The lack of specific guidance regarding failure to supervise liability for chief compliance officers (“CCOs”) has been a controversial and opaque topic that both FINRA and the SEC have struggled with for well over a decade. Back on September 30, 2013, the SEC’s Division of Trading and Markets issued guidance with “FAQs” entitled “Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act.” These FAQs focused on the potential supervisory liability of compliance personnel. Just over two years later, on November 4, 2015, the then Director of the Division of Enforcement gave the keynote address at the 2015 National Society of Compliance Professionals, National Conference, in which he described a limited number of categories regarding the infrequent circumstances in which the SEC would consider charging a CCO. Despite these and other historical attempts at clarifying guidance, just this past year we have seen additional attempts to seek and obtain more regulatory clarity for this high-risk area. On June 2, 2021, the New York City Bar issued a Committee Report entitled “Framework for Chief Compliance Officer Liability in the Financial Sector.” Most recently and earlier this year, the National Society of Compliance Professionals (“NSCP”) offered a “Firm and CCO Liability Framework.” (More information on this can be found on NSCP’s website.) In this “Framework,” NSCP proposed that regulators consider CCO liability contextually in reference to resources made available to CCOs in the first instance.
Cryptocurrencies are one of the fastest growing asset types worldwide. Cryptocurrencies, as an asset class, total over $1.5 trillion in market capitalization. With the rapid growth of this asset type, SEC Chair Gary Gensler shared his views for the SEC in this area. At a recent conference, Chair Gensler continued to broadly characterize most digital assets as “investment contracts,” placing cryptocurrencies within the scope of the SEC’s enforcement powers. During his remarks at the Aspen Security Forum on August 3, Chair Gensler stated, “many of these tokens are offered and sold as securities” because they meet the definition of an “investment contract.” As established by the U.S. Supreme Court under the “Howey Test”, investment contracts are defined as agreements in which a person invests money in a common enterprise, expecting profits based on the efforts of others. Investment vehicles that satisfy the “Howey Test” definition for investment contracts are securities that fall within the jurisdiction of the SEC.
Chair Gensler further stated that the cryptocurrency area currently “lacks the typical investor protection guardrails” and that he has asked Congress for additional authority to “prevent transactions, products and platforms from falling between regulatory cracks.” Chair Gensler’s views appear supported by the SEC’s Division of Enforcement having brought 75 enforcement actions over the last decade. However, others are not convinced that the SEC has clearly defined jurisdiction.
On May 3, 2021, the Securities Exchange Commission (“SEC”) announced charges against Under Armour Inc. (“Under Armour”) for “misleading investors as to the bases of its revenue growth and failing to disclose known uncertainties concerning its future revenue prospects.” Under Armour agreed to settle the case, paying a $9 million fine. The settlement stems from allegations that Under Armour violated Sections 17(a)(2) and (3) of the Securities Act of 1933, which do not require proof of scienter, as well as reporting provisions of the federal securities laws, by failing to tell investors that it pulled forward orders to meet its quarterly targets in order to appear healthier.
Congress recently overrode President Trump’s veto of the $740 billion 2021 National Defense Authorization Act (“NDAA”) and signed it into law. While the focus of the NDAA is not on the U.S. Securities and Exchange Commission (“SEC”), the NDAA does include a provision that gives the SEC, for the first time ever, statutory authority to seek disgorgement in federal court for securities enforcement matters. Further, the NDAA also provides for a 10-year statute of limitations for the SEC to seek such disgorgement for scienter-based violations, extending and doubling the current 5-year statute of limitations.
Last week, on December 16, 2020, Chinese-based coffee chain Luckin Coffee Inc. (“Luckin”) agreed to a $180 million settlement with the United States Securities and Exchange Commission (“SEC”). Luckin’s American Depositary Shares traded on the Nasdaq until July 13, 2020. The settlement stems from allegations that Luckin defrauded investors by materially misstating revenues, expenses, and net operating losses. The SEC’s complaint alleges that these fraudulent accounting actions were taken in an attempt by Luckin to increase profitability and meet earnings estimates.
The case is a reminder of risks associated with investing in U.S. listed companies with Chinese operations, which the SEC flagged in a June 2011 bulletin and a December 2018 cautionary public statement. The case follows a number of SEC enforcement proceedings brought in 2011-2012 featuring trading halts or delistings of at least 50 companies in those years.
In an October 12 speech, the Director of Market Oversight for the Financial Conduct Authority (FCA) emphasized the need to adapt insider trading controls to account for changes in working conditions due to COVID-19 restrictions.
The Director’s speech started by discussing that global economic conditions have heightened the need for companies to raise capital, and that the UK has seen a significant portion of this activity, with the FCA citing the fact that “the UK saw a greater volume of follow-on equity issuance than the next 7 major European bourses combined.” At the same time, working conditions of financial professionals has changed dramatically since March 2020 with many now working from home in response to the COVID-19 pandemic. While this situation presents novel issues for firms and professionals, the FCA emphasized the need for firms to adapt and implement effective insider trading controls. The Director emphasized, “[a]t a time where capital raising activity is vital to fuel much needed economic activity, we must be crystal clear that behaviours that risk disrupting that activity will not be tolerated.”
On October 6, 2020, the Commodity Futures Trading Commission (“CFTC”) issued a release describing its record-breaking enforcement year. The release noted that in fiscal year 2020 (“FY2020”), the CFTC filed more enforcement actions than any other year in the history of the agency. CFTC Chairman Heath P. Tarbert stated “[w]e are tough on those who break the rules, and this historic year only further underscores this point.”
The most recent headlines emphasize the CFTC’s enthusiasm in pursuing spoofing-related actions. Of note, the CFTC ordered a registrant and affiliates associated with one of the largest bank holding companies to pay a record $920 million for spoofing and manipulation that spanned over eight years. This penalty comes as the largest monetary relief in the agency’s history. In September alone, the CFTC announced three other spoofing settlements with fines totaling nearly $1.8 million, and brought charges against a trading firm and two of their traders.