Regulatory Update and Recent SEC Actions

Investment Management


  • SEC Emphasizes the Importance of Delivering Timely and Material Information to Investment Company Investors
  • SEC Eases In-Person Board Meeting and Other Filing and Delivery Requirements in Response to COVID-19 Developments
  • SEC Provides Temporary Borrowing Flexibility to Registered Investment Companies Affected by COVID-19
  • Division of Investment Management Staff Expands Remote Board Contracts Votes Due to Potential Effects of COVID-19
  • SEC Indicates Public Comment Deadline Flexibility in Response to COVID-19
  • SEC Staff Offers Guidance Regarding COVID-19-Related Risk Disclosures                                        
  • SEC Issues Guidance for Conducting Shareholder Meetings Amid COVID-19 Concerns
  • SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by COVID-19
  • CFTC Issues Relief to Market Participants in Response to COVID-19

SEC Emphasizes the Importance of Delivering Timely and Material Information to Investment Company Investors

On April 14, 2020, the Securities and Exchange Commission’s (“SEC”) Division of Investment Management issued a statement emphasizing the ongoing importance of updating and delivering information to investors in a timely manner consistent with investment companies’ disclosure obligations, even during the current period of operational challenges caused by the coronavirus (“COVID-19”). In the statement, the staff reminded investment company issuers of their obligation under the Securities Act of 1933 (the “Securities Act”) to update the information in their prospectuses, including the required underlying certified financial statements. The Division also encouraged investment companies to consider whether their disclosures, including risk disclosures, should be revised based on how COVID-19-related events may affect the investment company and its investments. In its statement, the Division also clarified that, although it has provided COVID-19 related temporary relief in the case where an investment company is not able to physically deliver a current prospectus to existing investors, that relief does not apply with respect to sales of investment company shares to new purchasers and investment companies must continue to deliver the fund’s prospectus or summary prospectus in a timely manner for those types of purchases.

SEC Eases In-Person Board Meeting and Other Filing and Delivery Requirements in Response to COVID-19 Developments

The SEC issued temporary regulatory relief for investment funds and investment advisers whose operations may be affected by COVID-19, from certain in-person board meeting requirements and certain filing and delivery requirements. The relief was initially issued on March 13, 2020, and updated on March 25, 2020. Subject to certain conditions, (i) fund boards are relieved from the obligation to hold in-person meetings through August 15, 2020; (ii) deadlines are extended for Form N-CEN and Form N-PORT filings and for annual and semi-annual shareholder report transmittals, in each case for which the original due date is on or prior to June 30, 2020; (iii) companies are exempted from the requirement to file Form N-23C-2 through August 15, 2020; and (iv) prospectus delivery deadlines are extended for prospectuses that are required to be delivered on or prior to June 30, 2020. The SEC also granted temporary relief to investment advisers from certain filing requirements with respect to Form ADV and Form PF, in each case for which the original due date is on or prior to June 30, 2020. In issuing the relief, the SEC noted that it intends to continue to monitor the current situation and, if necessary, may extend the time period for any or all of the relief provided.

SEC Provides Temporary Borrowing Flexibility to Registered Investment Companies Affected by COVID-19

On March 23, 2020, the SEC announced temporary flexibility for registered funds affected by recent market events to borrow funds from certain affiliates and to enter into certain other lending arrangements. The relief is designed to provide funds with additional tools to manage their portfolios for the benefit of all shareholders as investors may seek to rebalance their investments. Subject to certain conditions, the SEC’s order provides for (i) relief permitting registered open-end funds and insurance company separate accounts to borrow money from certain affiliates; (ii) relief that permits additional flexibility under existing interfund lending arrangements and extends the ability to use interfund lending arrangements to funds that do not currently have exemptive relief; and (iii) relief that permits registered open-end funds to enter into lending arrangements or borrowings that deviate from fundamental policies, subject to prior board approval. This temporary relief will extend until the date specified in a public notice from the staff stating that the relief will terminate, which date will be at least two weeks from the date of the notice and no earlier than June 30, 2020. The SEC may provide additional relief as circumstances warrant.

