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Compliance and Legal Officer Guidelines to Prevent Non-Line Supervisory Liability

Posted on April 7th, by and in Compliance Rule, Guidance, SEC Guidance. Comments Off on Compliance and Legal Officer Guidelines to Prevent Non-Line Supervisory Liability

Chicago partner Jim Lundy and associate Carrie DeLange, members of Drinker Biddle’s SEC & Regulatory Enforcement Team, authored “Compliance and Legal Officer Guidelines to Prevent Non-Line Supervisory Liability” for the National Society of Compliance Professionals’ (NSCP) professional journal, Currents, March 2017 edition.

The article provides guidance and recommendations to compliance officers and in-house attorneys with investment management and broker-dealer firms regarding the legal background and recommended practices to avoid supervisory liability with respect to the violative conduct of business personnel. Specifically, the article examines the applicable statutes and rules, the controversial “Gutfreund Standard,” and the SEC’s more recent guidance from a Division of Trading and Markets “FAQ” and speeches. Jim and Carrie build on this information to provide recommendations for investment management and broker-dealer compliance and in-house personnel to manage satisfying their compliance obligations while dealing with the potentially problematic conduct … Read More »


Broker Pays $2.5 Million Fine for Using Market Volatility to Hide Markups Yielding Unearned Commissions

Posted on April 3rd, by and in Civil Penalties, Disgorgement, Neither Admit Nor Deny, Settlements. Comments Off on Broker Pays $2.5 Million Fine for Using Market Volatility to Hide Markups Yielding Unearned Commissions

Last week, Louis Capital Markets, L.P. (“LCM”) agreed to disgorge $2.5 million in settlement of charges that it charged false execution prices to its customers in order to generate secret commissions.

LCM executed orders to purchase and sell securities for its clients, without holding any securities in its own account and thus bore no market risk, i.e., riskless principal trades. It purported to generate profits by charging customers small commissions, typically between $0.01 and $0.03 per share. LCM, however, unbeknownst to customers, inflated those commissions, by embedding undisclosed markups and markdowns into reported execution prices. LCM provided those false execution prices—either lower sales prices or higher purchase prices than LCM actually obtained in the market—to its customers. Critically, LCM did not engage in this deceptive behavior for every trade, rather “LCM opportunistically added markups/markdowns to trades at times when customers were … Read More »


Ninth Circuit: You Don’t Need to Report Securities Violations to the SEC to Be Protected by the Dodd-Frank Anti-Retaliation Provision

Posted on March 10th, by and in Dodd-Frank, SEC Guidance, Whistleblower. Comments Off on Ninth Circuit: You Don’t Need to Report Securities Violations to the SEC to Be Protected by the Dodd-Frank Anti-Retaliation Provision

On March 8, 2017, a divided panel of the United States Court of Appeals for the Ninth Circuit held that the anti-retaliation provision of the Dodd-Frank Act protects individuals who make purely internal disclosures of alleged securities violations. The decision, Somers v. Digital Realty Trust, Inc., No. 15-17352 (9th Cir. March 8, 2017), aligns the Ninth Circuit with the Second Circuit, which reached the same result in Berman v. Neo@ogilvy, LLC, 801 F.3d 145 (2d Cir. 2015). These opinions stand in stark contrast to the position of the Fifth Circuit, which concluded in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), that in order to enjoy the protection of the anti-retaliation provision an individual must report the alleged securities violation to the SEC. While the Ninth Circuit’s decision is the latest entry in this evolving circuit … Read More »


Caught by the Satellite: SEC Files Charges against Mexican-Based Company Homex

Posted on March 10th, by and in Enforcement. Comments Off on Caught by the Satellite: SEC Files Charges against Mexican-Based Company Homex

On March 3, 2017, the SEC published its complaint against Desarrolladora Homex, once one of Mexico’s leading homebuilders. The complaint alleged that Homex committed “massive fraud” when it reported the construction and sale of 100,000 homes that did not even exist.

The complaint alleges that Homex booked revenue from a development in the Mexican state of Guanajuato where it claimed that homes were built and sold by the end of 2011. However, satellite images taken in March 2012 showed that tens of thousands of those homes were “nothing but bare soil.” According to the SEC, through this fraudulent scheme Homex overstated its revenue by 355% (or approximately $3.3 billion).

Signs of trouble for Homex began as early as 2013 when Homex’s builder and his competitors suffered incredible losses on stocks and bonds. In 2014, Homex filed for the Mexican equivalent of bankruptcy … Read More »


The SEC Heightens Its Interest in Robo-Advisers

Posted on March 3rd, by , and in Guidance, OCIE, Robo-advisers. Comments Off on The SEC Heightens Its Interest in Robo-Advisers

Over the last two weeks, the SEC has put robo-advisers on notice that they are on the staff’s radar. First, on February 23, 2017, the SEC’s Division of Investment Management, along with the SEC’s Office of Compliance, Inspections, and Examinations, issued a Guidance Update for robo-advisers. The term “robo-adviser” refers to registered automated investment advisers that provide investment advice that uses computer algorithms. Robo-advisers generally collect information about a client’s financial goals, income, assets, investment horizon, and risk tolerance by way of an online or electronic questionnaire. With limited human interaction, robo-advisers use this information to create and manage investment portfolios for clients. Robo-advisers are often more economical than traditional investment advisers. Robo-advisers, which began as an appeal to millennials, are now widely becoming popular with all age groups and types of investors.

