Enforcement Highlights

“Independence-Day” Malware and Managing the (Beach) Risks of Jaws

In the spirit of our previous Holiday film blogs, we present for your viewing pleasure (and background research) the following Independence Day films for your (re)viewing pleasure. Both deserve renewed attention in light of:

The SEC’s recent Solar Winds-Cybersecurity-related events, regarding disclosure of material weaknesses or material cyber security risks related to the Solar Winds compromise;
The re-opening of offices and recent announcements of certain businesses explaining employees should be back in the office or else.

We offer the following Independence Day Weekend themed film streaming recommendations that relate to each of the above and therefore count as background research.

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SEC Chairman, Gary Gensler, Seeks to “Freshen Up” Restrictions on Executive Stock Trading Plans under Rule 10b5-1

Upcoming Changes to Rule 10b5-1:

The SEC is seeking to propose four key changes to executive stock trading plans under Rule 10b5-1 in October. Its Chairman, Gary Gensler, reported that the SEC is considering “freshen[ing] up Rule 10b5-1 after twenty years” to address insider trading concerns on June 7, 2021. Gensler’s comments come after a year of heightened insider trading reporting and the release of new research conducted by Stanford University and the Wharton School of the University of Pennsylvania finding that 10b5-1 plans have been used by executives to engage in “opportunistic, large-scale” sales of company stock. Gensler remarked the current plans under Rule 10b5-1 have led to a “real crack in our insider trading regime,” which he seeks to address in the upcoming months.

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Chair Gensler Appoints NJ AG SEC Enforcement Director

On Tuesday, the U.S. Securities and Exchange Commission (“SEC”) announced that Gurbir Grewal will be the Director of the Division of Enforcement, effective July 26, 2021. Grewal has been the Attorney General of New Jersey since 2018.

Grewal’s appointment follows the previous appointment and abrupt resignation of Alex Oh for the same role. In contrast to Oh, Grewal has spent most of his career in government. Prior to his current role, Grewal was an Assistant United States Attorney in the Eastern District of New York and the District of New Jersey. From 2014 to 2016, Grewal led the Economic Crimes Unit for the District of New Jersey.

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SEC “Sweep” of Public Companies’ & Registrants’ Responses to the SolarWinds Cyberbreach

As publicly reported late last week, the Securities and Exchange Commission’s Division of Enforcement (SEC) sent voluntary requests for information to a range of public companies and investment firms seeking voluntary disclosure of information related to last year’s SolarWinds cyberattack. Specifically, the SEC is seeking information related to whether the companies and firms were exposed to the SolarWinds cyberattack and any remedial measures the companies and firms implemented in response.

SolarWinds, an IT, network, and systems software developer, disclosed in a filing with the SEC in December 2020 that a cyberattack had infiltrated its Orion monitoring product, which could allow the attacker to compromise the server on which the Orion product runs. SolarWinds disclosed that it believed that nearly 18,000 Orion customers downloaded the product containing the vulnerability and that it had notified all 33,000 users of the product that a cyberattack had taken place. The SolarWinds cyberattack was unprecedented in its scope and sophistication—including compromising nine U.S. federal agencies—leading the United States and other governments to blame the attack on an outside nation state actor.

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Chair Gensler Overhauls PCAOB

On Friday June 4, 2021, Securities and Exchange Commission Chair Gary Gensler removed the head of the Public Company Accounting Oversight Board (PCAOB), an independent agency created by the Sarbanes-Oxley Act of 2002 that is charged with setting standards and overseeing audits of public companies and broker-dealers. The move is part of a broader overhaul of the PCAOB announced by the SEC that includes soliciting nominations for all five of the PCAOB’s board positions, including board positions currently filled by members whose terms have not yet expired.

The removed chair of the PCAOB, William Duhnke III, was appointed by former President Trump and had held the position since January 2018. In 2020, President Trump called for the PCAOB to be folded into the SEC by 2022, losing its independent watchdog status. In a recent lawsuit filed against Duhnke, the PCAOB’s former chief risk officer alleged that Duhnke shared President Trump’s sentiment and called the PCAOB a “frivolous organization” that should be combined with the SEC.

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NYC Bar Association Proposes a CCO Enforcement Framework

Responding to a “concern” from Chief Compliance Officers (CCOs) to the purported increase in enforcement actions holding compliance personnel personally liable, the New York City Bar Association recently released a framework of nonbinding factors it believes the SEC should consider when making CCO charging decisions. The report, titled “Framework for Chief Compliance Officer Liability in the Financial Sector” (Framework), is available here. According to the Framework, it claims that the risk of facing a career-ending enforcement action has deterred qualified individuals from assuming or remaining in the all-important CCO role.

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Robinhood vs. Massachusetts’ Secretary of the Commonwealth: A Battle for the Ages over Massachusetts’ New Strict Fiduciary Duty Rule

Sandra D. Grannum, James G. Lundy and Heaven L. Chandler discuss Robinhood’s alleged violation of Massachusetts’ new fiduciary duty rule for broker-dealers on the Broker-Dealer Regulations and Insights blog. Massachusetts’ Secretary of Commonwealth, William Galvin, filed a regulatory complaint raising three different violations against Robinhood. The complaint attempts to ban the trading app for violating the State’s fiduciary duty rule which requires broker-dealers to act in the best interest of their clients. This new rule, passed in February 2020, was created in response to the Securities and Exchange Commission’s Regulation Best Interest (Reg BI). During this past year, due to COVID-19 and other meme-based investment activities on the application, Robinhood accumulated over 3 million new users in the first four months of 2020. Galvin’s concerns revolve around the 500,000 customers in Massachusetts, with accounts totaling over $1.6 billion. For more information, please read the post on the Broker-Dealer blog.

We previously posted another discussion on the New York best interest fiduciary rule for insurance that was recently struck down. This has now also been posted to the Broker-Deal Blog.

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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