The Show, Er, Um, Article About Nothing (Other Than SEC, CFTC, FINRA, and State Securities Enforcement Actions in August 2020)
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NSCPCurrents SEPTEMBER 2020 The Show, er, um, Article About Nothing (other than SEC, CFTC, FINRA, and State Securities Enforcement Actions in August 2020) By Brian Rubin and Alexa Shockley About the Authors: Brian Rubin is a partner at Eversheds Sutherland. He can be reached at [email protected]. Alexa Shockley is an associate at Eversheds Sutherland. She can be reached at [email protected]. 1 SEPTEMBER 2020 NSCP CURRENTS 1 SEPTEMBER 2020 NSCP CURRENTS Jerry: So what’s the deal with this article? You’re telling me that Seinfeld, a show about nothing, was really about securities? Elaine: Get out! Kramer: Giddy-up! Jackie Chiles (the most prominent attorney on Seinfeld) (which isn’t saying much): What Mr. Seinfeld and Ms. Benes are saying, with the able assistance of Mr. Kramer, is this: If you watch this super, stellar, stupendous show with care and calculated calibration, but not with callousness, you too will see that reality. Indeed, in fact, indubitably, Ms. Benes will provide an example. Elaine: See, there was one episode called, “The Stock Tip,” and, yada yada yada, Jerry loses his investment, but George makes a killing. Crazy, right? George: Worlds are colliding! Jerry: Yeah, I guess you could say that.1 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.2 It was self-identified as a “show about nothing.”3 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.”4 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;5 • A low talker,6 a close talker,7 and a high talker;8 • A short-tempered soup restaurant owner who yells, “No soup for you”;9 • Waiting for a table at a Chinese restaurant;10 • Contests among friends;11 • Re-gifting;12 and • Of course, yada yada yada.13 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). Like Seinfeld, this article isn’t about “nothing” either. Rather, it explores themes contained in Seinfeld that help explain securities enforcement actions. 1. Some, but not all, of the above quotes are real. But because they aren’t of significance to compliance professionals, we will not provide citations for them. However, a fun WFH game could be to “find the real quotes.” Or not. 2. https://www.emmys.com/shows/seinfeld. 3. https://www.seinfeldscripts.com/ThePitch.htm#:~:text=JERRY%3A%20Right.,GEORGE%3A%20Exactly. 4. https://www.cheatsheet.com/entertainment/seinfeld-larry-david-created-dark-humor-by-enforcing-2-rules-for-writers-no-hugging-no-learning.html/. 5. https://www.seinfeldscripts.com/ThePuffyShirt.htm. 6. Id. 7. https://www.seinfeldscripts.com/TheRaincoats.html. 8. https://www.seinfeldscripts.com/ThePledgeDrive.html. 9. http://www.seinfeldscripts.com/TheSoupNazi.htm. 10. https://www.seinfeldscripts.com/TheChineseRestaurant.htm. 11. https://www.seinfeldscripts.com/TheContest.htm. 12. https://www.seinfeldscripts.com/TheLabelMaker.html. 13. http://www.seinfeldscripts.com/TheYadaYada.htm. 14. https://tv.avclub.com/the-stake-out-the-robbery-the-stock-tip-1798165194. 2 SEPTEMBER 2020 NSCP CURRENTS Misrepresentations and Omissions The four main characters on Seinfeld (Jerry, George, Elaine, and Kramer), while amusing to outside observers like us, were not always the nicest people to others on the show. Indeed, in the show’s finale, they were put on trial for the crime of “ignor[ing] a fellow human being in trouble.”15 As the prosecutor told the jury, [T]hey have quite a record of mocking and maligning. This is a history of selfishness, self- absorption, immaturity, and greed. And you will see how everyone who has come into contact with these four individuals has been abused, wronged, deceived and betrayed. But, more than that, they and their cohort (e.g., Newman, George’s father) sometimes engaged in the act of prevaricating—particularly, George. The following are examples of different types of misrepresentations George was known for: The Occupation Lie: You know I always wanted to pretend I was an architect.16 The Consistent Liar: I lie every second of the day. My whole life is a sham.17 The But-I-Believed-It Lie: Jerry, just remember. It’s not a lie . if you believe it.18 In the securities world, while firms and individuals are not sanctioned for ignoring fellow human beings (even under the Department of Labor’s old—or new and improved—Fiduciary Rule), they can be sanctioned for making misrepresentations or omitting material facts. One issue that we have seen repeatedly during the past year and one-half