The Guidance Update focused on in three unique … Read More »


SEC Speaks 2017 – OCIE Had Something To Say

Posted on March 1st, by in OCIE. Comments Off on SEC Speaks 2017 – OCIE Had Something To Say

Last week, the Securities and Exchange Commission (SEC) Acting Chairman, senior leadership across Divisions and Offices, and former SEC Commissioners spoke at the “SEC Speaks” Conference 2017. Senior leadership from the SEC’s Office of Compliance Inspections and Examinations (OCIE) used its panel and workshop to provide guidance on the reshaping of its examination programs that it began in 2016. Below we outline the revamped OCIE.

OCIE’s Reorganization & Reallocation of Resources

The OCIE panel included OCIE’s Acting Director and its Deputy Director. The commentators for the panel were former SEC Chairman Hon. Harvey L. Pitt and former SEC Commissioners Hon. Paul S. Atkins and Hon. Daniel M. Gallagher. At the beginning of the presentation, OCIE’s Acting Director reminded the audience that OCIE’s mission is to protect investors, ensure market integrity, and support responsible capital formation through risk-focused strategies that: 1) improve compliance; … Read More »


Acting SEC Chairman Limits Delegated Formal Order Authority

Posted on February 21st, by , and in Enforcement, Formal Order, General. Comments Off on Acting SEC Chairman Limits Delegated Formal Order Authority

Acting SEC Chairman Michael Piwowar has apparently revised the staff’s ability to subpoena records and investigative testimony (“formal order authority”) by returning the authority to grant formal order authority to the agency’s Director of Enforcement. While the SEC has not formally recognized this policy shift, multiple sources, including Law360 and the Wall Street Journal, have reported that Acting Chair Piwowar has recently implemented this change, which revokes the delegated authority to regional directors and enforcement associate directors to approve the staff’s requests for formal order authority.

In 2009, under Chair Mary Schapiro and as part of certain initiatives to enhance enforcement’s capabilities in the aftermath of the financial crisis, the SEC delegated its authority to authorize formal order authority to the Director of Enforcement. The Director of Enforcement, in turn, delegated this authority to regional directors and enforcement associate directors. As … Read More »


11th Circuit Nixes CPA’s Claim That SEC Sanctions Preclude Criminal Prosecution

Posted on February 14th, by and in Accountants, Civil Penalties, Criminal Liability, General, Parallel Investigations. Comments Off on 11th Circuit Nixes CPA’s Claim That SEC Sanctions Preclude Criminal Prosecution

On February 3, 2017, the United States Court of Appeals for the Eleventh Circuit rejected an accountant’s argument that the imposition of both criminal charges and SEC sanctions on the basis of the same alleged conduct violated the Fifth Amendment’s Double Jeopardy Clause. This appellate court ruling illustrates that defendants in SEC investigations and enforcement proceedings must be mindful that the imposition of civil penalties, disgorgement, and permanent bars do not preclude the prospect of criminal prosecution.

Thomas D. Melvin (“Melvin”), a certified public accountant, agreed in April 2013 to pay the SEC a civil penalty of $108,930 and disgorgement of $68,826 to settle alleged violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. According to the SEC, Melvin purportedly had disclosed confidential insider information that he received from a … Read More »


OCIE Highlights the Top 5 Compliance Topics from Examinations of Investment Advisers

Posted on February 10th, by and in Compliance Rule, Custody Rule, Ethics Rule, Form ADV, Investment Advisers, OCIE, Office of Compliance Inspections and Examinations, SEC Guidance. Comments Off on OCIE Highlights the Top 5 Compliance Topics from Examinations of Investment Advisers

On February 7, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert discussing the five most frequent compliance topics identified in OCIE examinations of investment advisors. The Alert was compiled based on deficiency letters from over 1,000 investment adviser examinations completed during the past two years. The top five topics are: (1) the Compliance Rule; (2) Regulatory Filings; (3) the Custody Rule; (4) the Code of Ethics Rule; and (5) the Books and Records Rule.

The Compliance Rule

The Compliance Rule requires: (1) written and policies and procedures reasonably designed to prevent violations of the Advisers Act; (2) annual review of the policies and their implementation; and (3) a chief compliance officer who monitors the policies and procedures.  Examples of common Compliance Rule problems included:

Advisers did not follow their compliance policies and procedures;
Annual reviews were not performed or … Read More »


District Court Invalidates Tolling Agreements in Criminal Securities Fraud Prosecution Case Due to Misunderstanding of Applicable Statute of Limitations

Posted on February 6th, by and in Criminal Liability, Dodd-Frank, Statute of Limitations, Tolling Agreements. Comments Off on District Court Invalidates Tolling Agreements in Criminal Securities Fraud Prosecution Case Due to Misunderstanding of Applicable Statute of Limitations

On January 30, 2017, the United States District Court for the District of New Jersey dismissed the government’s indictment against Guy Gentile for a pump-and-dump securities fraud scheme. After his arrest Gentile admitted to having engaged in the scheme and agreed to cooperate, which included signing two tolling agreements, each extending the statute of limitations for one year. In dismissing the indictments, the court held that the tolling agreements were invalid and the applicable statute of limitations for securities fraud was five years, not six years.

According to the opinion, Gentile engaged in a securities fraud scheme that indisputably ended in June 2008, at which time the statute of limitations for securities fraud was five years. In 2010, however, the Dodd-Frank Wall Street Reform and Consumer Protection Act extended the statute of limitations to six years for certain criminal securities fraud … Read More »






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