Securities Enforcement Roundup – November 2024

In this issue of our monthly Securities Enforcement Roundup, we highlight top securities enforcement developments and cases from November 2024.

In November 2024:

• The US Court of Appeals for the DC Circuit issued a decision in the closely watched Alpine Securities Corp. v. FINRA case. Largely sidestepping the constitutional issues that have received significant industry attention, the DC Circuit reversed the district court’s denial of Alpine’s request for a preliminary injunction on narrow grounds.
• The US Securities and Exchange Commission (SEC) announced its enforcement results for fiscal year 2024.
• The SEC announced that its Chair, Gary Gensler, will be stepping down effective January 20, 2025.
• The SEC charged three broker-dealers with filing deficient suspicious activity reports (SARs).
• The SEC charged an investment adviser for allegedly making misleading statements about its percentage of assets that utilized environmental, social, and governance (ESG) factors in making investment decisions.
• The Financial Industry Regulatory Authority (FINRA) charged a broker-dealer for deficiencies in its trade monitoring practices that resulted in more than $1.2 million in client losses.
• FINRA charged a broker-dealer for failing to disclose certain material aspects of the firm’s relationship with its execution venues and for filing incorrect Rule 605 and 606(a) reports.

DC CIRCUIT ISSUES DECISION IN ALPINE SECURITIES V. FINRA

As discussed in our recent LawFlash, on November 22, 2024, the US Court of Appeals for the DC Circuit issued its much-anticipated decision in the Alpine case.[1] Declining to decide larger constitutional questions, the court instead reversed on narrow grounds, teeing up further questions and potential challenges to FINRA’s ability to carry out its enforcement mandates and whether and when constitutional issues are triggered.

In August 2019, FINRA filed a complaint against Alpine Securities Corp. for violating several FINRA rules, including for charging unfair and excessive fees, prices, and commissions, misappropriating customer property, and violating liquidity rules.[2] A FINRA disciplinary panel concluded that Alpine’s violations were “intentional and egregious,” issued a cease-and-desist order to prevent future violations, ordered Alpine to pay restitution to its clients, and expelled Alpine from FINRA; Alpine appealed.[3] Alpine also sued FINRA in federal court, challenging FINRA’s constitutionality under the nondelegation doctrine, the Appointments Clause, and the First, Fifth, and Seventh Amendments.[4]

While Alpine’s federal suit and internal FINRA appeal were pending, FINRA opened a follow-on investigation into potential violations by Alpine of the cease-and-desist order.[5] The second investigation led to an expedited disciplinary proceeding against Alpine, through which FINRA sought Alpine’s immediate expulsion from FINRA.[6] Alpine asked the district court for a preliminary injunction against the expediated disciplinary proceeding while its constitutional challenge was pending, but the district court denied Alpine’s request and issued a ruling rejecting Alpine’s constitutional challenges.[7] Alpine appealed to the US Court of Appeals for the DC Circuit, which issued an emergency injunction pending appeal, putting a halt to FINRA’s expedited disciplinary proceeding.[8]

A split DC Circuit panel declined to reach Alpine’s constitutional challenges and instead reversed the district court’s denial of Alpine’s preliminary injunction request, finding Alpine likely to succeed on the merits of its private nondelegation claim that FINRA cannot unilaterally expel a member without SEC review.[9] The DC Circuit noted the irreparable harm Alpine would suffer “if expelled from FINRA and the entire securities industry before the SEC reviews the merits of FINRA’s decision.”[10] The DC Circuit ultimately remanded to the district court to allow Alpine’s constitutional challenges to proceed without the threat that its business would be shut down prior to SEC review.[11]

Judge Walker concurred with the ruling but dissented from the majority’s decision not to enjoin the entirety of the enforcement proceedings, concluding that FINRA’s enforcement arm violates the nondelegation doctrine, even if the SEC reviews the findings afterward.[12] Although the DC Circuit’s decision did not address the constitutional questions that had been generating significant buzz in the industry, Judge Walker’s dissent signals a willingness to review the entirety of FINRA’s enforcement arm, which is exclusively administrative in nature. And while Alpine’s arguments are novel, given the changing of tides with a new administration, it is possible that such arguments will gain traction with other jurists.

THE SEC ANNOUNCES ITS FISCAL YEAR 2024 ENFORCEMENT RESULTS

On November 22, the SEC’s Enforcement Division published its enforcement results for fiscal year 2024.[13] The report provides an overview of the number and types of enforcement actions that were filed in FY 2024. Some key takeaways include:

• The SEC filed 583 enforcement actions and obtained orders for a total of $8.2 billion in financial remedies (notably, more than half of that total was derived from one matter), the highest amount ever recorded by the SEC. Of the $8.2 billion in remedies recorded, $6.1 billion consisted of disgorgement and prejudgment interest, and $2.1 billion represented civil penalties.
• While the financial remedies were record breaking, the total number of enforcement actions filed (583) represents a 26% decline from fiscal year 2023. Of the 583 actions, 431 were standalone while 93 were follow-on administrative proceedings.
• The SEC obtained 124 orders barring individuals from serving as officers and directors of public companies, the second-highest number of bars obtained in the past decade.
• The SEC received 45,120 tips, complaints, and referrals—the most ever received in one year—including more than 24,000 whistleblower tips. The Commission issued whistleblower awards totaling $255 million in 2024.
• The enforcement results emphasized that registrants and other market participants who self-reported, remediated, or otherwise cooperated meaningfully with the Division of Enforcement were rewarded with reduced civil penalties or no penalty settlements.
• The results highlighted SEC initiatives and areas of focus in fiscal 2024: off-channel communications, the Marketing Rule, whistleblower protections, disclosures of holdings and transactions by insiders and investment managers, concerns regarding emerging technologies (such as AI, cybersecurity, and crypto), public company misstatements, and individual accountability.