Division of Investment Management Staff Expands Remote Board Contracts Votes Due to Potential Effects of COVID-19

On March 4, 2020, the Division of Investment Management announced that, due to current and potential effects of COVID-19, the Division staff has extended the no-action position it expressed in its February 2019 letter to the Independent Directors Council to cover all approvals and renewals (including material changes) of contracts, plans or arrangements under section 15(c) or rules 12b-1 or 15a-4(b)(2), as well as the selection of a fund’s independent public accountant pursuant to Section 32(a) where such accountant is not the same accountant as selected in the immediately preceding fiscal year. This position applies to board meetings held between the date of the announcement and June 15, 2020. The Division staff may extend the time period for this no-action position as circumstances warrant, with any additional conditions deemed appropriate.

SEC Indicates Public Comment Deadline Flexibility in Response to COVID-19

The SEC indicated on its website that it will not take action on six specific pending rule proposals until May 1, 2020, in order to allow commenters additional time if needed. The rule proposals covered are those relating to (i) funds’ use of derivatives and the other transactions; (ii) expanding the definition of an accredited investor; (iii) loosening auditor independence rules; (iv) disclosure of payments by resource extraction issuers; (v) proposed new National Market System Plan regarding consolidated equity market data; and (vi) ability of a banking entity or nonbank financial company to engage in proprietary trading with a hedge fund or private equity fund. Before the SEC’s above-referenced action, comment periods for these proposals were set to expire on various dates in March 2020.

SEC Staff Offers Guidance Regarding COVID-19-Related Risk Disclosures

On March 25, 2020, the Division of Corporate Finance staff issued detailed guidance on how companies should assess and communicate COVID-19 risks, encouraging timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19 may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. Assessing the evolving effects of COVID-19 and related risks will be a facts-and-circumstances analysis. Disclosure about these risks and effects, including how the company and management are responding thereto, should be specific to a company’s situation. In its guidance, the staff included a non-exhaustive list of questions for companies to consider while assessing their disclosure obligation regarding COVID-19-related effects. In the same release, the staff reiterated that, where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public. The staff also addressed certain issues related to reporting earnings and financial results and acknowledged that the impact of COVID-19 on businesses may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve.

SEC Issues Guidance for Conducting Shareholder Meetings Amid COVID-19 Concerns

Amid growing COVID-19-related concerns and challenges, the SEC issued guidance on March 13, 2020, which it updated on April 7, 2020, designed to facilitate the ability of companies to hold shareholder meetings, including through the use of technology, and engage with shareholders while complying with federal securities laws. The release provides companies with guidance and considerations regarding: (i) changing the date, time, or location of a shareholder meeting; (ii) conducting a “virtual” shareholder meeting through the Internet or other electronic means in lieu of an in-person meeting; (iii) the presentation of shareholder proposals; and (iv) delays in printing and mailing full sets of proxy materials.

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by COVID-19

On March 4, 2020, the SEC issued an order that provided conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws. Subject to certain conditions, publicly traded companies are provided with an additional 45 days to file certain disclosure reports (e.g., Forms 10-K, 10-Q and 20-F) under the Securities Exchange Act of 1934 (“Exchange Act”) that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must convey through a current report a summary stating the reason(s) the relief is needed in their particular circumstances. The order also provided relief to companies that are furnishing proxy statements, annual reports, and other soliciting materials to stockholders that are located in an area where, as a result of COVID-19, mail delivery service has been suspended. The SEC may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.

CFTC Issues Relief to Market Participants in Response to COVID-19

On March 17, 2020 the Commodity Futures Trading Commission (“CFTC”) announced that the Division of Market Oversight issued three no-action letters providing temporary, targeted relief to swap execution facilities (“SEFs”) and certain designated contract markets (“DCMs”) in response to the COVID-19 pandemic. The relief granted to SEFs was from CFTC regulations requiring recording of oral communications related to voice trading and other telephonic communications that would make SEFs unable to comply with certain audit trail requirements, recordkeeping requirements related to maintaining a complete audit trail, and monitoring requirements related to audit trail reconstruction. In addition, relief was granted to certain DCMs from audit trail and related requirements. This relief was necessary due to the displacement of market participants, such as floor brokers, from trading floors and other designated premises from which they may enter orders. The relief granted is scheduled to expire on June 30, 2020.


