SEC Chairman Clayton Issues Statement on Cybersecurity

SEC Chairman Jay Clayton today issued a statement highlighting the importance of cybersecurity to the agency and market participants, and detailing the agency’s approach to cybersecurity as an organization and as a regulatory body.

The statement is part of an ongoing assessment of the SEC’s cybersecurity risk profile that Chairman Clayton initiated upon taking office in May. Components of this initiative have included the creation of a senior-level cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency.   The statement provides an overview of the Commission’s collection and use of data and discusses key cyber risks faced by the agency, including a 2016 intrusion of the Commission’s EDGAR test filing system. In August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading.  Specifically, a software vulnerability in the test filing component of the Commission’s EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information. It is believed the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. An internal investigation was commenced immediately at the direction of the Chairman.  

“Cybersecurity is critical to the operations of our markets and the risks are significant and, in many cases, systemic,” said Chairman Clayton. “We must be vigilant. We also must recognize—in both the public and private sectors, including the SEC—that there will be intrusions, and that a key component of cyber risk management is resilience and recovery.”

The statement also outlines the management of internal cybersecurity risks, including the incorporation of cybersecurity considerations in disclosure-based and supervisory efforts, coordination with other government entities, and the enforcement of the federal securities laws against cyber threat actors and market participants that do not meet their disclosure obligations.

Chairman Clayton writes, “By promoting effective cybersecurity practices in connection with both the Commission’s internal operations and its external regulatory oversight efforts, it is our objective to contribute substantively to a financial market system that recognizes and addresses cybersecurity risks and, in circumstances in which these risks materialize, exhibits strong mitigation and resiliency.”

Thomas J. Butler Named an Associate Regional Director for Examinations in New York Regional Office

The Securities and Exchange Commission today announced that Thomas J. Butler has been named an Associate Regional Director for the Investment Adviser and Investment Company examination program in the agency’s New York Regional Office.  Mr. Butler is leaving his current position as Director of the SEC’s Office of Credit Ratings (OCR), a position he has held since June 2012.

“I am delighted to welcome Tom to the team,” said Pete Driscoll, Acting Director of the Office of Compliance Inspections and Examinations. “The New York region is responsible for more than 2,800 registered investment advisers with more than $18 trillion in assets under management and over 200 investment company complexes. Tom’s significant industry experience and leadership prior to and at the SEC will be invaluable to the experienced and dedicated staff in the New York examination program.”

Prior to his 2012 appointment as the inaugural Director of OCR, Mr. Butler was a Managing Director at Morgan Stanley Smith Barney and Citigroup, held senior financial advisory and structuring roles at UBS and Babcock & Brown, and worked at two major law firms. Mr. Butler received his undergraduate degree from Rutgers College and his law degree from Rutgers School of Law at Newark.

Jessica Kane, Director of the SEC’s Office of Municipal Securities (OMS), has been appointed to serve as Acting Director of OCR on an interim basis following Mr. Butler’s departure.  In turn, Rebecca Olsen, Deputy Director of OMS, will serve as Acting Director of that office while Ms. Kane is assigned to OCR.

Thomas J. Butler Named an Associate Regional Director for Examinations in New York Regional Office

The Securities and Exchange Commission today announced that Thomas J. Butler has been named an Associate Regional Director for the Investment Adviser and Investment Company examination program in the agency’s New York Regional Office.  Mr. Butler is leaving his current position as Director of the SEC’s Office of Credit Ratings (OCR), a position he has held since June 2012.

“I am delighted to welcome Tom to the team,” said Pete Driscoll, Acting Director of the Office of Compliance Inspections and Examinations. “The New York region is responsible for more than 2,800 registered investment advisers with more than $18 trillion in assets under management and over 200 investment company complexes. Tom’s significant industry experience and leadership prior to and at the SEC will be invaluable to the experienced and dedicated staff in the New York examination program.”

Prior to his 2012 appointment as the inaugural Director of OCR, Mr. Butler was a Managing Director at Morgan Stanley Smith Barney and Citigroup, held senior financial advisory and structuring roles at UBS and Babcock & Brown, and worked at two major law firms. Mr. Butler received his undergraduate degree from Rutgers College and his law degree from Rutgers School of Law at Newark.