CHAIR GARY GENSLER ANNOUNCES HIS IMPENDING DEPARTURE

On November 21, the day before it announced its enforcement results, the SEC announced that Gary Gensler, the Commission’s 33rd Chair, will depart the Commission on January 20, 2025 after nearly four years as Chair.[14] Gensler has held the position of SEC Chair since April 2021. He was formerly chair of the US Commodity Futures Trading Commission, advised on the drafting of the Sarbanes-Oxley Act, and served as undersecretary of the Treasury for Domestic Finance and assistant secretary of the Treasury.

Gensler said that it had been “an honor of a lifetime to serve with [the Commission] on behalf of everyday Americans and ensure that our capital markets remain the best in the world.” President-elect Donald Trump announced on December 4, 2024 that he intends to nominate Paul Atkins, CEO of Potomak Partners and former SEC commissioner under George W. Bush, to replace Chair Gensler.

THREE BROKER-DEALERS ARE CHARGED WITH FILING DEFICIENT SARs

Three broker-dealers agreed to settle charges by the SEC that they allegedly filed deficient suspicious activity reports (SARs) over a four-year period, beginning in 2018.[15] The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), with which the SARs are filed, requires that the SARs contain a “clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion.”[16]

In the cases at issue, the SAR narratives allegedly omitted facts identifying the “five essential elements” necessary to the narrative—the “who, what, when, where, and why” of the activity being reported. For example, the SEC concluded that narratives stating that an account may be “compromised” or that a client was trading “illiquid options chains” provide insufficient information; specifics such as names and account numbers are required by FinCEN.[17]

Without admitting or denying the SEC’s charges, the firms agreed to pay between $75,000 and $125,000 each in civil penalties; two of the firms further agreed to undergo review of their anti-money laundering programs by compliance consultants. The SEC’s press release announcing the charges noted that the resolutions reflect the firms’ cooperation after being contacted by the staff, as well as certain remedial measures taken by one of the firms.

SEC CHARGES INVESTMENT ADVISER FOR MAKING ESG-RELATED MISSTATEMENTS

On November 8, the SEC announced charges against an investment adviser for making misleading statements about the percentage of company-wide assets under its management that integrated environmental, social, and governance (ESG) factors in investment decisions. According to the SEC’s order, between 2020 and 2022, the company stated that between 70% and 94% of its assets under management were “ESG integrated.”

However, according to the SEC, these percentages included a significant amount of assets that were held in passive exchange-traded funds (ETFs) that did not consider ESG factors. Moreover, the SEC alleged that the adviser did not have any written policies defining “ESG integration” or concerning how the adviser would determine what percentage of assets were ESG integrated. The SEC further alleged that the adviser’s justifications for the integration of its passive ETFs were inconsistent with the public statements the adviser made.

Without admitting or denying the SEC’s findings, the adviser agreed to pay $17.5 million in civil penalties to settle the charges against it.

FINRA CHARGES BROKER-DEALER FOR DEFICIENT TRADE MONITORING

On November 7, FINRA issued a letter of Acceptance, Waiver, and Consent (AWC) finding that a broker-dealer failed to (1) reasonably supervise for excessive and unsuitable trading, including unsuitable options trading; and (2) reasonably supervise for unauthorized trades in a deceased client’s account.

According to the AWC, the firm permitted registered representatives with insufficient knowledge, training, and experience to override automated supervisory alerts with respect to options trading. As a result, one of the firm’s registered representatives opened options positions in a customer account on margin, even though the customer did not have a margin account. The AWC also found that the firm failed to supervise for unauthorized trading in the account of one of its customers following the customer’s death, including by failing to follow up with the registered representative when it became aware that the deceased customer’s account was not yet frozen and that the registered representative had continued to trade in the account.

As a result of its conduct, FINRA found that the firm violated FINRA Rules 2111, 2360, 3110, and 2010. The firm was fined $250,000.

FINRA CHARGES BROKER-DEALER FOR INSUFFICIENT DISCLOSURES RELATED TO EXECUTION PRACTICES

Continuing its focus on execution-related practices,[18] FINRA issued an AWC on November 20 based on a firm’s failure to properly disclose material aspects of its relationship with the firm’s execution venues. To help customers understand how broker-dealers route their orders, broker-dealers are required to publish quarterly Rule 606(a) reports that disclose certain information about the firm’s routing and execution practices. In addition, to allow for the comparison of execution quality between exchanges and market makers, exchanges and market makers are required to publish monthly Rule 605 reports regarding execution statistics for certain transactions.

According to the AWC, throughout a four-year period, the firm’s Rule 606(a) reports erroneously classified orders routed to alternative trading systems as “other” orders, despite the firm routing those orders to its venue as mid-point peg orders. Consequently, the firm (which also operated an execution venue) failed to include information about its mid-point peg orders in its Rule 605 report, despite FINRA informing the firm it was erroneously doing so. This resulted in the firm’s alleged failure to report approximately one billion transactions in its Rule 605 reports. The AWC also concluded that the firm’s 606(a) reports included incomplete or inaccurate information related to pricing schedules utilized by venues, as well as fees and rebates paid by the firm to the venues based on exchange rules.

As a result of its conduct, FINRA found that the firm violated Rule 605 of Regulation NMS and FINRA Rule 2010. The firm was fined $175,000.