SEC Office of Compliance Inspections and Examinations Announces 2020 Examination Priorities

On January 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2020 examination priorities. The OCIE publishes annual examination priorities identifying key areas of risk that self-regulatory organizations, clearing firms, investment advisers, and other market participants should identify and mitigate. OCIE’s 2020 examination priorities include a new or continued focus on the following areas: (i) disclosures related to fees, expenses, and conflicts of interest for retail investors; (ii) entities that provide services critical to capital markets; (iii) cyber and other information security risks across the entire examination program; (iv) risk-based examinations for registered investment advisers (“RIAs”), investment companies, broker-dealers, and municipal advisors, with a focus on RIAs that have never been examined (i.e., new RIAs and RIAs registered for several years that have yet to be examined); (v) compliance with anti-money laundering requirements; (vi) SEC-registered firms engaged in the digital asset space, as well as RIAs using “robo-advisers;” and (vii) overseeing the operations, regulatory programs, and effectiveness of both the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board. In its release, the OCIE also indicated it will focus on matters related to (i) recent rulemaking, including the implementation of Regulation Best Interest (“Reg BI”), Form CRS, and other provisions; (ii) the accuracy and adequacy of disclosures around new types of or emerging investment strategies, such as those focused on environmental, social, and governance (“ESG”) criteria; and (iii) firms’ use of alternative data and the growing use of third-party firms to obtain such data.

Asset Management Advisory Committee Holds its Inaugural Meeting

The SEC’s newly formed Asset Management Advisory Committee held its first meeting on January 14, 2020. The committee was formed to provide the SEC with diverse perspectives on asset management and related advice and recommendations. It is comprised of a group of outside experts, including individuals representing the views of retail and institutional investors, small and large funds, intermediaries, and other market participants. The topics covered at the January meeting included (i) the evolution of asset management and value proposition; (ii) the evolution of public and private securities offerings; and (iii) the globalization of asset management. Participants discussed trends in the industry, the impact of technology, the implications of permitting retail investors access to private markets and recent regulatory changes, including the impact of the European Union’s Markets in Financial Instruments Directive II. At the close of the meeting, participants noted the themes they would like to continue to discuss and agreed to provide feedback on working processes and next steps for action at future committee meetings.

OCIE Publishes Observations on Cybersecurity and Resiliency Practices

On January 27, 2020, OCIE issued examination observations for cybersecurity and operational resiliency practices taken by market participants. These observations highlighted certain approaches taken by market participants in the areas of governance and risk management, access rights and controls and data loss prevention. The observations also included approaches taken in mobile security, incident response and resiliency, vendor management, and training and awareness.

Agencies Propose Changes to Modify “Covered Funds” Restrictions of Volcker Rule

On January 30, 2020, the SEC, and various other federal agencies, invited public comment on a proposal to modify regulations of the Volcker rule. The proposal relates to the rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as “covered funds.” Since its implantation in 2013, the Volcker rule has fostered uncertainty around compliance and has imposed limits on certain banking services and activities that the rule did not intend to restrict. In an effort to address these concerns, the agencies simplified requirements for the proprietary trading restrictions in November 2019. This latest proposal would modify the restrictions for banking entities investing in, sponsoring, or having certain relationships with covered funds. Specifically, this proposal would streamline the covered funds portion of the rule, address the treatment of certain foreign funds, and permit banking entities to offer financial services and engage in other permissible activities. The proposed changes were jointly developed by the SEC, the Federal Reserve Board, the CFTC, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Comments will be accepted until May 1, 2020.

SEC Proposes Amendments to Modernize and Enhance Financial Disclosures

On January 30, 2020, the SEC voted to propose amendments to certain financial disclosure requirements in Regulation S-K of the Securities Act, and separately issued guidance on key performance indicators and metrics in Management's Discussion and Analysis. These proposals are part of a comprehensive evaluation of the SEC’s disclosure requirements that were recommended in the SEC’s staff Report on Review of Disclosure Requirements in Regulation S-K. The proposed amendments would eliminate Item 301 (Selected Financial Data) and Item 302 (Supplementary Financial Data), and amend Item 303 (Management's Discussion and Analysis). The SEC guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. In releasing the proposed amendments, the SEC also reminded companies of their obligations under the Exchange Act and Rules 13a-15 and 15d-15 thereunder to maintain disclosure controls and procedures and that these requirements should be considered when disclosing metrics.

