Posted on Thursday, February 8 2018 at 9:42 am by

SEC Chairman Clayton’s Remarks on Remaining Dodd-Frank Mandates

By Paul Foley, John I. Sanders, and Lauren Henderson

On January 22, 2018, SEC Chairman Jay Clayton gave the opening remarks at the Securities Regulation Institute.[1] As part of his remarks, Chairman Clayton discussed the SEC’s approach to the remaining Dodd-Frank rulemaking mandates. The SEC’s approach places the remaining rulemaking into three categories.[2]

In the first category are rules to complete the security-based swap regime.[3] Chairman Clayton seeks to harmonize SEC and CFTC rules governing security based swaps. The SEC and CFTC rules generally vary because of differences in the products and markets of each agency and statutory differences. By harmonizing the SEC’s and CFTC’s rules governing security-based swaps, the SEC hopes to increase effectiveness and reduce costs.[4]

In the second category are rules related to executive compensation for public and SEC-regulated companies.[5] Under recently finalized rules, registrants must provide pay ratio disclosures for fiscal years beginning on or after January 1, 2017. This means some companies will be required to make pay ratio disclosures early this year.[6] The SEC recently released interpretive guidance on the pay ratio rules as the first step in an incremental approach to implement the remaining executive compensation rules.[7]

In the third category are specialized disclosure rules, like resource extraction disclosure.[8] Chairman Clayton noted multiple constraints on the rule implementation process in this area, including the Administrative Procedure Act, legal challenges, and the Congressional Review Act and how any proposed rule will take these factors into account.[9] In addition, Chairman Clayton stated any rule should reflect market developments that have “mitigated some of the motivation behind the statutory requirement.”[10]

While Chairman Clayton’s tenure has not been marked by formal rulemaking, his remarks indicate substantial rulemaking is on the horizon. Fortunately, market participants have anticipated these rules since Dodd-Frank was enacted in 2010 and Chairman Clayton has been clear in his approach.

If you have any questions about Chairman Clayton’s remarks or Dodd-Frank mandates generally, please feel free to contact us.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] SEC Chairman Jay Clayton, Opening Remarks at the Securities Regulation Institute – Washington, D.C. (Jan. 22, 2018), available at https://www.sec.gov/news/speech/speech-clayton-012218#_ftnref1.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Division of Corporate Finance, SEC, Commission Guidance on Pay Ratio Disclosure, Release No. 33-10415 (Sept. 21, 2017), available at https://www.sec.gov/news/press-release/2017-172.

[7] Clayton, supra note 1.

[8] Id.

[9] Id.

[10] Id.

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Posted on Tuesday, December 19 2017 at 2:20 pm by

Four Key Takeaways from the SEC’s Bitcoin and Cryptocurrency Statement

By Paul Foley, John I. Sanders, and Lauren Henderson

Over the past few months, there has been a great deal of excitement among investors about Bitcoin and other cryptocurrencies. This excitement intensified in recent weeks as Bitcoin values rose 1800% and the Chicago Mercantile Exchange began to allow trading of Bitcoin futures.[i]

The sudden emergence of cryptocurrencies has been met with concern by the SEC. Earlier this year, the SEC issued an Investor Bulletin on Initial Coin Offerings (ICOs) highlighting some of the risks of investing in ICOs.[ii] Last week, with interest in cryptocurrencies reaching new heights, SEC Chairman Jay Clayton issued an official statement on cryptocurrencies and ICOs.[iii] The statement addressed both “Main Street” investors and market professionals (e.g., investment advisers, broker-dealers, and securities lawyers). Here are the four key takeaways for investment advisers:

  1. Any activity that involves an offering of securities, whether novel or not, must be accompanied by disclosures, processes, and other investor protections required by securities laws.[iv]
  2. In evaluating whether ICOs should be registered, investment advisers should review the SEC’s investigative report on ICOs and consult with legal counsel as needed.[v]
  3. Excessive touting of investments in thinly-traded and volatile markets is a red flag that may indicate scalping, pump and dump schemes, and other forms of market manipulation.[vi]
  4. A decision to allow payments in cryptocurrency, purchasing cryptocurrency on margin, or other uses of cryptocurrency to facilitate securities transactions should be accompanied by a review of anti-money laundering and know-your customer requirements.[vii]

If you have any questions about Chairman Clayton’s statement as it relates to investment advisers or the regulation of investment adviser more generally, we invite you to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] Alexander Osipovich & Gunjan Banerji, Exchange Giant CME Launches Bitcoin Futures, WALL ST. J., Dec. 17, 2017, available at https://www.wsj.com/articles/exchange-giant-set-to-launch-bitcoin-futures-after-rival-stumbles-1513432800.

