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 ...
The MSRB recently released a content outline for the new Series 50 Municipal Advisor Representative examination, which the SEC approved in principle earlier this year. See MSRB Reg. Notice 2015-06. The MSRB filed the Rule Proposal with the SEC on April 22 for immediate effectiveness. SR-MSRB-2015-04. The Series 50 exam will require MA Representative candidates to complete 100 multiple-choice questions within 3 hours on a range of topics, including:
- SEC and MSRB Rules on municipal advisor activities;
- Municipal Finance generally;
- Credit analysis and due diligence of municipal ...
The MSRB filed its Municipal-Advisor conduct rule proposal with the SEC on April 15. The Rule G-42 proposal has been around the block twice, since the Board first floated it in January last year (Reg. Notice 2014-01). The Revised Draft was issued last July (Reg. Notice 2014-12). I discussed them in our July 30, 2014 and January 23, 2014 blogs. As proposed for adoption by the SEC, the Rule broadly imposes:
- A fiduciary duty to Municipal Entities, but only of care to Obligated Persons;
- An "engagement letter" disclosure regime requiring conflicts and disciplinary disclosures ...
The Financial Industry Regulatory Authority ("FINRA") recently issued an Investor Alert (the "Alert") to warn investors about the most prevalent types of investment fraud and provide guidance on how to avoid being defrauded. According to the Alert, the five (5) most common fraudulent investment schemes tend to fall into the following general categories:
Pyramid Scheme: A fraudulent ploy in which a small investment is promised to yield large profits within a short period in time, but, in reality, investors only make money if they successfully recruit new investors into the ...
On February 20, 2015, Chairwoman of the United States Securities and Exchange Commission ("SEC"), Mary Jo White, spoke at the 2015 SEC Speaks Conference in Washington, D.C. During her speech, Chairwoman White addressed a number of topics in providing an overview of the SEC's activities and initiatives during 2014.
In particular, Chairwoman White commented on reforms made with respect to U.S. money market funds via the promulgation of new SEC rules in July 2014. Under these new rules, institutional prime money market funds will be required to maintain a floating net asset value ...
The Wall Street Journal reported Thursday that the SEC is in the midst of a sweep to crack down on companies' use of NDAs or employment agreements that might impede whistleblower reporting in violation of Dodd-Frank amendments. Wall St. J. at C1 (Feb. 26, 2015). We reported last November on a letter from eight House Democrats asking the SEC to examine the issue, here. SEC Chair White's January 5 response is here. SEC Rules prohibit using agreements to restrict or prevent whistleblower reporting. 17 C.F.R. § 240.21F-17(a). And the SEC's broadened administrative jurisdiction now gives ...
Addressing SIFMA's Anti-Money Laundering ("AML") conference Wednesday, SEC Enforcement Director Andrew Ceresney said that - when it comes to AML - the lack of red flags itself is a red flag. Bank Secrecy Act ("BSA") AML requirements under the Currency & Foreign Transactions Reporting Act of 1970, as amended, 31 U.S.C. §5311, et seq. (31 C.F.R. Chap. X and related laws / regulations: here) require financial institutions to file "suspicious activity reports" ("SARs") with the Financial Crimes Enforcement Network ("FinCEN") within the Department of Treasury. Examples ...
In a brief filed last week, the SEC urged the D.C. Circuit to give Chevron deference to the Commission's unnecessary conclusion that Congress's 180-day enforcement deadline doesn't matter. The conclusion is consistent with case law, but the approach turns basic judicial tenets on their head in a sharp-elbowed approach to Commission authority. The Commission barred investment-adviser Montford from the industry, and also required disgorgement and civil penalties, over undisclosed solicitor kickbacks and conflicts of interest. See Advisers Act Rel. No. 3829 (May 2, 2014).
FINRA Dispute Resolution filed with the SEC a proposed change to Code of Arbitration Rules 12214 and 12601 (and industry Rules 13214 and 13601) to increase late cancellation fees from $100 to $600 per arbitrator and expand the notice period for late hearing cancellations from 3 to 10 days. See SR-FINRA 2015-003 (filed SEC Feb. 5, 2015). Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience ...
The SEC and FINRA each issued February 3 cyber security "alerts" summarizing last year's sweep exams and pointing out the obvious. In two parts, the SEC's press-release covered the results of the Commission's 2013-2014 sweep exams and an investor bulletin. SEC Press Release 2015-20, here. The Commission's Office of Compliance Inspections and Examinations ("OCIE") conducted a "sweep exam" - or wide industry survey on the subject among broker-dealers and investment advisers- during 2013 and 2014. The good news is that a wide majority of them have have information security ...
On January 29, the Commission dismissed its insider-trading suit against Canadian analyst Jordan Peixoto in connection with his purchase of puts on the stock of Herbalife in advance of a negative hedge fund presentation on the company. The SEC instituted proceedings against Peixoto last September in its administrative forum - something it could not have done before Dodd-Frank against the non-registered Canadian-citizen research analyst. In the Matter of Jordan Peixoto, AP File No. 3-16184 (SEC Sept. 30, 2014)(OIP here) Dodd-Frank reforms expanded the availability of the ...