SEC Updates Frequently Asked Questions (“FAQs”) for Regulation Best Interests

On February 11, 2020, the SEC issued updated FAQs for both Reg BI and Form CRS. All broker-dealers with retail customers will be required to comply with Reg BI as of June 30, 2020, and all broker-dealers and investment advisers must comply with Form CRS requirements with respect to their retail customers/investors. The updated FAQs address, among other things (i) who is considered a "retail customer" or "retail investor," (ii) the types of recommendations covered by Reg BI, (iii) how to satisfy Reg BI’s disclosure obligation, and (iv) Reg BI’s conflict of interest obligations.

SEC Proposes to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Securities Market Data

On February 14, 2020, the SEC proposed a new rule package under Regulation NMS of the Exchange Act that aims to modernize the infrastructure for the collection, consolidation, and dissemination of quotations for and transactions in national market system (“NMS”) stocks. The proposal updates the rules governing the content and dissemination of NMS market data, which rules have not been updated significantly since their implementation in the late 1970s. The proposal expands the NMS information that is required to be collected, consolidated, and disseminated under Regulation NMS and seeks to introduce competitive forces into the core component of the national market system, which would introduce competition among new data consolidators. As a result, the changes would allow all market participants, including investors, to access and benefit from the expanded content of NMS market data. Presently, the national securities exchanges and FINRA act jointly to collect, consolidate, and disseminate information for NMS stocks. For each NMS stock, these entities are required to provide specified market data to exclusive securities information processors (“SIPs”). The SIPs then consolidate that information and make it available to the public. This proposal is designed reduce the current disparity in content and latency between NMS market data, and the proprietary data products that some of the individual exchanges sell directly to market participants. Effectively, this proposal would eliminate the “exclusive SIP” model with a decentralized model of “competing consolidators.”

SEC Agrees to Blackstone In-Person Sub-Adviser Meeting Relief

On February 19, 2020, the SEC granted exemptive relief to the Blackstone Alternative Investment Funds (“Blackstone Funds”) and its adviser, Blackstone Alternative Investment Advisors LLC, which, subject to certain conditions, allows the Blackstone Funds’ board of trustees to approve new sub-advisory agreements and make material amendments to existing sub-advisory agreements without complying with the in-person meeting requirement of Section 15(c) of the Investment Company Act of 1940 (“1940 Act”). In requesting relief, the Blackstone Funds noted that market conditions or investment opportunities may necessitate a change in sub-advisers in between quarterly in-person board of trustees meetings. The relief was subject to the conditions contained in the application, which included that: (i) the independent trustees will approve a sub-advisory agreement (or a material change thereto) at a non-in-person meeting in which board members may participate by any means of communication that allows those board members participating to hear each other simultaneously during the meeting; (ii) the materials for the non-in-person meeting will include the same information the board would have received if the sub-adviser change would have occurred in person; (iii) the notice of the non-in-person meeting will explain the need for considering the change to a sub-advisory agreement and trustees will have the opportunity to object to making such considerations at a non-in-person meeting; and (iv) the Blackstone Funds will disclose the ability to rely upon the exemptive relief in its registration statement.

U.S. Department of Justice Reviewing Schwab Acquisition of TD Ameritrade

In February 2020, it was reported that the U.S. Department of Justice (“DOJ”) was conducting the second phase of its review of Schwab’s proposed acquisition of TD Ameritrade. The acquisition, valued at around $26 billion, was announced in November 2019. As part of its review, the DOJ is requesting additional information from the companies as well as from their competitors, including advisors and custodians. The extent of the DOJ’s review reflects the deal's complexity, size, and ramifications for advisors, competitors, and investors. Schwab and TD Ameritrade have indicated that they expect the deal to close in the second half of 2020.

