Editor’s letter

Citation

Davis, H.A. (2015), "Editor’s letter", Journal of Investment Compliance, Vol. 16 No. 3. https://doi.org/10.1108/JOIC-07-2015-0045

Editor’s letter

Article Type: Editor’s letter From: Journal of Investment Compliance, Volume 16, Issue 3

In this third quarterly issue for 2015, our articles cover the usual full range of regulatory and compliance issues relevant to investment bankers, investment advisers, broker-dealers, hedge funds, mutual funds, and private equity firms. Our mission is to provide articles by experts explaining these issues in the clearest possible way.

The three-hour trading halt on the New York Stock Exchange on July 8, 2015 brought worldwide attention to the critical role computer systems play in our financial infrastructure, though fortunately it also highlighted the ability of other exchanges to accommodate trading in NYSE-listed stocks during that downtime and the NYSE’s ability to restore operations before the markets closed that day. In our first article, James Burns, Georgia Bullitt, Howard Kramer, Jack Habert and Jed Doench explain the requirements of Regulation Systems Compliance and Integrity (Regulation SCI) and the new responsibilities of organizations defined as “SCI Entities.” Regulation SCI launches a broad and extensive overlay of rules and guidance to address systems capacity and integrity issues that have increasingly affected the securities markets. It requires written policies and procedures for maintenance of systems reliability, designation of “responsible SCI personnel,” emergency plans, annual compliance reviews, and regulatory reporting. The new obligations add a regulatory mandate to the technology focus that has long been a part of daily life for operations and business professionals at SCI entities and at member and participant firms.

Peer-to-peer lending platforms have grown rapidly and attracted significant attention in the past few years, with some operating in the public markets and one going public itself. Robert Rosenblum, Susan Gault-Brown and Amy Caiazza provide an overview of the basic model used by many peer-to-peer lending platforms and some of the key peer lending regulatory and structuring considerations under the federal securities laws.

SEC Rule 21F-17, under Section 21F of the Securities Exchange Act of 1934, adopted in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act in August 2011, prohibits companies from taking any action to impede potential whistleblowers from reporting possible securities law violations to the SEC, including enforcing, or threatening to enforce, a confidentiality agreement. Daniel Adams, Jennifer Chunias, Robert Hale, John Newell and William Goldberg describe the SEC’s first enforcement action based on the language in a company’s confidentiality agreements warning employees that they could face discipline and potential termination for discussing internal investigation matters with outside parties without the prior approval of the company’s legal counsel. Significantly, there were no apparent instances in which the company specifically prevented employees from communicating with the SEC about any securities law violations. This enforcement action is part of the SEC’s continuing enforcement and expansion of the Dodd-Frank Act’s whistleblower protections.

Peter Chan and Amy Greer take a broader look at the SEC’s whistleblower policies. They note the Dodd-Frank mandate that the SEC implement a whistleblower program and the Commission’s work on discharging that mandate since the July 21, 2010 effective date of the law. Although the SEC had some prior experience with an insider trading bounty program and Congress’s previously enacted Sarbanes-Oxley whistleblower statute, the Dodd-Frank Act outlines a far more comprehensive and far-reaching program and the SEC has made that vision a key priority. The SEC’s use of whistleblower tips, complaints, and referrals has grown and changed as its Office of the Whistleblower has developed. Moreover, a more aggressive SEC Enforcement Division has found that it can more efficiently and successfully conclude enforcement investigations using information derived by and through whistleblowers. Recent high-level public statements from SEC Commissioners and Senior SEC Staff suggest that this trend will only continue and, given whistleblowers’ importance to the work of the SEC Staff, significant steps are being taken to ensure that employers do not, knowingly or otherwise, mute the voices of those who might want to take their concerns to the government. The speech analyzed in this article is a recent example of high-profile public statements made by SEC Chair Mary Jo White. The article offers an overview of how the Commission views the importance of whistleblowers to its overall mission of protecting investors.

David Engvall, Reid Hooper, Keir Gumbs, and David Martin outline and summarize the new disclosure requirements under the SEC’s proposed pay-for-performance rule, which as proposed would represent a significant new annual disclosure requirement for many public companies, would have the effect of endorsing total shareholder return (TSR) as a “one size fits all” approach to measuring a company’s financial performance, and could require even more disclosure for companies that don’t consider TSR to be the optimal measure of financial performance. The purpose, according to the SEC, is to allow shareholders to be better informed when they vote to elect directors and submit advisory votes on executive compensation. The pay-for-performance rule is one of four provisions related to corporate governance and executive compensation mandated by Dodd-Frank but not yet adopted by the SEC. The other three are disclosure of the CEO pay ratio, disclosure regarding employee and director hedging, and rules on company policies providing for recovery of erroneously awarded compensation.

