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Government Investigations and White Collar Litigation Group
Compliance, Enforcement and Prosecution Policy and Trends, Financial Institution Regulation, Securities and Commodities

SEC Enforcement Co-Directors Issue Statement on Insider Trading

Under the leadership of U.S. Securities and Exchange Commission Chairman Jay Clayton, the SEC’s Division of Enforcement has made the protection of Main Street investors its overarching priority.  On March 23, 2020, Division of Enforcement Co-Directors Stephanie Avakian and Steven Peikin issued a statement to financial market participants re-emphasizing the SEC’s commitment to safeguard the integrity of the nation’s financial markets given the market disruption caused by the 2019 coronavirus disease (COVID-19).

In their Statement Regarding Market Integrity (found here: Statement Regarding Market Integrity) Co-Directors Avakian and Peikin reminded market participants – corporate issuers, broker-dealers, investment advisers, and other registrants – of the importance of controlling for the potential receipt and misuse of material nonpublic information (MNPI) in light of the unprecedented market and economic conditions caused by COVID-19.  They further cautioned that trading in a company’s securities on the basis of inside information (insider trading), or the improper dissemination of MNPI, may violate the antifraud provisions of the federal securities laws.

To start, the Co-Directors noted that in the current dynamic climate, corporate insiders are continually learning new MNPI that may be even more valuable than under normal circumstances particularly if a company’s earnings reports or required SEC disclosure filings are delayed due to COVID-19.  Given the unique circumstances, a greater number of persons may have access to MNPI, and companies would be wise to revisit corporate controls and remind those with access to keep this information confidential and comply with insider trading prohibitions.

Further, they urged companies to be mindful of, among other things, established disclosure controls and procedures, insider trading prohibitions, and codes of ethics, to ensure that companies are protecting against improper use and dissemination of MNPI.  Safeguarding confidential corporate information is particularly critical given the current work environment where many employees are forced to work remotely, corporate emergencies are hashed out from unsecure locations, and relaxed controls over confidential information could lead to its potential downstream misuse.

Finally, Co-Directors Avakian and Peikin reminded broker-dealers and investment advisers to adhere to policies and procedures designed to prevent the misuse of MNPI.  As the industry has seen in prior government enforcement investigations and actions involving market moving information related to congressional, legislative, and governmental agency actions, controlling the rapid flow of information concerning COVID-19 and its potential impact on market sectors and public issuers will be critical to financial services firms and other market participants using such information to inform investment decisions for themselves and investors.  Congressional, executive branch, and government agency information can be deemed confidential or MNPI, and financial firms and other market participants monitoring government information and actions need to be aware that each of the executive and legislative branches as well as government agencies have rules and guidance in place governing confidential and nonpublic information.  Now more than ever, market participants interacting with government employees should make clear that their firms and employees do not wish to receive confidential information or MNPI concerning congressional, legislative, and executive branch or other government agency actions, and firms would be well served to double down on policies designed to control for the possible receipt and misuse of confidential information or MNPI arising from those interactions.

In these challenging times, we recommend that market participants heed the Co-Directors’ reminder of the need to comply with the prohibitions on illegal securities trading.  Companies and financial institutions should take a fresh look at policies and procedures governing the potential receipt and misuse of confidential information or MNPI and remind/retrain their employees accordingly.  The SEC has made clear that it remains committed to maintaining the integrity of the financial markets and ensuring the protection of Main Street investors during these unprecedented times.

McGuireWoods Securities Enforcement and Litigation Team

The firm’s SEC and DOJ enforcement lawyers have extensive experience counseling clients on compliance with insider trading rules and regulations as well as defending government investigations and litigation involving allegations of insider trading. If you have any questions regarding these matters, please contact the authors of this alert. Additional information regarding McGuireWoods’ Securities Enforcement and Litigation Team is available here.

McGuireWoods Securities and Compliance Team

The firm’s securities compliance lawyers assist registrants with their reporting obligations under the Securities Exchange Act of 1934, including forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider trading policies, develop training programs, and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.

Energy Enforcement, Enforcement and Prosecution Policy and Trends

Cybersecurity and Infrastructure Security Agency Issues Initial Guidance on Essential Workers, Sectors

As many industries transition to alternate working arrangements in response to COVID-19, certain sectors and functions essential to the nation’s public health, safety and community well-being must continue to operate. The Cybersecurity and Infrastructure Security Agency (CISA) of the Department of Homeland Security recently released an initial list of “Essential Critical Infrastructure Workers” to help guide state/local officials and industry leaders on which sectors and functions should continue during the COVID-19 response. This memorandum was released after President Trump issued guidance that workers in critical infrastructure industry, as defined by DHS, “have a special responsibility” to maintain a normal work schedule.

The memo sets forth an initial, non-exhaustive list of essential workers that is intended to be advisory only. It is not intended to be a federal directive or standard. Government officials and industry leaders should “use their own judgment, informed by this list” to determine which services and functions are critical and must continue.

CISA is soliciting feedback on the list (in terms of the workers listed and the sectors included) and plans to update it in response. Feedback should be sent to CISA.CAT@CISA.DHS.GOV.

The preliminary list includes workers from the following sectors:

  • Healthcare/Public Health
  • Law Enforcement, Public Safety, First Responders
  • Food and Agriculture
  • Energy
  • Water and Wastewater
  • Transportation and Logistics
  • Public Works
  • Communications and Information Technology
  • Other Community-Based Government Operations and Essential Functions
  • Critical Manufacturing
  • Hazardous Materials
  • Financial Services
  • Chemical
  • Defense Industrial Base

CISA’s list was developed based on the following key principles:

  1. Response efforts to the COVID-19 pandemic are locally executed, state managed and federally supported.
  2. Everyone should follow guidance from the CDC, as well as state and local government officials, regarding strategies to limit disease spread.
  3. Workers should be encouraged to work remotely when possible and focus on core business activities. In-person, nonmandatory activities should be delayed until normal operations resume.
  4. When continuous remote work is not possible, businesses should enlist strategies to reduce the likelihood of spreading the disease. This includes, but is not limited to, separating staff by off-setting shift hours or days and/or social distancing. These steps can preserve the workforce and allow operations to continue.
  5. All organizations should implement their business continuity and pandemic plans, or put plans in place if they do not exist. Delaying implementation is not advised and puts at risk the viability of the business and the health and safety of employees.
  6. In the modern economy, reliance on technology and just-in-time supply chains means certain workers must be able to access certain sites, facilities and assets to ensure continuity of functions.
  7. Government employees, such as emergency managers, and the business community need to establish and maintain lines of communication.
  8. When government and businesses engage in discussions about critical infrastructure workers, they need to consider the implications of business operations beyond the jurisdiction where the asset or facility is located. Businesses can have sizeable economic and societal impacts as well as supply chain dependencies that are geographically distributed.
  9. Whenever possible, jurisdictions should align access and movement control policies related to critical infrastructure workers to lower the burden of workers crossing jurisdictional boundaries.

