Weekly RoundUp
May 27, 2015

Financial Services Weekly News

SEC Enforcement Action on FCPA Compliance – Check the Box Is Not Enough. On May 20 the SEC announced that global resources company BHP Billiton had agreed to pay $25 million to settle charges that it had violated the Foreign Corrupt Practices Act (FCPA) when it sponsored the attendance of foreign government officials at the Summer Olympics in Beijing. In the Order Instituting Cease-and-Desist Proceedings, the SEC notably did not make findings of profits from corrupt practices. Rather, its case was built on a finding of inadequate compliance systems and implementation. BHP Billiton was a sponsor of the 2008 Olympics, and the SEC found that it sought to maximize its investment in the Olympic Games by “strengthen[ing] relationships with key local and global stakeholders, e.g., Government Ministers, Suppliers and Customers.” BHP Billiton ultimately invited approximately 650 people to attend the Beijing Olympics, including 176 government officials, 98 of whom were, according to the SEC findings, representatives of state-owned enterprises that were customers or suppliers of BHP Billiton, and the spouses of 102 of the government officials. BHP Billiton had developed a hospitality application which business managers were required to complete for individuals, including government officials, that they wished to invite, and the application included questions designed to determine whether the invitation would create a risk of violation of anti-corruption laws. However, the SEC found that the applications were not completed with all relevant information and were not updated to reflect subsequent developments like commencement of contract discussions with government officials. The SEC also found that BHP Billiton did not have a separate and independent compliance department to review the applications. It had an Ethics Panel, but the Panel’s mandate was not to review the applications but to provide advice on ethical and compliance matters. Final accountability for anti-corruption compliance rested with business leaders. The SEC action is a reminder that it is not sufficient to have compliance procedures if the procedures are not followed and subjected to effective supervisory review. The SEC announcement includes a link to summaries of prior FCPA cases.

Regulatory Developments

FINRA Requests Comment on Proposed Amendments to Rules Governing Communications With the Public

FINRA is soliciting comment on proposed amendments to the FINRA rules governing communications with the public. The proposed amendments would revise the filing requirements in FINRA Rule 2210 (Communications with the Public) and FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) and the content and disclosure requirements in FINRA Rule 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings). FINRA proposes to narrow the new firm filing requirement by requiring new firms to file only their websites and material changes to their websites within 10 business days of first use for a one-year period. FINRA also proposes to exclude from filing requirements shareholder reports that investment companies have filed with the SEC, and to eliminate the requirement for investment companies to file ranking and comparison material used in retail communications (they must instead maintain backup material as part of their records).

FINRA Provides Guidance on Rules Governing Communications With the Public

FINRA has published questions and answers on its website which are intended to supplement previously published guidance. Among the topics addressed are non-promotional communications, social media posts in online interactive electronic forums and the treatment of institutional communications distributed to retail investors by an intermediary. FINRA also reminds firms that a business development company (BDC) falls within the definition of direct participation program under FINRA Rule 2310(a)(4). Accordingly, firms must file with FINRA retail communications concerning BDCs that are registered under the Securities Act within 10 business days of first use or publication of the communication.

FINRA Staff Issues Interpretive Letter Permitting “Related Performance Information” For Mutual Funds to be Given to Institutional Investors

The FINRA staff issued an interpretive letter permitting “related performance information” to be included in communications pertaining to mutual funds distributed to institutional investors as defined in FINRA Rule 2210(a)(4), subject to a number of conditions. Historically, FINRA has not permitted communications with investors about a mutual fund to include related performance information consisting of actual performance of all separate or private accounts or funds that have (i) substantially similar investment policies, objectives, and strategies to the fund, and (ii) are currently managed or were previously managed by the same adviser or sub-adviser that manages the mutual fund.  Among the interpretive letter’s conditions are that recipients of the related performance information be instructed not to provide it to current or prospective customers or others who are not institutional investors. The letter further states that the guidance it provides does not affect FINRA’s longstanding prohibition on the presentation of related performance information, other than the performance of a predecessor private account or fund, in communications used with retail investors. Letter from Joseph E. Price, FINRA, to Edward P. Macdonald, Hartford Funds Distributors, LLC (May 12, 2015).

FINRA Proposes Rule Change to Extend the Implementation of FINRA Rule 4240

FINRA is filing with the SEC a proposed rule change to amend FINRA Rule 4240 (Margin Requirements for Credit Default Swaps) to extend the implementation of FINRA Rule 4240 to July 18, 2016. FINRA Rule 4240 implements an interim pilot program with respect to margin requirements for certain transactions in credit default swaps that are security-based swaps.

Enforcement & Litigation

Supreme Court Vacates Decision Applying Statute of Limitations in ERISA Excessive Fee Case 

In a highly anticipated decision concerning 401(k) excessive fee litigation, the U.S. Supreme Court ruled in favor of the plaintiffs in Tibble v. Edison, Int’l, No. 13-550, vacating the lower court’s decision that had found certain of the plaintiffs’ excessive fee claims time-barred. In addressing the application of ERISA’s six-year statute of limitations to claims challenging the investment options offered to a large 401(k) plan, the Court ruled unanimously that the Ninth Circuit erred when it applied the statute of limitations to breach of fiduciary duty claims based on the initial selection of investments without considering that the fiduciaries had a separate, continuing duty to monitor investments and to remove imprudent investments. In so ruling, the Court declined to define the scope of an appropriate ongoing investment review, but noted that the nature and timing of such review would be contingent on the circumstances. The Court remanded the case to the Ninth Circuit to consider the plaintiffs’ claims that the fiduciaries breached their duties within the six-year statutory period. The decision will be covered in more detail in Goodwin Procter’s upcoming ERISA Litigation Update.

SEC Alleges Fiduciary Breach by Investment Adviser in Making Recommendations to City of Atlanta Pension Funds That Did Not Comply With Georgia Law Governing Public Pension Fund Investments

The SEC announced that it had instituted administrative proceedings against Gray Financial Group, Inc., an Atlanta-based investment adviser, and Laurence O. Gray and Robert C. Hubbard, IV, the firm’s co-CEOs, over recommendations that pension funds for the City of Atlanta’s police and firefighters, transit workers, and other employees invest in a private fund of funds managed by the firm. The SEC alleges violations of various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940, and related rules, on the basis that the respondents knew, were reckless in not knowing, or should have known that such an investment did not comply with provisions of Georgia law relating to investment in an alternative fund by a Georgia public pension plan. In the Matter of Gray Financial Group, Inc., Laurence O. Gray and Robert C. Hubbard, IV, SEC Rel. No. 33-9789 (May 21, 2015).