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Second Circuit Makes Class Certification in Securities Cases Easier

On November 6, 2017, the Second Circuit clarified that plaintiffs do not need to provide an “event study” to demonstrate market efficiency at the class certification stage in putative class actions. Rather, courts will certify a putative class if plaintiffs can demonstrate sufficient indirect evidence of market efficiency. Waggoner v. Barclays PLC, No. 16-1912-cv (2d. Cir. Nov 6, 2017).

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Householding Accounts – Avoiding a Prohibited Transaction

Householding of brokerage accounts is a common practice. Clients like it because they can get reduced fees by aggregating all of their accounts. Broker-dealers like it because they get more assets to manage. But when retirement accounts are involved, broker-dealers need to be mindful of special rules that can adversely affect their clients…because unhappy clients don’t tend to remain clients for long.

The problem occurs under the prohibited transaction rules of ERISA and the Internal Revenue Code. They say that a fiduciary (i.e., the person in control of the account – the investor) can’t use retirement assets to obtain a personal benefit. With householding, the client gets a personal benefit when the combined value of both his or her retirement and personal accounts hits a breakpoint that reduces the fee on the personal accounts. In other words, the investor gets a personal benefit from the use of retirement assets.

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SEC Issues MiFID II No-Action Relief and Allays Various Cross-Border Concerns

The SEC recently issued three no-action letters designed to provide market participants with greater certainty regarding their U.S. regulated activities as they engage in efforts to comply with the EU’s Markets in Financial Instruments Directive (MiFID II).

In a recent client alert, I provided a summary of all three no-action letters and explain that as a result of these no-action letters, existing soft-dollar and commission-sharing arrangements may continue, subject to certain new restrictions. Click here to read the client alert.

As background, MiFID II will require, for impacted EU parties, that research be priced separately from execution, starting on January 3, 2018. This represents a significant change from the current practice, whereby research is generally supplied as part of a bundle of services, with no explicit charge.

Absent new U.S. regulations or other relief, this change had the potential to cause a significant number of problems for U.S. advisers, funds and clients dealing with EU parties.

WSP’s Under the DOL Fiduciary Rule

Broker-dealers have written supervisory policies (WSPs) that cover almost all aspects of their business.  But more WSPs may be needed to address the DOL fiduciary rule.

While it may seem that no such requirement exists, the Department of Labor (DOL) has turned this around … if the firm intends to rely on the Best Interest Contract Exemption (BICE).

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The SEC’s Back In the Fiduciary Regulation “Game”

The SEC announced its plans to move “from the sideline” on fiduciary regulations on June 1, 2017.  That day, SEC Chairman Jay Clayton issued a statement referencing U.S. Department of Labor Secretary Alexander Acosta’s call for SEC participation and stated that he “look[ed] forward to robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.” This represented the SEC’s first serious foray back into this area since a rule finalized in April 2005 entitled “Certain Broker-Dealers Deemed Not To Be Investment Advisers” that added Rule 202(a)(11)-1 to the Investment Advisers Act of 1940.  That rule was short-lived and was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2007.
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Required Disclosures After the DOL Fiduciary Rule

You may have already missed a required deadline for disclosure to your retirement plan clients … or not.  In this post, we explore the requirement to update retirement plan disclosures to reflect changes in the information that was initially provided, including a change in fiduciary status under the new rules.
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Political Contribution Limitations Now Also Mandatory for Broker-Dealers

The SEC’s Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), aka the Pay-to-Play Rule, was partially delayed until recently, when FINRA adopted a complementary Rule. Broker-dealers that engage in distribution or solicitation activities with a government entity on behalf of any investment adviser need to pay close attention to the rule changes. I have outlined the rules, penalties and new FINRA rule below.
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The SEC’s 2017 Cybersecurity Alert and New Cyber Unit

In August 2017, the SEC’s Office of Compliance Inspection and Examinations (OCIE) issued a Risk Alert outlining observations from its “Cybersecurity 2 Initiative,” which was built upon its 2014 “Cybersecurity 1 Initiative.”  Notably, this alert offered a rare industry compliment, describing “an overall improvement” in cybersecurity practices and processes since the Cybersecurity 1 Initiative.  Below we summarize the OCIE staff’s observations, certain criticisms and their descriptions of robust policies, procedures and practices.
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