[ii] SEC, Investor Bulletin: Initial Coin Offerings (July 25, 2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings.

[iii] Jay Clayton, Chairman, SEC, Statement on Cryptocurrencies and Initial Coin Offerings by SEC (Dec. 11, 2017), available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.

[iv] Id.

[v] Id.

[vi] Id.

[vii] Id.

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Posted on Monday, November 27 2017 at 5:46 pm by

Another Shoe Drops: UBS Withdraws from the Broker Protocol

By Paul Foley, John I. Sanders, and Lauren Henderson

Only one month after Morgan Stanley withdrew from the Protocol for Broker Recruiting (the “Protocol”), a second major brokerage firm has announced its intention to withdraw effective December 1st. UBS says it is withdrawing as part of a strategy to focus on retaining its current brokers instead of recruiting brokers from competitors. [i] Still, many observers believe Morgan Stanley’s and UBS’s withdrawals are meant “to stanch the flow of brokers and client assets.”[ii] This flow, of course, has quickened in recent years as advisers have left traditional, large brokerage firms to form independent advisory firms.[iii]

When Morgan Stanley withdrew from the Protocol, many speculated as to whether the Protocol would survive.[iv] Such speculation has only increased as sources have confirmed that Morgan Stanley’s withdrawal was the catalyst for UBS’s departure.[v] We expect more firms are currently considering how to respond to two of the largest brokerage firms withdrawing from the Protocol, and we would not be surprised to see similar announcements before year-end.

If you have questions about the recent withdrawals from the Protocol or general questions about the complexities that arise in establishing an independent advisory firm, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] Lisa Beilfuss, UBS to Pull Out of Pact on Broker Recruiting, WALL ST. J., Nov. 27, 2017, available at https://www.wsj.com/articles/ubs-to-pull-out-of-pact-on-broker-recruiting-1511799020 .

[ii] Id.

[iii] Neil Weinberg, Broker Protocol Reduced to a Sell Game, OnWallSteet, Oct. 18, 2016, available at https://www.onwallstreet.com/news/broker-protocol-reduced-to-a-shell-game.

[iv] Lisa Beilfuss, Morgan Stanley to Exit Accord on Broker Recruiting, WALL ST. J., Oct. 30, 2017, available at https://www.wsj.com/articles/morgan-stanley-to-exit-accord-on-broker-recruiting-1509380038

[v] Beilfuss, supra note 2.

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Posted on Friday, November 17 2017 at 8:38 am by

SEC Announces Enforcement Results, Sets New Priorities

By Paul Foley, John I. Sanders, and Lauren Henderson

On November 15, 2017, the SEC announced the results of its enforcement actions for fiscal year 2017 and stated its enforcement priorities for fiscal year 2018.

During fiscal year 2017, the SEC brought 754 enforcement actions, returned $1.07 billion to harmed investors, and obtained judgments and orders totaling $3.789 billion in disgorgement and penalties.[i] Of the 754 enforcement actions, 446 were standalone cases.[ii] Investment advisory issues, securities offerings, and issuer reporting each accounted for 20% of the standalone cases, roughly in line with fiscal year 2016 results.[iii]

In the current fiscal year, the following five core principles will guide the SEC’s enforcement actions:[iv]

  • Focus on Main Street (i.e., unsophisticated) investors
  • Focus on individual accountability (as opposed to organizational accountability)
  • Keep pace with technological change
  • Impose sanctions that most effectively further enforcement goals
  • Assess the allocation of resources

Both the enforcement results for the recently completed fiscal year and the stated priorities for the current fiscal year reflect Chairman Clayton’s oft-articulated dedication to the SEC’s mandates: protect investors, maintain fair and efficient markets, facilitate capital formation.

