Asset Management Litigation/Enforcement Flash Report

May 22, 2020

Especially in today’s economic and work environment, we find it helpful – and we therefore thought our clients would also find it helpful – to keep track of the important litigation and regulatory enforcement developments impacting the asset management industry in real time. The result is our “flash report,” which we will continue to maintain and circulate on a regular basis. As always, please do not hesitate to contact any of us if there is anything with which we can help you.

Regulatory Enforcement


  • Steven Peikin, Keynote Address: Securities Enforcement Forum West 2020 (May 12, 2020).

    • Coronavirus Steering Committee created to coordinate the Division’s response to coronavirus-related enforcement actions.Expect close coordination with specialized units.

    • Systematic process developed to review public filings from issuers in highly impacted industries.

    • Focus on identifying disclosures that appear to be significantly out of step with others in the same industry, and disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.

    • Also monitoring the impact of the crisis on the performance of complex structured products and to identify possible improper marketing and sale of such products to retail investors.

  • Regulatory Notice 20-13, FINRA Reminds Firms to Beware of Fraud During the Coronavirus (COVID-19) Pandemic (May 5, 2020).

    • FINRA urges firms and associated persons to be cognizant of the heightened threat of frauds and scams to which firms and their customers may be exposed during the COVID-19 pandemic and encourages firms to assess their compliance programs relating to account opening and money transfers and reminds them to review policies and procedures.
  • Regulatory Notice 20-14, Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products (May 15, 2020).

    • Due to recent extraordinary conditions in crude oil markets, combined with the manner in which the products are structured, several oil-linked ETPs have experienced significant volatility and lost a substantial percentage of their value, with at least one ETP liquidating and another forced to halt the issuance of new shares and adjust its investment objective.

    • Firms should be mindful of their sales practice obligations in connection with oil-linked ETPs, including that recommendations to customers must be based on a full understanding of the terms, features, and risks of the product recommended; communications with the public must be fair and accurate; firms must have reasonably designed supervisory procedures in place to ensure that these obligations are met; and firms that offer oil-linked ETPs must train registered representatives who sell these products about the terms, features and risks of these products.

  • SIFMA Webinar Series: Ask FINRA: A Panel of Senior FINRA Officials Respond to Your Questions (May 19, 2020).

    • FINRA executives report having seen significant upticks in market manipulation alerts and fraud reports, noting that letters and notices are forthcoming as they look to keep abuses in check.

    • Reported significant increases in alerts related to best execution, pricing issues, wash sales, spoofing and layering.
Recent Sweep Activity

  • In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC’s Division of Enforcement appears to be conducting a sweep investigation of issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The scope is apparently focused on assessing statements made in reported financial statements with certifications made in PPP applications regarding the necessity of funding.
Disclosure-based litigation

  • Early stages of COVID-19 based securities fraud class actions – less than 10 cases filed so far, facts have been extreme (e.g., company allegedly misrepresented the existence of COVID-19 contracts), defendants are either foreign-based or smaller in terms of market cap.

  • Larger and more sophisticated plaintiffs’ firms have not entered this fray … yet.SEC and FINRA pronouncements about public disclosures generally and to asset managers specifically almost certainly will be used as predicates for later-filed, “hindsight”-type claims.

  • Potential utility of “federal forum” provision to manage Section 11 litigation risk (see Delaware Supreme Court Rules that Corporations Can Require Securities Act Claims to Be Filed Exclusively in Federal Court).

Section 36(b) litigation

  • No new cases filed since 2018, but several press release inquiries earlier this year (pre-COVID 19) from “new” plaintiffs’ attorneys suggests continued interest in this space – which only will be exacerbated as macro-economic impacts work their way through registered funds/advisers (performance challenges, fee/margin pressures).

  • Sixth Circuit affirmance of summary judgment in favor of JP Morgan Investments Management (see Sixth Circuit Issues Section 36(b) Ruling Affirming Grant of Summary Judgment To Mutual Fund Investment Adviser).

  • A number of important rulings from post-Jones litigation wave still to be issued: post-trial ruling in Great-West (D. Colo., post-trial filings to be completed by June 2020); appellate rulings in Davis Ventures (2nd Cir., oral argument held in May 2020), BlackRock (3rd Cir., appeal to be decided on briefs) and MetWest (9th Cir., oral argument likely to be scheduled for Q4 2020).

Clawback litigation

  • Trustees and creditors of bankrupt companies continue to seek recovery of proceeds paid in connection with leveraged buyouts to former company shareholders – including mutual funds.

  • Earlier this year, the Second Circuit affirmed the dismissal of state law constructive fraudulent conveyance claims brought against former shareholders of The Tribune Company. The appeal to the Second Circuit from the district court’s dismissal of federal claims is pending.

  • Former shareholders of The Jones Group were recently sued in federal courts located around the country by the Litigation Trustee of Nine West Holdings and the Indenture Trustee of certain Nine West Holdings senior notes. A petition to have the cases consolidated and transferred to one federal jurisdiction will be argued later this month.

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