SEC Guidance

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On April 16, 2019, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert addressing all registered broker-dealers and investment advisers’ (together, “Firms”)[1] privacy-related obligations under Regulation S-P (“Reg S-P”).  The Risk Alert set out the most frequent Reg S-P deficiencies OCIE identified during examinations over the past two years, and encouraged registrants to review their written privacy policies and procedures as well as the consistency with which these policies and procedures have been implemented.  The Alert is the latest in a series of recent privacy and cybersecurity guidance documents issued by the SEC, including the February 2018 Commission Statement and Guidance on Public Company Cybersecurity Disclosures and October 2018 Report of Investigation on cyber-related frauds and public company accounting controls.

This Risk Alert is consistent with the SEC’s approach of seeking to influence the conduct of registrants by providing guidance on specific compliance issues, followed by Risk Alerts noting common exam deficiencies, prior to pursuing enforcement actions.  Investment advisers and broker-dealers should  take this as a prompt to review their relevant policies and procedures to ensure they are appropriate and being followed in practice.
Continue Reading SEC Privacy Risk Alert may Foreshadow Upcoming Reg S-P Enforcement Against Broker-Dealers, Investment Advisers

On April 3, 2019, staff of the Securities and Exchange Commission released (1) a framework providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security, as defined in SEC v. W.J. Howey Co. and (2) a no-action letter permitting TurnKey Jet, Inc., without satisfying registration requirements under the Securities…

On February 20, the Securities and Exchange Commission (the “SEC” or “Commission”) issued a cease-and-desist order against Gladius Network LLC (“Gladius”) concerning its 2017 initial coin offering (“ICO”).  The SEC found that the Gladius ICO violated the Securities Act of 1933’s (“Securities Act”) prohibition against the public offer or sale of any securities not made pursuant to either an effective registration statement on file with the SEC or under an exemption from registration.[1]  While this is far from the first time that the SEC has found that a particular ICO token meets the definition of a “security” under the Securities Act,[2] this is notably the first action involving an ICO token issuer that self-reported its potential violation.  Due to this, and Gladius’s cooperation throughout the investigation, the SEC stopped short of imposing any civil monetary penalties among its ordered remedial measures.
Continue Reading SEC Issues First ICO Enforcement Action Against a Self-Reporting Token Issuer

On December 20, 2018, the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities.  The six themes for this year’s priorities are:  retail investors (including seniors and those saving for retirement), compliance and risk in registrants responsible for critical market infrastructure (clearing agencies, transfer agents, national securities exchanges and Regulation SCI entities), oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board, digital assets, cybersecurity and anti-money laundering.  The only new theme for 2019 compared to 2018 is digital assets, which we take to imply a plan to more closely—and substantively—regulate investment advisers and broker-dealers involved with this asset class.  The 2019 priorities also more explicitly than the 2018 priorities describe specific practices that OCIE found concerning in examinations of those entities, many of which involved failure to adequately safeguard client assets and the adequacy of disclosures of conflicts of interest.  We expect to see a corresponding focus in Enforcement Division investigations and cases on these issues as a result.
Continue Reading Lessons from the SEC Office of Compliance Inspections and Examinations’ 2019 Priorities

On November 28, 2018, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California denied the U.S. Securities and Exchange Commission’s motion for a preliminary injunction against Blockvest, LLC and Reginald Ringgold in connection with Defendants’ initial coin offering (“ICO”).  In doing so, the court found disputed issues of fact existed regarding whether the so-called “BLV” tokens constituted “securities” under the test set out in SEC v. W.J. Howey Co.[1]  This is not the first time a court has characterized the question of whether an ICO token satisfies Howey’s requirements as a factual one.[2]  But, the decision is notable for being the first instance of a court ruling against the SEC in an ICO and because it focused its inquiry under Howey on the subjective understanding of particular investors rather than the objective characteristics of the tokens themselves.
Continue Reading California District Court Denies SEC Preliminary Injunction in ICO Case, Says Tokens’ Status As Securities Is Question of Fact

On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.”  The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens.  These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018.
Continue Reading SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions

On November 8, the Securities and Exchange Commission (“SEC”) imposed a cease-and-desist order against Zachary Coburn for causing his former company, EtherDelta, to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (“Exchange Act”).  Notably, EtherDelta, a trading platform specializing in digital assets known as Ether and ERC20 tokens,[1] was not operated like a traditional exchange with centralized operations, as there was no ongoing, active management of the platform’s order taking and execution functions. Instead, EtherDelta was “decentralized,” in that it connected buyers and sellers through a pre-established smart contract protocol upon which all operational decisions were carried out.

In the SEC’s view, EtherDelta met Exchange Act Rule 3b-16(a)’s definition of an exchange notwithstanding the lack of ongoing centralized management of order taking and execution.  Robert Cohen, the Chief of the SEC’s Cyber Unit within the Division of Enforcement stated after the order’s release, “The focus is not on the label you put on something . . . The focus is on the function . . . whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” This functional approach echoes prior SEC guidance and enforcement actions in the digital asset securities markets in emphasizing that the Commission will look to the substance and not the form of a market participants’ operations in evaluating their effective compliance with U.S. securities laws.
Continue Reading SEC Brings First Enforcement Action Against a Digital Assets Trading Platform for Failure to Register as a Securities Exchange

On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018.  At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017.  This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.

But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division.  These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze.  We address here the most notable of these subtle but important changes. 
Continue Reading Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report

On October 16, 2018, the Securities and Exchange Commission released a Report of Investigation that cautioned public companies to consider cyber threats when designing and implementing internal accounting controls.  The report was based on an investigation of nine victims of email cyber-fraud schemes for potentially failing to have adequate internal accounting controls, in violation of the Securities Exchange Act of 1934.  The report highlights the need for companies to reassess their controls in light of the current cybersecurity risk environment.  By describing the remedial steps taken by the investigated companies, it further provides guidance about the key areas that companies should consider when assessing their own policies and procedures.
Continue Reading SEC Investigative Report Urges Public Companies to Guard Against Cyber Threats When Implementing Internal Accounting Controls

On September 26, 2018, the attorney generals of all 50 states and the District of Columbia (“State AGs”) announced a record-breaking $148 million settlement with Uber Technologies Inc. (“Uber”) over Uber’s alleged failure to disclose a massive data breach in 2016.[1] The settlement holds significant implications for U.S. companies concerned about their cybersecurity measures in the face of increasing incidents of data breaches, as well as intensifying scrutiny by authorities.
Continue Reading State AGs Announce Settlement With Uber Over Data Breach