SIFMA C&L 2018 Annual Seminar Summary

General Session Panel Highlights

One-on-One with SEC Chairman Jay Clayton and SIFMA President & CEO Kenneth E. Bentsen, Jr.

The conference began with a one-on-one discussion with SEC Commissioner Clayton. He applauded the agency for its diverse talent and an ability to coordinate effectively with other state and federal regulators and FINRA. 

Commissioner Clayton acknowledged that the jurisdiction of multiple regulators touches upon the relationship of the typical customer/financial advisor. That presents two related potential challenges: competing standards of conduct and compliance with those standards. In his view, those challenges are at least initially met with less multiple regulatory oversight. That said, he did not expand upon how a reduction in regulatory jurisdiction could be achieved given what are certain to be competing interests of the various regulators.

No Q&A with Commissioner Clayton would be complete without a discussion of the Best Interest Standards and the Fifth Circuit Court of Appeals’ strike down of the DOL’s fiduciary rule last week. Commissioner Clayton said that the decision has not affected the SEC’s rulemaking and that it will be acting reasonably soon to address the issue.

The Agency believes there should be a more clearly articulated standard of conduct for FINRA registered representatives and added clarity on standards for investment advisors. The Commissioner impressed that ideally, both standards would conform to the SEC’s “plain English” initiative in the disclosure area. Even with clearer standards in this area, he was not at all supporting one of strict liability, especially for Chief Compliance Officers.

Commissioner Clayton stressed that whether initial coin offerings and cryptocurrencies are necessarily securities is up for debate; the label alone does not dictate the result. Indeed, in previous speeches and commentaries, he and SEC Staff have cautioned investors that ICOs are not subject to the same sort of regulatory protections as traditional securities and, in fact, no one has registered an ICO with the SEC as of yet.

The Commissioner spoke about the following SEC initiatives and changes:

  • Rebate fee pilot, which will have a two-year time period with one-year sunset on compensation structures and incentives in the equity space;
  • Changes (e., modernization) to how the fixed income market is regulated;
  • Moving away from broken windows policy of Commissioner Clayton’s predecessor and focusing the cases will have the most impact on individuals and their expectations of the SEC’s investor protection; and
  • Cyber security and cyber resiliency – the Commissioner advocated that firms should run table top exercises.

And, we must mention that Commission Clayton said he is not happy that the SEC does not have access to market data, referring to the Consolidated Audit Trail program. He opined that the market regulator should have access to trading data and that concern over risk of the data being hacked and the storage of sensitive information should not stand in the way of the SEC receiving the data and ability to monitor trading.

Treasury/Capitol Hill Update – Administration and Legislative Priorities

The panel included moderator Andy Blocker (Head of U.S. Government Affairs, Invesco), Kevin Bailey (Global Head of Regulatory Affairs, Citigroup), Jeffrey Brown (SVP, Legislative & Regulatory Affairs, Charles Schwab), Monique Frazier (SVP, Federal Government Affairs, HSBC), and Craig Phillips (Counselor to the Secretary, U.S. Department of the Treasury).

The panel discussed the Fifth Circuit strike down of the DOL fiduciary duty rule. Panel members said they agreed that the decision opens the door for the SEC to establish a standard (and hopefully one that makes more sense), but also that we should expect to see more states enter into decision-making in this area, something that was triggered by Nevada last year. This, however, potentially creates the same problem observed in other areas: multiple regulators attempting to regulate the same conduct and imposing layers of regulation that present different standards. 

As observed in past SIFMA conferences (and SIA conferences before that), there is a problem of multiple regulators performing multiple examinations of the same issues with apparently very little communication among them.  The panelists discussed a atypical example where, in closing an examination, regulator XYZ invited regulator ABC to attend the wrap-up and ask questions. ABC indicated that he had no questions then, but instead would ask its questions following its examination which was expected to begin in a few weeks.  The net result is a regulated business that, instead of being in business for the benefit of clients, employees, and shareholders, is in the business of being regulated.  

One-on-One with FINRA’s President and CEO Robert Cook and SIFMA Executive Vice President & General Counsel IRA D. Hammerman

On Tuesday morning, March 20, IRA Hammerman had a one-on-one with Robert Cook, with the majority of the interview discussing FINRA’s 360 Initiative. Later this month, FINRA will be publishing its progress report that is expected to detail all the steps FINRA has taken under its Initiative as well as improvements it may roll out this year. Some examples include examinations, changes to committee structure, and more.