If you have any questions about the SEC enforcement actions or enforcement priorities, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] SEC, SEC Enforcement Division Issues Report on Priorities and FY 2017 Results (Nov. 15, 2017), available at https://www.sec.gov/news/press-release/2017-210.

[ii] Id.

[iii] Id.

[iv] Id.

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Posted on Thursday, November 9 2017 at 11:10 am by

Four Key Takeaways for Investment Advisers from Chairman Clayton’s PLI Address

By Paul Foley and John I. Sanders

On November 8, 2017, SEC Chairman Jay Clayton gave the keynote address at the Practicing Law Institute’s 49th Annual Institute on Securities Regulation.[i] Chairman Clayton’s remarks shed considerable light on the SEC’s priorities in the near-term. We believe there are four key takeaways from the address for investment advisers:

  • The SEC will deemphasize formal rulemaking and focus instead on enforcement actions that will improve “transparency in our securities markets”;[ii]
  • The SEC will scrutinize whether investment advisers’ proxy voting decisions are maximizing value for their clients;[iii]
  • The SEC will prioritize enforcement actions related to “complex, obscure, or hidden fees and expenses that can harm investors” (e.g., investing client assets in a mutual fund share class that charges a 12b-1 fee when a lower-cost share class of the same fund is available);[iv] and
  • The SEC will help investors track bad actors by creating a website with a searchable database of “individuals who have been barred or suspended as a result of federal securities law violations.”[v]

Chairman Clayton is clearly signaling to investment advisers that the SEC, in the near-term, will focus its energy on whether they are making complete and accurate disclosures to their clients.

If you have questions about Chairman Clayton’s keynote address or the regulations that govern investment advisers generally, please feel free to contact us.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders is an associate based in the firm’s Winston-Salem office.

[i] SEC Chairman Jay Clayton, Remarks at the PLI 49th Annual Institute on Securities Regulation – New York, N.Y. (Nov. 8 2017), available at https://www.sec.gov/news/speech/speech-clayton-2017-11-08.

[ii] Id.

[iii] Id.

[iv] Id.

[v] Id.

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Posted on Wednesday, November 1 2017 at 8:46 am by

Morgan Stanley’s Withdrawal from the Broker Protocol Shocks the Industry

By Paul Foley, John I. Sanders, and Lauren Henderson

In 2004, the Protocol for Broker Recruiting (the “Protocol”) was established with the goal of furthering “client interest of privacy and freedom of choice in connection with the movement of their Registered Representatives between firms.”[1] The Protocol defined what information a registered representative could take when moving between signatory firms, how that information could be used, and when it could be used.[2] The Protocol has provided brokers and registered representatives important clarity for the past 13 years, which has cut down significantly on litigation associated with moves from one signatory firm to another, including from brokers to investment advisers.

In a letter dated October 24th, Morgan Stanley, one of the largest employers of registered representatives, announced its withdrawal from the Protocol.[3] According to Morgan Stanley, the Protocol is “replete with opportunities for gamesmanship and loopholes” and is “no longer sustainable.”[4] In particular, Morgan Stanley has been frustrated by the ability of talented advisers to take advantage of the Protocol’s terms to establish independent registered investment advisers (“RIAs”) and solicit the clients they served while employed by Morgan Stanley.[5] Still, the firm’s withdrawal is the most significant in the history of the Protocol. Since 2004, more than 1,600 firms have become signatories, and only 100 have withdrawn.[6]

Following Morgan Stanley’s announcement, speculation as to its significance for the investment advisory industry has been rampant. Some are asking whether “Morgan Stanley’s exit from the protocol will usher in its end.”[7] Supporting that speculation is the silence of Morgan Stanley’s largest competitors in response to the withdrawal.[8]

Some large firms may determine that they are able to derive a competitive advantage in recruiting by remaining signatories of the Protocol. However, large firms that decide to withdraw from the Protocol, will likely be forced to offer top talent some of the same post-termination rights found in the Protocol and will experience significantly greater litigation cost. Those rights can be inserted into employment contracts. Alternatively, firms could increase financial incentives to compensate top advisers for the loss of those rights. Either way, this course of action will increase the cost and complexity of maintaining a talented team of advisers.

