Investment Management Updates December 2021

Investment Management, Trading & Markets Updates – December 2021

NFA Adds Virtual Currency and Micro Contract Questions to Annual Questionnaire

On December 6, 2021, the National Futures Association (NFA) released Notice I-21-42 to notify NFA members that new questions had been added to the Annual Questionnaire regarding members’ spot/physical virtual currency, virtual currency derivatives, and micro contract transactions. The new questions are meant to address the increased interest and activity in virtual currency and micro contract products. As the Annual Questionnaire must be completed annually and updated throughout the year to reflect significant changes in business activity, the NFA is requiring all CPO, CTA, FCM, FDM, and IB members to complete the new questions as soon as possible to avoid unnecessary inquiries.

SEC Releases Report on Meme Stocks and Equity and Options Market Structure Conditions

On October 18, 2021, the Securities and Exchange Commission (SEC) published a Staff Report on Equity and Options Market Structure Conditions in Early 2021 focusing on the January 2021 trading activity of GameStop Corp (GME). GME’s share prices skyrocketed to new highs and garnered a significant amount of attention, leading GME to become known as a “meme stock.” As the episode progressed in January, several retail broker-dealers temporarily prohibited certain activity in some of these meme stocks and options. GME experienced a number of factors that impacted the meme stocks generally: (1) large price moves; (2) large volume changes; (3) large short interest; (4) frequent Reddit mentions; and (5) significant coverage in the mainstream media. Because the meme stock episode raised several questions about market structure, the report also provides an overview of the equity and options market structure for individual investors. The report concludes by identifying several areas of market structure and regulatory framework that may be considered for potential study, including: (1) forces that may cause a brokerage to restrict trading; (2) digital engagement practices and payment for order flow; (3) trading in dark pools and wholesalers; and (4) the market dynamics of short selling.

SEC Announces Enforcement Results for FY 2021

On November 18, 2021, the SEC announced its enforcement results for fiscal year 2021, which ended on September 30. Over the course of FY 2021, the SEC filed 434 new enforcement actions, a 7% increase from 2020. These new actions spanned the entire securities waterfront, including against emerging threats in the crypto and SPAC spaces. The SEC also obtained judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, a 33% decrease and 33% increase, respectively, from 2020. FY 2021 also set a record for whistleblower awards, with the SEC awarding a total of $564 million to 108 whistleblowers. There were also several noteworthy enforcement actions in new areas such as actions involving securities using decentralized finance, or “DeFi,” technology, securities law violations on the “dark web,” charging an alternative data provider with securities fraud, failures to timely file and deliver Forms CRS, and an action against an order and execution management system provider that facilitated electronic trading for failing to register as a broker-dealer.

SEC Proposal on Electronic Recordkeeping Requirements

On November 18, 2021, the SEC published proposed amendments to electronic recordkeeping and prompt production of records requirements applicable to broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs). The proposal would bring the SEC’s rule in line with current technology. Currently, the SEC’s broker-dealer electronic recordkeeping rule requires firms to preserve electronic records exclusively in a nonrewriteable, nonerasable format. The proposed amendments would add an audit-trail alternative to this rule, allowing electronic records to be preserved in a manner that permits the re-creation of an original record if it is altered, overwritten, or erased. The comment period for this proposal will be open until January 3, 2022.

SEC Adopts Amendments to the Application of Universal Proxy Rules, Excluding Registered Investment Companies and BDCs

On November 17, 2021, the SEC adopted amendments to the proxy rules that require the use of universal proxy cards in contested elections. The new rules will take effect for shareholder meetings held after August 31, 2022 and will require companies and dissidents to list on their proxy cards all duly nominated director candidates: the board’s nominees, the dissident’s nominees, and any proxy access nominees. The rule was first proposed in 2016 and was adopted largely in its proposed form with one main change: a dissident is required to represent that it will solicit holders of at least 67% of the voting power entitled to vote in the election of directors.

Notably, the new rules will not apply to elections held by registered investment companies and business development company (BDC) funds. The SEC stated that since funds were not included in the original proposal, and based on the comments the SEC received on the proposal, further consideration was necessary on whether this new rule should apply to funds. The SEC encouraged industry participants, and in particular registered closed-end funds and BDCs, to continue an active dialogue with the SEC to explain the fundamental differences between activism in an operating company context and activism in a fund context.

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