Sidley Securities Regulatory Compliance and Enforcement

On March 27, the U.S. Court of Appeals for the Sixth Circuit became the latest appellate court to question whether there are fundamental defects in FINRA’s enforcement program. Much of the case focused on a narrow statutory question—whether the petitioner was the type of person who, under the Exchange Act, was subject to FINRA’s jurisdiction—that the court resolved in FINRA’s favor. In an attempt to bolster his case before the court, the petitioner also argued for the first time that FINRA’s in-house enforcement process violated his 7th Amendment right to a jury trial and Article III of the Constitution, basing both arguments on the Supreme Court’s 2024 decision in SEC v. Jarkesy. The court unanimously agreed that the petitioner had forfeited his constitutional arguments by not making them in the administrative proceeding below. But two members of the three-judge panel indicated that, had the issue been properly preserved, they viewed FINRA’s enforcement program as resting on uneasy constitutional footing. In doing so, the judges in different ways raised significant doubts and expressly rejected several of the core arguments the SEC and FINRA have relied upon to defend FINRA’s in-house enforcement program. The Sixth Circuit’s opinion is a reminder that significant constitutional questions about aspects of FINRA’s enforcement regime remain open, and the opinion underscores the importance of thinking strategically about preserving constitutional arguments when responding to potential FINRA enforcement actions. Read the opinion here: https://lnkd.in/gkdATaxq.

The SEC proposed amendments to limit the scope of Exchange Act Rule 15c2-11 to equity securities that would exclude fixed-income and other nonequity securities from its coverage. In this Sidley Update, we explain the proposal’s background, its anticipated effect on broker-dealers and other market participants, and practical considerations as a result of the SEC’s proposed definition of “equity security” under the amendments. Read our insights here: https://lnkd.in/gZA7amKB.

After years of regulatory fragmentation and interagency turf wars, the U.S. Commodity Futures Trading Commission and the SEC recently announced a landmark memorandum of understanding and Joint Harmonization Initiative, signaling a decisive shift toward coordinated oversight. Although these do not amend existing regulations or create new regulatory obligations, they establish a framework that could materially reshape the U.S. financial regulatory landscape. Read our insights here: https://lnkd.in/g7-3Kure.

The SEC settled charges under Advisers Act Section 206(2) against a registered investment adviser for failing to adequately disclose conflicts of interest related to cash allocation for its robo-advisory accounts and certain Form ADV disclosures.    Key Takeaways • Conflicts of interest for no-fee accounts: According to the SEC, the RIA allocated 30% of client assets to cash in its no-advisory-fee robo-advisor accounts but did not disclose that the allocation percentage was selected, in part, to make up for not charging an advisory fee, by generating revenue for affiliated entities through interest-related payments. • Form ADV Part 2A disclosures: According to the SEC, the RIA’s Form ADV Part 2A disclosures were deficient because the RIA stated that portfolios were managed based on Modern Portfolio Theory (MPT) but did not disclose that MPT only applied to the non-cash portion (70%) of portfolios.   Settlement Terms • $500,000 penalty,  • Cease-and-desist order, censure and undertaking to send order to affected clients. • The SEC did not order disgorgement.   Why It Matters This action underscores continued SEC scrutiny of robo-advisory platforms offered to retail investors, particularly around: • Revenue-generating features embedded in “no-fee” products; • Transparency of portfolio construction methodologies; and • Adequacy of conflict disclosures tied to affiliated entities. Read more here: https://lnkd.in/gbc3xkyM.

On March 20, the SEC published notice of MEMX LLC’s application for temporary exemptive relief from key aspects of the September 2024 amendments to Rule 610(c) of Regulation NMS.   What’s at issue? The 2024 amendments lowered access fee caps and, alongside Rule 612 changes, introduced new half-penny ($0.005) tick size for certain NMS stocks.   What is MEMX requesting? Two key forms of relief: • Delay implementation of amended access fee caps for certain NMS stocks—stocks not subject to $0.005 tick sizes could have access fees of up to $0.003 (as exists today). • Permit higher access fees—up to $0.0015—for stocks subject to the new $0.005 tick size (rather than $0.001 under the 2024 amendments).   Why does it matter? MEMX argues additional time is needed for the SEC and market participants to evaluate how access fees should be structured—particularly in light of potential changes to Rule 611 (Order Protection Rule). MEMX requests the relief be effective until the SEC determines whether it will take future action with respect to Rule 610(c) if or when Rule 611 is amended or repealed.   Comments are due 30 days after Federal Register publication.   Read the MEMX proposal here: https://lnkd.in/gU8E-uaC.

The U.S. Commodity Futures Trading Commission is taking a more active role in regulating prediction markets, issuing guidance on event contracts and seeking public input through an Advance Notice of Proposed Rulemaking. Market participants should review the guidance closely and consider submitting comments. Read our key takeaways: https://lnkd.in/ghpR4Dxz.

On February 13, FinCEN scaled back the requirement that covered financial institutions identify and verify the beneficial owners of legal entity customers (beneficial ownership information, or BOI) at every new account opening. In its exceptive relief order, FinCEN granted exceptive relief limiting the requirement to identify and verify BOI of legal entity customers to three circumstances: (1) at initial account opening, (2) when facts arise that reasonably call into question the reliability of previously obtained BOI, and (3) as warranted under the institution’s risk-based customer due diligence procedures.   Firms have expended significant resources to address prior burdensome BOI requirements and now may consider whether those processes should remain in place or whether the exceptive relief warrants business workflow changes. While the order meaningfully reduces burdens associated with BOI collection, the third circumstance, where BOI remains required “as warranted under the institution’s risk-based customer due diligence procedures,” may render implementation of changes under this order more challenging than it first appears. Firms should look closely as to how they will implement their BOI workflow, taking into account FinCEN’s exceptive relief order.   Read the order here: https://lnkd.in/gAUxWf6Z.

The proposed rulemakings on Trump Accounts — new tax-advantaged savings vehicles for children — cover certain operation questions but leave others unaddressed for now. Read our insights here: https://lnkd.in/gXa2VF2M.

On March 16, the SEC announced that Judge Margaret Ryan has resigned from her role as Director of the Division of Enforcement, effective immediately. Judge Ryan had held the role for approximately six months, since September 2025. Principal Deputy Director Sam Waldon has been named Acting Director of the Division, and the SEC stated in a press release that it expects to announce a permanent successor in the coming weeks.

Join Sidley partner Ian McGinley on Wednesday, March 18 in Washington, D.C. for the DC Blockchain Summit, where he’ll share insights on a panel titled “Governing Digital Asset Markets: A Boardroom Perspective on Sanctions, AML, and Regulatory Risk.”   The event will bring together the most influential voices leading the blockchain and digital asset ecosystem, connecting them with the nation’s top policymakers and regulators for crucial discussions and conversations on key issues that will define the future of our industry and its success.   Lean more here: https://lnkd.in/g8xvYFnP.