May 25, 2022

Volume XII, Number 145

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May 23, 2022

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Cadwalader Cabinet: No More Pause on Pay

SEC Reopens Comment Period on Executive Compensation Proposal

The SEC reopened the comment period on a proposal to amend the current executive compensation disclosure rule, Item 402 of Regulation S-K, to require that companies disclose the relationship between their executive compensation and financial performance.

The proposal was originally published in April of 2015 (see prior coverage). The proposed revisions to Item 402 implement Exchange Act Section 14(i) ("Proxies - disclosure of pay versus performance"), which was created by Dodd-Frank Section 953.

Commissioner Statements

SEC Chair Gary Gensler expressed support for the proposed rulemaking, saying it would "strengthen the transparency and quality of executive compensation disclosure." Mr. Gensler also noted that, if adopted, the proposal would "fulfill a mandate from Congress under the Dodd-Frank Act of 2010."

Commissioner Caroline A. Crenshaw also supported the reopening of the comment period, observing how executive pay practices have changed since 2015. Ms. Crenshaw stated that it was important to re-solicit public feedback, noting that companies are now "increasingly linking executive pay to environmental, social, and governance ("ESG") measures."

Commissioner Allison Herren Lee expressed support for the action and focused on changes involving smaller reporting companies, stating that "smaller reporting companies today would account for 45 percent of all companies that would be subject to the rule’s requirements." She added: "[i]t would be helpful to hear from commenters as to whether we should include exemptions for smaller reporting companies in the final rule and, if so, how best to calibrate them."

Commissioner Hester M. Peirce dissented, stating she would have favored a release that asked the public "whether [the SEC] should permit companies greater flexibility to determine which financial performance measure is appropriate in this context and to determine how to calculate executive compensation actually paid."

Primary Sources

  1. SEC Release No. 34-94074: Reopening of Comment Period for Pay versus Performance

  2. SEC Chair Gary Gensler's Statement of Support

  3. SEC Commissioner Caroline A. Crenshaw's Statement of Support

  4. SEC Commissioner Allison Herren Lee's Statement of Support

  5. SEC Commissioner Hester M. Peirce's Statement of Dissent


SEC Division Warns Private Fund Advisers on Compliance Deficiencies

In a risk alert for private fund advisers, the SEC Division of Examinations highlighted compliance issues found during the 2020 exam period. The Division stated that the alert was meant to help SEC-registered investment advisers review and enhance their compliance programs.

Conduct Inconsistent with Disclosures

The Division said that its examiners observed issues with regard to material investor disclosures, including:

  • failures to get informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees required pursuant to fund disclosure rules;

  • management fee calculations that did not adhere to fund disclosures, as well as failures to comply with liquidation, fund extension terms, and recycling practices described in fund organizational documents, resulting in erroneous management fees;

  • fund investments that diverged materially from fund-disclosed investment strategies; and

  • failures to announce "key person" departures in accordance with fund disclosures.

Performance and Marketing Disclosures

The Division said that its examiners observed violations of IAA Rule 206(4)-8 ("Pooled Investment Vehicles") and Rule 204-2(a)(16) ("Books and Records to Be Maintained by Investment Advisers"), including:

  • the use of cherry-picked and inaccurate data, resulting in misleading track records and erroneous performance metrics;

  • failures to maintain books and records about predecessor performance at other advisers, as well as material omissions and deceptive claims about such performance; and

  • misleading advisor statements with regard to performance awards and unsupported claims of government supervision.

Due Diligence

The Division said that its examiners observed fiduciary failures, including:

  • advisers that did not reasonably research investments and/or critical service providers in accordance with fund due diligence policies and procedures; and

  • investment due diligence policies and procedures that were inadequately designed for a fund's investment strategy.

Hedge Clauses

The Division said that its examiners observed fund documents that misleadingly attempted to waive or limit fiduciary duties established by Advisers Act Sections 206(1) and (2) ("Prohibited Transactions by Investment Advisers").

The Division stated that its findings resulted in deficiency letters and referrals to the Division of Enforcement.