Jessica Kane, Director of the SEC’s Office of Municipal Securities (OMS), has been appointed to serve as Acting Director of OCR on an interim basis following Mr. Butler’s departure.  In turn, Rebecca Olsen, Deputy Director of OMS, will serve as Acting Director of that office while Ms. Kane is assigned to OCR.

CEO Charged With Using Secret Accounts for Insider Trading in Company Stock

The Securities and Exchange Commission today charged the former CEO of a Silicon Valley-based fiber optics company with insider trading in company stock by using secret brokerage accounts held in the names of his wife and brother.

The SEC alleges that Peter C. Chang, who also was the founder and chairman of the board at Alliance Fiber Optic Products, generated more than $2 million in illicit profits and losses avoided by trading on nonpublic information and tipping his brother ahead of two negative earnings announcements and the company’s merger.  

According to the SEC’s complaint, Chang was the company’s largest shareholder and required under the federal securities laws to disclose his ownership of company securities as an officer and director.  Chang allegedly traded company shares secretly in the family member accounts, often times from his work computer after attending board meetings where confidential information was discussed.   He also allegedly tipped his brother in Taiwan with nonpublic information to trade ahead of the earnings announcements in 2015 and an announcement in 2016 that the company would be acquired via tender offer by Corning.

Chang allegedly tried to hide his control over one of the accounts by posing as his brother in communications with one of the brokerage firms, and he allegedly obscured his relationship with his wife in response to a market surveillance inquiry by the Financial Industry Regulatory Authority. 

“As alleged in our complaint, Chang betrayed his company and its shareholders for his personal gain by trading in clandestine accounts right after learning extremely confidential information in board meetings,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. 

The SEC’s complaint charges Chang with violating Sections 10(b), 14(e), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 14e-3, and 16a-3.  The complaint seeks disgorgement with prejudgment interest plus a penalty, permanent injunction, and officer-and-director bar.

In a separate action by the U.S. Attorney’s Office for the Northern District of California, criminal charges were unsealed against Chang.

The SEC’s investigation, which is continuing, has been conducted by Serafima Krikunova and supervised by Jennifer J. Lee of the San Francisco office with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit.  The SEC’s litigation will be led by Susan F. LaMarca.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

CEO Charged With Using Secret Accounts for Insider Trading in Company Stock

The Securities and Exchange Commission today charged the former CEO of a Silicon Valley-based fiber optics company with insider trading in company stock by using secret brokerage accounts held in the names of his wife and brother.

The SEC alleges that Peter C. Chang, who also was the founder and chairman of the board at Alliance Fiber Optic Products, generated more than $2 million in illicit profits and losses avoided by trading on nonpublic information and tipping his brother ahead of two negative earnings announcements and the company’s merger.  

According to the SEC’s complaint, Chang was the company’s largest shareholder and required under the federal securities laws to disclose his ownership of company securities as an officer and director.  Chang allegedly traded company shares secretly in the family member accounts, often times from his work computer after attending board meetings where confidential information was discussed.   He also allegedly tipped his brother in Taiwan with nonpublic information to trade ahead of the earnings announcements in 2015 and an announcement in 2016 that the company would be acquired via tender offer by Corning.

Chang allegedly tried to hide his control over one of the accounts by posing as his brother in communications with one of the brokerage firms, and he allegedly obscured his relationship with his wife in response to a market surveillance inquiry by the Financial Industry Regulatory Authority. 

“As alleged in our complaint, Chang betrayed his company and its shareholders for his personal gain by trading in clandestine accounts right after learning extremely confidential information in board meetings,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. 

The SEC’s complaint charges Chang with violating Sections 10(b), 14(e), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 14e-3, and 16a-3.  The complaint seeks disgorgement with prejudgment interest plus a penalty, permanent injunction, and officer-and-director bar.

In a separate action by the U.S. Attorney’s Office for the Northern District of California, criminal charges were unsealed against Chang.

