A panel of the D.C. Circuit recently relied on Lucia and Cochran to enjoin a FINRA regulatory enforcement action pending appeal of an Appointments Clause challenge.
In securities-regulatory enforcement, the Securities Exchange Commission (“SEC”) and its delegates long have had a trinity-like advantage over those it seeks to punish: It is prosecutor, judge, and jury, with home-field advantage. Enabling the Commission, Congress empowered it to prosecute violations of the securities laws and the regulations promulgated under them. The SEC can choose to proceed in federal ...
On June 20, 2023, the Supreme Court granted certiorari to review three questions about the Securities and Exchange Commission’s (SEC’s) administrative courts:
- Do they violate the 7th Amendment’s right to jury trial of actions then known at common-law, rather than “public rights”?
- Do they violate the non-delegation doctrine by enabling statutes giving the SEC discretion to choose to bring enforcement actions in its administrative courts or Article III courts?
- Do the two levels of “for cause” removal protection for SEC ALJs violate Article II by protecting them ...
Last week, a divided Securities and Exchange Commission adopted a set of rule changes requiring next-day (T+1) settlement of most equity trades by May 24, 2024. The suite of rules also require same-day trade allocations and affirmations, and T+2 settlement for firm-commitment underwritings priced after 4:30 p.m. Finally, the rules require clearing agencies providing matching services to work toward fully-automated “straight-through processing,” and to report to the SEC annually on their progress.
Announcing the rules, SEC Chair Gensler noted they were partially in ...
On July 27, 2022, FINRA filed a proposed rule change with the SEC that would “modernize” its supervision rule to make permanent pandemic-related temporary exemptions that allowed limited-scope work-from-home (“WFH”) for brokers.
The filing proposes “to adopt new Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision) that would align FINRA’s definition of an office of supervisory jurisdiction (“OSJ”) and the classification of a location that supervises activities at non-branch locations with the existing ...
Continuing its active regulatory agenda, the Securities and Exchange Commission on March 9, 2022, proposed new cybersecurity regulations for reporting public companies. Although couched as a series of “disclosure” requirements, the proposed list of required disclosures can be viewed as a de facto prescription of what public companies must do and say on cybersecurity; that prompted Commissioner Peirce to dissent.
The Proposed Rule would require reporting public companies to promptly disclose “material cybersecurity incidents” and their response, updating those ...
The regular “Weekly Update” email from the Financial Industry Regulatory Authority (“FINRA”) had an eye-catching warning February 16, urging broker-dealer member firms to heed the “Shields Up” cyber threat warning from the Cybersecurity and Infrastructure Security Agency (“CISA”) and the FBI.
That warning urged heightened cybersecurity vigilance “related to Russia’s potential destabilizing activities against Ukraine.” The CISA alert said, “While there are not currently any specific credible threats to the U.S. homeland, we are mindful of the ...
On February 9, the SEC proposed new cybersecurity risk management regulations for investment advisers, registered investment companies (funds), and business development companies.
Relying on the Commission’s mission to protect investors and ensure orderly markets, the Release cites increasing cybersecurity threats and emphasized the disruptive consequences and costs (to advisers, funds and investors) of unpreparedness. The Release grounds the Proposal in advisers’ fiduciary duty to clients and the anti-fraud “compliance rule” requiring written policies ...
In remarks this week at the SEC Speaks conference, new SEC Enforcement Director Gurbir Grewal said he’s bringing back admissions in SEC settled actions to help spur accountability. Most SEC actions are settled on a “neither admit nor deny” basis.
“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.” Grewal ...
The U.S. Securities and Exchange Commission (“SEC”) released its 2021 Examination Priorities on March 3. The Examinations group – elevated last December to Division status (formerly the Office of Compliance Investigations and Examinations (“OCIE”)) -- covered the list of perennial concerns. The 2021 priorities include some new subjects, however, reflecting the policy emphasis of the Biden administration.
“This year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns ...
The price of Bitcoin recently topped $57,000. New York’s Attorney General issued an Investor Alert on Virtual Currency Risks, as did the SEC’s Division of Examinations. The SEC’s “crypto-mom,” Commissioner Hester Peirce has been speaking on it daily, and Chair-nominee Gensler touches on it in his March 2 remarks before the Senate Banking Committee.