Ian Blumenstein, Eric Maki, and John Owen advise companies of a recent SEC no-action letter that allows an issuer of non-convertible debt securities to hold open a tender and exchange offer for as few as five business days compared to the usual 20-day minimum if certain conditions are met. These securities are generally held by knowledgeable institutional investors who would have no trouble deciding on an offer within the shorter time frame. For many companies this SEC action will make refinancing transactions more efficient and save extra interest expenses related to keeping tender and exchange offers open for longer periods. The shortened timeframe is subject to a number of limitations; it is available only for certain types of debt and not available for most restructuring and reorganization transactions.

Benjamin Neaderland and Jared Cohen analyze two cases now before US Courts of Appeals that carry the possibility of placing meaningful new limits on the SEC’s time horizon for bringing enforcement actions. The SEC has long argued that certain statutory provisions which appear on their face to create time limits on SEC actions are either limited in their scope or merely establish internal policy guidelines for the agency, and do not actually circumscribe its jurisdiction to bring actions. These impending appellate decisions, depending on their outcomes, may expand the defenses available to parties subject to SEC enforcement actions when those actions are not undertaken in a timely fashion.

Janet Angstadt, Michael Foley, Ross Pazzol, and James Van De Graaff explain a FINRA proposal that would require registration with FINRA of associated persons of FINRA-member firms who are primarily responsible for the design, development or significant modification of algorithmic trading strategies, and therefore would result in many various individuals who currently are not subject to a FINRA registration requirement, to pass a qualification examination and register. This is one of FINRA’s market structure-related initiatives aimed at addressing the explosion of automated trading activities – i.e., high-speed and algorithmic trading – in the nation’s securities markets by increasing the scope of trading information provided to FINRA, increasing the transparency of such trading activities and requiring employees of member firms engaged in electronic trading to be “trained, educated and accountable” for their role in algorithmic trading strategies. Of course, the proposal when implemented also will provide FINRA with enforcement and disciplinary authority over those registered individuals who are involved in the creation or modification of any algorithmic trading strategy that is deemed to be non-compliant with applicable legal and regulatory obligations.

Richard Parrino, Douglas Schwab and David Wertheimer examine the US Supreme Court’s recent Omnicare decision, which concerns liability under Section 11 of the Securities Act of 1933 for statements of opinion expressed in registration statements filed with the SEC in connection with public offerings. Section 11 imposes liability on an issuer for making a false statement of a material fact or for omitting to state a material fact that would be required to prevent a related statement or opinion from being misleading. In its decision, the Supreme Court found that the lower courts had conflated the two bases of Section 11 liability and improperly had focused solely on whether certain opinions expressed by Omnicare in a registrations statement opinions were false. The Supreme Court said that it was necessary to evaluate the funds’ claims separately under Section 11’s false-statement provision and the statute’s omissions provision. Drawing lessons from the decision, the authors highlight the importance of including in the disclosures meaningful cautionary statements identifying important facts that could cause actual outcomes to differ materially from views expressed in an opinion.

Winston Penhall analyzes the findings of a British court in the Arch Financial Products case relating to investment manager fiduciary duties under English law and conflicts of interest compliance failings. Prior to this judgment, there were few cases directly on point that supported the view that a discretionary investment manager would be subject to fiduciary duties. The author highlights the importance to regulated firms of identifying and managing conflicts of interest fairly and presents the Arch Financial Products case as a real life example of the hazards that firms, their principals and their compliance officers can face when improperly dealing with conflicts.

Majed Muhtaseb describes how a hedge fund manager established and built his business; how he solicited investors; how he falsified financial reporting to investors; how investors discovered his fraud and filed lawsuits; how about 500 investors, including prominent National Football League (NFL) players, lost about $185 million; how the SEC and the Federal Bureau of Investigation (FBI) took disciplinary action; and how the NFL players unsuccessfully sued the NFL and its players’ union for recommending the fraudulent manager’s firm. The author draws lessons from the story for investors and associations.

Henry Davis