The SEC’s investigation, which is continuing, has been conducted by Serafima Krikunova and supervised by Jennifer J. Lee of the San Francisco office with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit.  The SEC’s litigation will be led by Susan F. LaMarca.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

Catherine McGuire to Retire After More Than 40 Years at the SEC

Catherine McGuire to Retire After More Than 40 Years at the SEC

Ken C. Joseph, Head of Investment Adviser/Investment Company Examination Program in SEC’s New York Regional Office, to Leave SEC After 21 Years of Service

The Securities and Exchange Commission today announced that Ken C. Joseph, Head of Investment Adviser/Investment Company Examination Program in the New York Regional Office, is planning to leave the agency.

Since 2012, Mr. Joseph has led a team of over 130 accountants, examiners, attorneys, and support staff responsible for the examination of investment companies and investment advisers in New York and New Jersey.  During that time, the IA/IC Examination Program in the New York Regional Office has steadily increased the number of exams of investment advisers and investment companies and has made many changes that have led to a more efficient and effective examination program.

Before joining the National Exam Program, Mr. Joseph started at the SEC as a Law Clerk. He went on to serve as an Assistant Director in the SEC’s Enforcement Division, New York. When the division was reorganized in 2010, he joined the newly formed Asset Management Unit.

During his tenure with the Enforcement Division, Mr. Joseph investigated a wide array of alleged violations of the federal securities laws, including those involving financial fraud, auction rate and subprime securities, credit default swaps, reinsurance transactions, hedge funds, private equity funds, Ponzi schemes, special purpose entities, auditors, investment advisers, investment companies, self-regulatory organizations, transfer agents, and broker-dealers.

“Throughout his over two decade career at the SEC, Ken has served the Commission with dedication, leadership and integrity,” said Pete Driscoll, Acting Director of the SEC’s Office of Compliance Inspections and Examinations. “We and the investing public have greatly benefitted by his outstanding stewardship of the IA/IC Examination Program in New York and his commitment to the SEC’s mission.”

“Ken is the quintessential public servant, who has worked tirelessly for investors these last 21 years.  He is, without a doubt, one of the most gifted and talented managers I have ever encountered – a true visionary with a mighty work ethic who has spent night and day thinking about how to do his job better,” said Andrew M. Calamari, Director for the SEC’s New York Regional Office. “After a stellar enforcement career, Ken took on leadership of our investment management program and in five short years transformed the program in many positive ways including innovative ideas and changes that contributed to the National Exam Program. It has been my privilege to serve with Ken, and I will miss him greatly.”

Mr. Joseph said, “It has been a privilege and an honor to be entrusted with ever increasing responsibility for fulfilling the Commission’s mission. I have been fortunate to work cooperatively and collegially with professionals, all of whom have been bound by our deep commitment to public service. I also wish to acknowledge the support my teams have received over the years from law enforcement partners at the state, local and federal levels.”

Under Mr. Joseph’s supervision, the examination team has referred a number of impactful matters to the Division of Enforcement, which resulted in the payment of significant disgorgement and penalties. These impactful actions included:

• In the Matter of Royal Alliance Associates, Inc. et al., which resulted in the payment of $9.5 million in monetary relief stemming from alleged anti-fraud violations based on alleged failure to monitor client accounts and to disclose conflicts in selecting mutual fund share classes for clients. 
• Morgan Stanley Smith Barney LLC, which resulted in $13 million in monetary relief for alleged overcharges to clients of more than $16 million and alleged violations of the custody rule and compliance rule. 
• Kohlberg Kravis Roberts & Co. for alleged violations of the anti-fraud rules and for alleged misallocation of broker-dealer expenses, which resulted in monetary relief of $30 million for alleged misallocation of broken deal expenses. 
• Barclays Capital Inc., for alleged anti-fraud violations based on alleged overbilling of advisory fees and excess mutual fund sales charges, which resulted in $97 million monetary relief. 

Mr. Joseph earned his B.S., M.B.A., and post-graduate degrees from St. John’s University, New York, and his J.D. from the University of North Carolina at Chapel Hill School of Law.