SEC Requests Comment on Fund Names Rule; Seeks to Eliminate Misleading Fund Names

On March 2, 2020, the SEC requested public comments on its current requirements for restricting the use of potentially misleading fund names, noting that a fund’s name is often the first piece of information investors see when making investment decisions. The SEC seeks feedback on whether current requirements have been effective and whether there are viable alternatives that it should consider. In 2001, SEC adopted rule 35d-1 under the 1940 Act, which prohibited funds from using materially deceptive or misleading names. The rule requires a registered investment company or business development company with a name suggesting that the fund focuses on a particular type of investment (e.g., "stocks" or "bonds") to invest at least 80 percent of its assets accordingly. However, since adoption of the rule, market and other developments, such as increasing use of derivatives and hybrid instruments, impact the rule's application. The request for comment solicits information to determine whether the rule continues to accomplish its purpose to protect investors and help ensure they are not misled by a fund's name.

SEC Amends Exemptions from Investment Adviser Registration for Advisers to Rural Business Investment Companies

On March 2, 2020 the SEC announced that, in order to implement congressionally mandated exemptions from registration for investment advisers who advise rural business investment companies (“RBICs”), it had adopted amendments to Rules 203(l)-1 and 203(m)-1 of the Investment Advisers Act of 1940 (“Advisers Act”). These rules implement exemptions from SEC registration for advisers to venture capital funds and private funds. The amendments include RBICs in the definition of the term “venture capital fund” and exclude their assets from the definition of the term “assets under management” for purposes of the private fund adviser exemption. The amendments will be published on the SEC’s website and in the Federal Register. They will become effective upon publication in the Federal Register.

SEC Proposes Rule Changes to Harmonize, Simplify, and Improve the Exempt Offering Framework

On March 4, 2020, the SEC proposed a set of amendments to the exemptive offering framework under the Securities Act that would simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections. Informed by the comments it received in response to its June 2019 concept release, the SEC’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs. The proposed amendments would: (i) address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital; (ii) increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; (iii) provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and (iv) harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections. The comment period for the proposal will remain open for 60 days following publication in the Federal Register.

Massachusetts Issues Final Fiduciary Rule for Brokers

Massachusetts issued final regulations, effective on March 6, 2020, that raise investment-advice requirements for brokers in the state. The regulations set a fiduciary standard for brokers when they make investment recommendations to customers, requiring them to act without regard to their own financial interests. The state will begin enforcing the regulation in September 2020. The regulations had been modified to meet some financial industry concerns; however, they apply a tougher standard than the SEC’s Reg BI, which is scheduled to become effective on June 30, 2020. Massachusetts is the first to issue a final fiduciary rule for brokers. New Jersey and Nevada also are considering setting their own fiduciary advice standards. The fight over state-level advice standards is likely to continue. The financial industry has indicated that it is considering filing lawsuits against state rules.

SEC Grants HSBC Holdings plc’s Request for Waiver of Ineligible Issuer Status

On March 16, 2020, the SEC determined that HSBC Holdings plc (“HSBC”) made a showing of good cause under clause (2) of the definition of ineligible issuer in Rule 405 of the Securities Act and that HSBC will not be considered an ineligible issuer by reason of the entry of the SEC’s order (the “Order”) against HSBC’s subsidiary, HSBC Securities (USA), Inc. (“HSBC Securities”) on the same date. The Order required that, among other things, HSBC Securities cease and desist from committing or causing any violations and any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. In requesting relief, HSBC noted that the conduct addressed in the Order does not call into question the reliability of HSBC’s current or future disclosures as an issuer of securities. HSBC stated that it should be granted a waiver from ineligible issuer status for reasons including: (i) the conduct described in the Order did not pertain to activities undertaken by HSBC; (ii) HSBC Securities is not an issuer of securities, and the employees responsible for the disclosures addressed in the Order did not have any responsibility with respect to HSBC’s role as an issuer of securities; (iii) the Order identified two instances in which HSBC Securities’ disclosures were false and misleading during a 22-month period (from November 2015 to August 2017); (iv) the Order does not allege that HSBC or HSBC Securities acted with scienter or intent to defraud; and (v) HSBC Securities voluntarily revised its Form ADV and wrap program brochures in August 2017 to address the disclosures at issue in the Order. The SEC noted that the relief granted was based on the facts and representations in HSBC’s letter.