Companies already are working on identifying essential personnel and documenting the need for such personnel via company letters.

McGuireWoods can assist with business continuity planning and advise on documentation for essential personnel as needed.

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.

Anti-Money Laundering, Financial Institution Regulation, Fraud, Deception and False Claims

FinCEN Issues Statement to Financial Institutions on BSA/AML Compliance During COVID-19 Pandemic

The Financial Crimes Enforcement Network (FinCEN) released a statement to financial institutions on March 16, 2020, concerning the COVID-19 pandemic. The statement covered two main topics:

  1. Potential delays by financial institutions in filing required Bank Secrecy Act (BSA) reports
  2. Remaining alert to identify malicious or fraudulent transactions, which often arise during natural disasters

First, FinCEN addressed COVID-19-affected financial institutions that have concern over potential delays in their ability to file required BSA reports. It encourages these institutions to contact both FinCEN and their functional regulator “as soon as practicable” and keep them apprised as circumstances change. The statement directs financial institutions seeking to contact FinCEN to “call FinCEN’s Regulatory Support Section (RSS) at 1-800-949-2732 and select option 6 or e-mail at”

Second, FinCEN advised institutions to remain vigilant regarding potential financial fraud, which has arisen in the wake of past natural disasters. It specified the following emerging trends on this front:

  1. Imposter scams, where bad actors impersonate government agencies, international organizations or healthcare organizations to solicit donations, steal personal information and distribute malware.
  2. Investment scams, where opportunistic individuals or companies falsely claim that publicly traded companies’ products or services “can prevent, detect, or cure coronavirus.” See SEC Notice on COVID-19-related investment scams.
  3. Product scams, where companies sell purported health products that are unapproved or unbranded and make claims as to their effect on the coronavirus.
  4. Insider trading related to the COVID-19 pandemic.

FinCEN also directed financial institutions to its prior advisory regarding disaster-related fraud, which discusses other relevant fraud types, including benefits fraud, charities fraud and cyber-related fraud.

Where suspicious transactions involve COVID-19, FinCEN advised individuals preparing suspicious activity reports (SARs) not only to identify the appropriate suspicious activity typologies, but also to enter “COVID19” in Field 2 of the SAR template.

FinCEN did not commit to extending any reporting deadlines. As a result, financial institutions should remain vigilant during this challenging time and develop methods to continue investigating fraud and related alerts in accordance with regulations and company policy. And if any COVID-19-related delays arise, contact FinCEN and functional regulators as soon as possible. A simple call or email now may avoid MRAs, penalties and other regulatory pitfalls later.

For details, see the full text of FinCEN’s release, available online.

McGuireWoods has a COVID-19 response team in place to address client questions that may arise, and firm attorneys will continue to monitor updates and developments from FinCen.

Compliance, Securities and Commodities

COVID-19: Securities Regulators and Industry Associations Issue Coronavirus Guidance and Relief

Update: Our May 21, 2020, alert provides our most recent discussion of information and guidance issued by the SEC, FINRA, MSRB and SIFMA.

As the Coronavirus, or COVID-19, continues to spread, the widespread impact on the markets, trading, firm operations, compliance obligations – every facet of the market, firms, and individuals working in the industry and customers are affected. Securities regulators and industry associations are racing to issue guidance, relief, and information to assist the industry. This post addresses a number of the recent securities regulator announcements, and we will continue to send updates as regulator guidance and relief efforts continue.

Securities & Exchange Commission

The U.S. Securities and Exchange Commission (“SEC”) issued conditional relief in a number of areas affecting funds, advisers, and public companies with respect to meeting their regulatory obligations as they grapple with the impacts of coronavirus.

The SEC issued the relief via  companion Releases, one under the Investment Advisers Act of 1940, as amended, (the “IA Release”), and one under the Investment Company Act of 1940, as amended, (the “ICA Release”), as well as an Order addressing public company filings recognizing the disruption caused by COVID 19 and investor interest in timely corporate information.

Registered Investment Advisers

  • In the IA Release, the SEC provided relief from (1) Form ADV amendment and delivery requirements and (2) Form PF filing requirements until April 30, 2020 to advisers who are unable to meet a filing deadline/delivery requirement as a result of the impact of COVID-19.
  • An adviser relying on the relief must, among other things, provide notice to the Commission via email at and provide notice on the adviser’s public website as prescribed in the IA Release.