SEC Chair Nominee Gary Gensler’s prepared remarks for his March 2 hearing before the Senate Banking Committee indicate he will focus on FinTech:
Markets—and technology—are always changing. Our rules have to change ...
In an SEC filing, Friday, February 26, Robinhood Financial and Robinhood Securities disclosed they are negotiating with FINRA, the SEC, and state regulators, attempting to settle investigations into options-trading and outages from March 2020.
The investigations focus on Robinhood’s options-trading approval processes and how the app displays cash and buying power to customers. Similar issues were involved in the GameStop (“GME”) imbroglio earlier this year. Congress and various regulators continue to examine the GME situation.
The Companies disclosed they have ...
The Deposit Trust & Clearing Corp. (“DTCC”) released a February 24 roadmap for shortening the settlement cycle for US equities by half over the next two years. The proposal anticipates DTCC’s completion of its “Project ION” using distributed ledger technology (“DLT”) to integrate and speed clearing and settlement processes. Moving to a shorter settlement cycle would reduce industry costs, market risk, and lower margin requirements.
The clearing and settlement process was front and center at the House Financial Services Committee’s February 18, 2021 hearing ...
On February 9, Acting SEC Chair Lee announced she was restoring the delegated authority of Enforcement Division senior officials to issue subpoenas to compel document production and sworn testimony without the need of a Formal Order of Investigation by the full Commission.
Until 2009, the SEC could only issue compulsory processes (for document production and testimony) under a Formal Order of Investigation issued by the Commission. In 2009, however, then-Chair Mary Shapiro delegated that authority to the Director of Enforcement for a trial period of one year. The Final Order, No ...
The SEC recently announced the creation of the Event and Emerging Risks Examination Team (“EERT”) in its Office of Compliance Inspections and Examinations (“OCIE”). OCIE is the unit charged with conducting compliance exams on registered investment companies, investment advisors, and broker-dealers -- although primary responsibility for examining broker-dealers lies with their self-regulatory organization, FINRA (itself subject to OCIE exams).
The SEC said the EERT unit “will proactively engage with financial firms about emerging threats and current market ...
In a May 4 joint public statement, SEC Chair Clayton and Municipal Securities Office Director Rebecca Olsen urged municipal issuers to make voluntary disclosures specific to issuers, and their various outstanding municipal securities, regarding the effect of COVID-19 on present and expected future operating and financial status.
Municipal issuers are obligated under SEC Rule 15c2-12 to provide annual audited financial disclosures and disclosures of certain material events. The MSRB’s description of the Rule is here.
The SEC’s statement emphasized the relative size and ...
The SEC recently issued an investor alert warning about crypto advisory and trading websites. The alert cautions investors to be especially wary of web-based crypto-currency sites with any of these red-flags:
- Outsized “guaranteed” investment returns.
- Complicated jargon or difficult-to-understand technologies.
- Unlicensed sellers.
- Sounds too good to be true.
- Unsolicited offers.
- Urgency to act.
…in short, the usual hallmarks of many scams.
The advisory comes on the heels of an indictment against two Nigerian citizens for wire fraud and conspiracy to commit ...
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 ...
Late last week, the SEC issued a no-action letter widely hailed as its first on a blockchain-based digital token for private jet services. In its TurnKey Jet letter, the Commission Staff indicated it would not recommend enforcement action over the operation of a private, permissioned, centralized blockchain network and smart-contract infrastructure for clearing and payment using a utility-token effectively functioning as a pre-paid jet card (or streetcar token).
See TurnKey Jet, Inc. (Apr. 3, 2019), here.
And the request, here.
CoinDesk reports that the no-action ...
This week, the SEC's Division of Investment Management issued a letter seeking industry and public input on custody issues arising from digital assets.
The "Custody Rule," Rule 206(4)-2 under the Advisers Act of 1940, provides it is a fraudulent act or practice to have custody of client assets, unless an adviser complies with Custody-Rule requirements, including among others, by a qualified custodian subject to annual independent audits.
The Division's recent Guidance Update on custody issues focused on inadvertent custody (e.g. where boilerplate in the adviser’s agreement ...
In an article published in the latest issue of the Journal of Robotics, Artificial Intelligence & Law (RAIL), Tom Potter discusses the current state of regulatory efforts by the U.S. Securities and Exchange Commission. Unlike the 1900's, today's cryptocurrencies rely on the internet, high-speed computing and higher-math cryptography, not stones.