SEC Charges Investment Adviser for Violations in Connection with its Recommendation of More Expensive Share Classes

On January 9, 2020, the SEC announced it settled charges against a registered broker-dealer and investment adviser for violations under the Securities Act and the Advisers Act. The charges related to the investment adviser’s failure to provide certain retail retirement account and charitable organization brokerage customers with sales charge waivers and lower fee share classes when selling certain mutual funds to them, instead placing the customers in more expensive mutual fund share classes. The SEC’s order found that the investment adviser did not disclose that it would receive greater compensation from the customers' purchases of the more expensive share classes. It also found that the investment adviser did not disclose that the more expensive share classes would negatively impact the overall return on the customers’ investments due to the different fee structures for the different mutual fund share classes. The investment adviser consented to cease-and-desist from future violations, a censure, a civil penalty of $1,500,000 and disgorgement of approximately $251,000 with prejudgment interest of approximately $71,000.

In the Matter of ABN AMRO Clearing Chicago, LLC (SEC File No. 3-19693)

On February 6, 2020, the SEC announced that ABN AMRO Clearing Chicago LLC agreed to pay more than $586,000 to settle charges over the improper handling of “pre-released” American Depositary Receipts (“ADRs”). ADRs are U.S. securities that represent shares of a foreign company and require a corresponding number of foreign shares to be held in custody at a depositary bank. The SEC order found that ABN AMRO wrongfully borrowed pre-released ADRs from other brokers when it should have known that those brokers did not own the foreign shares needed to support corresponding ADRs. Without admitting or denying fault, ABN AMRO agreed to return more than $326,000 of ill-gotten gains and pay a $179,353 penalty plus $80,970 in prejudgment interest. The SEC has conducted 15 investigations into abusive ADR pre-release practices and found misconduct by numerous industry participants who had introduced “phantom” ADRs into the marketplace.

SEC v. Kinetic Investment Group, LLC, et al. Case No. 8:20-cv-00394-WFJ-SPF (M.D. Fla.)

On March 6, 2020, the SEC obtained an asset freeze against Kinetic Investment Group, LLC and its managing member in connection with an unregistered securities offering which raised approximately $39 million from investors in Florida and Puerto Rico. According to the SEC complaint, the defendants fraudulently solicited investments into Kinetic Funds I LLC, a supposed hedge fund that they managed. Among other alleged misrepresentations, the SEC claims that the defendants represented that Kinetic Funds’ largest sub-fund invested solely in U.S.-listed financial products; and that at least 90 percent of its portfolio was hedged using listed options. The SEC alleges that the managing member instead invested a substantial amount of the sub-fund’s assets in his private start-up company and misappropriated at least $6.3 million through undisclosed loans to himself and his entities. The defendants are charged with violating the antifraud provisions of federal securities laws. Ultimately, the SEC is seeking an injunction and financial penalties against the defendants.

SEC v. Westport Capital Markets, LLC and Christopher E. McClure Case No. 3:17-cv-02064 (D. Conn.)

On March 16, 2020, the SEC secured a verdict against Westport Capital Markets, LLC, a Connecticut-based investment advisory firm, and its owner, Christopher E. McClure. The jury found that the defendants had enriched themselves at their clients’ expense by repeatedly purchasing securities that generated significant amounts of undisclosed compensation for Westport and McClure. The court previously granted partial summary judgment in holding that the defendants violated section 206(2) and 206(3) of the Advisers Act, in failing to disclose their conflicts of interest and that McClure aided and abetted unauthorized principal transactions. The remaining counts were to determine whether the defendants acted intentionally, knowingly, or recklessly under the antifraud provisions of section 206(1) and whether the defendants acted willfully under the antifraud provisions of section 207. Ultimately, the jury convicted the defendants on these counts.

Thomas R. Westle and Stacy H. Louizos would like to thank Margaret M. Murphy and Andrae D. Nelson for their contributions to this update.

© 2020 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.