Registered Investment Companies and Business Development Companies

  • In the ICA Release, the SEC provided relief from:
    • Certain in-person board of director voting requirements (until June 15, 2020),
    • Certain Form N-CEN and Form N-PORT filing deadlines (until April 30, 2020),
    • Annual and semi-annual report transmittal deadlines (until April 30, 2020) and
    • Form N-23C-2 filing deadlines following the call or redemption of securities by closed-end funds and business development companies (until June 15, 2020).
  • In order to qualify for the relief, entities must satisfy certain conditions, including that they are unable to comply with the requirements due to the impact of COVID-19.
    • Other conditions include, but are not limited to, ratifying all non-in person votes taken in reliance on the relief at the next in-person meeting and, with respect to the filing relief, provide the specified notice to the Division of Investment Management of the SEC via email at

Public Companies

  • On March 4th, the SEC issued an Order granting an extension to public companies for filing certain reports with the SEC as long as certain conditions are met. See, SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19).; and Securities Exchange Act of 1934 Release No. 34-88318 (March 4, 2020). Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemption from Specified Provisions of the Exchange Act and Certain Rules Thereunder.
  • The SEC noted that “[t]he impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions.”
  • Relief: Subject to specified conditions, publicly traded companies have an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.
    • Among other conditions, companies must convey through an 8-K (current report) a summary of why the relief is needed in their particular circumstances.
  • The SEC also granted registrants relief from furnishing proxy statements, annual reports, and other soliciting materials, as applicable, to security holders in areas where, as a result of COVID-19, mail delivery has been suspended, provided, however, that the registrant has made a good faith effort to furnish such soliciting or information materials in accordance with the rules governing the furnishing of such materials.
  • With respect to the substance of the filings, Chairman Clayton provided the following guidance to Companies in the Release:
    • To the fullest extent possible, Companies should provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus so information on material events is disclosed.
    • Companies should work with audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.
    • Companies providing forward-looking information to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.
  • Additionally, on March 13th, the SEC Division of Corporation Finance issued guidance designed to assist companies in complying with the federal proxy rules and shareholder meeting requirements given the public health and safety concerns relating to COVID-19.
    • Among other things, this guidance:
      • Provides that issuers may hold virtual meetings to the extent permitted by applicable state law. The guidance noted that issuers that have not already filed their definitive proxy materials should include clear disclosure and directions regarding such virtual meetings in their proxy materials.
      • Provides that an issuer that has already mailed its definitive proxy materials may notify shareholders of changes in the date, time or location of annual meetings without mailing additional soliciting materials or amending proxy materials provided certain conditions are met, including issuing a press release and filing the announcement as definitive additional soliciting material on EDGAR.
      • Encourages issuers to permit proponents of shareholder proposals to present them through alternative means during the 2020 proxy season.

Financial Industry Regulatory Authority (“FINRA”)

FINRA has taken a number of steps to provide guidance and relief to the industry.

  • On March 9th, FINRA issued Regulatory Notice 20-08: Business Continuity Planning; Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief.
    • The Notice highlights firms’ Business Continuity Plan (“BCPs”) obligations and expectations around implementation in a pandemic situation. (FINRA also refers to Reg. Notice 09-59, which specifically addressed pandemic preparedness.)
    • Other areas addressed in the Notice specifically provide relief in connection with certain compliance obligations, including:
      • Remote Offices or Telework Arrangements
      • Cybersecurity
      • Form U4/Form BR
      • Emergency Office Relocations
      • Communicating with Customers
    • FINRA also highlighted the fact that pandemic emergencies at a firm may impact its ability to timely make regulatory filings (e.g., FOCUS filings, etc.) or timely respond to inquiries or investigations. FINRA noted that, if extra time is needed, firms should contact their Risk Monitoring Analyst or the relevant department seeking the information.
    • Military Personnel: FINRA also discussed the possibility that, in areas where declarations of emergency are declared, some personnel may volunteer or be called to active duty. If that is the case, Rule 1210 (registration) provides specific relief addressing licensing issues.
  • FINRA has created a COVID-19 Resource Site:, which consolidates the guidance that has been issued to date. As new information is issued by the regulator, this site will be updated. To date, areas covered include:
    • Impact on Membership Application Program
      • Pre-filing meetings and membership interviews for new and continuing membership applications will be conducted via video conference.
      • FINRA will grant a courtesy extension on new or continuing membership applications, if needed.
    • Postponement of In-Person Arbitration & Mediation Hearings
      • FINRA is postponing all in-person arbitration and mediation proceedings scheduled through May 1, 2020.
      • FINRA staff will be contacting the parties to reschedule or discuss remote scheduling options.
      • All other case deadlines continue to apply and must be timely met unless the parties jointly agree otherwise.
    • Extensions for Exam Candidates
      • FINRA will grant a courtesy cancellation of an upcoming exam appointment and/or extend the candidate’s existing enrollment period to take a FINRA exam.

Municipal Securities Rulemaking Board

On March 9th, the MSRB issued MSRB Notice 2020-07: MSRB Reminds Regulated Entities of Application of Supervisory Requirements in Light of Coronavirus to remind firms of their supervision obligations pursuant to MSRB Rules G-27 and G-44, even during the operational challenges and disruption created by the coronavirus.

  • With respect to each of G-27 and G-44, the MSRB noted that in light of the current challenges, supervision does not require in person supervision and that technology “plays a prominent role in how dealers conduct their supervisory reviews and a reasonably designed supervisory system could incorporate remote supervision.”


SIFMA has put together a robust site linking industry and regulatory guidance and announcement. BCP and COVID-19 Resources:

  • This site includes, among other things:
    • Cybersecurity and Infrastructure Security Agency (CISA)
    • DTCC: Industry Operations
    • Exchange & CCP Guidance (CBOE, CME Group, ICE/NYSE, Nasdaq, Options Clearing Corp.)
    • Regulator Updates (SEC/FINRA, CFTC/NFA, MSRB, FCA, FFIEC)

We expect regulators will continue to issue new guidance and additional relief. We also anticipate that deadlines in the current relief issued may need to be extended further. We are monitoring the developments and will provide updates to our clients as information becomes available.  Please let us know if you have any questions or if there is anything else we can do to support you during this challenging time.

McGuireWoods’ COVID-19 Response Team helps clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic. Lawyers in our 21 offices are ready to assist quickly on questions involving healthcare, labor and employment, education, real estate and more. For assistance, contact a team member listed or send an email to

Compliance, Energy Enforcement

FERC Directs NERC to Amend its Sanctions Guidelines by July 21, 2020

Entities registered with the North American Electric Reliability Corporation (NERC) to comply with mandatory electric reliability standards (Reliability Standards) or face civil penalties should take note of an order issued by the Federal Energy Regulatory Commission (FERC) on January 23, 2020 in Docket No. RR19-7-000 (January 23 Order).  In the January 23 Order, FERC, which oversees NERC in its role as the Electric Reliability Organization (ERO), ordered NERC to revise and refine its “NERC Sanctions Guidelines” that it uses to assess such penalties. NERC must submit a compliance filing no later than July 21, 2020, proposing amendments to its NERC Rules of Procedure to amend the Sanctions Guidelines consistent with FERC’s directives.

