Welcome to the Regulatory Roundup. Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.
NASAA Proposes Revisions to its Broker-Dealer Standard of Conduct Model Rule
- On November 4, the North American Securities Administrators Association (NASAA) proposed revised amendments to its model rule regarding the broker-dealer standard of conduct (Model Rule). NASAA’s November 2024 proposal (November 2024 Proposal) would expressly incorporate Reg BI into the Model Rule and prohibit the misleading use of the “adviser” and “advisor” titles.
- By way of background, the November 2024 Proposal follows from NASAA’s originally proposed amendments in September 2023 (September 2023 Proposal). The September 2023 Proposal received substantial industry pushback due to its inclusion of requirements derived directly from SEC staff guidance and/or NASAA’s own interpretation of certain Reg BI principles. Many commenters believed that NASAA’s inclusion of these requirements in the Model Rule text itself would have resulted in state requirements that conflicted with Reg BI.
- NASAA’s elimination of the originally proposed requirements that were derived from SEC staff guidance and NASAA’s own interpretations more closely aligns the proposed Model Rule with the duties imposed on broker-dealers under Reg BI. NASAA is accepting comments on the November 2024 Proposal until December 19.
SEC Releases Enforcement Results for Fiscal Year 2024
- On November 22, the SEC released its Fiscal Year 2024 Enforcement Results, announcing that it filed 583 total enforcement actions in fiscal year 2024, a 26% decrease from fiscal year 2023, resulting in $8.2 billion in financial remedies. The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest, the highest amount on record, and $2.1 billion in financial penalties, the second-highest amount on record.
- The SEC emphasized its seventy (70) enforcement actions against broker-dealers and investment advisers targeting their employees’ alleged use of “off-channel communications,” with civil penalties totaling more than $600 million.
- The SEC also highlighted actions related to non-compliance with the SEC’s Marketing Rule, the failure of certain insiders and market participants to disclose their securities holdings and transactions, and the use by market participants of false or misleading disclosures involving artificial intelligence, social media, cybersecurity and crypto assets.
Missouri Issues a New “Anti-ESG” Proposal
- In August 2024, a Missouri District Court found that Missouri’s anti-ESG rules for broker-dealers and investment advisers violated the First Amendment and were preempted by federal laws. The anti-ESG rules would have required broker-dealers and investment advisers to disclose and obtain written consent from customers if their investment decisions or advice incorporated a social or other nonfinancial objective. The District Court held that the anti-ESG rules were preempted by the National Securities Markets Improvement Act of 1996 (NSMIA) and the Employment Retirement Income Security Act of 1974 (ERISA). Missouri recently dropped an appeal of this ruling.
- In response to the Missouri District Court’s order, Missouri recently amended its “anti-ESG” rules for broker-dealers and investment advisers. The new proposal (with regard to both broker-dealers and investment advisers) scraps the original anti-ESG rules in their entirety, and, in their place, adds language that would make it a deceitful or fraudulent act to effect “any transaction with an investment objective that the customer has not authorized at or prior to the time such transaction is effected.” In an attempt to avoid the conflicts with between NSMIA's provisions relating to preemption of state laws regulating federally registered broker-dealers and the original anti-ESG rules that were highlighted by the Missouri District Court with regard to the original anti-ESG rules, Missouri added language to the subsection of the proposal covering broker-dealers and broker-dealer agents noting that “nothing in this subsection shall require broker-dealers or their agents to create or retain any record memorializing the required customer authorization.” Missouri also attempted to address the court’s objections relating to NSMIA’s provisions governing preemption of state investment adviser laws by limiting the scope of the new proposal to investment advisers subject to registration in Missouri.
- The comment period for the proposal runs through January 2, 2025.
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