1. On November 23, 2022, the SEC released its Strategic Plan for fiscal years 2022 to 2026, outlining agency objectives to fight against fraud, maintain a robust and relevant regulatory framework, and sustain a skilled and diverse workforce to serve America’s investors and capital-raising entrepreneurs alike.
The SEC’s new Strategic Plan establishes three primary goals:
- Protect the investing public against fraud, manipulation, and misconduct
- Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies
- Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives
2. On November 22, 2022, charged Goldman Sachs Asset Management, L.P. for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance investments. The SEC’s order finds that GSAM had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities. The company failed to have any written policies and procedures for ESG research in one product, and once policies and procedures were established, it failed to follow them consistently. The order finds that GSAM’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection; however, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds’ board of trustees. To settle the charges, GSAM agreed to pay a $4 million penalty. https://www.sec.gov/news/press-release/2022-209
3. On November 3, 2022, the SEC instituted administrative proceedings against Legal & General Investment Management America, Inc. (“LGIMA”). LGIMA, a registered investment adviser, effected 44,125 principal transactions between clients and LGIMA principal accounts without making the required client disclosures or obtaining the required client consents. LGIMA also effected 547 cross trades between certain of LGIMA’s registered investment company (“RIC”) clients and other LGIMA clients who were affiliated persons of those RICs or affiliated persons of an affiliated person of those RICs, without complying with the statutory provisions governing cross trades involving RICs. LGIMA’s violations were caused in part by its failure to adopt and implement reasonably designed policies and procedures to prevent unlawful principal and cross trading effected, initially, by its trading personnel and, later, through an automated trade matching program. LGIMA was ordered to pay a civil money penalty in the amount of $500,000. https://www.sec.gov/litigation/admin/2022/ia-6188.pdf
4. On November 15, 2022, the SEC announced its enforcement results for fiscal year 2022. The SEC filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or “stand alone,” enforcement actions, a 6.5 percent increase over fiscal year 2021. Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and up from $3.852 billion in fiscal year 2021. Of the total money ordered, civil penalties, at $4.194 billion, were also the highest on record. Disgorgement, at $2.245 billion, decreased by 6 percent from fiscal year 2021. Fiscal year 2022 was the SEC’s second highest year ever in whistleblower awards, in terms of both the number of individuals awarded and the total dollar amounts awarded. Similar to prior years, in fiscal year 2022, more than two-thirds of the SEC’s stand-alone enforcement actions involved at least one individual defendant or respondent. https://www.sec.gov/files/fy22-enforcement-statistics.pdf
5. On November 9, 2022, the SEC entered a final judgment against Matthew Clason, a Connecticut-based investment adviser, with stealing hundreds of thousands of dollars from an advisory client. Clason was charged with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Clason consented to the judgment entered by the court, which imposes a permanent injunction against him and orders him to pay disgorgement and prejudgment interest totaling $634,472, which was deemed satisfied by the restitution order imposed in a parallel criminal action brought by the U.S. Attorney’s Office for the District of Connecticut. Clason pleaded guilty and was sentenced on December 7, 2021 to 30 months in prison. https://www.sec.gov/litigation/litreleases/2022/lr25574.htm
6. On November 7, 2022, the SEC charged S&P Global Ratings, a nationally recognized statistical rating organization registered with the Commission, with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings. The SEC’s order finds that an issuer engaged S&P to rate a jumbo residential mortgage-backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees—employees responsible for managing the relationship with the issuer—on several occasions attempted to pressure the S&P analytical employees—employees responsible for evaluating and assigning the rating—to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error. Despite sending the communications through the compliance department as required by S&P’s policies and procedures at that time, some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations. The order finds that, as a result of the content, urgent nature, high volume, and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations. S&P agreed to settle this matter by paying a $2.5 million penalty.