Mt. Gox holds its infamous part of Bitcoin's history as the once biggest cryptocurrency exchange that went under in a chaotic fashion. After the 2014 collapse of Mt. Gox underscored the fraud potential posed by cryptocurrencies ...
On November 29, the Securities and Exchange Commission (SEC) announced in a press release that it has settled charges against two celebrities for promoting investments in ICOs without disclosing payments received for the promotion. The SEC has previously indicated in a November 2017 statement to the public that investors should be wary of celebrity-backed ICOs, but these are the SEC's first cases against celebrities for promoting ICOs for compensation without appropriate disclosures.
Music producer Khaled Khaled (known as DJ Khaled) and professional boxer Floyd Mayweather ...
Earlier this week, SEC Enforcement staff lost a bid for a preliminary injunction against a prospective ICO in its pre-offering testing phase.
Blockvest was preparing for an ICO of "BLV" tokens. Its website touted the endeavor as the "first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States," and showed pictures of the seals of the SEC, CFTC, NFA and others. It also claimed to be regulated by the fictitious "BEC" (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.
So how ...
Last Friday, November 16, the SEC issued a pair of settled actions setting a de facto standard of compliance for unregistered ICOs wanting to "come in from the cold." In each of them, the ICO offeror paid a $250,000 monetary penalty, registered its ICO as a security, and entered a rescission undertaking respecting all tokens issued to date.
The first was a settled action by Paragon Coin - a digital token ("PRG") unregistered offeror in the cannabis industry. Paragon agreed to cease and desist, file a registration statement, and publicly offer rescission of the ICO. The Commission cited ...
On November 8, the SEC filed its first settled enforcement action against cryptocurrency trading platform for operating as an unregistered exchange trading securities, in violation of the Securities Exchange Act of 1934.
"EtherDelta" was a platform offering matched-book secondary market trading of ERC-20 tokens, many of which had issued in unregistered initial-coin-offerings ("ICOs") having attributes of "securities" under the Howey investment-contract analysis. The Howey test was applied by the SEC in its July 2017 Section 21A Report, The DAO, to conclude that digital ...
So maybe it's not such a good idea for a volatile, impulsive chief executive to use his personal Twitter account to announce major policy shifts. No, no - not that one.
Everyone thought it would happen tout de suite, but the SEC finally filed its Tweet suit this week over Elon Musk's August 7 Tweet (to over 22 million followers): "Am considering taking Tesla private at $420. Funding secured."
Everyone cringed immediately about those last two words - a representation of fact. Especially because $420 a share was a substantial, if cannabis-tinged and arbitrary, premium. And because Tesla ...
On September 11, the SEC announced a pair of settled cryptocurrency enforcement actions. The first was against an unregistered digital-asset hedge fund. The second shut down an "ICO Superstore" as an unregistered broker-dealer.
Crypto Asset Management LP ("CAM") ran an unregistered investment company while falsely marketing it as the "first regulated crypto asset fund in the United States." The unregistered offering raised $3.6 million over four months in late 2017, violating the '33 Act. Because the offering proceeds were used to buy digital assets that constituted over 40% of ...
In a triumph of positive statutory law over Chevron deference to the administrative state, the unanimous Supreme Court held this week that Dodd-Frank whistleblower protections require SEC reporting, because the statute defines "whistleblower" as someone who reports "to the Commission."
I'm relieved to know the Court agrees that "'When a statute includes an explicit definition, we must follow that definition,' even if it varies from a term's ordinary meaning. This principle resolves the question before us." Slip Op. § II at 9. The Ninth Circuit and the U.S. Solicitor General ...
After several years of examination focus and a series of enforcement actions, the SEC's Enforcement Division on February 12 announced a "Share Class Selection Disclosure Initiative" in an attempt to level-set industry compliance and bring investment-advisers in from the cold. See SEC Press Release No. 2018-15.
Investment advisers have a fiduciary duty to their customers. Investment Advisers Act of 1940 ("Advisers Act") § 206(2). That precludes self-interesting action and includes full disclosure of all compensation conflicts. And the Act prohibits Advisers from making ...