The more likely scenario is that Morgan Stanley’s withdrawal (and any similar firm’s withdrawal) is likely to hasten, not slow, the flow of advisers from the traditional, large brokerage firms to independent advisory firms. That flow has been so great in recent years that assets under management at registered investment advisers doubled between 2007 and 2015.[9] The most significant change for advisers employed by firms that withdraw from the Protocol is that they will need more sophisticated legal counsel to handle the process of establishing and transitioning to an independent advisory firm.

If you have questions about Morgan Stanley’s withdrawal from the Protocol or general questions about the complexities that arise in establishing an independent advisory firm, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] Protocol for Broker Recruiting, available at http://www.bressler.com/DE0ED6/assets/files/Documents/Copy_of_Broker_Protocol.pdf.

[2] Id.

[3] Lisa Beilfuss, Morgan Stanley to Exit Accord on Broker Recruiting, WALL ST. J.,Oct. 30, 2017, available at https://www.wsj.com/articles/morgan-stanley-to-exit-accord-on-broker-recruiting-1509380038.

[4] Id.

[5] Neil Weinberg, Broker Protocol Reduced to a Sell Game, OnWallSteet, Oct. 18, 2016, available at https://www.onwallstreet.com/news/broker-protocol-reduced-to-a-shell-game.

[6] Beilfuss, supra note 3.

[7] Id.

[8] Id.

[9] Weinberg, supra note 5.

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Posted on Monday, October 30 2017 at 8:39 am by

Advisers Trading in Europe or Advising E.U. Clients Must Prepare for MiFID II

By Paul Foley, John I. Sanders, and Lauren Henderson

On January 3, 2018, the European Commission’s sweeping reform, the Markets in Financial Instruments Directive II (“MiFID II”), will become effective. MiFID II applies to firms providing investment services or performing investment activities in the European Union (the “E.U.”).[1] E.U. investment advisers, naturally, will be among those effected. However, U.S. investment advisers who transact in European financial markets or offer investment advice to E.U. citizens through separately managed accounts (“SMAs”), pooled products (e.g., hedge funds), or indirectly through sub-advisory arrangements may be effected as follows:

  • Trading Equities and Derivatives: Under MiFID II, equity trading must occur on regulated markets, multilateral trading facilities, systematic internalisers, or equivalent third country venues.[2] Accordingly, over-the-counter trading of European equities may be severely restricted and the cost of trading certain securities may increase substantially. In addition, derivatives are subject to new reporting requirements and national regulators are empowered to set position limits for certain derivatives.[3]
  • Marketing Separately Managed Accounts: Each U.S. investment adviser must review licensing requirements in each jurisdiction where an E.U. client or potential client resides to determine whether the adviser must establish a branch or obtain a license to do business in the jurisdiction.[4]
  • Marketing Pooled Products: U.S. investment advisers that offer alternative investment funds (“AIFs”) will be governed by the Alternative Investment Fund Managers Directive (“AIFMD”) and jurisdiction-specific private placement rules, not MiFID II, when engaging in marketing activities for an AIF.[5] Likewise, U.S. investment advisers offering Undertakings for Collective Investment in Transferable Securities (“UCITSs”) are not directly subject to MiFID II when marketing a UCITS to E.U. clients, but will be indirectly impacted by MiFID II’s investor protection regime.[6]
  • Providing Sub-Advisory Services to E.U. Firms: E.U. firms subject to MiFID II may attempt to delegate compliance obligations to U.S. investment advisers serving as their sub-advisors. Among compliance obligations likely to be passed to the U.S. sub-advisor are those related to transparency and reporting.[7]

We invite you to contact us directly if you have any questions about the application of MiFID II to U.S. investment advisers.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments and Amending Directive 2002/92/EC and Directive 2011/61/EU, 2014 O.J. (L 173) 349, 374.

[2] Id. at 409.

[3] Id. at 440, 444.

[4] Christopher D. Christian & Dick Frase, MiFID II: Key Considerations for US Asset Managers, 23 The Investment Lawyer. 1, 4 (May 2016).

[5] Id. at 5.

[6] Id.

[7] Id. at 4.