NERC and it Regional Entities have assessed hundreds of penalties every year since the late 2000s when NERC (subject to FERC review) gained enforcement authority over Reliability Standards violations. And, the stakes are potentially high with recent cases including several multi-million dollar fines. From a policy perspective, the importance of NERC penalties has grown with the recent focus of these regulators on cyber-security of the grid and as the NERC “Critical Infrastructure Protection” (CIP) program has matured greatly.  Preventing or mitigating the hacking of the grid is a major focus of both NERC and FERC.

In the July 23 Order, FERC accepted NERC’s “Five-Year Performance Assessment” and found that NERC continues to satisfy the statutory and regulatory requirements for certification as the ERO.  Yet, according to the January 23 Order, the NERC Sanction Guidelines (which are now 14 years old) may not have kept pace with the growth of the overall NERC program. FERC noted that, while it still agrees the guidelines are not to be used as a straightjacket to setting penalties, the thrust of the order is that NERC must add more specificity in how it gets from a fact pattern to a penalty number.  FERC directed NERC “to provide more transparency in th[e] guidelines as to how NERC and the Regional Entities apply the Base Penalty, Adjustment Factors and Non-Monetary Sanctions, and to submit for Commission review any ‘tools or formulae’ used to implement the Sanction Guidelines.” Specifically, NERC is directed to submit a compliance filing revising its Sanction Guidelines to explain how it addresses so-called “aggravating” factors such as:

  • Reliability risk
  • duration of violations
  • size of the entity
  • management involvement
  • repetitive violations
  • any other factors applied to increase a base penalty amount.

In its compliance filing, NERC also has to address how it applies factors that might reduce the penalty, such as:

  • settlement
  • self-reporting
  • admission of a violation
  • internal compliance programs
  • cooperation
  • any other credits used to decrease the base penalty amount.

Additionally, NERC must address whether and/or how non-monetary sanctions will be considered in reaching the final penalty amount; how to deal with multiple subsidiaries of a parent corporation that commit the same violations; how to calculate a single penalty for multiple violations by a single entity; and how NERC and the Regional Entities consider the violator’s financial ability to pay the penalty.

Although these sorts of factors have generally, and for years, been embraced by the existing Sanctions Guidelines, what has been missing up to now is any sort of explanation in NERC’s penalty cases as to how the various factors resulted in the actual penalty.  Moreover, NERC has never explained in general guidance, in any detailed way, how these factors weigh in the determinations.  This has left registered entities (and perhaps FERC itself – which must review and approve these penalties) somewhat mystified as to how various penalties in seemingly similar cases came out in seemingly different ways.  Notably, the factors outlined above bear a striking similarity to the factors outlined in FERC’s own Penalty Guidelines through which FERC assesses penalties in its own enforcement cases.  Indeed, this order may be the result of a judgment by FERC that NERC’s approach should more closely resemble the more formulaic approach used by FERC in assessing civil penalties.

As NERC proceeds with stakeholder processes to develop these new guidelines, registered entities should weigh in through their regular channels into NERC processes. And, when the process comes back to FERC for review in July of 2020, registered entities should monitor and consider participating in the docket and watch closely the developments thereafter. The outcome has the potential to affect NERC enforcement for years to come.

Other “areas for improvement” to be addressed in a separate compliance filing due no later than April 22, 2020 include:  1) information about whether and the extent to which NERC conducted audits of its Regional Entities during the five-year assessment period; 2) NERC’s process for developing and evaluating the success of guidance documents; 3) an explanation of NERC’s relationship with the Electric Information Sharing and Analysis Center (E-ISAC) and the use of E-ISAC metrics.

Compliance, Securities and Commodities

FINRA 2.0: FINRA Releases Its 2020 Risk Monitoring and Examination Priorities

FINRA’s examination program has undergone its most significant reorganization in decades. As stated in a press release, Oct. 1, 2018, FINRA’s goal for the reorganization was to “consolidate its Examination and Risk Monitoring Programs, integrating three separate programs into a single, unified program to drive more effective oversight and greater consistency, eliminate duplication and create a single point of accountability for the examination of firms.” The new look of the examination program was released, along with new management, on Dec. 12, 2019.

FINRA launches its revamped examination program with its release of its 2020 Risk Monitoring and Examination Priorities, issued on January 9th.

In 2020, FINRA is prioritizing risk monitoring, surveillance, and examination programs to further its mission of investor protection and market integrity.  The examination priorities are organized around four themes, which build on FINRA’s priorities from prior years:

  1. Sales practice and supervision;
  2. Market integrity;
  3. Financial management; and
  4. Firm operations.

One significant change in this year’s priorities letter is FINRA’s focus on providing guidance to firms – practical considerations and questions that firms should be focused on as they review their program for compliance with regulatory requirements. In the past, the letters have traditionally been a detailed description of issues and requirements. Providing practical guidance is far more valuable to firms and will aid their compliance efforts.

Sales Practice and Supervision

FINRA will continue to focus on areas it has discussed in previous annual priorities letters, including complex products, variable annuities, private placements, fixed income mark-up/mark-down disclosures, representatives acting in positions of trust or authority, and senior investors.  In addition to these areas, FINRA will evaluate firms’ compliance with obligations related to several new or emerging areas, discussed below.

Regulation Best Interest (Reg BI) and Form CRS

The SEC adopted Reg BI in June 2019, which establishes a “best interest” standard of conduct for broker-dealers.  The SEC also adopted a new form – Form CRS – which requires broker-dealers to provide a brief relationship summary to retail investors.  Firms must comply with Reg BI and Form CRS by June 30, 2020.