7. On Nov. 8, 2022, the SEC issued an investor bulletin regarding investment adviser advertisements. The bulletin explains that in recent years there have been changes in the technology used for communications between advisers and clients/prospective clients, the expectations of investors shopping for advisory services, and the nature of the investment advisory industry. The bulletin is issued to help investors understand what to expect in advertisements from advisers, especially in online reviews or on social media, in this changed landscape. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/investment?utm_medium=email&utm_source=govdelivery
8. On November 10, 2022, the SEC issued a risk alert on issues seen with broker-dealers’ quantifiable and material aspects disclosures in Regulation NMS rule 606 (“Rule 606”) reports. The Division of Examinations (“EXAMS”) conducted a series of examinations regarding how broker-dealers were complying with the new Rule 606 disclosure requirements. Staff focused on two aspects of the public reports broker-dealers prepare under Rule 606(a): (1) broker-dealer figures reported in public disclosures and (2) broker dealer descriptions of the material aspects of their relationships with each specific venue. FINRA has also been reviewing firms’ compliance with Rule 606 and has noted similar observations as described in its 2022 Report on FINRA’s Examination and Risk Monitoring Program.
In November 2018, the Commission adopted amendments to Rule 606 to require broker-dealers to provide enhanced disclosures regarding the handling of their customers’ orders in the firms’ public Rule 606(a) reports. As amended, Rule 606(a) requires a broker-dealer to provide a publicly available quarterly report on its routing of non-directed orders from its customers that are: (1) for NMS stock and submitted on a held basis; or (2) for an NMS security that is an option contract with a market value less than $50,000. The report’s disclosures are aggregated across all of the qualifying orders that the broker-dealer routes on behalf of all of its customers.
The public report is designed to provide better insight into factors that may influence a broker dealer’s order routing decisions. In particular, broker-dealer customers can view the material aspects of their firm’s payment for order flow (“PFOF”) arrangements and disclosures on how the firm routes non-directed orders for execution. The public report must contain a discussion of the material aspects of the broker-dealer’s relationships with each specified venue, including “a description of any arrangement for payment for order flow and any profit-sharing relationship and a description of any terms of such arrangements, written or oral, that may influence a broker’s or dealer’s order routing decision.”
Broker-dealers may have conflicts of interest from compensation arrangements as well as conflicts of interest from a number of monetary and non-monetary order routing incentives. PFOF may present a potential conflict of interest because the PFOF receiving firm may be incentivized to route order flow to maximize PFOF revenue, including only routing orders to venues that agree to pay a certain level of PFOF, which may come at the expense of their customers’ order execution quality. The Rule 606 disclosure requirements are intended to allow broker-dealer customers to better evaluate their firm’s routing services and how well they manage potential conflicts of interest.
9. On November 7, 2022, the SEC named Keith E. Cassidy and Natasha Vij Greiner as Deputy Directors of the Division of Examinations. In addition to serving as Deputy Director, Mr. Cassidy is the National Associate Director of the Division’s Technology Controls Program (“TCP”) with responsibility for examinations of Regulation SCI entities and for overseeing the SEC’s CyberWatch program and the Cybersecurity Program Office. In addition to serving as Deputy Director of the Division, Ms. Greiner is the National Associate Director of the Investment Adviser/Investment Company (IA/IC) examination program, which includes the Private Funds Unit, and is the Associate Director of the Home Office IA/IC examination program. Mr. Cassidy and Ms. Greiner will continue to serve in their current leadership roles within the TCP and IA/IC examination program, respectively, in addition to their new responsibilities as Deputy Directors. https://www.sec.gov/news/press-release/2022-202
10. On November 4, 2022, the SEC instituted administrative proceedings against Tyler Forbes. While employed as a trader by a global financial institution, Forbes engaged in a manipulative and unlawful “spoofing” strategy, to manipulate the market prices of certain U.S. Treasury securities. Forbes’s spoofing strategy involved electronically placing large, non-bona fide orders that he intended to cancel on one side of the market, while simultaneously entering smaller, bona fide orders that he intended to execute on the opposite side of the market. The purpose of the non-bona fide orders was to create a false appearance of market depth and activity in order to mislead other traders and artificially raise or depress the prevailing market prices, so that Forbes could execute his bona fide orders more easily or more profitably. The information alleged that Forbes canceled his non-bona fide orders after executing his bona fide orders. Forbes was barred. https://www.sec.gov/litigation/admin/2022/34-96238.pdf