Cut, paste and forward ‒ just as the boss instructed. But Lorenzo's email to two clients was misleading, so the SEC filed an enforcement action. The ALJ held Lorenzo liable for violating anti-fraud provisions and imposed a C&D plus a $15,000 penalty. The full Commission reviewed the case de novo and imposed a permanent industry bar along with the $15,000 fine.
On appeal, a split panel of the D.C. Circuit affirmed on liability but remanded to the Commission for reconsideration of the penalty. The majority held Lorenzo was not a "maker" of a Rule 10b-5(b) "false statement," but his ...
The SEC announced two cyber-enforcement initiatives on September 25. The Commission will establish a Cyber Unit within the Enforcement Division to address misconduct like:
- Market manipulation through social-media "fake news";
- Hacking to obtain material nonpublic information (ahem);
- Blockchain- and bitcoin-like violations;
- Dark web misconduct;
- Hacking retail accounts;
- Cyber-threats to trading and market infrastructure.
The Commission also announced a Retail Strategy Task Force to identify and respond to cyber-threats targeting retail investors.
The SEC's release ...
In an Opinion highlighting the Circuit split over the constitutionality of SEC administrative law judges ("ALJs"), the Fifth Circuit recently stayed an FDIC civil-penalty and bar order against a Bank director, pending complete judicial review.
Petitioner Burgess is a bank director (and former officer) prosecuted administratively by the FDIC for improper expense practices and misuse of bank property. An FDIC ALJ conducted the hearing and recommended civil penalties and a banking bar. The FDIC largely adopted those findings and conclusions. Burgess moved to stay ...
A unanimous Supreme Court held June 5 that SEC disgorgement is a "penalty" subject to five-year limitations under 28 U.S.C. §2462 and Gabelli v. SEC, 568 U.S. 442 (2013)(5-year limitations applies to civil monetary penalties).
Justice Sotomayor's Opinion started with the premise that a "penalty is a punishment … imposed and enforced by the State," redressing a public wrong for punishment and deterrence, rather than victim compensation. Slip Op. at 5-7. She rejected all three of the SEC's standard arguments.
First, the Court held that deterrence is not a legitimate non-punitive ...
On Monday, May 22, the SEC stayed all its administrative proceedings assigned to an ALJ in which a Respondent has an option for review by the 10th Circuit. (Securities laws provide appellate review of SEC administrative proceedings in the Respondent's choice of the Circuit for her State of residence or the D.C. Circuit). The stay will remain in place until Supreme Court action on the agency's expected cert petition in Bandimere or further Commission order.
In Bandimere v. SEC, 844 F. 3d 11689 (10th Cir. 2016), reh'g denied, 2017 WL 1717498 (May 3, 2017)(No. 15-9586), the Tenth Circuit ...
The two remaining SEC Commissioners agreed March 1 to propose amendments "requiring" municipal securities issuers to disclose non-security financial obligations and material events occurring in other outstanding obligations.
The Municipal Securities Rulemaking Board ("MSRB") and other market participants have argued for years that undisclosed bank loans, direct participations, and material events occurring with an issuer's other outstanding obligations remained "blind spots" to market transparency, and to investors' ability to evaluate issuers' financial status ...
On Friday, January 13, the Supreme Court granted certiorari to resolve a Circuit split on the extent to which SEC enforcement actions are restricted by the five-year statute of limitations in 28 U.S.C. § 2462.
Section 2462 sets a five-year limitations period "for the enforcement of any civil fine, penalty, or forfeiture." The Supreme Court has held those limitations accrue when the violation occurs and the SEC does not benefit from a "discovery rule." Gabelli v. SEC, 133 S. Ct. 1216, 1220 (2013).
But there's disagreement over whether it applies to the commonly-sought disgorgement and ...
OCIE released its 2017 exam priorities on January 12. The priorities list was most notable for being shorter than prior years. But that likely means only more focus, rather than less vigor. Here is the list with some quick takes on its content:
Robo-adviser and wrap-fee programs (under scrutiny too for the DOL fiduciary rule - whether it stays or goes)
ETFs (due to increasing popularity)
Un-examined IA's (recognizing resource scarcity and the growth of SEC-registered IAs)
Recidivist Reps (the subject of several Wall St. Journal articles last year)
The Port Authority of New York and New Jersey has admitted wrongdoing and agreed to pay a $400,000 penalty to settle SEC charges that it failed to adequately disclose project risks to investors purchasing $2.3 billion in bonds to fund the Pulaski Skyway. The settlement includes additional remedial measures.
