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2018 Year in Review: Select SEC and FINRA Developments and Enforcement Cases

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2018 Year in Review: Select SEC and FINRA Developments and Enforcement Cases 2018 YEAR IN REVIEW SELECT SEC AND FINRA DEVELOPMENTS AND ENFORCEMENT CASES www.morganlewis.com Table of Contents TABLE OF CONTENTS ............................................................................................. I-IV EXECUTIVE SUMMARY ........................................................................................... 5-8 The SEC ................................................................................................... 5-6 FINRA ...................................................................................................... 6-8 US SECURITIES AND EXCHANGE COMMISSION ........................................................ 9-95 Personnel Changes…. ...............................................................................9-15 Enforcement Statistics ............................................................................ 15-16 Categories of Cases ................................................................................ 16-17 Civil Penalties and Disgorgement Orders .................................................. 17-18 Additional Statistics ................................................................................ 18-20 Office of the Whistleblower ..................................................................... 20-23 Key SEC Enforcement Developments ....................................................... 23-25 Litigation Matters Affecting the Enforcement Division ................................ 26-28 Additional Areas of Focus for the Enforcement Division ............................. 28-30 Looking Ahead ....................................................................................... 30-31 SEC Enforcement and Examination Priorities ............................................ 31-34 SEC Enforcement Actions ........................................................................ 35-96 Cases Relating to Broker-Dealer Firms and Their Employees/Affiliated Persons ............................................35-56 American Depositary Receipts (ADRs) ......................................... 35-37 American Depositary Shares ............................................................. 37 Anti-Money Laundering/Suspicious Activity Reports (SARs) ..... ……..38-40 Customer Protection Rule Violations ............................................. 40-41 Customer Personally Identifiable Information (PII) Breach ............. 41-42 Electronic Blue Sheets (EBS) Deficiencies ..................................... 42-43 Exchange Failures ........................................................................... 43 Municipal Bond Flipping .............................................................. 43-44 i www.morganlewis.com Fraudulent Bond Offering ............................................................ 44-45 Manipulative Trading Activity ............................................................ 45 Material Nonpublic Information ....................................................... 46 Material Nonpublic Information Supervision .................................. 46-47 Misappropriation of Assets ............................................................... 47 Municipal Advisor Violations ............................................................. 47 Mutual Fund Disclosure Violations .................................................... 48 Net Capital Violations ..................................................................... 48 Order Handling Practices – Misrepresentations ............................. 49-50 Recordkeeping Violations ............................................................ 50-51 Regulation SHO Issues ............................................................... 51-52 Regulatory Issues re: RMBS Transactions ..................................... 52-53 Regulatory Issues re: CMBS Transactions .......................................... 53 Sales Practices Violations ................................................................. 54 Supervision ................................................................................ 54-55 Unauthorized Trading ...................................................................... 56 Cases Relating to Investment Advisers/Investment Companies and Their Employees/Affiliated Persons ............................. 57-95 Advertising ................................................................................ 57-60 Advisory Fees ............................................................................ 60-62 Compliance Policies and Procedures ............................................. 62-63 Conflict of Interest Disclosure...................................................... 63-67 Conflict of Interest Disclosure – Mutual Fund Share Class Selection ................................................................................................ 67-71 Conflict of Interest Disclosure – Receipt of Undisclosed Compensation ................................................................................................ 72-75 Cross-Trades/Affiliated Transactions ............................................ 75-76 Custody ..................................................................................... 76-77 Digital Assets .................................................................................. 77 Digital Investment Advisers ......................................................... 77-78 ii www.morganlewis.com Disclosure ...................................................................................... 79 Due Diligence ............................................................................ 79-80 Expense Allocation ..................................................................... 80-81 Form PF ......................................................................................... 82 Fraud ........................................................................................ 82-83 Gatekeepers .............................................................................. 83-84 Investment Companies ............................................................... 84-86 Model Governance ..................................................................... 86-87 Pay to Play ................................................................................ 87-88 Privacy/Information Security ....................................................... 88-89 Private Funds – Preferential Liquidity ................................................ 89 Soft Dollars ............................................................................... 89-90 Trade Allocation ......................................................................... 90-91 Trading Practices ....................................................................... 91-93 Valuation ................................................................................... 93-94 Wrap Fee Programs – Trading Away ................................................. 95 FINANCIAL INDUSTRY REGULATORY AUTHORITY ................................................ 96-120 Enforcement Developments .................................................................... 96-97 New Member Regulation Appointment and Consolidation of Examination and Risk- Monitoring Programs .............................................................................. 97-98 Targeted Examination Letter ....................................................................... 98 FINRA Report on Examination Findings ........................................................ 98 FINRA’s 2019 Regulatory and Examination Priorities ............................... 98-101 Enforcement Statistics ............................................................................... 101 FINRA Enforcement Actions ....................................................... 102-120 Anti-Money Laundering (AML) ................................................. 102-106 Books and Records .................................................................. 106-107 Customer Protection Rule ........................................................ 107-109 Intermarket Sweep Orders (ISOs) .................................................. 109 IPO Sales ............................................................................... 109-110 iii www.morganlewis.com Market Access ......................................................................... 110-112 Microcap Securities ....................................................................... 112 Order Audit Trail System (OATS) Reporting ............................... 112-113 Regulation SHO ...................................................................... 113-114 Short Interest Reporting ................................................................ 115 Suitability ............................................................................... 115-118 Supervision ............................................................................. 118-120 Trade Confirmations ...................................................................... 120 SECURITIES ENFORCEMENT AND LITIGATION PRACTICE ............................................ 121 INVESTMENT MANAGEMENT PRACTICE ........................................................... 122-123 iv www.morganlewis.com Executive Summary The Morgan Lewis Year in Review highlights key US Securities and Exchange Commission (the SEC or the Commission) and Financial Industry Regulatory Authority (FINRA) enforcement developments and cases regarding broker-dealers, investment advisers, and investment companies.* THE SEC For a time in
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