Stay tuned for these changes:

  • FINRA sensing an uptick in oversight from the SEC; and
  • FINRA considering consolidating and reducing the number of exams per firm.

Finally, President Cook deferred commenting on the “Best Interest Standard,” noting that it is high on the SEC’s agenda moving forward.  

Enforcement Panel

The panel included moderator Stephen Cutler (Vice Chairman, JPMorgan Chase), Stephanie Avakian (Co-Director, Division of Enforcement, SEC), Steven Peikin (Co-Director, Division of Enforcement, SEC), Susan Schroeder (Executive Vice President and Head of Enforcement, FINRA), James McDonald (Director, Division of Enforcement, U.S. CFTC), David Green (Director of the Serious Fraud Office U.K.), and Mary Jo White (former SEC Chair).

The panel underscored that there are three key factors influencing a regulator in bringing a case:  (1) where there is investor harm, (2) significant impact to market integrity, and (3) where conduct creates risk to the market, investors, and industry (many cases fall into this third category). As an overlay, there was a stated focus from the regulators on matters involving cyber security issues and retail investors.     

The panelists addressed the sometimes vague area of cooperation credit. The panelists imparted that both the SEC and FINRA are trying to be more transparent in their orders and AWCs to clarify when cooperation credit is given and under what circumstances. Self-reporting is a major factor toward obtaining cooperation credit – a “qualitative” factor, not necessarily a monetary factor. The SEC considers a full range of cooperation which may result in reduced charges, reduced penalty, no penalty, or even no case at all. The maximum cooperation credit would most likely apply in those circumstances where firms self-police, self-report, and remediate. At least one regulator, the CFTC, did indicate that even if a firm does not self-report, it may still receive cooperation credit, just not to the same extent. Given FINRA’s 4530 self-reporting requirements, FINRA gives less cooperation credit than other regulators but does place emphasis on “extraordinary cooperation credit” to include fast remediation and restitution to investors.

The SEC and the CFTC were somewhat vague about whether executing a tolling agreement would prevent firms from receiving cooperation credit. At least in the wake of Kokesh, the SEC’s view is that if refusal to sign a tolling agreement takes conduct out of SEC authority and remediation, then it will give no cooperation credit to a firm.

The SEC stressed that it has named individuals in 80 percent of its cases and expects that to continue. In every case, the SEC considers whether it is appropriate to name an individual based upon precedent, corporate benefit, and the message sent to the community. In instances where the SEC pursued just the firm, those tend to be true corporate negligence-type cases or cases with an international scope where an individual is not necessarily available or there would otherwise be no meaningful remedy against the individual. The CFTC believes there is a direct link between company cooperation, reduced penalties, and holding individuals accountable.

Each of the regulators indicated that they strive to coordinate investigations and prosecutions with other regulators, but that that effort is “a work in progress.” FINRA said that it coordinates with other regulators and the sanctions include a “totality of sanctions.”

And finally, the regulators underscored the following 2018 priorities:

FINRA

  • High risk brokers, high risk conduct;
  • Restitution is critical component of sanctions (particularly in excessive trading, product, and disclosure cases); and
  • Integration of its enforcement teams.

SEC

  • Initial Coin Offerings and Cryptocurrencies; and
  • Retail Strategy Task Force (focusing on areas of excessive fees, mutual fund share class initiative, conflicts of interest discourse, one size fits all recommendations of products).

CFTC

  • Harm to market integrity;
  • Harm to customers;
  • Market manipulation; and
  • Internal capacity to collect data and expert in-house to analyze and identify misconduct to bring cases.

Federal Regulator Highlights

The Federal Regulator Highlights panel – which included Robert Colby, Chief Legal Officer of FINRA and Ted Dowd, Office of the Comptroller of the Currency, Director of Securities and Corporate Practices – was cancelled due to inclement weather.

Breakout Panel Highlights

Private Client Enforcement Developments

The panel included moderator Mark Keene (Managing Director and Associate General Counsel, Bank of America), Kevin Carroll (Managing Director and Associate General Counsel, SIFMA), Michael Freedman (Assistant General Counsel, Raymond James Financial, Inc.), Julie Glynn (Deputy Chief Legal Officer, J.P. Morgan Securities), Nader Salehi (Sidley Austin LLP), and Susan A. Schroeder (Executive Vice President and Head of Enforcement, FINRA).