is alleged misrepresentations regarding share class selection and the receipt of Rule 12b-1 fees under the Investment Company Act of 1940. As recently as August 2020, the SEC entered into another settlement in this area.19 In that case, the firm failed to self-report to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative.20 The SEC ordered the firm to pay disgorgement of approximately $544,000, prejudgment interest of approximately $23,000, and a civil monetary penalty of $200,000. What made this case different from the other 12b-1 settlements is that this case involved an additional charge. The SEC found that the firm purchased or recommended cash sweep money market funds for its advisory clients, and in connection with those funds, the firm received revenue sharing payments from its clearing broker. The firm, however, failed to disclose the receipt of this compensation to clients. The firm also selected more expensive share classes than the lowest cost share classes for the same money market fund that were available to clients. The firm received more than $400,000 in cash sweep revenue sharing. While the SEC has previously expressed an interest in this area, this case appears to be the first of its kind with this charge. In November 2019, the SEC’s head of Enforcement, Stephanie Avakian, warned that Enforcement would investigate firms that did not adequately disclose that they accepted revenue sharing from their custodians cash sweep programs.21 In particular, Ms. Avakian stated, “These types of cash sweep arrangements create an obvious incentive for an adviser to recommend products where revenue sharing will result in larger payments to the adviser and lesser returns for the adviser’s clients.” Takeaways • The SEC continues to bring cases dealing with share class disclosure and 12b-1 fees. 15. https://www.seinfeldscripts.com/TheFinale.htm. 16. https://www.seinfeldscripts.com/TheMarineBiologist.htm. 17. https://www.quotes.net/mquote/846818. 18. https://www.seinfeldscripts.com/TheBeard.htm. 19. https://www.sec.gov/litigation/admin/2020/ia-5560.pdf. 20. SEC, Share Class Selection Disclosure Initiative (Updated May 1, 2018), available at https://www.sec.gov/enforce/announcement/scsd-initiative. 21. https://www.sec.gov/news/speech/speech-avakian-2019-11-05#_edn11. 2 SEPTEMBER 2020 NSCP CURRENTS 3 SEPTEMBER 2020 NSCP CURRENTS • Firms may want to review their cash sweep arrangements and their disclosures about the receipt of compensation related to those programs. • The SEC has several investigations regarding revenue sharing from cash sweeps. Therefore, the SEC may bring additional enforcement actions in this area. However, because the above is the first such case, it is not clear whether the SEC will bring stand-alone cash sweep disclosure cases or whether the SEC will bring such cases only if firms also had inadequate disclosures regarding the receipt of 12b-1 fees. Anti-Money Laundering (AML) Despite their other misdeeds, the stars of Seinfeld avoided participating in money laundering, as far as we know. (With Kramer and Newman, you can never be certain.) Some of them (George) also tried to avoid regular (clothing) laundering. George: I can’t stand doing laundry. That’s why I have forty pairs of underwear. Carol: You do not. George: Absolutely. Because instead of doing a wash, I just keep buying underwear. My goal is to have over three hundred and sixty pairs. That way, I only have to do wash once a year.22 The concept of other laundering (money) did show up in one episode, and Kramer, not surprisingly, had his own take on it: Jerry: So you’re saying UNICEF is a scam? Kramer: It’s the perfect cover for a money laundering operation. No one can keep track of all those kids with the little orange boxes of change.23 Despite money laundering not playing a prominent role in and around 129 West 81st Street, Apartment 5A,24 it does have significance in the securities world. For example, in August 2020, in separate actions, the SEC, the CFTC, and FINRA each settled charges with one firm for repeated AML failures. To settle the SEC’s charges, the firm agreed to pay a monetary penalty of $11.5 million.25 To settle the CFTC charges, the firm agreed to pay an $11.5 million civil money penalty and comply with the undertakings, including paying disgorgement of $706,215.26 And to settle FINRA’s charges, the firm agreed to pay a $15 million fine and comply with various undertakings, including retaining a third-party AML consultant.27 It is not common for regulators to bring cases against firms for the same conduct.