Ken C. Joseph, Head of Investment Adviser/Investment Company Examination Program in SEC’s New York Regional Office, to Leave SEC After 21 Years of Service

The Securities and Exchange Commission today announced that Ken C. Joseph, Head of Investment Adviser/Investment Company Examination Program in the New York Regional Office, is planning to leave the agency.

Since 2012, Mr. Joseph has led a team of over 130 accountants, examiners, attorneys, and support staff responsible for the examination of investment companies and investment advisers in New York and New Jersey.  During that time, the IA/IC Examination Program in the New York Regional Office has steadily increased the number of exams of investment advisers and investment companies and has made many changes that have led to a more efficient and effective examination program.

Before joining the National Exam Program, Mr. Joseph started at the SEC as a Law Clerk. He went on to serve as an Assistant Director in the SEC’s Enforcement Division, New York. When the division was reorganized in 2010, he joined the newly formed Asset Management Unit.

During his tenure with the Enforcement Division, Mr. Joseph investigated a wide array of alleged violations of the federal securities laws, including those involving financial fraud, auction rate and subprime securities, credit default swaps, reinsurance transactions, hedge funds, private equity funds, Ponzi schemes, special purpose entities, auditors, investment advisers, investment companies, self-regulatory organizations, transfer agents, and broker-dealers.

“Throughout his over two decade career at the SEC, Ken has served the Commission with dedication, leadership and integrity,” said Pete Driscoll, Acting Director of the SEC’s Office of Compliance Inspections and Examinations. “We and the investing public have greatly benefitted by his outstanding stewardship of the IA/IC Examination Program in New York and his commitment to the SEC’s mission.”

“Ken is the quintessential public servant, who has worked tirelessly for investors these last 21 years.  He is, without a doubt, one of the most gifted and talented managers I have ever encountered – a true visionary with a mighty work ethic who has spent night and day thinking about how to do his job better,” said Andrew M. Calamari, Director for the SEC’s New York Regional Office. “After a stellar enforcement career, Ken took on leadership of our investment management program and in five short years transformed the program in many positive ways including innovative ideas and changes that contributed to the National Exam Program. It has been my privilege to serve with Ken, and I will miss him greatly.”

Mr. Joseph said, “It has been a privilege and an honor to be entrusted with ever increasing responsibility for fulfilling the Commission’s mission. I have been fortunate to work cooperatively and collegially with professionals, all of whom have been bound by our deep commitment to public service. I also wish to acknowledge the support my teams have received over the years from law enforcement partners at the state, local and federal levels.”

Under Mr. Joseph’s supervision, the examination team has referred a number of impactful matters to the Division of Enforcement, which resulted in the payment of significant disgorgement and penalties. These impactful actions included:

• In the Matter of Royal Alliance Associates, Inc. et al., which resulted in the payment of $9.5 million in monetary relief stemming from alleged anti-fraud violations based on alleged failure to monitor client accounts and to disclose conflicts in selecting mutual fund share classes for clients. 
• Morgan Stanley Smith Barney LLC, which resulted in $13 million in monetary relief for alleged overcharges to clients of more than $16 million and alleged violations of the custody rule and compliance rule. 
• Kohlberg Kravis Roberts & Co. for alleged violations of the anti-fraud rules and for alleged misallocation of broker-dealer expenses, which resulted in monetary relief of $30 million for alleged misallocation of broken deal expenses. 
• Barclays Capital Inc., for alleged anti-fraud violations based on alleged overbilling of advisory fees and excess mutual fund sales charges, which resulted in $97 million monetary relief. 

Mr. Joseph earned his B.S., M.B.A., and post-graduate degrees from St. John’s University, New York, and his J.D. from the University of North Carolina at Chapel Hill School of Law.

SunTrust Charged With Improperly Recommending Higher-Fee Mutual Funds

The Securities and Exchange Commission today charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.

SunTrust Investment Services has agreed to pay a penalty of more than $1.1 million to settle the charges.  SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation.  SEC examiners cited the practice during a compliance review of the firm in mid-2015.  More than 4,500 accounts were affected.

