LATEST DEVELOPMENTS
SEC Announces Departure of William Birdthistle; Natasha Vij Greiner Named Director of the Division of Investment Management
The SEC announced on February 28, 2024 that William Birdthistle, the Director of the Division of Investment Management, would leave the SEC effective March 8, 2024 to rejoin academia. Mr. Birdthistle has been replaced by Natasha Vij Greiner, who was the Deputy Director of the Division of Examinations.
Ms. Greiner has been with the SEC for 22 years, joining at the start of her career, and has served as the National Associate Director of the Investment Adviser/Investment Company (IA/IC) examination program which includes the Private Funds Unit. She has served in several other roles across divisions of the agency and according to Chair Gensler, "brings deep and broad expertise to the Division." Ms. Greiner received her J.D. from The Catholic University of America, Columbus School of Law and B.S. degree from James Madison University.
LATEST DEVELOPMENTS: ADVISERS
FinCEN Proposes Anti-Money Laundering Rule Applicable to Certain Investment Advisers
The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, has proposed a new rule to address illicit finance risk that would include registered investment advisers and exempt reporting advisers within the definition of "financial institution" under the Bank Secrecy Act (BSA). The proposed rule seeks to address regulatory gaps in Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) programs for certain investment advisers, including suspicious activity reporting and related recordkeeping requirements.
FinCEN is proposing the rule in light of the considerable expansion in the investment adviser industry. The proposed rule reported that in 2015 (the last time FinCEN proposed similar rules) there were approximately 12,000 registered investment advisers with approximately $67 trillion in assets under management and as of June 30, 2023 there were more than 15,000 registered investment advisers with approximately $125 trillion in assets under management. Unlike the 2015 proposed rule, the new rule would also apply to exempt reporting advisers who advise private equity funds, private funds, hedge funds and venture capital funds.
The proposed rule would require registered investment advisers and exempt reporting advisers to:
- Develop and Implement a Written AML/CFT Program: A
program, "reasonably designed to prevent money laundering,
terrorist financing, and other illicit finance activities,"
would need to be implemented which would require:
- designating a person responsible for the program;
- independent testing of the program;
- ongoing training to comply with program requirements; and
- ongoing customer due diligence (including identifying and verifying customers and developing customer risk profiles).
- File Suspicious Activity Reports (SARs): The rule would require advisers to timely file SARs with FinCEN regarding suspicious transactions relating to possible violations of laws or regulations subject to certain threshold requirements.
- Comply with Recordkeeping Requirements: The rule would require advisers to maintain records related to the transmittal of funds as well as records of SAR filings and supporting documentation.
Notably, investment advisers to mutual funds and exchange-traded funds (ETFs) would be exempt from the proposed rule as it relates specifically to their mutual funds and ETFs because those products are already subject to separate reporting obligations under existing AML/CFT requirements. Under the BSA, mutual funds and ETFs have implemented customer identification programs, due diligence requirements, and suspicious activity reporting in order to combat illicit finance risks. Advisers that manage other accounts in addition to mutual funds or ETFs would still be subject to the rule with regard to those other accounts
If finalized, the rule would delegate examination authority to the SEC in reviewing an adviser's compliance with the rule. The comment period for the proposed rule closes on April 15, 2024
Sources: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rulemaking (NPRM), Financial Crimes Enforcement Network Fact Sheet (Feb. 13, 2024), available here; Department of the Treasury, Proposed Rule (Feb. 15, 2024), available here; FinCEN Proposed Rule to Combat Illicit Finance and National Security Threats in Investment Adviser Sector, Press Release (Feb. 13, 2024), available here.
LITIGATION/ENFORCEMENT ACTIONS
Sixteen Firms Settle for Over $81 Million in Off-Channel Communications Recordkeeping Failures
The SEC recently announced settlements with 16 broker-dealer and investment advisory firms for failure to maintain and preserve electronic communications. The regulator's investigation of off-channel communications has resulted in enforcement actions against more than 40 firms and spans a period of over two years, though the SEC shows no signs of slowing down its recordkeeping sweep.
According to the SEC orders, the SEC staff uncovered "widespread and longstanding" uses of unapproved communication methods, such as personal text messages or WhatsApp messages, to communicate internally and externally regarding business matters. This occurred firm-wide and across multiple levels of authority, in violation of Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Section 204 of the Investment Advisers Act of 1940 (Advisers Act).
The orders state that employees of the investment advisory firms sent and received off-channel communications related to, among other things, recommendations made or proposed to be made, and advice given or proposed to be given. Additionally, employees of the broker-dealer firms communicated about business matters such as placing and executing trades. Furthermore, the orders allege that the firms' widespread failure to implement their policies and procedures that prohibit such off-channel communication led to a failure to reasonably supervise personnel in violation of Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Advisers Act.
At the SEC Speaks conference held in early April, the Deputy Director of the SEC's Division of Enforcement discussed the six key factors the SEC considers in determining how much to fine the firms that have received penalties under the recordkeeping initiative. He said the agency considers: (1) the size of the firm, to ensure the penalty is an adequate deterrent; (2) the scope of the violations, including both the breadth and depth of off-channel communications in a firm; (3) a firm's efforts to comply with its recordkeeping obligations and to prevent off-channel communications, such as through the implementation of technological solutions; (4) precedent, namely the many settled orders that have come out of this initiative since 2021; (5) whether a firm self-reported, which is considered by the agency to be the most significant factor in terms of mitigating penalties; and (6) cooperation – firms that do not self-report may still receive credit based on their cooperation during the investigation.
A spokesperson from the SEC's Division of Examinations Chicago Regional Office recently indicated that their office is looking at off-channel communications primarily from the perspective of compliance with policies and procedures, and less as an exercise in searching employees' personal devices for every instance of unapproved communications; though egregious violations may prompt the Division of Examinations to conduct a more intensive review.
As part of the settlements, all firms agreed to retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices.
Godfrey & Kahn Note: While instituting a policy prohibiting off-channel communications is a good starting place, firms must take additional steps to show they are actively monitoring compliance with their policies, such as using a vendor service to capture employees' business communications.
Sources: Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures, SEC Press Release 2024-18 (Feb. 9, 2024), available here; SEC vs. Guggenheim Securities LLC et. al., No. 3-21851 (Feb. 9, 2024), available here; Sanjay Wadhwa, Remarks at SEC Speaks 2024 (Apr. 3, 2024), available here.
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