by T. GormanPosted on Posted in SECActions

Inspections for compliance with Form CRS and its rules will begin after the June 30, 2020 filing date, according to an OCIE Risk Alert dated April 7, 2020 (here). The Alert identifies key areas the staff will be examining regarding the new form for advisers. In projecting the inspection schedule OCIE made it clear that the Office is “up and running.”

Form CRS was adopted by the Commission on June 5, 2019, under the Exchange Act and the Advisers Act. The Form and its related rules were adopted as part of a package of items focused on retail investors. Under the new provisions advisory firms are required by the end of June to file their initial relationship summaries with the agency and post the material on their public website.

Key of the OCIE inspections will be an evaluation to determine if there was a “good faith effort to implement Form CRS.” The examinations may focus on the following points:

Delivery and filing – existing investors: The staff may begin with an assessment of compliance with the filing and delivery date and the policies and procedures used to ensure compliance. The staff may also evaluate compliance with regard to an account for an existing investor opened as a roll-over of assets into a new type of an account or, even if a new account was not opened, a recommendation for a new brokerage or advisory service.

Delivery and filing – new retail investors: With respect to new retail investors, the staff may assess compliance in four respects: 1) Prior to entering into a new advisory agreement; 2) a recommendation for a type of account, securities transaction or strategy; 3) placing an order; or 4) opening a brokerage account.

Content: OCIE may assess if the relationship summary contains the required information. Five points may be pertinent: 1) The description of the firm, its services, account monitoring and investment authority; 2) the description of the fees and costs that will be incurred directly or indirectly, including examples of the most common fees and costs applicable to retail investors such as custodian fees, maintenance fees, variable annuity fees and other transactional and product level fees; 3) descriptions of firm member compensation, including cash and non-cash components and any conflicts arising from those payments; 4) descriptions of conflicts of interest, including those arising from proprietary product, third party payments, revenue sharing and principal trading; and 5) disclosures regarding any disciplinary history of firm employees.

Formatting: The staff may also assess the formatting for the disclosures to determine if it is in accord with the instructions.

Updates: The firm’s policies and procedures for updating the disclosures may also be assessed.

Record keeping: OCIE may review the records of the firm related to the delivery of the relationship summary and the policies and procedures regarding record keeping to assess the manner in which the firm complies with its delivery and record keeping obligations.

Finally, the purpose of this Alert is to encourage firms to carefully assess their compliance with Form CRS. The Alert also ensures transparency regarding the evaluation process.

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by T. GormanPosted on Posted in SECActions

Regulators such as the Commission in the U.S. and their counterparts around the globe continue to operate despite the shelter at home orders issued in many jurisdictions. Regulators also continue to issue orders granting specific, targeted relief.

SEC Enforcement is continuing its investigative efforts. Subpoenas are being issued for documents. Testimony, however, is another matter. While technology such as Zoom may facilitate meetings and discussions, testimony is another matter. At the same time there is little doubt that there are those who are engaging is unsavory conduct designed to take advantage of current market conditions.

SEC Enforcement this week filed another offering fraud action. In addition the agency secured a final judgment in another offering fraud case and in an trading case.

Stay safe, stay healthy.

SEC

Statement: Sagar Teotia, Chief Accountant, issued a statement on the Importance of High Quality Financial Reporting In Light of the Significant Impacts of COVID-19, dated April 3, 2020 (here).

Whistleblowers: The agency awarded about $2 million to a whistleblower who provided vital information and assistance that substantially contributed to an on-going investigation, announced on April 3, 2020.

Volker rule comments: Comments on the proposed modifications to the Volker Rule, requested by April 1, 2020, submitted after that date will be considered, according to an April 2, 2020 release by the Commission.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and no administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.

Offering fraud: SEC v. OwnZones Media Network, Inc., Civil Action No. 220-cv-03108 (C.D. Cal.) is a previously filed action which names as defendants the firm, an entertainment technology company, its CEO and President, Dan Gorman, and its stock sales agent, Joe Gorman, the CEO’s brother. Beginning in 2011 the firm raised capital from over one thousand investors who purchased interest in the firm for a total of about $45 million. Supposedly MGM and Mark Cuban had purchased shares. In fact, the claims were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 24786 (April 2, 2020).

Offering fraud: SEC v. Wall, Civil Action No. 219-cv-00139 (D. Me.) is a previously filed action which named as defendants, Jeffrey Wall and his firm, The Lighthouse Events, LLC. The Court entered final judgments by consent as to each defendant. Each judgment precludes future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Each Defendants was also ordered to pay, on a joint and several basis, disgorgement in the amount of $1,589.815 and prejudgment interest of $202,056. In addition, each Defendant was directed to pay a penalty equal to the amount of the disgorgement. The underlying action is predicated on an offering fraud that began in April 2019 in which Defendants sought to raise capital for Christian music concerts and festivals. The offering focused on persons with Christian beliefs. About $3 million was raised from approximately 145 investors. Those solicited were assured the money would only be used for the stated purpose. Instead it was misappropriated by Defendants. See Lit. Rel. No. 24785 (April 1, 2020).

Insider trading: SEC v. Cohen, Civil Action No. 19-cv-09645 (S.D.N.Y.) is a previously filed action which names as defendants Bryan Cohen and George Nikas. The Court entered a final judgment as to Mr. Cohen by consent, enjoining him from future violations of Exchange Act Sections 10(b) and 14(e). The Court also directed Mr. Cohen to pay disgorgement in an amount to be offset by the Order of Forfeiture to be imposed in the parallel criminal action brought by the Manhattan U.S. Attorney’s Office. Mr. Cohen consented to the entry of an order barring him from the securities business and from participating in any penny stock offering. In the underlying case the Commission’s complaint alleged that Mr. Cohen obtained inside information about the potential acquisition of Syngenta AG and also of Buffalo Wild Wings, Inc. The information was obtained from his then employer. Mr. Cohen tipped a Swiss based trader who later tipped Defendant George Nikas. The Swiss based trader and Mr. Nikas each traded in the shares of Syngenta. Mr. Nikas also traded in the shares of Buffalo Wild Wings.

CFTC

COVID – 19: The regulator issued a notice dated March 31, 2020 providing certain relief to futures commission merchants in response to the virus pandemic (here).

FinCEN

Obligations: The regulator issued a release dated April 3, 2020, focusing on the obligations of those subject to its regulations in view of the COVID – 19 pandemic (here).

Hong Kong

COVID – 19: The Securities and Futures Commission, in conjunction with the Stock Exchange of Hong Kong Ltd., and after consultation with the HKSAR Government, issued guidance on conducting annual meetings as of April 1, 2020 (here).

Singapore

COVID – 19:The Monetary Authority of Singapore announced on March 31, 2020 that it had acted in conjunction with the Association of Banks in Singapore, the Life Insurance Association, the General Insurance Association and the Finance Houses Association of Singapore to create a package of measures to help ease the financial strain on individuals and SMEs caused by the virus. The package complements the initiatives in the Government’s Unity Budget and Resilience Budget to preserve jobs and support enterprises and households (here).

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