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Posted on Friday, October 13 2017 at 11:35 am by

Regulation S-K Amendments Promise FAST Relief for Advisers and Funds

By Paul Foley, John I. Sanders, and Lauren Henderson

On October 11, 2017, the SEC issued a Proposed Rule to modernize and simplify disclosure requirements in Regulation S-K.[1] The Proposed Rule, authorized by the Fixing America’s Surface Transportation Act (the “FAST Act”), is intended to reduce the costs and burdens on registrants while still providing investors with disclosures that are user friendly, material, and free of unnecessary repetition.[2]

The Proposed Rule, if adopted, would amend rules and forms used by public companies, investment companies, and investment advisers.[3] The most notable provisions of the Proposed Rule include the following:

  • Eliminating risk factor examples from Item 503(c) of Regulation S-K because the examples do not apply to all registrants and may not actually correspond to the material risks of any particular registrant;[4]
  • Revising requirements related to descriptions of property owned by the registrant in Item 102 of Regulation S-K to emphasize materiality;[5]
  • Eliminating undertakings that are unnecessarily repetitious from securities registration statements;[6]
  • Changing exhibit filing requirements and allowing flexibility in discussing historical periods in the Management’s Discussion and Analysis;[7]
  • Permitting registrants to omit confidential information (e.g., personally identifiable information and material contract exhibits) from Item 601 without submitting a confidential treatment request;[8] and
  • Using hyperlinks in forms to help investors access documents incorporated by reference.[9]

The SEC will accept public comments on the Proposed Rule for sixty days before determining whether to issue a final rule or amend the proposal and seek additional public comment.[10] We are hopeful the Proposed Rule will be well-received by all stakeholders and be finalized relatively quickly.

We invite you to contact us directly if you have any questions about the SEC’s Proposed Rule or Regulation S-K generally.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices.  John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] SEC, SEC Proposes Rules to Implement FAST Act Mandate to Modernize and Simplify Disclosure (Oct. 11, 2017), available at https://www.sec.gov/news/press-release/2017-192.

[2] Id.

[3] Id.

[4] SEC, Proposed Rule: FAST Act Modernization and Simplification of Regulation S-K,

Release No. 33-10425; 34-81851; IA-4791; IC-32858, available at https://www.sec.gov/rules/proposed/2017/33-10425.pdf.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

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Posted on Friday, September 8 2017 at 9:48 am by

ERISA Group Offers Insights into DOL Proposal to Extend Fiduciary Rule Transition Period

Kilpatrick Townsend & Stockton’s ERISA Law practice group has a new article with valuable insights into the DOL’s Proposed Rule that would extend the Fiduciary Rule transition period.  We encourage those impacted by the Fiduciary Rule to read it here.

 

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Posted on Thursday, August 31 2017 at 5:45 pm by

DOL’s Proposed Rule Would Extend the Transition Period for Certain Fiduciary Rule Exemptions to July 2019

 By Paul Foley and John I. Sanders

Today, the text of a Department of Labor (the “DOL”) Proposed Rule we have been anticipating for several weeks was made available to the public.[i] The Proposed Rule would “extend the special transition period” for certain components of the Best Interest Contract Exemption (the “BIC Exemption”) and certain other exemptions to the Fiduciary Rule.[ii] Perhaps the most important aspect of the Proposed Rule is that it would maintain the current version of the BIC Exemption, which requires fiduciaries relying on it to merely “give prudent advice that is in retirement investors’ best interest, charge no more than reasonable compensation, and avoid misleading statements.”[iii] In making the proposal, the DOL stated that its purpose was to give the DOL “time to consider possible changes and alternatives” to the exemptions.[iv] If finalized, the Proposed Rule would extend the transition period of the effected exemptions to July 1, 2019.[v]

Please contact us if you have any questions about this article or the DOL Fiduciary Rule generally.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices.  John I. Sanders is an associate based in the firm’s Winston-Salem office.

[i] DOL, Notice of proposed amendments to PTE 2016-01, PTE 2016-02, and PTE 84-24, 82 Fed. Reg. 41365, available at https://www.federalregister.gov/documents/2017/08/31/2017-18520/extension-of-transition-period-and-delay-of-applicability-dates-best-interest-contract-exemption-pte.

[ii] Id.

[iii] Id. at 41367.

[iv] Id. at 41365.

[v] Id.

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