Primary Sources

  1. SEC Division of Examinations Risk Alert: Observations from Examinations of Private Fund Advisers

SEC Extends Decisions on Crypto ETF Listings

The SEC extended its consideration of a proposed rule change to list and trade shares of ARK 21Shares Bitcoin Exchange-Traded Fund ("ETF") on the Cboe Exchange, Inc. The date to approve or disapprove the proposed rule was extended to April 3, 2022.

The SEC also extended its consideration of a proposed rule change to list and trade shares of Teucrium Bitcoin Futures Fund on the NYSE Arca Exchange. The date to approve or disapprove the proposed rule was extended to April 8, 2022.

The SEC is assessing whether the exchanges (i) have a comprehensive surveillance-sharing agreement with a significant, regulated market and (ii) can effectively prevent fraudulent and manipulative activity. In similar proposals, the SEC previously expressed concern over the ability of exchanges to adequately meet the requirements under Exchange Act Section 6(b)(5) ("National Securities Exchange Registration Determination") in protecting investors and the public interest by preventing fraudulent and manipulative practices.

Primary Sources

  1. SEC Release No. 34-94055 (January 25, 2022)

  2. SEC Release No. 34-94054 (January 25, 2022)


SEC Extends Period for a Decision on Proposal Enhancing Capital Requirements for Clearing Organizations

The SEC extended the period for action on a proposed rule change enhancing capital requirements for clearing organizations. The SEC designated March 29, 2022 as the new date by which it will "either approve, disapprove, or institute proceedings to determine whether to disapprove" the proposed rule change.

As previously covered, in separate filings, the Fixed Income Clearing Corporation, the Depository Trust Company and the National Securities Clearing Corporation proposed changes to their respective rules, bylaws and procedures to raise the capital requirements of their members. Clearing organizations are permitted to condition member participation on meeting the net capital requirements under Exchange Act Section 17A(b)(4)(B).

The SEC said that extending the 45-day period for action was appropriate, since that would give the SEC "sufficient time to consider and take action on the Proposed Rule Change."

Primary Sources

  1. SEC Release: Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Designation of Longer Period for Commission Action on a Proposed Rule Change to Enhance Capital Requirements and Make Other Changes

  2. Federal Register: Self-Regulatory Organizations; the Depository Trust Company; Notice of Filing of Proposed Rule Change to Enhance Capital Requirements and Make Other Changes

  3. Federal Register: Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change to Enhance Capital Requirements and Make Other Changes

  4. Federal Register: Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change to Enhance Capital Requirements and Make Other Changes


House Bill to "Modernize" FinCEN's Special Measure Authorities

The America COMPETES Act of 2022 (Full name: "The America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength") was introduced in the U.S. House of Representatives. The bill would, among other things, modernize FinCEN's special-measures authority to "empower FinCEN to adapt its existing tools, monitor and obstruct global financial threats, and meet the challenges of combating 21st century crime."

The bill states that innovations in financial services - such as digital assets and informal value transfer systems - have "transformed and expanded" international business since FinCEN was given its special-measures authority 20 years ago. Further, the bill asserts that while innovations are "useful to legitimate consumers," they are a "boon for bad actors," enabling perpetrators to attack U.S. companies with ransomware and using the financial system to "move and obscure the proceeds of their crimes."

The bill would allow the Secretary of the Treasury to "prohibit, or impose conditions upon certain transmittals of funds" to or from any domestic financial institution or domestic financial agency if the Secretary finds that the transmittal involves:

  • a foreign jurisdiction of primary money laundering concern;

  • one or more types of accounts within, or involving, a foreign jurisdiction of primary money laundering concern; or

  • one or more classes of transactions within, or involving, a foreign jurisdiction of primary money laundering concern.

Primary Sources

  1. House Financial Services Committee Press Release: America COMPETES Act Contains Key Provisions Authored by Committee Democrats

  2. House.gov: America COMPETES Act of 2022


CFTC Chair Behnam Talks Tech, Climate, Enforcement and Diversity

CFTC Chair Rostin Behnam described the challenges associated with developing rules to govern trading on electronic platforms, given technological innovations that have created a "growing divergence" between CFTC rules and the marketplace.

