2017 YEAR IN REVIEW: SELECT SEC AND FINRA DEVELOPMENTS AND ENFORCEMENT CASES www.morganlewis.com Table of Contents TABLE OF CONTENTS ............................................................................................. I-IV EXECUTIVE SUMMARY ........................................................................................... 1-4 The SEC ..................................................................................................... 1-2 FINRA ........................................................................................................ 3-4 US SECURITIES AND EXCHANGE COMMISSION ........................................................ 5-79 Personnel Changes .................................................................................... 5-11 Enforcement Statistics ............................................................................. 11-12 Categories of Cases ................................................................................. 12-13 Civil Penalties and Disgorgement Orders................................................... 13-14 Additional Statistics ................................................................................. 14-15 Office of the Whistleblower ...................................................................... 16-19 Key SEC Enforcement Developments ........................................................ 19-25 Additional Areas of Focus for the Enforcement Division ............................. 25-28 Looking Ahead ........................................................................................ 28-29 SEC Enforcement and Examination Priorities ............................................. 29-31 SEC Enforcement Actions.............................................................................. 31 Cases Relating to Broker-Dealer Firms and Their Employees/Affiliated Persons ......................................................................................32-43 American Depository Receipts (ADRs) ..................................... …...32-33 Anti-Money Laundering/Suspicious Activity Reports………………………33-34 Complex and Structured Products .................................................34-36 Disclosures – Retirement Plan Customers .......................................... 37 Material Nonpubilc Information Supervision ...................................37-38 Order Handling Practices ..............................................................38-39 Regulation SHO ...........................................................................39-40 Sales Practices Violations ................................................................. 40 SEC Judgment Enforcement .............................................................. 41 i www.morganlewis.com Supervision ..................................................................................... 41 Underwriter Due Diligence ................................................................ 42 Undisclosed Markups and Markdowns ............................................42-43 Cases Relating to Investment Advisers/Investment Companies and Their Employees/Affiliated Persons ........................................................44-79 Allocation of Fees and Expenses ...................................................44-46 Calculation of Advisory Fees .........................................................46-49 Conflict of Interest Disclosure .......................................................49-50 Conflict of Interest Disclosure – Forgivable Loans & Recruitment Benefits ...................................................................................................50-51 Conflict of Interest Disclosure – Mutual Fund Share Class Selection ...................................................................................................51-55 Conflict of Interest Disclosure – Receipt of Undisclosed Compensation…………………………………………………….………………...…56-58 Conflict of Interest Disclosure – Referral Arrangements/Senior Investors ...................................................................................................58-59 Conflict of Interest Disclosure – Undisclosed Related Party Transactions ................................................................................59-62 Custody ........................................................................................... 63 Exchange-Traded Funds (ETFs) ....................................................... 64 Investment Adviser Registration………………………….…….…………….…64-65 Investment Company Registration/Misrepresentation ......................... 65 Material Nonpublic Information ......................................................... 66 Misleading Advertising Claims .......................................................66-69 Mutual Fund Distribution .................................................................. 69 Outsourced Chief Compliance Officer................................................. 70 Pay-to-Play ...................................................................................... 71 Scalping/Misrepresentation ...........................................................71-72 Sharing of Confidential Information ...............................................72-73 Suitability of Investments .............................................................73-74 ii www.morganlewis.com Trade Allocation ...........................................................................74-76 Unregistered Investment Company ...............................................76-77 Valuation .....................................................................................77-79 Wrap Fee Programs – Trading Away ............................................... …79 FINANCIAL INDUSTRY REGULATORY AUTHORITY ................................................ 80-106 Enforcement Developments ..................................................................... 80-81 Targeted Examination Letter ......................................................................... 81 FINRA Report on Examination Findings .................................................... 81-82 FINRA’s 2018 Regulatory and Examination Priorities .................................. 82-85 FINRA Enforcement Actions ................................................................... 85-106 Advertised Trading Volumes ..................................................... ….85-86 Anti-Money Laundering ................................................................86-87 Consolidated Reporting .................................................................... 87 Customer Protection Rule .............................................................87-88 Exchange-Traded Products ............................................................... 88 Extended Settlement Transactions .................................................... 89 Fingerprinting .................................................................................. 89 Large Options Position Reporting ..................................................89-91 Market Access Rule ......................................................................91-94 Mutual Fund Sales Charges ...........................................................94-96 Net Capital .................................................................................96-97 OATS Reporting ...........................................................................97-98 Offering Fraud ................................................................................. 98 Order Handling ................................................................................ 99 Prospectus Delivery ......................................................................... 100 Research Ratings ..................................................................... 100-101 Sales Charge Discounts ................................................................... 101 Supervision .............................................................................. 101-103 Survivor Bonds ........................................................................ 103-104 TRACE Reporting ............................................................................ 104 iii www.morganlewis.com Unit Investment Trusts .................................................................... 105 WORM..................................................................................... 105-106 SECURITIES ENFORCEMENT AND LITIGATION PRACTICE ............................................ 107 INVESTMENT MANAGEMENT PRACTICE ........................................................... 108-109 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 In Fiscal Year 2017 (FY 2017), as well as the months since, there has been significant personnel transition at the SEC, and during this period we also have seen legal developments and changes to technology that are likely to impact how the Agency operates for many years to come. First, the Commission composition has changed significantly; for much of FY 2017, the Commission operated with fewer than its full five members. The last time we saw this type of transition, in 2013, also resulted in a meaningful reduction in the number of enforcements actions brought, and the Enforcement Division statistics this past year reflect