The Authority's internal discussions raised substantial doubts about the project's lawful authorization, and risks of bondholder challenges. Yet, the issuer's offering documents made no mention of those risks and represented the proceeds would be used for projects ...
The SEC reports it brought 868 enforcement actions in the fiscal year ended September 30, 2016 -- more than ever before, and for the third year in a row. But a Wall Street Journal article this week attributes it to playing "small ball" with little, easily-won cases.
In the Journal's analysis, the SEC's enforcement numbers would have remained relatively flat (up some) if not for the addition of 91 smaller cases under Chair White's "broken windows" mandate. The mandate derives from community policing models (and a 1982 article by political scientist James Q. Wilson) that posit overall ...
Having lost her initial suit (and appeal) to enjoin an SEC administrative enforcement action against her, the so-called "diva of distressed," Lynn Tilton recently filed another lawsuit trying to halt her upcoming October 24 hearing before an SEC administrative law judge.
In her last suit, Tilton argued the SEC's administrative forum - particularly the selection of the ALJs who hear the proceedings - was unconstitutional under the Appointments Clause. Her new suit raises different arguments, claiming that SEC has a pattern and practice of depriving respondents of their Fifth ...
The SEC announced August 25 that it approved FINRA's pay-to-play rules governing placement-agent or solicitor broker-dealers and was "prepared" to approve the extension of MSRB Rule G-37 to municipal advisors as well.
The two rule proposals would complete the pay-to-play suite of rules across municipal securities dealers, investment advisors, broker-dealers, and municipal advisors. The bedrock Rule - MSRB's Rule G-37 governing municipal finance professionals and dealers - has been in place since 1994. After Dodd-Frank's expansion of municipal-advisory regulation, the ...
On August 24, the SEC announced settled administrative actions against 71 state and local issuers arising from $3.7 trillion in municipal securities offerings. The Commission alleged the issuers made false statements claiming they had complied with their continuing disclosure obligations under prior debt issues from 2011-2014. Each settled action imposed a cease-and-desist order and compliance undertakings.
The settlements appear to be the last leg of the Commission's Municipal Continuing Disclosure Cooperation ("MCDC") initiative, under which the SEC offered ...
The SEC has fined an Atlanta company $265,000 for using various severance agreements restricting whistleblower activities.
The Dodd-Frank Act added '34 Act § 21F encouraging whistleblower programs. The SEC adopted Rule 21F-17 providing:
(a) No person may take any action to impede an individual from communicating
directly with the Commission staff about a possible securities law violation,
including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.
The Company's severance agreements contained confidentiality and ...
The D.C. Circuit has affirmed that SEC ALJs are not constitutional Officers subject to the Appointments Clause, rejecting perhaps the strongest of the constitutional challenges to the Commission's administrative forum. The ruling is the first case to decide the issue on its merits instead of rejecting it on procedural grounds (as the 2nd, 7th, 11th and D.C. Circuits previously did).
The Court held the Commission's right of discretionary review, coupled with the requirement to issue an affirmative order declining it (where not exercised), means its ALJs do not issue final ...
This SRO gamesmanship is making a mockery of governing.
The latest is the SEC's position that it didn't take any action on the new MSRB Rules extending pay-to-play prohibitions to municipal advisors, so it can't be sued to stop the implementation of the regulations implemented by the MSRB under the SEC's jurisdiction. Making it only worse, the SEC says that it's because Congress prohibited the Agency from spending any money on this part of the Dodd-Frank mandate Congress required.
Whaaat?!? So hold onto your hat, as we go down the rabbit hole to explain this:
The MSRB: The SEC's ...
In an effort to provide transparency, the Dodd-Frank Act has previously formed an Investor Advisory Committee to assist the SEC on various issues including regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.
One of the goals of the Committee is to ensure the effectiveness of corporate disclosures that are made for investors. In keeping with this goal, the Committee ...
The Eleventh Circuit Friday joined three others in concluding that Congress intended Respondents must wait until appeal from the Commission to have a Court consider their challenges to the Constitutionality of the SEC's administrative forum.
Following the Thunder Basin line of cases, the Eleventh Circuit held that federal courts do not have jurisdiction to short-circuit the SEC's administrative process to hear claims that the process is not constitutional. Instead, Respondents must raise their arguments twice before the very tribunals they claim aren't Constitutional ...