In an address before the ABA Business Law Section Derivatives & Futures Law Committee, Mr. Behnam emphasized the importance of having a "strategic, mission-driven agenda supported by a sound - but flexible - infrastructure." Mr. Behnam also emphasized the CFTC's goal of encouraging innovation while "enhancing the regulatory experience for market participants." He highlighted the agency's approach, which includes:

  • increasing stakeholder engagement;

  • leveraging principles-based regulation; and

  • harmonizing regulations for market participants subject to CFTC and SEC jurisdiction.

Further, Mr. Behnam discussed the need for the CFTC to improve data collection and use as part of its larger strategy to strengthen the derivatives markets while "address[ing] new and emerging risks." Mr. Behnam highlighted, among these risks, those associated with climate change and the need to keep pace with "emerging markets in the Middle East and Asia."

On enforcement, Mr. Behnam suggested that the CFTC might use its authority more aggressively with respect to cash market issues. He described the CFTC as having historically "refrained" from bringing enforcement actions with respect to misconduct in the cash market. He rejected this approach, and described the use of "enforcement authority to crystalize our law through judicial interpretation more as a feature of the system than as a bug."

Mr. Behnam highlighted the importance of moving towards a more diverse workforce within the agency, and talked about his directive "to better attract, develop, retain, and promote" one that "will serve as a hallmark in the derivatives industry." In this regard, he touted his hiring of the CFTC's first Chief Diversity Officer.

Primary Sources

  1. Keynote Address of Chair Rostin Behnam at the ABA Business Law Section Derivatives and Futures Law Committee Virtual Winter Meeting

Firm Settles FINRA Charges for Short Sale Trading Violations

A firm specializing in execution services for institutional and broker-dealer clients settled FINRA charges for short sales ("Regulation SHO") and FINRA trade reporting rule violations.

In a Letter of Acceptance, Waiver and Consent ("AWC"), FINRA found that, between April 2016 and September 2018, the firm failed to:

(i) obtain locates in connection with short sale transactions, in violation of Rule 203(b)(1) ("Borrowing and delivery requirements") of Regulation SHO and FINRA Rule 2010 ("Commercial Honor and Trade Principles);

(ii) report short sales to the FINRA/NYSE Trade Reporting Facility with the required short sale indicators, in violation of FINRA Rules 6182 ("Trade Reporting") and 2010;

(iii) establish, maintain and enforce written procedures to prevent the execution of short sale transactions during a circuit breaker, in violation of Rule 201(b)(1) ("Circuit Breaker") of Regulation SHO and FINRA Rules 3110 ("Supervision") and 2010;

(iv) correctly report net trades with a W modifier to multiple reporting facilities, in violation of FINRA Rules 6380A(a)6380B(a) and 6622(a) ("Transaction Reporting"); and

(v) establish a supervisory system, including written supervisory procedures, designed to achieve compliance with local requirements of Regulation SHO and the trade reporting of short sales, net trades and trade modifiers, in violation of FINRA Rules 3110(a) and 2010.

To settle the charges, the firm agreed to (i) a censure and (ii) a $100,000 fine. The AWC states that the firm may attach a corrective action statement to the AWC as a demonstration of corrective steps taken to prevent any future misconduct.

Primary Sources

  1. FINRA AWC: DriveWealth Institutional LLC (f/k/a Cuttone & Co., LLC)

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 28
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About this Author

Mark P. Howe, Cadwalader Law Firm, Corporate Taxation Attorney
Partner

Mark Howe's practice is concentrated in partnerships, financial products, securitization, the tax aspects of capital markets, general corporate finance, securities, and commodities. His work includes emphasis on the tax structuring of domestic and offshore investment funds and in the development, structuring, and implementation of a wide variety of financial and derivative products and transactions, such as fixed income, currency, equity, and commodity linked swaps, forwards, notes, options, and similar instruments and transactions, securities and other instruments with...

202-862-2236
Christian Larson White Collar Defense and Investigations Attorney Cadwalader Washington, DC
Associate

Christian Larson is an associate in Cadwalader’s White Collar Defense and Investigations Group. His practice focuses on advising corporations and individuals in connection with financial regulations, internal investigations, and government inquiries. He has extensive experience with U.S. and international anti-money laundering rules and regulations, and related compliance programs. Christian has advised banks, broker-dealers, funds, advisors, securitization parties, cryptocurrency and other money services businesses, national governments, and individuals in relation to the Bank Secrecy Act...

202-862-2402
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