SEC Issues Waiver to Bank Holding Company from "Ineligible Issuer" Status

The SEC Division of Corporation Finance ("Division") granted no-action relief to a bank holding company from being considered an "ineligible issuer" under the definitions section of Securities Act rules on registration statements and prospectuses. ("Securities Act Rule 405"). Relief was granted notwithstanding the finding of a "best execution" violation by a subsidiary of the holding company.

According to the Order, between February and August 2020, the subsidiary violated its duty to seek best execution for its clients in wrap accounts by utilizing funds and share classes with higher expense ratios instead of those with lower expense ratios. The SEC stated that the subsidiary increased costs to its clients and did not disclose these fees in its ADV Brochure. The SEC also found that the subsidiary failed to adopt and maintain written compliance policies "reasonably designed" to prevent violations of the Investment Advisers Act. In the Order, the SEC specified that these actions by the bank violated Advisors Act Sections 206(2) and (4) ("Prohibited transactions by investment advisers") as well as Rule 206(4)-7 ("Compliance procedures and practices") thereunder.

The Division stated that it considered (i) the nature of the violation, (ii) whether it involved a criminal conviction, (iii) who was responsible for the violation and its duration, (iv) remedial efforts and (v) the "impact" on the issuer if granting the request for the waiver. The Division noted a number of factors in favor of granting the waiver, including that the violations did not impact investors in the holding company and the persons involved in the violations were not involved in disclosure matters.