The following are summaries of key developments in the investment management industry. More detailed coverage of these and other topics can be found here.

OCIE Announces 2015 Priorities

The SEC’s Office of Compliance, Inspections and Examinations (OCIE) recently announced its selected list of 2015 examination priorities for investment advisers, broker-dealers, and transfer agents. These priorities generally address high-risk practices and products affecting market participants on both individual and national scales. They are grouped into three primary areas:

1) Protecting Retail Investors and Investors Saving for Retirement
2) Assessing Market-Wide Risks
3) Using Data Analytics To Identify Signals of Potential Illegal Activity

OCIE also expects to address other priorities, in addition to the areas above, including:

1) Proxy Services
2) Never-Before-Examined Investment Companies

SEC Broadly Interprets Janus on Enforcement Actions

The SEC has issued an opinion essentially exempting its enforcement actions from the holding of the U.S. Supreme Court’s decisions in Janus Capital Group v. First Derivative Traders.

The opinion addressed an enforcement action brought by the SEC’s Division of Enforcement against two employees of an unregistered fixed-income fund. The two employees, a senior product manager and chief investment officer, were charged with misleading investors about the risk profile and extent of subprime mortgages held by the fund between 2006 and 2007, as well as the effect of certain asset sales. Both employees were initially cleared in 2011, with the administrative law judge holding that Janus precluded charges being brought against either party, as neither of them had “ultimate authority” over the statements.

On appeal, the SEC reasoned that while Janus does limit liability for a misleading statement under Rule 10b-5(b), it does not similarly restrict Rules 10b-5(a) or (c). The SEC concluded that the ruling in Janus does not, in fact, limit its ability to bring charges under Rule 10b-5 at all. Additionally, the SEC held Janus does not apply to Section 17(a), which has no private right of action.

Ultimately, the SEC found that the senior product engineer had violated all three sections of 10b-5 and Section 17(a)(1) by approving and using presentation materials that misrepresented his firm’s investment in asset-backed securities by as much as 45 percent. The chief investment officer was found to have violated only Section 17(a)(3) when he negligently approved client letters containing false statements about the fund’s risk profile and advice from the investment adviser that was inconsistent with the views of others within the firm. The SEC suspended the respondents for one year from association with any investment adviser or investment company, and assessed penalties of $65,000 and $6,500, respectively. The matter is currently on appeal.

SEC Staff Releases Results of Cybersecurity Examination Sweep

On February 3, 2015, OCIE released a summary of its findings from a set of examinations it conducted on registered broker-dealers and investment advisers in 2013 and 2014. The examinations focused on how firms representing a cross-section of the industry handle risks related to cybersecurity, and how vulnerable they are to cyber-attacks.

The following are a few of the observations OCIE offered based on the examinations:

  • The vast majority of firms have adopted written information security policies, and most of them conduct audits of compliance with these policies.
  • The vast majority of firms conduct periodic assessments to identify cybersecurity threats and potential business consequences. However, fewer firms require such risk assessments from vendors with access to the firms’ networks.
  • Most of the firms reported that they had experienced some kind of cyber-related incident. In particular, a quarter of the broker-dealers that had losses related to fraudulent e-mails noted that the losses resulted from employees not following the firms’ identity authentication procedures.

OCIE staff is still reviewing information from these examinations, and cybersecurity will continue to be a focus of OCIE in 2015. In addition to the SEC, the Financial Industry Regulatory Authority, the regulatory organization for broker-dealers, has identified cybersecurity as a top examination priority. Further SEC guidance about how firms can address cyber risks and incidents is probably forthcoming. In the meantime, OCIE’s reported findings highlight a number of items that firms may want to consider in evaluating their current level of preparedness.

To learn more about these developments and other investment management news, please contact a member of the Ballard Spahr Investment Management Group or the attorney with whom you regularly work.


Copyright © 2015 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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