11. On November 4, 2022, due to the SEC’s new marketing rule, the Division of Investment Management issued an update in connection with modified or withdrawn no-action letters and other staff statements. For a list of the modified or withdrawn no-action letters, please see https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements?utm_medium=email&utm_source=govdelivery
12. On November 4, 2022, the SEC instituted administrative proceedings against Michael Mueller. This proceeding arises out of insider trading in the securities of Layne Christensen Company by Mueller based on material nonpublic information provided to him by his friend and broker, John Mendes. Mendes’s close friend, Andre Dabbaghian, told Mendes that Dabbaghian’s then employer, Granite Construction Inc. had identified Layne as an acquisition target and provided Mendes with MNPI regarding the potential acquisition. Mendes tipped Mueller about the impending acquisition of Layne. Based on the MNPI, Mueller authorized Mendes to purchase Layne securities in Mueller’s brokerage account. Mueller also recommended that a close relative (“Relative-1”) purchase Layne securities, which Relative-1 did. Layne announced that Granite had agreed to acquire Layne for $565 million. After the Announcement, the price of Layne shares increased by approximately 18 percent from the previous day’s close. As a result of Mueller’s transactions in Layne’s securities, he generated a profit of over $38,000. As a result of Relative-1’s transactions in Layne securities, Relative-1 generated a profit of over $14,000. Mueller’s conduct violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Mueller was ordered to pay disgorgement of $38,075, prejudgment interest of
$8,003 and a civil penalty of $52,118. https://www.sec.gov/litigation/admin/2022/34-96243.pdf
13. On November 3, 2022, the SEC instituted administrative proceedings against David Mata a co-founder and Managing Member of Block Bits Capital, LLC and Block Bits Capital GP I, LLC and provided services to Block Bits during its offering of securities in Block Bits Fund I. Mata participated in a scheme to defraud investors in a fraudulent and unregistered securities offering by Block Bits orchestrated by Block Bits’s co-founder and co-Managing Partner Japheth Dillman which raised at least $960,000 from approximately 22 investors. Block Bits and Dillman provided materially false and misleading information to investors in the offering about the uses of proceeds, risks relating to the investment, and status of a purported Block Bits proprietary “auto-trading bot” that would automatically trade digital assets on more than thirty trading platforms, and that Mata engaged in deceptive acts and practices in furtherance of the scheme. https://www.sec.gov/litigation/admin/2022/ia-6181.pdf
14. On November 2, 2022, the SEC voted to propose amendments to better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders’ interests. The rule and form amendments would enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information.
Currently, open-end funds other than money market funds and most exchange-traded funds are required to classify the liquidity of their investments into four categories, ranging from highly liquid to illiquid. The proposal seeks to improve these funds’ liquidity classifications by establishing new minimum standards for classification analyses, including some that incorporate stressed conditions, and by updating the liquidity categories to limit the extent of a fund’s investments in securities that do not settle within seven days. These changes are designed to help better prepare funds for stressed conditions and prevent funds from over-estimating the liquidity of their investments. Affected funds would also be required to maintain a minimum amount of highly liquid assets of at least 10 percent of net assets to help manage stressed conditions and heightened redemption levels. These funds would publicly report certain information about their liquidity profiles to improve the availability of information about liquidity risk for investors as well as information about use of liquidity classification service providers.
In addition, the proposal would require open-end funds other than money market funds and exchange-traded funds to use a liquidity management tool called “swing pricing,” which is a method to allocate costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. The proposal would also require a “hard close” for relevant funds. With a hard close, investor orders would need to be received by the fund, its transfer agent, or a registered clearing agency by the time of the fund’s pricing, typically 4 p.m. ET, to receive that day’s price. In addition to helping to operationalize swing pricing, a hard close would help prevent late trading of fund shares and improve order processing. https://www.sec.gov/news/press-release/2022-199