The panel covered five broad and important topics: (1) protecting firms, (2) AML, (3) Financial Advisors and their behavior, (4) products, and (5) elder investors.

Carrot and Stick: By June 12, 2018, firms must decide whether to participate in the SEC Share Class Selection Disclosure Initiative. SEC enforcement will not recommend penalties against participating firms that self-report, but there will still be remediation, customer notification, and other obligations. It is up for debate whether it is in a firm’s interest to participate. FINRA applauded the effort.

Through an upcoming Notice to Members, FINRA may be clarifying the circumstances under which and the extent to which “extraordinary cooperation” credit is given. FINRA’s Schroeder noted that firms may receive cooperation credit by self-reporting even though FINRA members have a self-reporting obligation per Rule 4530.  According to Schroeder, cooperation credit may be available when the firm engages in early and in-depth information sharing with FINRA followed by swift remediation and restitution to investors.  Schroeder also acknowledged that past AWCs alone may not have adequately described the extent of cooperation credit given. Future AWCs will not include a specific quantification of cooperation credit given that AWCs are so often the product of negotiation. 

The panel’s tips on self-reporting:

  • Consider litigation and arbitration risks stemming from self-reporting by including litigators in the corresponding discussions.
  • Get ahead of client remediation questions from FINRA by raising the issue early and often and indicate what remediation the firm is willing to make.
  • Utilize consultants when self-reporting numbers/metrics to regulators.

Interesting FINRA tidbits:

  • FINRA may not be aware of parallel investigations conducted by other regulators.
  • Where there are multiple regulators, FINRA’s position is that the end settlement result reflects the totality of the circumstances among the regulators.
  • FINRA plans to be more clear in future AWCs where there is supervisory liability, e., with AMLCOs. Because the position and duties are specifically laid out in FINRA rules, FINRA believes that an AMLCO is a fair game target if FINRA can show that the compliance officer failed to execute his designated duties.
  • FINRA does not mine SARs for enforcement, but may use them as an aid to an investigation.

Schroeder advised on what FINRA’s focus would be for 2018:

  • Recidivist FAs – FINRA monitors U4 and U5 filings on individual financial advisors and expects that firms are aware of the same possible issues raised viz-a-vis an individual; firms that do not take appropriate action against repeat offenders are themselves at risk.
  • Products of Interest – variable annuities, concentrated positions, and adequate vetting of new products.
  • Concerns over fees – mutual fund share class distinctions, UITs (sales charges and rollovers), and surveillance tools that fail to detect instances when lower cost alternatives are available.
  • Elder investors – microcap fraud, FAs with control over investors assets (resulting in excessive commissions, excessive trading, and high losses).

Misconduct from an Acorn to an Oaktree (a/k/a Internal Investigations)

The panel included moderator Gary Rosen (Managing Director and Head of Institutional Sales and Trading Compliance, Citigroup Global Markets Inc.), Hannah Berkowitz (Murphy & McGonigle), James McHale (Executive Vice President and Chief Compliance Officer, Wells Fargo Advisors), Dan Rosenbaum (Director & Associate General Counsel, UBS Financial Services Inc.), Douglas  Siegel (Chief Compliance Officer, Oppenheimer & Co. Inc.), and Michael Walsh (Assistant Vice President, Federal Reserve Bank of New York). The panel based its presentation on a creative and complex hypothetical involving an internal investigation into multiple level employee misconduct and subpar branch supervision.   

The panelists stressed the following:

  • Preserve the privilege at all levels of the investigation while still being sensitive to what observations and conclusions are put in writing.
  • Upjohn warnings must be clear and consistently given at the outset of any employee interview.
  • Evaluate evidence with an eye toward whether it makes sense to reach out to clients and make restitution vs. waiting to see if FINRA takes action.
  • Pre-hire can be the single most important piece firms can do to prevent employee misconduct: (1) that applies not only to financial advisors, but also to their supervisors; (2) conduct a deep dive prior to hire; (3) financial advisor incentives must be a good match with those of the firm and vice versa.   
  • Consider whether policies are sufficient to cover certain conduct.
  • Track internal discipline and conduct/develop actionable data and metrics which are reassessed periodically and tested.
  • Conduct post-mortem/lessons learned sessions to evaluate whether additional and broader actions should be taken with respect to training and supervision. Engage outside counsel, especially when potential internal conflicts may exist.

