Weekly RoundUp
May 6, 2015

Financial Services Weekly News

In This Issue – More on the SEC Whistleblower Program. In the April 8 issue of the Roundup we reported on the SEC’s administrative proceedings based on findings that restrictive language in a form confidentiality agreement used with employees interviewed as part of a firm’s internal investigation program improperly impeded whistleblowing activity. That was also covered in a Goodwin Procter client alert. In this issue we report on the SEC’s announcement of a whistleblower award payment of 30% of the amounts collected in connection with a matter – the maximum share of monetary sanctions allowable under the SEC’s whistleblower program – and statements by SEC Chair Mary Jo White about the award.

Regulatory Developments

SEC Proposes “Pay for Performance” Rules

The SEC proposed “pay for performance” disclosure rules required by the Dodd-Frank Act under which a company would be required to disclose in a table its executive pay along with annual performance as measured by total shareholder return for the company and companies in a peer group, and to tag the information in an interactive data format. The SEC press release announcing the proposal includes a fact sheet with additional detail. The proposal, which a divided Commission approved by a 3-2 vote, asks for public comment on several questions. Comments are due 60 days after the proposal’s publication in the Federal Register. This is the third of four Dodd-Frank compensation disclosure rulemaking mandates to reach the proposal stage. The SEC proposed the CEO pay ratio disclosure rules in September 2013 (discussed in this client alert), and proposed the hedging policy disclosure rules in February 2015 (discussed in this client alert). The SEC has not yet proposed rules that will require stock exchange listing standards to require listed companies to establish and implement incentive compensation clawbacks in certain circumstances.

SEC Investment Management Staff Issues Cybersecurity Guidance

The staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2015-02 which describes specific measures that registered funds and advisers may wish to consider in addressing cybersecurity risk, including conducting periodic assessments and implementing strategies to prevent, detect and respond to cybersecurity threats. The Guidance Update urges funds and advisers to identify their respective compliance obligations under the federal securities laws and take into account these obligations when assessing their ability to prevent, detect and respond to cyberattacks, e.g., by addressing cybersecurity risk as it relates to identity theft and data protection, fraud and business continuity, as well as to other disruptions in service that could, for instance, affect a fund’s ability to process shareholder transactions.

SEC Announces Compliance Outreach Program Seminars for Senior Officers of Investment Advisers and Investment Companies

The SEC announced the schedule for regional Compliance Outreach Program seminars in six cities beginning June 10 that will be jointly sponsored by the SEC’s Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Asset Management Unit of the Division of Enforcement. The seminars will provide an overview of the SEC’s National Examination Program as well as a discussion of current topics of particular interest for the Division of Investment Management and the Enforcement Division’s Asset Management Unit. The seminars will also feature panels on current “hot-button” topics in investment management regulation that will vary by city as detailed in the announcement.

FINRA Files Proposed Change to Reporting Requirement of FINRA Rule 4530(a)(1)(H)

On May 5, FINRA filed a proposal to amend Rule 4530 to provide an exception from the requirements of paragraph (a)(1)(H) of the rule for dealings with a member or associated person subject to statutory disqualification. That paragraph currently requires a member firm to report if the member or an associated person is subject to statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934 or is engaged in certain activities with a person subject to statutory disqualification. A person subject to statutory disqualification is not permitted to be a member or associated person without FINRA approval. The exception would provide that a member is not required to report activities with another member or associated person that is subject to a statutory disqualification but has been approved, or is otherwise permitted pursuant to FINRA rules and the federal securities laws, to be a member or to be associated with a member. Comments are due 21 days after publication of the proposal in the Federal Register.

Enforcement & Litigation

CFPB Announces First Enforcement Action for Illegal Overdraft Fees

On April 28, the Consumer Financial Protection Bureau (CFPB) announced its first enforcement action under federal rules regulating overdraft fees by banks. According to the CFPB’s order, Regions Bank did not ask consumers if they wanted to opt in to overdraft protection prior to charging them for the service, and continued to charge consumers for nearly a year after the bank discovered the violation. Regions Bank also agreed that it would not charge overdraft and non-sufficient funds fees on its deposit advance product, but did so anyway. Regions Bank has voluntarily refunded $49 million to consumers and has been ordered to refund all other affected consumers as well as pay a fine of $7.5 million in connection with the violations. The CFPB noted that if Regions Bank had not voluntarily refunded funds and self-reported the violation, it would have received a stiffer penalty.

SEC Settles with Hedge Fund Manager and Accountant Over Expense Allocations

The SEC announced that it had settled administrative proceedings against Alpha Titans LLC, a hedge fund adviser, the firm’s principal Timothy P. McCormack, and the firm’s general counsel and chief operating officer, Kelly D. Kaeser, related to SEC findings that office rent, employee salaries and benefits, and other operational expenses of the adviser were allocated to private funds managed by the adviser without clear authorization under operative fund documents, including the funds’ private placement memorandums, and were not properly disclosed as related party transactions in the funds’ annual financial statements. The SEC separately settled related administrative proceedings against Simon Lesser, the audit partner for McGladrey LLP, the auditors that conducted the audits of the funds’ annual financial statements. Alpha Titans and McCormack agreed to pay disgorgement of $469,522, prejudgment interest of $28,928, and a civil penalty of $200,000. McCormack and Kaeser each agreed to one-year securities industry bars. Lesser agreed to pay a civil penalty of $75,000 and an order denying him the ability to practice before the SEC as an accountant for at least three years. In the Matter of Alpha Titans, LLC, Timothy P. McCormack and Kelly D. Kaeser, Esq., SEC Rel. No. 34-724828 (Apr. 29, 2015). In the Matter of Simon Lesser, CPA, CA, SEC Rel. No. 34-74827 (Apr. 29, 2015).

SEC Announces Award to Whistleblower in First Retaliation Case

The SEC announced a maximum whistleblower award payment of 30 percent of amounts collected in connection with In the Matter of Paradigm Capital Management, Inc. and Candace King Weir (discussed in July 1, 2014 Financial Services Alert), the SEC’s first administrative proceeding exercising its new authority under Dodd-Frank whistleblower program provisions to bring anti-retaliation enforcement actions. The award of $600,000 represents the maximum share of monetary sanctions allowable under the SEC’s whistleblower program.  The SEC press release announcing the award quoted Sean McKessy, Chief of the SEC’s Office of the Whistleblower, as stating that he hopes the award “encourages potential whistleblowers to come forward in light of our demonstrated commitment to protect them against retaliatory conduct and make significant financial awards to whistleblowers who suffer employment hardships as a result of reporting possible securities law violations.” In an April 30 speech about the SEC’s whistleblower program, SEC Chair Mary Jo White referred to the award in discussing the SEC’s strong stance on enforcing anti-retaliation protections.