According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees.  Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees.  The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.

“SunTrust made self-serving investment recommendations to the detriment of everyday investors who rely on mutual funds to secure their financial futures,” said Aaron W. Lipson, Associate Regional Director for Enforcement in the SEC’s Atlanta office.  “The story has a happy ending for customers with the extra fees back in their accounts, and an obvious lesson for investment advisory representatives that you must always recommend the best deal for your clients, not yourselves.”

The SEC’s order finds that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.  The firm also agreed to be censured.

The SEC’s investigation was conducted by Brian M. Basinger and supervised by Mr. Lipson and Stephen E. Donahue in the Atlanta office with support from the Division of Economic Risk and Analysis.  The SEC examination that led to the investigation was conducted by Vincent H. Catrini and Samra Fleschner of the Atlanta office.

SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey

The Securities and Exchange Commission is closely monitoring of the impact of Hurricane Irma on investors and capital markets, and continues to monitor the impacts of Hurricane Harvey. 

“As we are doing in areas affected by Hurricane Harvey, the SEC will be closely monitoring the effects of Hurricane Irma. We will be making sure investors have access to their securities accounts, evaluating the need to extend deadlines for filings and other regulatory requirements, and keeping a watchful eye for storm-related scams,” said SEC Chairman Jay Clayton. “Our thoughts and prayers continue to be with everyone affected by these terrible storms.”

The SEC Divisions and Offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms. Until the Commission’s Miami Regional Office reopens, investors and market participants in Florida, Mississippi, Louisiana, U.S. Virgin Islands, and Puerto Rico can contact the Commission’s Atlanta Regional Office. Entities and investment professionals affected by Hurricanes Harvey and Irma are encouraged to contact Commission staff with questions and concerns:

• Office of Compliance Inspections and Examinations staff in the Commission’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
• Office of Compliance Inspections and Examinations staff in the Commission’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
• Office of Compliance Inspections and Examinations staff in the Commission’s Fort Worth Regional Office can be reached by phone at 817-978-3821 or email at dfw@sec.gov
• Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
• Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
• Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
• Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov

Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricanes are encouraged to contact the Commission’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.

The Division of Enforcement will be vigilant for Hurricane Harvey and Irma-related securities scams and will vigorously prosecute those who attempt to defraud victims of the storms. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.  An SEC Investor Alert can be found at: https://investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-be-vigilant-investment-scams.

SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey

The Securities and Exchange Commission is closely monitoring of the impact of Hurricane Irma on investors and capital markets, and continues to monitor the impacts of Hurricane Harvey. 

“As we are doing in areas affected by Hurricane Harvey, the SEC will be closely monitoring the effects of Hurricane Irma. We will be making sure investors have access to their securities accounts, evaluating the need to extend deadlines for filings and other regulatory requirements, and keeping a watchful eye for storm-related scams,” said SEC Chairman Jay Clayton. “Our thoughts and prayers continue to be with everyone affected by these terrible storms.”

The SEC Divisions and Offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms. Until the Commission’s Miami Regional Office reopens, investors and market participants in Florida, Mississippi, Louisiana, U.S. Virgin Islands, and Puerto Rico can contact the Commission’s Atlanta Regional Office. Entities and investment professionals affected by Hurricanes Harvey and Irma are encouraged to contact Commission staff with questions and concerns:

• Office of Compliance Inspections and Examinations staff in the Commission’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
• Office of Compliance Inspections and Examinations staff in the Commission’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
• Office of Compliance Inspections and Examinations staff in the Commission’s Fort Worth Regional Office can be reached by phone at 817-978-3821 or email at dfw@sec.gov
• Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
• Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
• Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
• Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov

Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricanes are encouraged to contact the Commission’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.

The Division of Enforcement will be vigilant for Hurricane Harvey and Irma-related securities scams and will vigorously prosecute those who attempt to defraud victims of the storms. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.  An SEC Investor Alert can be found at: https://investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-be-vigilant-investment-scams.