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The weekly news source for investment management legal and compliance professionals

The SEC Strikes Back: EDGAR Hacking Suspects Found and Charged

Nine suspects – hackers, traders and other entities from multiple countries – were charged by the SEC January 15 in federal court with perpetrating the 2016 hack of the agency’s online Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, including some of its personally identifiable information.
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Cato Institute Challenges SEC’s Use of Settlement Gag Orders

The Cato Institute, the well-known libertarian think tank, took aim at the SEC this month. It filed a complaint against the Commission in federal court, challenging the SEC’s use of the gag order that prevents settlement respondents from denying the allegations in their settlements or telling their side of the story.
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GIPS: Adviser Association Urges Changes in Draft 2020 Standards

The Investment Adviser Association is concerned that the scope and breadth of the proposed 2020 Global Investment Performance Standards (GIPS) may make compliance with GIPS more difficult. It urged the CFA Institute in a recent comment letter to address this and other issues, including that the proposed standards take into account local regulation and the voluntary nature of GIPS.
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Recent Stories

Government Shutdown Leaves Advisers, Funds Hanging

The partial government shutdown – which includes the SEC – is now approximately three weeks old, and the effect on advisers, funds and others regulated by the agency is only likely to grow the longer it stays in effect. Most aspects of SEC regulation – examinations, answers to questions or requests, enforcement and more – have slowed considerably, if not stopped, leaving advisory firms and investment companies that are dependent on the SEC without a clear path forward.
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‘Comprehensive Overhaul’ of Custody Rule Urged by IAA

The Investment Adviser Association wants the SEC to consider a “comprehensive overhaul” of Advisers Act Rule 206(4)-2, the Custody Rule, which would, among other things, limit the Rule to risks presented by “actual physical custody.” Other proposed changes included considering circumstances when surprise examinations might not be required, and excepting certain clients or services from the Rule’s requirements.
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SEC Share Class Crackdown Continues and Shows No Sign of Abating

The SEC in late December settled charges against three advisory firms involving their alleged placement of clients in mutual fund share classes that assessed certain fees when less expensive share classes of the same funds were available. These settlements, as well as the inclusion of this practice in the agency’s 2019 examination priorities list, make clear that advisers, mutual funds and their legal representatives should not expect any let-up in these enforcement actions in the near future.
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SEC Takes First Robo-Adviser Enforcement Actions

It was only a matter of time until it happened. With the SEC focusing its enforcement guns on cryptocurrencies and cybersecurity, advisory firms’ use of robo-advisers couldn’t have been far behind. The agency primed the pump with guidance on the subject in early 2017, but really showed that it meant business late last month, when it brought its first two enforcement actions against advisory firms involving the use of robo-advisers.
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Clayton Addresses Past and Future in Senate Testimony

SEC Chairman Jay Clayton, in testimony before a Senate committee, spoke of the agency’s achievements during 2018, as well as what it hoped to do in the coming year. Throughout the hearing, he stressed his ongoing themes, among them looking out for retail investors and staying on top of technological changes, including digital currencies and cybersecurity.
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SEC Issues 2019 Examination Priorities

The SEC had a holiday present for advisers this year. It released its 2019 examination priorities on December 20 rather than in January or February of the new year, as it has done in the past. The priorities listed are not that much different from the 2018 priorities, although digital assets is given more prominent play.
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2018 in Review: Standards of Care, Cryptocurrencies, SEC Changes and More

With the past year almost over and a new one about to begin, it’s time to take a look back and take stock of what was accomplished in 2018 and what issues remain. The past 12 months found major developments involving standards of care for advisers and broker-dealers, the emergence of an SEC strategy regarding cryptocurrencies, a full year in office for a new SEC team and philosophy, the rising challenges of cybersecurity, and more.
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Electronic Messaging: OCIE Wants Advisers to Adopt Better Controls

Use of social media, texts and other types of electronic messaging, as well as employment of mobile and personal devices, count as business communications as much as email or paper documents. Advisers must establish proper policies and procedures, train employees, provide supervisory review and establish control over such communications and the devices used.
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IAA Urges Senate Committee to Focus on Proxies, Not Proxy Advisory Firms

Stay away from proxy advisory firms and focus instead on repairing proxy infrastructure. That was the message the Investment Adviser Association sent in a letter this month to the Senate Banking Committee, which on the same day held a hearing on issues related to a bill that, if passed, would require proxy advisory firms to register with the SEC as investment advisers, meaning they would be subject to agency regulation.
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Watchdog’s Six-Month Report Card Provides Updates on Investigations of SEC

A potential leak of nonpublic information, securities fraud and obstruction of an SEC proceeding, threats against an administrative law judge, an SEC official operating a hedge fund, and improper influence. These are just some of the allegations against the agency that its Office of the Inspector General has investigated over the past six months, and on which the OIG reports in its latest Semiannual Report to Congress.
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Advisers Must Follow Through on Promised Advisory Fee Discounts

It may sound like an obvious point to make: If an advisory firm promises clients that they will receive fee discounts at certain “breakpoints” based on the amount of assets they turn over to the adviser for management, it must follow through and provide those discounts. However, if an advisory firm fails to implement procedures to make good on these promises, it may find itself both shortchanging clients and facing SEC sanctions.
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Adviser Association Finds Recent Testing of Proposed Form CRS ‘Flawed’

The Investment Adviser Association is not happy with the recent testing of the SEC’s proposed Form CRS. In a December 6 statement, the IAA said that the testing of the relationship summary form, conducted by the Rand Corporation at the agency’s behest, “is substantially flawed and does not provide a reasonable basis for adopting Form CRS as proposed.”
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Ruling Against SEC in ICO Case May Upset Agency’s Cryptocurrency Strategy

The question of whether a digital token constitutes a security may have been put into play by a federal judge’s ruling in an ongoing case involving the SEC and a company engaged in a digital coin offering (ICO). The judge turned down the agency’s request for a preliminary injunction against the company, saying that the SEC had not sufficiently proved that the digital tokens involved met the definition of a security.
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Holiday Compliance: It’s Not Just Gifts, It’s Client and Vendor Parties

Every year at this time, advisory firms and their employees take a fresh look at their gift and entertainment policies to ensure that there are no compliance problems and that everyone knows what is expected. While many employees are aware of their firms’ dollar limits for receiving or giving gifts, there is another issue that draws less attention: employee attendance at holiday parties thrown by clients, prospective clients, vendors or other third parties.
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