During the first half of 2020, FINRA plans to review firms’ preparedness for Reg BI.  After June 30, 2020, FINRA will focus on firms’ compliance with Reg BI, Form CRS, and related SEC guidance.  FINRA will work with the SEC to ensure consistency in evaluating broker-dealers and their associated persons for compliance with Reg BI and Form CRS.  FINRA’s 2020 Risk Monitoring and Examination Priorities Letter includes a list of factors FINRA may consider when reviewing firms for compliance with Reg BI.

Two of the questions posed by FINRA bear particular consideration: (1) Do your firm and your associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers? (2) Do your firm and your associated persons consider reasonably available alternatives to the recommendation?  Both FINRA and the SEC have been explicit in their guidance that the Best Interest standard does not always mean the cheapest option available. That said, cost is a factor and the specific question regarding whether “reasonably available alternatives” will be an important consideration for firms. The regulators will be looking at what alternatives were available to firms to offer their customers and, if a firm chooses not to make those available, it will be important to ensure that there their review, assessment, and determinations are fully documented.

Communications with the Public

FINRA will continue to focus on firms’ compliance with obligations relating to FINRA Rule 2210 (Communications with the Public), as well as related supervisory and recordkeeping requirements.  In 2020, FINRA will expand its focus to private placement retail communications, by reviewing how firms handle retail communications regarding private placement securities via online distribution platforms, as well as traditional channels. As the SEC looks to expand retail access to private placements, firms will need to be vigilant in the manner in which these products are offered to customers.

FINRA will  also continue to focus on the challenges that the increasingly broad array of digital communications (i.e., texting, messaging, social media, or collaboration applications) pose to firms’ ability to comply with obligations related to the review and retention of such communications.

Cash Management and Bank Sweep Programs

FINRA recognizes that as commission practices change, cash management services that sweep investor cash into firms’ affiliated or partner banks or money market funds have taken on a greater significance. Bank Sweep Programs are offering more services to retail investors (such as check-writing, debit cards, and ATM withdrawals.  These added features raise concerns about firms’ compliance with a range of FINRA and SEC rules.  FINRA will therefore focus on firms’ compliance with such rules in the context of Bank Sweep Programs. Further, to the extent that firms benefit from these programs and, with commissions dropping and or going away in some instances, regulatory review of fees involved in providing services will increase, reviewing such areas as conflicts, disclosure, fairness, etc.

Sales of Initial Public Offering (IPO) Shares

In light of the growth of the IPO market over the past year, FINRA will focus on firms’ obligations under FINRA Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions).

Trading Authorization

This year, FINRA will also focus on whether firms maintain reasonable supervisory systems relating to trading authorization, discretionary accounts, and key transaction descriptors.  It will review whether these supervisory systems are designed to detect and address registered representatives exercising discretion without written authorization from the client.

Market Integrity

FINRA will continue to review compliance with the ongoing obligations related to market manipulation, Trade Report and Compliance Engine (TRACE) reporting, short sales, and short tenders.  Certain firms will be required to begin reporting to the Consolidated Audit Trail (CAT) in April 2020, and that FINRA will work with those firms as they prepare for reporting.  The FINRA Letter reminds firms to continue devoting resources to ensure accuracy in their Order Audit Trail System (OATS) reporting, because OATS remains a critical part of the audit trail data that FINRA uses to meet its regulatory obligations.

In 2020, FINRA expects to focus on the following additional areas to promote market integrity:

  1. Direct market access controls;
  2. Best execution;
  3. Disclosure of order routing information; and
  4. Vendor display rule.

Financial Management

Firms can expect FINRA to continue its focus on compliance programs relating to Exchange Act Rule 15c3-3 (Customer Protection Rule) and Exchange Act Rule 15c3-1 (Net Capital Rule), as well as firms’ overall financial risk management programs.  FINRA has identified the following new areas of focus for 2020:

  1. Digital assets;
  2. Liquidity management;
  3. Contractual commitment arising from underwriting activities; and
  4. London Interbank Offered Rate (LIBOR) transition.

Firm Operations

As firms increasingly rely on technology for business systems and customer-facing activities, cybersecurity has become a large operational risk.  As such, FINRA will focus on cybersecurity and technology governance in 2020.  Specifically, firms should expect FINRA to assess whether their policies and procedures are designed to protect customer information and whether they are implementing controls appropriate to their business model and scale of operations.  FINRA will also ensure firms’ compliance with FINRA Rules 4370 (Business Continuity Plans and Emergency Contact Information), 3110 (Supervision), and 4511 (General Requirements), as well as Exchange Act Rules 17a-3 and 17a-4.

In terms of technology governance, it continues to be important for firms to ensure that all of the right stakeholders are at the table when new technology is being implemented or current technology modified. Often technological solutions are implemented to address an issue and there are unintended consequences creating regulatory gaps. Having compliance and risk at the table as these decisions are being made can often go a long way to mitigating that risk.


FINRA’s examination priorities for 2020 will largely follow prior focus areas, emphasizing firms’ compliance in important areas such as systems for supervision, sales practice risks, anti-money laundering and fraud, insider trading, and manipulation across markets and products.  New this year is an emphasis on Reg BI and Form CRS, as well as issues related to communications with the public, cash management and bank sweep programs, direct market access controls, best execution, disclosure of order routing information, and cybersecurity.

To support firms in their efforts to comply with federal securities laws and regulations, as well as FINRA rules, the 2020 Risk Monitoring and Examination Priorities Letter includes a list of practical considerations and questions for each topic, which may be helpful to firms in evaluating the state of their compliance, supervisory, and risk management programs.


Compliance, Securities and Commodities

SEC 2020 National Exam Program Examination Priorities

On January 7, 2020, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) released its 2020 examination priorities.  OCIE is prioritizing practices, products, and services that it believes present heightened risks to investors or market integrity.  The examination priorities are organized around seven themes, many of which build on OCIE’s priorities from prior years:

  1. Retail investor protection, including seniors and those saving for retirement;
  2. Market infrastructure;
  3. Information security;
  4. Focus areas relating to investment advisers, investment companies, broker-dealers, and municipal advisors;
  5. Anti-money laundering programs (AML);
  6. Financial technology (Fintech) and innovation, including digital assets and electronic investment advice; and
  7. Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB).

