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Adviser Regulatory & Compliance News

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SEC Charges Mutual Fund/ETF Adviser with Improper Order Flow Arrangement

August 5, 2020

The SEC charged registered investment advisers WBI Investments Inc. and Millington Securities Inc. for making material misrepresentations to clients about compensation Millington received in an institutional payment for order flow arrangement for routing client orders to certain brokerage firms for execution. According to the SEC, WBI and Millington served as advisers to a series of mutual funds and a series of exchange-traded funds, among other clients. The order finds that Millington, which also served as WBI’s primary introducing broker, agreed to route WBI’s client orders to certain brokerage firms that agreed to pay Millington amounts they characterized as “payments for order flow.” The SEC found that the payments to Millington were $0.0125 to $0.0150 per share. The SEC further found that, in general and over time, the brokerage firms executing WBI’s client trades adjusted the execution prices by $0.02 to $0.03 per share higher for client buy orders and lower for client sell orders. According to the SEC, Millington and the brokerage firms mutually understood that the adjusted execution prices allowed the brokerage firms to recoup their payments to Millington and generate profits. The SEC noted, however, that on at least three occasions, WBI and Millington falsely assured the boards of the mutual funds and the ETFs that these institutional payment for order flow arrangements did not adversely affect the funds’ execution prices. More information can be accessed by clicking the headline to this summary.

SEC Proposes to Revamp Mutual Fund and ETF Shareholder Reports

August 4, 2020

The SEC proposed significant modifications to the mutual fund and exchange-traded fund disclosure framework. The stated goal of the proposed disclosure framework is to feature concise and visually engaging shareholder reports that would highlight information that is particularly important for retail investors to assess and monitor their fund investments. Specifically, the proposal would: • require streamlined reports to shareholders that would include, among other things, fund expenses, performance, illustrations of holdings, and material fund changes; • significantly revise the content of these items to better align disclosures with developments in the markets and investor expectations; • encourage funds to use graphic or text features—such as tables, bullet lists, and question-and-answer formats—to promote effective communication; and • promote a layered and comprehensive disclosure framework by continuing to make available online certain information that is currently required in shareholder reports but may be less relevant to retail shareholders generally. The proposed framework additionally would provide an alternative approach to keeping investors informed about their ongoing fund investments. Instead of receiving both prospectus updates and shareholder reports, which today can be lengthy and complex, existing investors would receive the streamlined shareholder report. According to the SEC, this would provide investors with timely and concise information to effectively assess and monitor their fund investments. Information currently required in shareholder reports that is not included in the streamlined shareholder report would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC. More information can be accessed by clicking the headline to this summary.

Adviser Charged with Misallocating Trades

July 31, 2020

The SEC brought an enforcement action against Birinyi Associates, a SEC-registered investment adviser for allegedly allocating profitable day trades from at least June 2014 to June 2019 in a manner that was unfair to certain clients and inconsistent with the firm’s disclosures and internal policies. The SEC stated that Birinyi Associates had a small group of clients whose strategy was limited to day trading, for whom equity positions were to be sold by the end of each trading day per client directives, while for the vast majority of its clients, Birinyi Associates followed a buy-and-hold strategy and primarily purchased stock for longer- term investment. The day trade client accounts were not affiliated in any way with Birinyi Associates or with its present or former principals, directors, officers, employees or agents. The SEC found that Birinyi Associates made block trades in a master account and then allocated stock purchases and sales to individual client accounts. During the relevant period, the SEC stated that Birinyi Associates occasionally executed a day trade in the master account and allocated the purchase and sale to a day trade client, rather than allocating the purchase to a buy and hold client’s account as originally intended. According to the SEC, the day trades allocated to the day trade clients were almost always profitable but the profits were small, averaging 0.30% of the purchase price. As a result, the SEC found that the day trade clients received risk-free day trades with small profits while the buy and hold clients effectively bore all market risk for the day trade clients. As a result, the SEC found that Birinyi Associates willfully violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon any client. More information can be accessed by clicking the headline to this summary.

SEC Creates Events and Emerging Risks Examination Team

July 28, 2020

The SEC launched the Event and Emerging Risks Examination Team (EERT) in the Office of Compliance Inspections and Examinations (OCIE). OCIE is responsible for conducting examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, and transfer agents, among others. EERT is designed to proactively engage with financial firms about emerging threats and current market events and quickly mobilize to provide expertise and resources to the SEC's regional offices when critical matters arise. EERT will focus on implementing OCIE exam priorities, including those identified in OCIE's annual examination priorities publication. It is hoped that EERT will help ensure, through examinations and other firm engagement and monitoring activities, that firms are better prepared to address exigent threats, incidents, and emerging risks. EERT will also work with OCIE staff to provide expertise and support in response to significant market events that could have a systemic impact or that place investor assets at risk, such as exchange outages, liquidity events, and cyber-security or operational resiliency concerns. More information can be accessed by clicking the headline to this summary.

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