For years, self-regulatory agencies (like FINRA or the Exchanges) have wielded the statutory authority granted them by Congress - and backed by the SEC - exercising governmental power to compel testimony, impose fines and punishments, and even bar a person or firm from an entire industry.
At the same time, they declaim that they're just membership organizations, so don't owe anyone Constitutional protections (like Fifth Amendment Due Process) and aren't subject to Equal Access to Justice Act claims for your litigation expenses when they lose.
So SROs essentially are the ...
In a recent new release, the Tennessee Securities Division urged investors to ask tough questions of their investment advisors, and about their compensation, account arrangements and educational / regulatory history.
The May 26 release is here.
SEC-registered investment advisors are required to provide the answers to those (and other) questions on their ADV Part 2, which is kept on file with the SEC and publicly-available through the Commission's IA Public Disclosure Portal, here. Information on registered broker-dealers and their associated persons is available through ...
Since the 2010 passage of the Dodd-Frank Act, the U.S. Securities and Exchange Commission ("SEC") has been the subject of growing criticism regarding its increased use of administrative proceedings.
By enacting Dodd-Frank, Congress vastly expanded the enforcement powers afforded to the SEC by allowing it to address potential violations, such as insider trading, in its internal administrative courts rather than in federal court. While the SEC attributes its increased use of administrative proceedings to the significant benefits the administrative proceedings provide ...
The SEC recently affirmed its ALJ's ruling barring Alan Stanford's former CCO from the industry and ordering monetary penalties of $260,000 together with $591,992 in disgorgement.
The Commission held the CCO approved false and/or misleading marketing and training materials in the face of red flags and without adequate due diligence or verification, instead relying upon superficial explanations of other company insiders.
"But the evidence shows that Young approved material misrepresentations without verifying them or establishing any reasonable or independent basis for ...
It is not uncommon for registered representatives to change broker-dealers over the course of their career.
In most cases, their customers will typically switch firms as well, as they follow their representative to wherever he or she may go. Seems like a non-issue, right? FINRA did not think so. FINRA became concerned that when the representatives contacted the customers to discuss the switch, the customers may not be provided all the information necessary to make an informed decision on whether to transfer their assets. Accordingly, FINRA proposed a rule that requires ...
On April 12, the Tennessee Republican Party filed a petition in the US Sixth Circuit Court of Appeals, seeking to invalidate the SEC's approval of new rules extending the MSRB's long-standing "pay-to-play" prohibitions to new municipal advisors.
The MSRB has prohibited "pay-to-play" practices in the municipal securities space since its Rule G-37 was promulgated in 1994. The Rule does not prohibit political contributions by bond dealers outright, but instead prohibits them from doing business with issuers to who's elected officials a dealer has made political ...
In a January 21, 2016 Report of Investigation, the Inspector General for the Securities Exchange Commission found no evidence to substantiate allegations of pro-agency bias among SEC administrative law judges. The allegations of bias by a retired SEC ALJ appeared in a May 2015 Wall St. Journal article; the article's statistical analysis also revealed the SEC won 90% of contested cases brought in its "home court" administrative forum. The SEC's administrative forum has been under fire ever since Dodd-Frank expanded its jurisdiction to include non-registered persons. Then ...
White House officials this week said that President Obama's fiscal 2017 budget will seek major increases in funding for Wall Street regulators in the near term, and proposes to double their funding by 2021. The President's budget proposal would provide an 11% increase for the SEC (of $1.8 billion) and a 33% increase for the CFTC (of $330 million). The SEC reportedly plans to use the additional funding to hire 250 new staffers, about half devoted to investment-advisor examinations. The SEC also plans to add 52 new enforcement positions, and add a lawyer to its Municipal Securities staff ...
The SEC's Office of Compliance Inspections and Examinations ("OCIE") announced the agency's priorities for this year on January 11. Commission staff will focus on three broad areas: Retail Investors, Market-Wide Risks, and increased used of Data Analytics. Retail Investors Seniors top the list in this category, as the SEC continues its "ReTIRE" initiative announced last June. A nod to the aging boomer bubble, the ReTIRE program is a multi-year effort focusing on investment-adviser and broker-dealer issues in the retirement savings context, including: reasonable-basis ...
