Failure to disclose lands firm with $9 million fine
The Securities and Exchange Commission (SEC) has charged investment advisory firm Betterment LLC for making material misstatements and omissions related to its automated tax loss harvesting service, failing to provide clients with notice of changes to contracts, and failing to maintain certain required books and records. To settle the charges, Betterment has agreed to pay a $9 million penalty and distribute funds to affected clients.
The SEC’s order states that from 2016 to 2019, Betterment misstated or omitted several material facts concerning its tax loss harvesting service, including failing to disclose changes in the software related to scanning frequency and a programing constraint affecting certain clients. Additionally, two computer coding errors prevented TLH from harvesting losses for some clients, resulting in over 25,000 client accounts losing around $4 million in potential tax benefits.
The SEC’s actions emphasize the importance of investment advisers accurately and fully disclosing material facts to clients and maintaining accurate records. The settlement serves as a reminder to investment advisers of their legal obligations to clients and the consequences of failing to meet those obligations.
SEC Governor Bowman on risks of CBDC
In a speech delivered At the Georgetown University McDonough School of Business Psaros Center for Financial Markets and Policy, Washington, DC, SEC Governor Michelle Bowman discussed central bank digital currencies (CBDCs) as part of the evolving landscape of payment systems.
Bowman identified a number of policy considerations and concerns for the introduction of a CBDC including:
- interoperability and innovation; and
- unintended effects on the banking system.
She concluded: “From my perspective, there could be some promise for wholesale CBDCs in the future for settlement of certain financial market transactions and processing international payments. When it comes to some of the broader design and policy issues, particularly those around consumer privacy and impacts on the banking system, it is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions.”
SEC Chair testimony outlines numerous ongoing proposals
In a lengthy testimony before the United States House of Representatives Committee on Financial Services, SEC Chair Gary Gensler outlined a number of areas in which the SEC is considering rule and regulation updates.
Gensler noted: “we have proposals with regard to securities lending, short sale disclosures, and large position reporting for securities-based swaps. Further, the Financial Industry Regulatory Authority is working to enhance post-trade transparency in the fixed-income markets to facilitate greater competition.” Discussing equity markets, Gensler noted four developments:
- “A proposal that brokers meet a Commission best execution standard—in essence that brokers seek the best execution for investors when they place orders. This rule proposal would cover all sectors of the securities markets, including equity, fixed-income, and crypto asset securities.
- Updating Rule 605, on order execution quality.
- A proposal to better level the playing field between dark and lit markets. We are seeking to harmonize the minimum price increment where stocks can be quoted and transacted as well as lower these minimum increments across the markets.
- A proposal to bring greater competition for a segment of the market related to individual investors’ marketable orders.”
Gensler also reminded the committee of further proposals:
- a rule to require private fund advisers to provide detailed reporting to investors of fees, expenses, performance, and preferential treatment, such as side letters;
- issuer-disclosure proposals for cyber risk and stock buybacks, as well as proposals regarding fraud and manipulation in the securities-based swaps market;
- proposals with regard to special purpose acquisition companies, investment fund names, and funds and advisers that incorporate environmental, social, and governance factors;
- proposal of a rule for consistent and comparable climate-risk disclosure by public companies (which has received more than 15,000 comments);
- proposals for comment on both money market funds and open-end fund liquidity; and
- proposals to improve systemic risk reporting through updates to Form PF.
FCA releases overdraft evaluation report
The FCA has published Evaluation Paper 23/1 looking at the results and lessons learned from their evaluation of remedies for consumer harm found in the market for overdrafts. The evaluation found that while many firms were meeting the FCA’s expectations, gaps were found particularly about how firms monitor and review the effectiveness of their policies and procedures for customers who repeatedly use their overdraft. Areas of concern included behavior around
- Identifying and monitoring of overdraft repeat use customers
- Communicating with customers and gathering information
- Interventions to support customers
- Monitoring the effectiveness of repeat use policies and procedures
The FCA notes that all firms included in the review will be sent the good practice examples so they can improve where necessary.
APRA consults on exempting from compliance change of control and ownership provisions of the Superannuation Industry (Supervision) Act
The Australian Prudential Regulation Authority (APRA) has published a draft consultation to exempt a specified class of persons from compliance with the change of control and ownership provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
The change of ownership and control provisions in the SIS Act require persons to obtain approval from APRA to own or hold a controlling stake of more than 15 per cent in a Registrable Superannuation Entities (RSE) licensee. The provisions ensure that such persons are subject to a rigorous approval process, and impose severe penalties for a person that obtains a stake greater than 15 per cent without APRA’s approval to do so.
These provisions can particularly impact certain RSE licensee directors. The proposed class exemption therefore intends to remove the requirement for this class of RSE licensee directors to obtain approval to own or control an RSE licensee, where they are not entitled to a personal financial benefit from the shareholding.
Deputy Governor Derville Rowland outlines Individual Accountability Framework timetable
Deputy Governor of the Central Bank of Ireland Derville Rowland has outlined the timetable for introduction of the Individual Accountability Framework (IAF), the key aims of which are to promote sound governance throughout the regulated financial services sector. The Central Bank (Individual Accountability Framework) Bill 2023, which will provide for the introduction of the IAF, was enacted on 9th March 2023. It introduces four key areas:
- A Senior Executive Accountability Regime (SEAR) which ensures clearer accountability by imposing obligations on in-scope firms and senior individuals within them to set out clearly where responsibility and decision-making lies for their business;
- Conduct Standards, which set out the standards of behavior the Central Bank expects of firms and the individuals working within them;
- Enhancements to the current Fitness & Probity (F&P) Regime to address some current limitations of that regime; and
- Enhancements to the Administrative Sanctions Procedure (ASP), including a key change regarding the ability for the bank to take enforcement directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.
Rowland outlined the timeline for introducing aspect of the new regime:
- Conduct Standards to apply from 31 December 2023;
- Fitness & Probity Regime – Certification and inclusion of Holding Companies to apply from 31 December 2023; and
- Regulations prescribing responsibilities of different roles and requirements on firms to clearly set out allocation of those responsibilities and decision making to apply to in-scope firms from 1 July 2024.
Comment deadline on the consultation paper introducing the IAF is June 13th
A selected summary of key developments for regulated financial institutions
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