Burr & Forman

05.6.2019   |   Blog Articles, SEC, Securities Litigation

Negligence & Willfulness Mutually Exclusive For SEC

Last week, the D.C. Circuit held that the SEC can’t prosecute the same conduct as both willful and as negligent under the tandem sections found in most of the nation’s securities laws.  The ruling prevents the SEC from piling on an additional negligence-based offense as some sort of “lesser included offense” in enforcement actions.

The SEC brought an administrative enforcement action against the Texas-based Robare Group and its officers for inadequate disclosure of a revenue-sharing agreement with Fidelity over certain funds on Fidelity’s platform.  The firm’s ADV Part disclosed only that “certain investment advisor representatives … may receive selling compensation … as a result of certain securities transactions….”  Fidelity’s compliance review team thought the disclosure inadequate and requested that the firm revise it.

The Commission charged the firm and its principals with Advisers Act Section 206(2) negligence-based violations for disclosures to clients (“practice … which operates as a fraud or deceit”) and also with Section 207 violations for willful untrue statements to the Commission in registration materials.  See 15 U.S.C. § § 80b-6(2), 80b-7.  The SEC ALJ had dismissed all charges, but on de novo review, the Commission upheld all the charges, imposing a cease-and-desist order and a $50,000 civil monetary penalty on the firm and each of two principals.

On appeal, the D.C. Circuit found that the evidence amply supported the negligence violations, because the vague ADV disclosures did not provide any information from which investors might discern which transactions in which funds gave rise to the conflict.  This prong of the Court’s opinion reinforces the Commission’s continuing focus on replacing broad, vague ADV disclosures warning only of potential conflicts with disclosures that provide investors with actionable information they can use to avoid or question conflicted transactions.

The Court went on to reverse the Commission’s Section 207 violation, holding that a “willful omission” require subjective intent to omit material from the ADV (using, without deciding, the Wonsover standard, 205 F.3d 408, 413-15 (D.C. Cir. 2000)).  The Court held that the same underlying conduct cannot support both a negligent and an intentional violation:  “Intent and negligence are regarded as mutually exclusive grounds for liability.”  Robare, Slip Op. at 17.  “Any given act may be intentional or it may be negligent, but it cannot be both.”  Id. at 18.

The opinion is The Robare Group, Ltd v. SEC, No. 16-1453 (D.C. Cir. Apr. 30, 2019), here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 33 years of experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2019 by Thomas K. Potter, III (all rights reserved).

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