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 made numerous, and significant, changes to the Securities and Exchange Commission's regulatory powers particularly with respect to regulated professionals in the securities industry. But its broad sweep did not ignore non-regulated persons either. And, the significance of these changes to non-regulated individuals should not be underestimated.
- 929P(a) of Dodd-Frank granted the SEC authority to initiate the administrative proceedings against both regulated and non-regulated persons and to seek ...
The SEC's Office of Compliance Inspections and Examinations ("OCIE") released its 2015 Exam Priorities January 13. Director Andrew Bowden's annual list details OCIE's subject of focus for the coming year. The hot topics for 2015 include: For Retail securities sales: - The "retail-ization" of private funds, illiquid investments and structured or other alternative products that pose extra risks when complex products are sold to "mom and pop" investors; - Fees & "reverse churning" (a fixed asset-based fee on accounts with little or no activity) - when account or commission ...
The US Second Circuit this Wednesday narrowed the scope of "tippee" liability for insider trading, rejecting the "doctrinal novelty" of recent government prosecution theories. In United State v. Newman, Nos. 13-1837-cr c/w 13-1917-cr (2nd Cir. Dec. 10, 2014), the Court reversed the insider-trading and conspiracy convictions of two portfolio managers. They were downstream tippees, who traded on information passed along from corporate insiders to securities analysts and, ultimately, Newman and Chaisson. The Court of Appeals reversed, because the jury instructions had ...
In an unusual three-page concurrence to a November 10 cert denial, Justice Scalia (joined by Justice Thomas) virtually called for a case that would subject the SEC's insider-trading interpretations to scrutiny. Because courts owe no deference to a prosecutor's interpretation of a criminal law, asked Scalia, then why should they owe Chevron deference to an executive agency's interpretation of a law [like '34 Act § 10(b)] that's enforced both criminally and administratively? Scalia also criticized deferring to the SEC's expansive insider-trading theory in the case as turning ...
The SEC continues to ramp up its Enforcement efforts in the municipal-securities realm. The agency announced a series of settled actions on November 6. First "Control Person" Charge Against Issuer Officials The Commission announced a settled administrative proceeding against municipal issuer Allen Park, Michigan and settlements in federal-court actions against the City's former Mayor and City Administrator. The SEC charged that offering documents for two bond issues knowingly painted too rosy a picture for a $146 million film-studio project, which had been all but ...
The SEC last week approved new MSRB Rule G-44 implementing supervision and compliance requirements for municipal advisors. The MSRB touted the Rule as "its first dedicated rule for municipal advisors" under the Dodd-Frank mandate for greater regulation of the nation's municipal-securities markets. See MSRB Reg. Not. 2014-19, here. New Rule G-44 requires Municipal Advisors to follow the same supervision and compliance regime otherwise applicable to registered broker-dealers under FINRA Rules 3110- 3130. It requires, among others: - Written supervisory procedures ...
The drumbeats of discontent grow louder against the SEC's more frequent use of its internal administrative forum for enforcement cases. I wrote about the current spate of Constitutional challenges to the agency's forum in an October 9 Law360 article, A Renewed Fight Over SEC's Admin Forum's Constitutionality, here. The SEC instituted administrative proceedings accusing Canadian Jordan Peixoto of insider-trading in options on shares of Herbalife Ltd. in advance of a hedge fund's announcement of its short position in the stock. See In re Peixoto, Admin. Proc. File No. 3-16184 ...
Ruling in a case of first impression, the Sixth Circuit rejected an implied cause of action under Section 36(a) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. Although the Circuits remain split, recent decisions (after 2001) agree on the point. Two pension funds sued an exchange-traded fund (ETF), its investment advisor (IA) and its trust-company-affiliate (BTC), claiming BTC's Lending Agent fee "' 35% of all net revenue on the ETF's securities-lending activity - was excessive. The Court affirmed dismissal of the express Section 36(b) claim for breach of fiduciary ...
The SEC's Office of Compliance Inspections and Examinations ("OCIE") announced August 19 a two-year, three-phase examination initiative targeting newly-registered municipal advisors. SEC Press Rel. 2014-170 (Aug. 19, 2014). The MA Examination Initiative hopes to engage a significant portion of newly-registered MA's. In the first phase, Engagement, OCIE will engage in nationwide outreach to inform MA's of their obligations under Dodd-Frank, the SEC's new MA Rule and related implementing Rules by MSRB and others. The second phase, Examination, will review identified ...
The SEC recently announced another issuer settlement under its Continuing Disclosure Cooperation Initiative (see our blogs First Settled Proceeding (July 23, 2014) here). In this settled action, Kansas consented to the standard sanctions offered municipal issuers under the Initiative - a settled administrative action (without admitting or denying) charging negligence under '33 Act §17(a)(2-3) and requiring remedial efforts (new policies and procedures), disclosure of the sanction during the next five years, and continuing cooperation. The charges arose from eight bond ...