Handling a Regulatory Investigation – Inhouse and Outside Counsel Perspectives

The panel included moderator Maria Douvas (Global Head of Litigation, RBC), Christian Bartholomew (Murphy & McGonigle), Caroline Hall (Senior Vice President and Associate General Counsel, Raymond James Financial Inc.), David Knight (Executive Vice President & General Counsel, Stephens Inc.), James Meadows (Head of Litigation for the Americas, Barclays), Lee S. Richards III (Richards, Kibbe & Orbe). The panel based their presentation on a complex front-running hypothetical to address:  (1) investigation, (2) self-reporting, (3) document productions to the regulators and witness interviews, and (4) other issues. Here are some key takeaways from each.

The panelists emphasized the following:

Investigation

  • Identify issues and have initial conversations.
  • Create a formal investigation team as soon possible (and memorialize it).

Self-Reporting

  • FINRA Rule 4530 requirement.
  • Potential for enhancing credibility with regulators.
  • But self-reporting must be done in a considered manner after sufficient facts have been explored and developed.

Document Production and Witness Interviews

  • Follow litigation hold procedures – early and often.
  • Review requests to ascertain whether they indicate a larger or systematic problem.
  • Negotiate breadth of requests – agree to search terms, engage a vendor for email review, agree to rolling productions (and produce documents asap to show good faith).
  • Encourage follow-on regulators to accept prior productions to first-in-time regulators to reduce costs and increase efficiency. Perhaps a first step in helping regulators coordinate parallel investigations?

Other Issues

  • Consider circumstances when an employee should be put on administrative leave, suspended, or terminated.
  • Encourage simultaneous settlement negotiations with different regulators to enhance coordination and consistency.

Privilege and Work Product Protections:  Ethical Considerations for In-House Teams The panel included moderator Allison Patton (Managing Director, Co-Head of Client Litigation, Morgan Stanley & Co. LLC), Pamela Chepiga (Allen & Overy LLP), Michele Coffey (Morgan Lewis & Bockius LLP), Suzanne Elovic (Regulatory Compliance, UBS), Merri Jo Gillette (Deputy General Counsel, Edward Jones), and Andrew Sidman (Bressler Amery & Ross).

The panel discussed a few important general reminders about the privilege:

  • Privilege and work product as it relates to auditors (no waiver because auditors are not potential adversaries);
  • Privilege and communications with consultants and vendors, employed to facilitate legal advice;
  • Privilege and affiliates (applies to parent and wholly-owned subsidiary as to the outside world but not between them); and
  • Dual hat dilemma of lawyers who render legal and non-legal advice (primary purpose must be seeking or receiving legal advice – not the only purpose, but the primary purpose).

The headline topic covered was whether to waive privilege in productions to regulators. Of course, a voluntary waiver should be an approach of last resort. True, it is a technique used to build credibility with the regulator and hopefully to gain extraordinary cooperation credit; but it is troublesome because it is like pulling the thread on a sweater – it may be easy to see where it begins but often a challenge to see where it ends. 

The panelists suggested that firms contemplating waiver should consider (1) other privileged documents on the same subject matter and if waiver is established with respect to those; (2) who might want the documents later, private litigation, other agencies; and (3) firms must be mindful of the jurisdiction because there are cases that go both ways on waiver, i.e., the recent Southern District of Florida case, Herrera,  where the court found the law firm waived privilege by giving regulators oral summaries of internal investigation memoranda, stating that a verbal proffer to the regulator was no different than producing the documents compared to the Southern District of New York case, GM Ignition, where the court found that while the report prepared by counsel and was given to federal agencies, underlying witness communications that were conducted as part of the company’s request for legal advice were protected by privilege. If the firm does want to give a regulator the verbal download, take detailed notes in case a judge or panel reviews to determine the scope of the waiver.

