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Select Sec and Finra Developments and Enforcement Cases 2020 YEAR IN REVIEW AND A LOOK FORWARD SELECT SEC AND FINRA DEVELOPMENTS AND ENFORCEMENT CASES www.morganlewis.com Table of Contents TABLE OF CONTENTS .............................................................................................. i-iv EXECUTIVE SUMMARY ...............................................................................................1 The SEC ...................................................................................................... 1 FINRA ......................................................................................................... 3 US SECURITIES AND EXCHANGE COMMISSION ..............................................................4 Personnel: Commisioners and the Division of Enforcement ............................. 4 The Effect of the Pandemic on SEC Enforcement ........................................... 5 What to Expect .................................................................................. 6 SEC Enforcement Under the Biden Administration .......................................... 6 Nomination of Gary Gensler ................................................................ 6 What to Expect ................................................................................ 10 Possible Legislation and Rulemaking............................................................ 11 What to Expect ................................................................................ 11 The Current State of SEC Disgorgement as an SEC Remedy ......................... 13 Liu v. SEC ........................................................................................ 13 Section 6501: Investigations and Prosecution of Offenses for Violations of the Securities Laws ....................................................... 15 What to Expect ................................................................................ 15 The SEC Whistleblower Program Comes of Age ............................................ 16 What to Expect ................................................................................ 20 SEC Enforcement in FY2020 by the Numbers ............................................... 20 Trends in SEC Enforcement Actions ................................................... 21 A Deeper Look into Investigations and Case Categories ...................... 22 What to Expect ................................................................................ 24 Data Analytics Under Chairman Clayton and into the Next Administration ...... 25 Data Analytics as Part of the Commission’s Strategic Plan ................... 26 Data Analytics Within the Division of Enforcement.............................. 26 i www.morganlewis.com Data Analytics in the Division of Examinations ................................... 27 Gary Gensler .................................................................................... 27 Division of Examinations 2021 Exam Priorities .............................................. 28 SEC Enforcement Actions............................................................................ 29 Cases Relating to Broker-Dealer Firms and Their Employees/Affiliated Persons .................................................. 29 Anti-Money Laundering (AML) ........................................................... 29 Electronic Blue Sheets ...................................................................... 31 Exchange-Traded Funds ................................................................... 31 Municipal Bond Flipping ................................................................... 32 Order Routing and Filling .................................................................. 33 Pre-Release American Depository Receipts Borrowing ........................ 34 Recordkeeping ................................................................................. 35 Regulation SHO ............................................................................... 35 Spoofing .......................................................................................... 36 Swaps ............................................................................................. 37 Trading Costs and Disclosure ............................................................ 37 Cases Relating to Investment Advisers/Investment Companies and Their Employees/Affiliated Persons ................................... 39 Allocation of Investments ................................................................. 39 Cash Sweep Vehicles and Other Fee-Related Issues ........................... 39 Conflicts of Interest .......................................................................... 41 Conflicts of Interest – Payment for Order Flow ................................... 42 Disclosure of Risk ............................................................................. 42 Exchange Traded Products ............................................................... 43 Fees and Expenses ........................................................................... 45 Investment Company Act ................................................................. 46 Mutual Fund Share Class Selection and Disclosure .............................. 48 a. Final Share Class Selection Disclosure Initiative Settlements . 48 b. Settlements Outside of the Share Class Selection Disclosure Initiative ............................................................................ 48 ii www.morganlewis.com c. Select Cases ....................................................................... 50 Policies and Procedures – Rule 144A of the Securities Act ................... 51 Policies and Procedures – Excessive Trading ...................................... 51 Policies and Procedures – Use of Material, Nonpublic Information ....... 52 Referral Arrangements ..................................................................... 53 Self-Reporting – Expenses ................................................................ 54 Trading Resources and Disclosure ..................................................... 55 Valuation ......................................................................................... 55 FINANCIAL INDUSTRY REGULATORY AUTHORITY ...................................................... 57 Leadership and Organizational Changes at FINRA ........................................ 57 COVID-19 ........................................................................................ 57 COVID Fraud Task Force .................................................................. 57 Regulatory and Information Notices .................................................. 57 529 Share Class Initiative Progress .............................................................. 58 Continued Focus on Restitution and Protecting Vulnerable Investors ............. 58 Targeted Examination Letters ........................................................... 58 Use of Data Analytics and Technology to Augment the Exam and Risk Monitoring Program .................................................................. 59 2021 Report on Examination and Risk Monitoring Program ........................... 59 Enforcement-Related Podcast ..................................................................... 60 Enforcement Statistics ................................................................................ 60 What to Expect ................................................................................ 60 FINRA Enforcement Actions ........................................................................ 61 529 Plans ........................................................................................ 61 Advertising ...................................................................................... 62 Anti-Money Laundering (AML) ........................................................... 63 Blue Sheets ..................................................................................... 64 Complex Products ............................................................................ 65 Customer Protection ......................................................................... 66 Customer Statements ....................................................................... 66 iii www.morganlewis.com Disclosure ........................................................................................ 67 Form U4 .......................................................................................... 67 Market Access .................................................................................. 68 Market Making ................................................................................. 69 Mutual Fund Fees ............................................................................ 70 Order Audit Trail System (OATS) ....................................................... 70 Options Rules .................................................................................. 71 Options Origin Codes........................................................................ 71 Recordkeeping ................................................................................. 71 Supervision ...................................................................................... 73 Trade Reporting and Compliance Engine (TRACE) .............................. 74 Unit Investment Trusts (UITs) .......................................................... 75 Variable Annuities ............................................................................ 76 SECURITIES ENFORCEMENT PRACTICE
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