Retail Investor Protection, Including Seniors and Those Saving for Retirement

 Continuing with the trend in recent years, OCIE will focus on recommendations and advice given to retail investors, with a particular focus on seniors and those saving for retirement.  The examinations will focus on intermediaries that serve retail investors—namely, registered investment advisers (RIAs), broker-dealers, and dually-registered firms—and on investments marketed to, or designed for retail investors, such as mutual funds and exchange-traded funds (ETFs), municipal securities and other fixed income securities, and microcap securities.  OCIE will also focus on higher risk products, such as those that:

  • are complex or non-transparent;
  • have high fees and expenses; or
  • where an issuer is affiliated with or related to the registered firm making the recommendation.

OCIE acknowledged the impact that Regulation Best Interest and Form CRS will have on retail investors.  In order to help broker-dealers with the June 30, 2020 compliance date for Regulation Best Interest and Form CRS, OCIE will engage with broker-dealers during the exam process to answer questions they may have concerning implementation of the new rules.

With regard to RIAs as fiduciaries, OCIE will focus on whether they have fulfilled their duties of care and loyalty by providing advice in the best interests of their clients and eliminating—or at least exposing—conflicts of interest.  Fees and expenses, as well as undisclosed—or inadequately disclosed—compensation arrangements, will likely continue as focus areas.

Information Security

In 2020, OCIE examiners will focus on:

  • Governance and risk management;
  • Access controls;
  • Data loss prevention;
  • Vendor management;
  • Training; and
  • Incident response and resiliency.

As in past years, these focus areas will allow OCIE to prioritize cyber and other information securities risks in each of its five examination programs.  Examinations will focus on proper configuration of network storage devices, information security governance generally, retail trading information security, and RIAs’ protection of clients’ personal financial information.  With respect to third-party and vendor risk management, OCIE will focus on oversight related to certain service providers.

Fintech and Innovation, Including Digital Assets and Electronic Investment Advice

Recognizing that advancements in financial technologies, methods of capital formation and market structures, and registered firms’ use of new sources of data warrant ongoing attention and review, OCIE has placed particular emphasis on Fintech and Innovation in 2020.

In the digital asset space, OCIE will continue to assess: (1) suitability; (2) portfolio management and trading practices; (3) safety of client funds and assets; (4) pricing and valuation; (5) effectiveness of compliance programs and controls; and (6) supervision of employee outside business activities.

With regard to “robo-advisers” or automated investment tools and platforms, OCIE will continue its focus on:

  • Registration;
  • Cybersecurity policies and procedures;
  • Marketing;
  • Fiduciary duty, including adequacy of disclosures; and
  • Effectiveness of compliance programs.

Additional Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors

These registrants can expect OCIE to continue its risk-based examinations in 2020.

  • New RIAs and RIAs registered for several years that have yet to be examined should expect to become areas of focus for OCIE in 2020.
  • Investment companies can expect examinations focusing on mutual funds and ETFs, RIA activity, and oversight practices.
  • Broker-dealer examinations will focus on recent rulemaking and trading practices, and
  • Municipal advisor examinations will include registration and continuing education requirements, as well as fiduciary duty obligations.

Anti-Money Laundering

AML is a repeat priority for OCIE as it is for all regulators in the financial industry regulatory space.  In 2020, OCIE will examine whether broker-dealer and investment companies are complying with their AML obligations.  OCIE notes four areas of review:

  • customer identification programs and SAR filing obligations;
  • customer due diligence;
  • compliance with beneficial ownership requirements; and
  • timely and robust independent testing of AML programs.

Market Infrastructure

With respect to market infrastructure, OCIE will continue examinations of entities providing services critical to market infrastructure, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents.  Particular attention will be given to the security and resiliency of entities’ systems.


OCIE’s examination priorities for 2020 will largely follow prior focus areas, emphasizing the protection of retail investors with particular focus on fee disclosures, senior investors, and retirement accounts.  OCIE will also continue to examine firms’ abilities to manage risk associated with cybersecurity breaches, money laundering, and digital assets and electronic investment advice.  Finally, regulated firms are reminded that the examination priorities identified are not exhaustive and that OCIE will continue to conduct examinations determined through a risk-based approach that includes analysis of an entity’s history, operations, services, products offered, and other factors.

Enforcement and Prosecution Policy and Trends, Financial Institution Regulation, Securities and Commodities

SEC Continues Compensation Disclosure Focus With FAQs and Enforcement

On Oct. 18, 2019, the Securities and Exchange Commission (SEC) Division of Investment Management staff published Frequently Asked Questions Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation (FAQs). Many in the industry view the FAQs as overdue SEC guidance in an area that has been a focus of the SEC Division of Enforcement. Registered investment advisers (RIAs) should review the FAQs in light of continuing enforcement actions in this area, including the recent action announced against Bolton Securities Corporation d/b/a Bolton Global Asset Management.

Highlights of the FAQs

  • Sources of disclosure obligations. The Division of Investment Management staff emphasized an RIA’s duty to disclose conflicts of interest relating to its compensation from both its general fiduciary duty to make full and fair disclosure and the specific disclosure obligations imposed by Form ADV. The FAQs detailed the various sections of Form ADV that require disclosure of conflicts of interest relating to an RIA’s compensation, including incentives relating to compensation that could influence the RIA’s advice.
  • Mutual fund share class disclosure. The SEC has particularly focused on disclosure surrounding selection by RIAs of one share class of a mutual fund when a lower-cost share class is available. The Division of Investment Management staff continued this focus in the FAQs, providing examples of material facts related to share class conflicts that RIAs should disclose.
  • Incentives. The Division of Investment Management staff provided a few examples of material facts an RIA should disclose about its practices related to revenue-sharing arrangements, emphasizing that the list was not comprehensive. These examples included the existence of any incentives provided to the adviser or shared between the adviser and others (for example, an affiliate of the adviser).
  • Continued dislike of “may.” The Division of Investment Management reiterated its position that a disclosure that an RIA “may” have a conflict is insufficient disclosure when a conflict actually exists. See, e.g., Robare Group, LTD. v. SEC, No. 16-1453 (D.C. Cir., Apr. 30, 2019) and SEC Share Class Selection Disclosure Initiative.
  • Share class disclosure is material for Form ADV Update. The Division of Investment Management staff stated that an adviser must identify changes in disclosure concerning share class recommendations or revenue sharing arrangements as material changes for purposes of Item 2 of Form ADV Part 2A.

