that it had its own cyber breach and the Edgar system was compromised. Today, the SEC announced charges against nine defendants for participating in a scheme to hack the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, two other entities and six individual traders in California, Ukraine, and Russia.

The SEC’s complaint alleges that the Ukrainian hacker, Oleksandr Ieremenko, used hacking techniques to gain access to EDGAR in 2016 and extract nonpublic “test files”. These test files allow companies to submit in advance of their official filings to ensure EDGAR will process the filings as intended. Issuers sometimes elected to include actual, nonpublic information in these test filings, including quarterly earnings results not yet released to the public. The information was passed to individuals who used it to trade between the time the files were extracted and when the companies released the information to the public. The traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.

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

We expect the SEC to grow increasingly efficient at identifying trading anomalies and tracing them back to their source. Despite multiple steps to conceal the fraud, including using an offshore entity and shell accounts to place trades, Staff from the Market Abuse Unit, the Cyber Unit and IT Forensics, with assistance from various other divisions, were able to collaborate and expose the common element behind the traders’ successes, providing evidence that each of them traded based on information hacked from EDGAR.

 

Examiners Take Reprieve with Gov’t Shut Down, But CCOs Must Carry On

in Communiques

January 07, 2019

These government shut downs don’t usually go on indefinitely. Before we blink an eye, examiners will be back on the beat. CCOs must stay vigilant.

On December 20th the SEC’s Office of Compliance Inspections and Examinations made its annual release of the National Exam Program priorities. Below, we’ve listed the items explicitly mentioned in the release. Many of the focus areas for the 2018 NEP remain in the 2019 Program, and certain others from earlier periods have reappeared:

  • Senior Investors and Retirement Accounts has been a longstanding area of focus, and illustrates the Commissions emphasis on protecting the Main Street investor.
  • Fees & Expenses: Disclosure of the Costs of Investing continues as an area of focus from years prior
  • Conflicts of Interest has had broad application throughout the NEP. For 2019, OCIE identified three specific areas of focus: Securities-Backed Non-Purpose Loans and Lines of Credit, Borrowing Funds from Clients, and Securities-Backed Non-Purpose Loans and Lines of Credit (controls, incentives, and disclosures).
  • Never Before & Not Recently Examined Investment Advisers this year added the “not recently” indicating an expansion of this area of focus since its introduction in 2014.
  • Mutual Funds and ETFs: Following a year of targeted sweeps, ETFs continue as an area of focus alongside their mutual fund cousins. They have been a focus area of the NEP since 2014.
  • Municipal Advisers have been an element of the NEP since 2015.
  • Broker-Dealers Entrusted with Customer Assets appears this year as a return of the broad category of Custody and Safety of Client Assets which has appeared as a distinct item intermittently. This year’s NEP will focus particularly on broker-dealers that hold customer assets and compliance with the Customer Protection Rule (Exchange Act Rule 15c3-3).
  • Microcap Securities return as an explicit focus from the 2016 NEP, having been introduced in 2015.
  • An emphasis on the fundamental aspects of the markets brought an emphasis to National Securities Markets and FINRA oversight in 2017, and MSRB oversight in 2018. These remain in the 2019 Program.
  • Transfer Agents and Clearing Agencies have each been an area focus since 2013.
  • Information Technology has been a NEP priority in one form or another since at least 2012, shifting in focus over the years from infrastructure concerns to Cybersecurity and, more recently, Regulation Systems Compliance and Integrity (Reg SCI). These last two are separate items on the NEP, indicating continued focus across individual providers and the markets as a whole.
  • Anti-Money Laundering has been an element of the NEP since 2015.
  • Digital Assets - Cryptocurrency, ICOs & Secondary Market Trading, Blockchain – continue from 2018 as an area of focus.

A few items dropped off of the NEP as explicit mentions this year. As with Private Fund Advisers in 2018, we expect that this means merely that these areas - Wrap Fee Programs, Fixed Income Order Execution, and Electronic Investment Advice – have been thoroughly incorporated into the broader Program and will continue to receive thorough coverage. This is supported by recent findings of multiple compliance breakdowns at two robo-advisers, including antifraud, advertising, compliance, and books and records provisions.

A New Emphasis on Portfolio Management and Trading

The most notable entry this year was a focus on portfolio management and trading. While reviewing portfolio management processes has been an integral component to investment adviser examinations, the OCIE has specifically identified Portfolio Management and Trading for the 2019 NEP. This heading encompasses a number of related topics including the execution of client transactions, allocation of investment opportunities among clients, consistency of investments with client objectives and other legal restrictions, and disclosure of critical information to clients. OCIE will examine portfolio recommendations to assess, among other things, style drift, the introduction of new risk assets, and appropriate monitoring of risks. As these areas are typically central to the services that advisers provide to their clients, we expect there will be little tolerance for weak controls.

While the NEP priorities provide a starting point for CCOs regarding determining where to prioritize reviews, it is not a catch-all and is just a starting point for guiding your internal compliance program.

 

Chief Compliance Officer Roundtable: Breakfast Briefing - November 8, 2018

in Events

November 02, 2018

When: November 8, 2018
Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000

Schedule:

9:00-9:30am - Networking and Continental Breakfast
9:30-11:00am - Program

Thomas Westle and Janaya Moscony, along with industry experts, will discuss current topics of interest to chief compliance officers.

Click here to register

Space is limited. Due to the overwhelming interest in these events, we are inviting only chief compliance officers and their staff.

 

Newsletter

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tip: check both to keep informed!

Communiques

FINRA’S Box of Chocolates

While we know you prefer a box of chocolates today instead of this industry update on compliance, this one is a gift and hence, will not add to your ever-growing... read more »

A Motivated Agency: The SEC Closing the Loop on the Edgar System Cyber Breach

You may recall after Clayton took the helm as Chairman at the SEC, the agency disclosed that it had its own cyber breach and the Edgar system was compromised. Today,... read more »

Examiners Take Reprieve with Gov’t Shut Down, But CCOs Must Carry On

These government shut downs don’t usually go on indefinitely. Before we blink an eye, examiners will be back on the beat. CCOs must stay vigilant. On December 20th the SEC’s Office... read more »

Pre-Dating & Back-Dating are Equally Risky

The SEC today suspended three accountants formerly of BDO USA LLP for improper professional conduct during its 2013 audit of AmTrust Financial Services Inc., an exchange-listed insurance company. According to the... read more »

Fiduciary Duty

On Friday, September 28, 2018 the SEC charged LendingClub Asset Management (LCA) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation (LendingClub),... read more »

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

Events

Chief Compliance Officer Roundtable: Breakfast Briefing - November 8, 2018

When: November 8, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...