The panelists also discussed document production. Efforts to comply with massive productions under tight deadlines come at a cost, and the financial cost is only the beginning. As a practical matter, it can be difficult to review all documents prior to production and the reality is that some (and maybe a large number of) documents may be produced absent attorney review. They pointed out three potential safeguards to avoid inadvertent privilege waiver that can be explored on the front end of a production:  (1) put thought and time in the e-discovery protocol and beta test it; (2) do the research and understand the governing law of inadvertent waiver and claw back; and (3) take steps to ensure that there is an agreement with the regulator to allow for a liberal claw back. They also pointed out that where possible, producing documents prior to a privilege review should be avoided and that a firm may wish to suggest rolling productions.

The panel briefly addressed the bank examination privilege (privilege held by the regulator). Any waiver of the CSI, Confidential Supervisory Information, must be by the bank regulator or with express approval of the bank regulator, including sharing with outside counsel.

General Counsel Roundtable Highlights

The roundtable included moderator Christopher Lewis (General Counsel, Edward Jones), Jessica Carey (Paul Weiss), Adam Meshel (Global General Counsel, Citi), Michelle Oroschakoff (Chief Legal and Risk Officer, LPL Financial), and Jonathan Santelli (General Counsel and Corporate Secretary, Raymond James). The panelists discussed diversity & inclusion, big data, legal operations, and cyber security. Here are some highlights from each:

Diversity & Inclusion

The panelists stressed that these issues affect every corporation today, and those within the securities industry are no different. The overarching theme of the panel is to take a fresh look at the organization with this present-day lens, starting with the firms’ internal policies and procedures, complaint and settlement history and crisis management solutions.  The message is that conduct that years ago might be met with a slap on the wrist may require much swifter and pronounced action today in order to protect the organization and its employees.

Big Data and Cybersecurity

The use of firm data is a pressing issue in light of new technology and recent data breaches. In recognition of the ethical issues and otherwise, the securities industry is one that is generally regarded as conservative in leveraging data for business purposes. Firms have been working to put governance frameworks in place for using, storing, and destroying data, and related training. In terms of cyber security, some firms have observed that vendors/partners are the weak link in a potential data breach.

Legal Operations

The panelists addressed the notion that money only temporarily increases employee happiness and that the biggest drivers of employee retention and happiness were increased transparency, diversity of work challenges (including stretch assignments and mobility assignments), flexible working environments, training opportunities, management interaction, and titles of substance.

On the cost front, some firms are moving lawyers to lower cost locations and leveraging technology. However, for firms that have experience with bots, only some portion of the legal work can be done (such as repetitive form documents or searching within specific parameters).

Investment Advisor Considerations for Dual Registrants

The panel included moderator Mackenzie Crane (Assistant General Counsel, Bank of America), Mara Galeano (Deputy General Counsel, UBS), Jennifer Klaas (Morgan Lewis), and Maureen Sheehan (Senior Counsel, Wells Fargo Advisors).

There were areas of overlap between 2017 and 2018 SEC priorities, with a corresponding focus on retail.  The 2017 SEC cases included calculation of advisory fees, undisclosed compensation, custody, misleading advertising, suitability, trade allocations, and trading away from wrap fee programs. The 2018 SEC priorities focused on retail investors, cyber security, and AML. The panel also believed the SEC would be focusing on advertising, specifically on general misrepresentations where statements are not true or simply cannot be substantiated.

The panel devoted significant time to robo offerings and the accompanying questions. The key takeaways include:

  • Regulators will be interested in robo fees vs. higher fees for similar products offered by the firm. The panelists agreed that firms should distinguish through disclosures the service models and account types (and other objective factors in terms of suitability of those accounts).
  • Regulators are focused on transitioning from traditional accounts to robo accounts or where a client has multiple accounts (some traditional and some robo advisory accounts).
  • Firms must make a judgment on how many know your client questions are sufficient for robo accounts (in light of the fact that there is really no client contact, all done online).
  • Firms should be prepared in their exams to show algorithmic trading platforms’ model validation, governance, and stress tests (run on a frequent basis).

Like other panels, this panel spent time on the uncertainty of the DOL “Best Interest” issue. The patchwork of regulation makes it very difficult for firms to adopt an appropriate standard of care. Some suggested adopting the most restrictive standard of care with carve-outs that meet firms’ individual business models. In the end, the important thing is to educate clients and the advisors on the standard (i.e., clear disclosures) and to ensure that firms’ disclosures and policies and procedures are consistent.