Bolton Allegations

In its Litigation Release issued Nov. 6, 2019, the SEC alleged violations of Sections 206(2), 206(3) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder in connection with, among other things, Bolton’s alleged failure to disclose to clients that it purchased or held share classes for its clients that generated Rule 12b-1 fees for an affiliate of Bolton when different share classes of the same mutual fund were available that did not include Rule 12b-1 fees.

Expect SEC and other regulatory scrutiny in this area to continue. RIAs should re-examine disclosure practices regarding all types of conflicts of interest, including receipt of compensation from various sources.


Financial Institution Regulation

Federal Court Clarifies Prejudgment Interest Rate Applicable to Texas Securities Act Claims

The U.S. District Court for the Western District of Texas recently clarified the applicable rate for the calculation of prejudgment interest under the Texas Securities Act (TSA). In FDIC v. Deutsche Bank Securities Inc., the FDIC, acting as receiver for Guaranty Bank, brought claims against the defendant bank under the TSA stemming from the sale of residential mortgage-backed securities prior to the financial crisis. While discovery was ongoing, the defendant moved for partial summary judgment seeking a determination regarding the calculation of potential damages, including prejudgment interest.

In ruling on the summary judgment motion, the court noted that while the TSA states that a buyer can recover “consideration paid for the security plus interest thereon at the legal rate,” the term “legal rate” is not defined in the TSA. Relying on other sources, including the Texas Constitution and Section 302.002 of the Texas Finance Code, the court held that the applicable legal rate of prejudgment interest was 6%. In advance of trial, and after the case was reassigned to a different district judge, the defendant moved for reconsideration of the court’s opinion regarding the applicable prejudgment interest rate, arguing that the applicable rate was the coupon rate specified in the securities’ certificates. The FDIC opposed, arguing that Section 302.002 of the Texas Finance Code sets the rate at 6% per year, as was initially determined by the court.

In an amended order granting the motion for reconsideration, the court held first that the coupon rate did not apply because the certificates at issue were not contracts that obligated the defendant to pay a set interest rate. The court then rejected the FDIC’s assertion that Section 302.002 of the Texas Finance Code governed, because that Section of the Finance Code only applies to contracts that establish a debtor-creditor relationship. Instead, the court held that where there is no relevant contract specifying an interest rate, Section 304.003 of the Texas Finance Code (which also applies to breach of contract claims where no rate is specified in the contract) supplies the proper prejudgment interest rate under the TSA. Section 304.003 states that such interest rate is the prime rate published by the Federal Reserve on the date of computation, with a floor of 5% and a cap of 15%.

If widely adopted, and given the substantial impact that prejudgment interest can have on a final damages award, defendants facing claims under the TSA should heed trends in the Federal Reserve prime rate when analyzing their potential exposure.


Financial Institution Regulation

Ready or Not, Prepare to Start Answering Questions About Reg BI Compliance

On June 5, 2019, the SEC adopted Regulation Best Interest (“Reg BI”), which requires broker-dealers and associated persons to make recommendations regarding securities transactions (or investments involving securities) that are in the “best interest” of their retail clients. The SEC also adopted Form CRS, requiring broker-dealers and investment advisers to provide a brief relationship summary to retail investors, and issued two pieces of guidance regarding investment advisory activities. This Alert focuses largely on Reg BI. While the compliance deadline for Reg BI and Form CRS is not until June 30, 2020, firms should be prepared to shortly begin answering questions from regulators regarding their Reg BI implementation efforts.

Reg BI


Reg BI has four broad requirements or “Obligations:” (a) a Disclosure Obligation, which generally requires disclosure of relevant facts, (b) a Care Obligation, which generally requires the exercise of reasonable diligence and care, (c) a Conflict of Interest Obligation, which generally requires the implementation of policies and procedures to disclose and/or eliminate conflicts of interest and (d) a Compliance Obligation, which generally requires the implementation of Reg BI policies and procedures.

In order to comply with Reg BI, firms should review and update their procedures, update account information where necessary, evaluate current conflicts of interest, and train registered representatives, supervisors, and compliance personnel on the SEC’s new standard.

Potential Pitfalls – Watch Out

While we will not attempt here to capture all of the issues that firms must address in implementing Reg BI and Form CRS, we identify below certain potential pitfalls in Reg BI compliance. In particular, there are areas in Reg BI that may look very familiar to concepts with which firms are already familiar. Do not be fooled. There are critical differences.

