All posts by Clifford E. Kirsch, Editor

Eversheds Sutherland With more than 25 years of experience, Cliff regularly counsels clients on the design and distribution of investment products including wrap-fee programs and other advisory products, mutual funds, bank collective investment funds and insurance products. He also focuses on issues related to the design and implementation of compliance programs at financial services firms.

Not Dead Yet: Just Flesh Wounds, Suspensions, and Fines (SEC, CFTC, and FINRA Enforcement Actions in September 2020)

The Holy Grail. Knights who say “Ni.” The list goes on and on. (Wink wink, nudge nudge, say no more.) Monty Python, the comedy group, is known for a lot of things. However, what most people don’t know is that if you watch their movies, TV shows and Broadway musical very carefully, you’ll actually learn a lot about compliance and securities enforcement.

To understand what Monty Python can teach us about the SEC, CFTC and FINRA enforcement actions brought in September 2020,  read more here.

FINRA Panel Stretched Rule 8210 Too Far

A recent 2-1 decision by the Financial Industry Regulatory Authority Office of Hearing Officers stretched Rule 8210 beyond its wording and intent, barring a registered representative in the process.

The case, Department of Enforcement v. Wilfredo Felix, et al., involved several issues, including Felix’s failure to produce his Wage and Income Transcript (IRS transcript), which he could have obtained by submitting an IRS Form.

An IRS transcript is an IRS-created document that shows “most line items” from tax returns, including adjusted gross income. During the investigation, FINRA staff asked Felix to produce his IRS transcripts (a very rare request), which he did not have in his possession, or to sign an IRS Form instructing the IRS to send them to him.

He refused, stating that FINRA’s request went beyond the scope of Rule 8210.

Read More Here.

The Show, er, um, Article About Nothing (other than SEC, CFTC, FINRA, and State Securities Enforcement Actions in August 2020)

Everyone knows that Seinfeld, which premiered 31 summers ago, was one of the most popular television sitcoms ever. It was on the airwaves (remember those?) for nine years, nominated for 68 Emmy Awards, winning ten times, including twice for Outstanding Writing in a Comedy Series, winning twice. It was self-identified as a “show about nothing.” Indeed, co-creator Larry David “admonished the writing staff that there would be ‘no hugging, no learning’ in the scripts, and there wasn’t. Ever.” However, despite this warning, those who watched the show know that it was, in fact, a show about a lot, including the following:

  •  A “puffy” shirt;
  •  A low talker, a close talker, and a high talker;
  •  A short-tempered soup restaurant owner who yells, “No soup for you”;
  •  Waiting for a table at a Chinese restaurant;
  •  Contests among friends;
  •  Re-gifting; and
  •  Of course, yada yada yada.

Those who watched the show carefully also know that despite the “no learning” admonition, Seinfeld provided important lessons about topics related to investing and the securities industry. Indeed, the final episode of the first season was called “The Stock Tip,” and 24% of all televisions in America “tuned in” to watch14 (back when we “changed” channels on a “TV”—not on a “screen” and “streaming” was the route tears took down your face when the TV antenna flew off your roof).

Read more here, to explore themes contained in Seinfeld that help explain securities enforcement actions.

Recent SEC enforcement raises questions for bank collective trust funds

The SEC, just a few days ago, announced an enforcement action against a trust company for failure to exercise substantial investment authority over their collective trust funds.  According to the SEC, because of this failure, the trust was not entitled rely on the Section 3(c)(11) under the Investment Company Act and was therefore operating unregistered investment companies. This SEC’s action is curious to say the least; it is first statement by the SEC in recent memory which addresses Section 3(c)(11)’s bank-maintained requirement. The action does not allege client harm and does not serve to advance any stated concern by the SEC regarding bank collective trust funds  which are bank-regulated products. By bringing last week’s case, the SEC raises the question of what constitutes “substantial investment authority” for purposes of the “maintained by a bank” requirement, but offers no sense of the SEC’s expectations or where the SEC may be headed more generally with respect to bank collective trust funds.

Read More Here.

Expansion of the pool of accredited investors

On August 26, 2020, the SEC adopted certain amendments that expand the pool of eligible investors in exempt private offerings, which may provide additional sources of capital to business development companies, closed-end funds and other private funds.  The Amendments:

  • expand the definition of “accredited investor” under Regulation D of the Securities Act of 1933, as amended (the Securities Act), to add new categories of natural persons and entities that can qualify, irrespective of their wealth.
  • also expand the entities eligible as “qualified institutional buyers” under Rule 144A offerings to be consistent with the amendment to the “accredited investor” definition.
  • adopt revisions to certain related rules, such as testing the waters under Rule 163B of the Securities Act.

Read more here.