An audience question prompted a discussion of the standard/duties related to a client-directed non-discretionary advisory account, which has generated SEC attention relative to the related fee and expense. The panelists suggested documenting those situations when advice is being given in an effort to ensure there is no ambiguity to the fact advice is being given and accepted.  

Mark the Date – June 12, 2018 – firms must decide whether to participate in the SEC Share Class Selection Disclosure Initiative. For firms that participate, SEC enforcement will not recommend penalties against those that self-report. Some things to consider before making that decision: 

  • Are firm disclosures sufficient?
  • Do firms have an obligation to disclose other sources of indirect compensation beyond 12b-1 fees?
  • There is no transparency for remediation calculations the SEC uses and likely no standard for disgorgement calculations. It may be better for some firms to address these issues on their own, draft a memo on the why/how of their conduct, and not participate in the SCSD.

And finally, according to the panel, the top issues for firms to stay on top of include:

  • Firms should continue to focus fundamentally on fees, suitability, and conflict of interest (mitigate and disclose);
  • Firms should focus on the shift of assets from brokerage to advisory accounts and the inherent conflicts/incentives for these shifts;
  • With respect to manager due diligence, the firm’s internal manager should be subject to the same operational and investment due diligence as third party managers;
  • The SEC and FINRA are both focused on non-purpose lending with advisory assets as collateral and the process and controls in place if clients default on the loan; and
  • Firms should review proprietary product payment flows, structure, and the firm’s role in development and sponsoring of those products.

Virtual Currencies – Tales from the “Crypt”

The panel included moderator Bari Jane Wolfe (Head of Regulatory Relations at The Depository Trust & Clearing Corporation), Joseph P. Borg (Director of Alabama Securities Commission), Susan Boudrot (Global CCO, TD Ameritrade Holding Corporation), Gus Stergiopoulos (Director/Head of U.S. Control Room and Surveillance, RBC Capital Markets, LLC), and Valerie Szczepanik (Assistant Director in Asset Management Unit, Division of Enforcement, SEC).

There are approximately 1400 different cryptocurrencies, arguably the most well-known being Bitcoin. Currently, there is a significant debate over whether some cryptocurrencies are securities and whether they pass the test announced in the 1946 U.S. Supreme Court case of SEC v. Howey. In his unprompted Dec. 11, 2017 warning over cryptocurrencies, SEC Chairman Jay Clayton acknowledges the uncertainty over whether some cryptocurrencies are securities, but does not answer the question. https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11. In more recent comments made to the Senate banking committee earlier this month, Chairman Clayton revealed that no launched initial coin offerings (ICOs) – the cryptocurrency equivalent of IPOs – had registered with the Commission, implying that there was a question that some should have registered as making an offering of securities. Early this month, the WSJ reported that the SEC issued dozens of subpoenas for documents to companies that have issued ICOs as well as their lawyers and advisers. The subpoenas reportedly included requests for information on how ICO sales and pre-sales are structured. The SEC is also requesting the identities of the investors who bought digital tokens.

Of the regulators, the States seem to have most aggressively approached ICOs. NASAA and its president, Alabama Securities Commissioner Joe Borg, have issued warnings to investors, noting that there is a “high risk of fraud.” http://www.nasaa.org/44073/nasaa-reminds-investors-approach-cryptocurrencies-initial-coin-offerings-cryptocurrency-related-investment-products-caution/. Borg further commented that some investors are going as far as to borrow against their homes to finance the purchase of ICOs. The state of Texas has issued at least two cryptocurrency related cease and desist orders. In the more recent one, the Texas State Securities Board said it considers the firm’s cryptocurrency mining and trading programs to be unregistered security offerings. In that particular case, the company allegedly used fake stock images of models on its web site to portray its team members.

Notwithstanding considerable investor interest in the coins, no member firm allows cryptocurrencies to trade on their platforms. At the end of last year, The CBOE and the CME allowed the trading of cryptocurrency-based futures contracts with a cash settlement. Some of the discount brokerage firms have allowed for the trading of cryptocurrency-based futures, but it appears that no firms are allowing this activity on a solicited basis. There is one Bitcoin-based ETF that trades – the Bitcoin Investment Trust (GBTC) – but again only a few discount firms seem to allow it on a self-directed basis and it has been widely criticized due to a significant tracking error.