On Christmas Eve's eve, the SEC approved, without change, the MSRB's proposed conduct rule for municipal advisors. Broadly, the Rule imposes:
- Fiduciary duty (care and loyalty) to municipal entity clients but only a duty of care to obligated persons;
- Written engagement-letter and conflict-disclosure regime;
- Suitability and KYC requirements;
- A list of prohibited practices, including a wide-ranging (but not absolute) ban on principal transactions with municipal entity clients.
New Rule G-42 has been in the works since January, 2014 and the MSRB filed two amendments with the SEC ...
On December 16, the Municipal Securities Rulemaking Board ("MSRB") filed with the SEC a proposed rule that would extend to municipal advisers the MSRB's existing rule prohibiting "pay-to-play" practices and restricting campaign contributions in the municipal securities and advisory business. The proposed amendments extend Rule G-37 to municipal advisers and third-party solicitors:
- Imposing a two-year ban on business with municipal entities after any contribution to an issuer official who can influence municipal-advisory business, subject to $250 de minimis
Last week, VW blamed its "culture" for allowing "individual misconduct" that lead to the emissions-testing-evasion scandal engulfing the company. It reminded me of a couple of corporate-compliance mantras and of DOJ's recent Yates Memo: To deter individual misconduct, you need a "Culture of Compliance" set by "Tone from the Top." Volkswagen's mea culpa bears that out: VW admitted it had neither and blamed both. See "VW Says 'Culture' Flaw Led to Crisis," Wall St. J. at B1 (Dec. 11, 2015) For years - decades, in fact - the United States Department of Justice and securities ...
The SEC granted two petitions for review last week that tee-up significant issues for full Commission consideration late next Spring. The Commission will consider the application of the Second Circuit's Newman decision restricting the "gifting theory" of insider trading and also will take up the constitutionality of the agency's administrative enforcement forum. Insider-Trading After Newman. ALJ Patil dismissed insider-trading charges against trader Joseph Ruggieri last fall, finding that his tipper hadn't provided the inside information in return for any personal ...
Atlanta federal Judge Leigh Martin May enjoined the SEC from proceeding in yet another administrative enforcement action Tuesday. Ironridge Global IV, Ltd. v. SEC, No. 1:15-CV-2512 (USDC NDGA Nov. 17, 2015). SEC ALJ Grimes had refused to dismiss or stay the administrative proceeding and that hearing was scheduled to commence December 7. The SEC charged Ironridge last June under the '34 Act for allegedly operating as an unregistered broker-dealer by its provision of "Liability for Equity" transactions with 28 microcap issuers. The OIP is here. As before, the Court held it had ...
Laurie Bebo, CEO of Assisted Living Concepts, initially got some sympathetic words from the U.S. District Judge who felt constrained to turn away her constitutional challenge to the SEC's administrative forum:
The Court finds that Bebo's claims are compelling and meritorious, but whether that view is correct cannot be resolved here. This is so because Bebo's claims are subject to the exclusive remedial scheme set forth in the Securities Exchange Act. Bebo must litigate her claims before the SEC and then, if necessary, on appeal to the Court of Appeals for the Seventh Circuit.The ...
SEC Commissioners Piwowar and Gallagher dissented from a recent Commission Opinion sanctioning an investment adviser's use of misleading historical data purporting to validate an asset-allocation model. Agreeing there was a violation, Piwowar and Gallagher nevertheless dissented, criticizing "rulemaking by opinion:"
Instead, the majority opinion creates from whole cloth specific requirements for advertisements that include the word "backtest." Despite the lack of any statutory or regulatory definition of what constitutes a "backtest," the majority opinion ...
The battle over the constitutionality of the SEC's administrative forum now moves to the U.S. Eleventh Circuit. The appellate court issued an order Wednesday, denying the SEC's bid to upset the trial court's preliminary injunction and allow the administrative trial to go forward. Moreover, the Court consolidated two cases on the issue for expedited merits disposition, including oral argument (if held). See Gray Financial Group, Inc. v. US Securities and Exchange Comm'n, No. 15-13738-F (11th Cir. Oct. 7, 2015); Hill v. Securities and Exchange Comm'n, No. 15-12831 (11th Cir.). In ...