  1. Recommendations: “Strategies,” “hold recommendations,” and “account recommendations” are all concepts that have existed, at a minimum, since FINRA Rule 2111 and the ensuing guidance was issued. Note, however, that in the Reg BI context, there can be an “implicit hold” recommendation when, for instance, the firm or associated person agrees to perform account monitoring services (i.e., silence can be a recommendation). Furthermore, if there is no agreement to perform account monitoring, but the associated person voluntarily undertakes such a review, that is not considered account monitoring but any recommendation arising from that review will be subject to the best interest standard.
  2. Dual Registrants: There are a number of nuances to consider when appropriately implementing Reg BI when the firm and/or the associated person is a dual investment adviser/broker-dealer registrant. Because Reg BI will only apply to the broker-dealer activities of a dual registrant firm, it will be important and potentially challenging for firms to clearly identify the activities that are subject to Reg BI.
  3. Disclosure: There are several questions that a firm/individual must consider when approaching the Reg BI disclosure obligations. For example, (a) how is the disclosure accomplished and when (i.e., at or before the recommendation)?, (b) to what extent will Form CRS disclosures satisfy the disclosure obligations?, (c) what is a material conflict of interest?, (d) are oral disclosures ever okay and if so, what are the requirements?, and (e) can the firm or individual refer to myself as an “advisor” or “adviser?”.
  4. Care Obligation: At first glance, the components of the Care Obligation look a lot like the three components of the Suitability Obligation in FINRA Rule 2111. However, while, like FINRA Rule 2111, there is a reasonable basis requirement, a customer specific requirement, and a quantitative (number of transactions) requirement, Reg BI requires much more than FINRA Rule 2111. In particular: (a) Firm must exercise reasonable diligence and skill to understand the potential risks, rewards, and costs (this includes assessing incentives, expected returns, and other factors), (b) With regard to the specific retail customer for whom the recommendation is made, the firm and associated person must have a reasonable basis to believe that the recommendation is in the customer’s best interest AND that it does not place the firm’s interest ahead of the customer, and (c) If a series of transactions is recommended, that strategy must be in the best interest of the customer and, with regard to this obligation, the biggest difference is that the series of transactions is evaluated without regard to whether the associated person exercises actual or de factor control over the account.
  5. Conflict of Interest Obligation: Under Reg BI, firms are required to have written policies and procedures that not only ensure disclosure conflicts of interest but that (a) Identify and disclose or eliminate conflicts, (b) Identify and mitigate conflicts creating an incentive to place interests ahead of the customer, (c) Identify and disclose if there is a limited product menu, and (d) Identify and eliminate certain sales contests, quotas, bonuses and non-cash compensation that are based on specific products or types to be sold within a specific time period.
  6. Compliance Obligation: This Obligation mandates that firms establish, maintain, and enforce written policies and procedures designed to achieve compliance with Reg BI. Because firms are very familiar with requirements to adopt compliance policies and procedures, particularly broker-dealer firms complying with FINRA Rule 3110, they may be inclined to not take this obligation as seriously as some of the others. However, the Compliance Obligation is a reminder that: (a) It is critical that this compliance program be reviewed periodically to assess whether changes are needed and (b) The SEC takes its policy and procedure requirements very seriously. In the past, in the broker-dealer context, FINRA has handled enforcement of policy and procedure deficiencies, because the SEC’s supervision cases were based on actual failures to supervise as opposed to procedural deficiencies. This Obligation provides a clear avenue for the examination and enforcement staff to take action if there a compliance program and procedural failures. Firms can expect that the SEC Staff will not be silent where compliance programs do not adequately address Reg BI.
  7. Firm Obligations vs. Individual Obligations: In the release adopting Reg BI, the SEC Staff emphasizes that the Conflict of Interest and Compliance Obligations apply only to firms, while the Care and the Disclosure Obligations apply to both the firms and the associated persons. With respect to the Conflict and Disclosure Obligations, a firm has responsibility for developing, maintain, and enforcement written policies and procedures, the firm must be vigilant in reasonably exercising those responsibilities. We have seen many cases in recent years where the regulators have brought enforcement actions against those with the same responsibilities when the program had material failures or gaps.                 

Early Examination Inquiry and Potential Enforcement Implications

As the primary regulator of broker-dealers, FINRA will be tasked with the leg work of Reg BI enforcement. FINRA will likely not wait until the effective date of Reg BI these requirements to begin asking firms about their Reg BI compliance efforts. Rather, FINRA will want to ensure that its member firms are prepared for this sea change in regulatory compliance obligations and requirements.

At a recent industry conference, senior FINRA officials indicated that FINRA will begin asking member firms about their Reg BI preparation efforts as part of its examination program as soon as early next year. While officials framed these examination inquiries as designed in part to identify areas where industry participants may need additional guidance, firms must nevertheless prepare for imminent questions regarding their Reg BI implementation efforts.

Many expect that it is unlikely that FINRA and the SEC will bring formal enforcement cases against firms and individuals in the first year or so following the compliance deadline. However, if firms fail to make an effort to comply with Reg BI or disregard issues a regulator identifies in a firm during an examination or otherwise, we would expect the SEC and FINRA will not hesitate to bring enforcement actions.

Firms will not only face scrutiny from the SEC and FINRA in connection with the subject matter of Reg BI. It is expected that the states, many of which have already passed, or are in the process of passing, their own more stringent fiduciary statutes and regulations, will be more proactive on the enforcement front in this space. Regardless of where a state may be with their own legislative action in this space, they could pursue actions when firms or individual registered representatives are not complying with Reg BI obligations. Furthermore, while the Department of Labor’s Fiduciary Rule, which sought to impose a fiduciary standard of conduct for registered representatives working with retirement accounts, was vacated by the U.S. Court of Appeals for the Fifth Circuit, the DOL has indicated that they expect to issue a revised rule later this year, with changes reflecting a similar approach to Reg BI.

Legal Challenge to Reg BI

On September 9, 2019, seven states and the District of Columbia filed suit against the SEC in the U.S. District Court for the Southern District of New York. The plaintiffs essentially claim that Reg BI is too weak, alleging that it undermines what they deem to be “critical consumer protections for retail investors” and allows registered representatives to continue to give conflicted advice. The plaintiffs seek to invalidate the SEC’s rule, alleging that the SEC exceeded its authority and that Reg BI is arbitrary and capricious under the Administrative Procedures Act.

Investment Adviser Guidance

Simultaneous with its adoption of Reg BI, the SEC approved two pieces of guidance in the investment advisory regulatory sphere.

First, the SEC issued guidance to clarify when a broker-dealer’s activities may qualify under the broker-dealer exclusion from investment adviser registration, which generally exempts a firm from investment adviser registration when such broker-dealer’s activities are “solely incidental” to its broker-dealer activities. In this guidance, the SEC Staff indicates that broker-dealers who have long-term investment discretion will unlikely be able to rely on the broker-dealer exclusion.

Second, the SEC issued guidance that generally expands upon prior SEC Staff guidance regarding an investment adviser’s fiduciary duty. In particular, this guidance provides more detail regarding an investment adviser’s duties of care and loyalty.

Form CRS

Form CRS and its related rules require SEC-registered investment advisers and broker-dealers to both file with the SEC and deliver to retail investors a customer or client relationship summary that meets certain requirements, which summary is intended to assist the customer or client in making decisions regarding its relationship with the adviser or broker-dealer.

If you have not started your Reg BI compliance preparation, Start Now.


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