What May Be In Store For The Investment Management Industry Under Chair Gensler: A Podcast

In Faegre Drinker’s “Enforcement Highlights” third podcast, Jim Lundy moderates a panel with Investment Management Group partner Jillian Bosmann and fellow SEC and Regulatory Enforcement partner David Porteous discussing what the plans may be for the SEC’s Divisions of Investment Management, Examinations, and Enforcement and the investment management industry under the leadership of new SEC Chair Gary Gensler. Topics also include the Division of Examination’s 2021 Annual Report, the SEC’s ESG Risk Alert, and FINRA’s anticipated relationship with the SEC under Chair Gensler.

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SEC’s Director of Enforcement Unexpectedly Resigns Just Days after Taking the Job: Reminiscent of Previous Resignation by former Chairman Harvey Pitt

Alex Oh, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler’s pick for the agency’s Director of the Division of Enforcement, unexpectedly resigned on Wednesday amid growing criticism for her decades-long work as a private corporate defense lawyer. Ms. Oh’s hiring was announced on April 22, 2021, less than a week before her resignation.

Ms. Oh’s resignation followed a ruling on Monday from Judge Royce C. Lambeth of the Federal District of Columbia reprimanding ExxonMobile’s legal team, which included Ms. Oh, for their conduct in a class action lawsuit brought by Indonesia villagers against Exxon alleging human rights abuses. According to the ruling, Exxon’s defense team characterized the lawyers for the villagers as “agitated, disrespectful and unhinged” during a deposition. Judge Lambeth ordered Exxon’s lawyers to show why penalties were not warranted for those comments.

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Speech by New Commissioner Provides Insight into Biden Administration SEC

As we await the impact of the Biden Administration on the direction of the SEC, we have been given a glimpse of what is to come in a speech last month by the newly confirmed commissioner, Caroline Crenshaw.  Specifically, Commissioner Crenshaw’s speech focused on “individual culpability” and penalties in the SEC’s enforcement program.  Strikingly, the Commissioner decried the SEC’s past stance on penalties:  “It is clear to me that the Commission has historically placed too much emphasis on factors beyond the actual misconduct when imposing corporate penalties – including whether the corporation’s shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty.  This approach is fundamentally flawed.”  Commissioner Crenshaw then stated that she thinks the SEC should revisit its approach to corporate penalties.  It remains to be seen how Crenshaw’s remarks will be observed at Enforcement with respect to corporate penalties, let alone the application of her observations about the focus on “factors beyond the actual misconduct” could also be extended to individuals who are similarly facing substantial penalties for factors beyond their misconduct.

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SEC Exams for 2021 to Focus on Climate and ESG, Reg BI, Crypto, & More

The Division of Examination’s (former OCIE) annual announcement of its exam priorities is always noteworthy, as it provides helpful insight into this division’s thinking and can serve as a roadmap for regulated entities to focus their compliance and supervision planning. The announcement of these priorities is even more important following a change in the presidential administration and the changes at the Commission that inevitably follow. Not surprisingly, the recently announced Division of Examination priorities for 2021 (summarized below) align with the Biden Administration’s policy priorities and key trends in the financial landscape.

Climate-Related Risks – Examinations will carefully consider environmental, social and governance (ESG) issues, including climate change. In the same way that the Division of Examinations previously focused on entities’ plans and disclosures related to the challenges posed by the COVID-19 pandemic, the Division announced that it will scrutinize business continuity plans to ensure that they “account for the growing physical and other relevant risks associated with climate change.” The Division will be looking for “maturation and improvements to these plans” to ensure that “registrants are considering effective practices to help improve responses to large-scale events.” The announcement of this examination focus also coincides with the Division of Enforcement’s announcement of the creation of a Climate and ESG Task Force. Continue reading “SEC Exams for 2021 to Focus on Climate and ESG, Reg BI, Crypto, & More”

New SEC Enforcement Task Force Targets Environmental, Social, and Governance Issues

As political leaders continue to debate how to address climate change, the SEC is poised to take (enforcement) action. In the latest example of how the Biden Administration is influencing the priorities of the SEC, the agency recently announced the creation of a Climate and Environmental, Social and Governance (ESG) Task Force in the Division of Enforcement. According to the SEC, the task force’s “initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The task force will also focus on investment adviser and funds, analyzing their ESG strategies for disclosure and compliance issues.

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SEC Enforcement Victory in its Efforts to Police Cannabis Industry Investments

As the cannabis industry continues to evolve and generate capital raising and investment opportunities, the SEC Division of Enforcement will continue to closely keep watch and target the bad actors that new market opportunities such as this inevitably and unfortunately attract.  Along those lines, investors looking to purchase stock in supposed cannabis company, Covalent Collective, may have found vindication in the recent judgment against Geoffrey Thompson, of Frankfurt, Illinois. Thompson is now permanently barred from engaging in the issuance, purchase, offer, or sale of any security, except in connection with his own personal account.  On January 20, 2021, the United States District Court for the Northern District of Illinois (Case No. 1:20-cv-05205), ruled in favor of the United States Securities & Exchange Commission (SEC), in connection with its complaint targeting Thompson.  Although Thompson did not admit or deny the allegations, he consented to the entry of the final judgment against him, which also ordered him to pay over half a million dollars collectively in disgorgement, prejudgment interest and civil penalties.

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Wrap Fee Programs Under Continued Scrutiny and Use of Investment Advisory Product Committees

Further to the Securities and Exchange Commission (“SEC” or the “Commission”)’s ongoing review of investment advisers offering wrap fee programs, on December 23, 2020, the Commission announced a settlement with Pruco Securities, LLC (“Pruco”) related to alleged breaches of fiduciary duty in connection with its wrap fee programs.  Pruco agreed to pay disgorgement, interest, and civil penalties totaling over $18.2 million to compensate for its alleged breaches of its fiduciary duties to its advisory clients that participated in its wrap fee programs.[1]  In short, the SEC alleged that Pruco breached its fiduciary duties and violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 (the “Advisors Act”), and Rule 206(4)-7 thereunder, by failing to disclose certain fees, savings, and revenue sharing payments it received in connection with its wrap fee programs, and the associated conflicts of interest related thereto, and by failing to assess whether the wrap fee programs were and remained suitable for the clients participating in them, as it represented it would.

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President Biden Announces Gary Gensler as SEC Chair Nominee

On January 18, 2021, the incoming President’s Transition Team announced additional key administration post nominees, including Mr. Gary Gensler as SEC Chair. The announcement specifically provided the following regarding Mr. Gensler’s background:

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