The citadel of the SEC's administrative forum has been under assault from several vectors over the past year or so, as a chorus of dissenting Respondents have mounted increasing challenges to its constitutional legitimacy, as well as it policy wisdom. The arguments were starting to get some traction, but two recent appellate decisions have repulsed the attack, including the D.C. Circuit's September 29 Jarkesy opinion. The arguments were gaining some momentum. First, they elevated the policy discussion to new prominence. SDNY Judge Jed Rakoff weighed in expressing doubt about the ...
The SEC recently - and predictably - rejected a Respondents' arguments challenging the constitutionality of the agency's administrative forum. The September 17 Timbervest decision was the first of the constitutional challenges to reach the full Commission itself, on appeal from the agency's internal administrative law judges ("ALJ"). The Commissioners rejected the Article II "appointments clause" argument, holding its ALJs were indistinguishable from those of the FDIC and thus were not "inferior officers" under Landry v. FDIC. That holding conflicts with those of ...
The SEC has announced a series of proposed changes to the Rules of Practice governing its internal enforcement actions. The changes update the decade-old Rules and respond in small part to a groundswell of criticism about the Commission's administrative forum. A. Lengthening the "rocket docket." Rule 360 presently requires actions to go from the Order Instituting Proceedings ("OIP" - the charging document) through to decision within 120, 210 or 360 days. That's a very fast schedule for Respondents to digest and defend a case the Enforcement Division might have taken up to 5 ...
Two rulings last week ordered the SEC to stop administrative proceedings in two cases, pending the Second Circuit's ruling on the constitutionality of its administrative forum. The Second Circuit stayed the SEC's prosecution of Lynn Tilton, pending appeal of her case. Tilton v. SEC, No. 15-2103 (2nd Cir. Sept. 17, 2015). The same day, Judge Richard Berman, denied the SEC's motion to allow its administrative case to proceed (by staying his preliminary injunction). Duka v. SEC, No. 15 Civ. 357 (USDC S.D.N.Y. Sept. 17, 2015). Judge Berman cited the "goose/gander" rule, noting the ...
An SEC administrative law judge ("ALJ") found that former Wells Fargo trader Joseph Ruggieri traded on material nonpublic information tipped him by former analyst Greg Bolan, but dismissed the insider-trading charges against Ruggieri, because the Division of Enforcement did not prove personal benefit to his tipper. The bottom line: It doesn't violate anti-fraud rules to trade on material non-public information obtained from a casual acquaintance who "simply could not follow the rules and keep his mouth closed," where there is no clearly-demonstrable personal benefit to ...
The Municipal Securities Rulemaking Board ("MSRB") announced September 2 that it has submitted for SEC approval proposed amendments extending its gift-limitations Rule G-20 to municipal advisors. In general, the Rule prohibits gifts or services (including gratuities) exceeding $100 per year to any person if they relate to the provision of municipal advisory services, with some exceptions, including:
- Normal Business Dealings: Occasional gifts of meals or tickets to events hosted and attended by advisors, or sponsored business functions recognized by the IRS as deductible ...
The SEC's administrative forum has been under increasing scrutiny over the past year. Now the SEC has removed an ALJ from a high-profile case, after he refused the Commission's "invitation" to provide a no-bias affidavit in similar case. In a May 6 article, "SEC Wins With In-House Judges," the Wall Street Journal reported that former ALJ Lillian McEwen felt pressured by the SEC's Chief Administrative Law Judge over her failure to rule more often in the Commission's favor. Respondents appealing an administrative case to the full Commission have alleged the process is unfair and ...
For over a year, critics have questioned the fundamental fairness of the SEC's administrative forum, including whether the Agency should act as prosecutor, judge and jury. Even as criticisms mount, the Commission Staff steadfastly declaims there's no issue here - and if there is, they should be the ones to decide it (through two layers of administrative proceeding, with judicial Chevron deference to their expertise, if ever judicially reviewed). Commissioner Piwowar and former SEC Staff have suggested that more transparency might be in order; but the Staff's response included ...
The SEC confirmed Friday that it may choose to be prosecutor, judge and jury in novel cases where it thinks it knows best and can urge Chevron deference when others seek judicial review.
The Commission dressed up the language a bit, of course:
If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission's rules, consideration should be given to whether, in light of the Commission's expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the ...
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- FINRA Proposal Modernizes Supervision Rule to Recognize WFH
- FINRA Report Denies Arbitrator Selection Manipulation
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