The MSRB proposed a Revised Draft of Rule G-42 ("Duties of Non-Solicitor Municipal Advisors") by Reg. Not. 2014-12 issued July 23, 2014. We addressed the original proposal in our January 23 blog post, here. The Revised Draft Rule G-42 contains the same basic structure and objectives as originally proposed. It establishes (a) DUTIES owed by Municipal Advisors ("MA's") to Municipal Entity ("ME") clients and to Obligated Person ("OP's"); (b) An engagement-letter-type disclosure regime with certain required DISCLOSURES; (c) A suitability requirement MA's must follow ...
On July 22, the SEC approved amendments to FINRA Rule 2081 that prohibit member firms from conditioning arbitration settlements (or seeking to) upon a customer's assent to CRD expungement relief. The Rule amendments prohibit paying any consideration or compensation for expungement relief and apply even if a customer suggests such a bargain. SEC Rel. No. 34-72649 (July 22, 2014). In cases that may warrant expungement relief under the conditions specified in Rule 2081, SIFMA's comment letter suggested, and FINRA responded approvingly to, using settlement-agreement language ...
On June 30, 2014, the Financial Industry Regulatory Authority ("FINRA") sent its proposed rules to limit the definition of "public arbitrators" to those without any experience in the securities industry. Previously, an arbitrator who had in the past worked in the securities industry but did not currently work in the industry could qualify as a "public" rather than a "non-public" or "industry" arbitrator. See FINRA Rules 12100 and 13100. According to FINRA, people "who represent investors or the financial industry as a significant part of their business would also be classified as ...
The SEC recently made the unusual move of asking the Eleventh Circuit to publish its previously-unpublished per curiam decision in SEC v. Monterosso, 2014 WL 2922670 (11th Cir. June 30, 2014). The decision was not merely a win for the Staff, who presumably sought publication due to the Court's unwarranted language purporting to limit the Supreme Court's Janus precedent only to cases explicitly charged solely under Rule 10b-5(b). In Monterosso, the Commission's Enforcement Staff pursued civil prosecution of three individuals who - in their roles as the issuer's COOs and officers of ...
It is obvious that broker-dealers and their registered representatives, as well as investment advisors, must be careful in making recommendations to their clients. But the rise of claims related to inaction in a client account should also give members of the securities industry cause for concern. In particular, the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other critics have begun to focus their attention on "reverse churning," a claim arising from an allegation that a registered representative or investment ...
I wrote earlier that the SEC was wrong to extend its "admission of wrongdoing" policy (once reserved for extreme cases) to negligent software-glitch misreporting of trade-data in the Scottrade case. Burr blog here, (April 17, 2014); Law360 Securities article here, (June 2, 2014). On June 4, FINRA announced that its response to similar blue-sheet violations by three firms was a standard AWC ("neither admit nor deny") with a fine of less than half the amount assessed Scottrade by the SEC. As in Scottrade, the firms' violations stemmed from software problems and FINRA also found ...
I recently wrote about Judge Rakoff's refusal to enter the SEC's proposed consent decree in SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (SDNY 2011) - and the shift in SEC enforcement policy that it prompted. Burr blog here, (April 17, 2014); Law360 Securities article here, (June 2, 2014). On June 4, the Second Circuit reversed the Citi ruling, holding the District Court "abused its discretion by applying an incorrect legal standard." United States Securities & Exchange Comm'n v. Citigroup Global Markets, Inc., Nos. 11-5227-cv(L); 11-5375-cv(con); ...
The SEC's new MA Rules become effective July 1, 2014, 17 CFR 240.15Ba1-1 through 1-8 and 15Bc4-1. Required by Dodd-Frank § 975, the Rules were adopted last year, but the SEC postponed their implementation from January to July 1. Rel. No. 34-71288 (stayed January 13 until July 1, 2014); Final Rule, Rel. No. 34-70462, here: http://www.sec.gov/rules/final/2013/34-70462.pdf
The Rules implement a registration regime and impose a fiduciary duty upon any person deemed a Municipal Advisor. The Rules are very specific about which circumstances and relationships impose that duty and what ...The SEC famously announced last year that it would insist upon admissions in settled cases involving egregious conduct - instead of its long-standing "neither admit nor deny" rubric. But its recent Scottrade action has the industry wondering if Commission staff are adhering to that standard. Scottrade entered an Offer of Settlement in administrative proceedings, admitting the Commission's factual and legal findings of books-and-records violations. A software code change in March 2006 inadvertently caused Scottrade's system to omit Error Account trades from its ...
The Securities and Exchange Commission last Thursday, February 27, approved a new consolidated set of registration forms and requirements for municipal market participants, MSRB Rule A-12. SEC Rel. 34-71616; MSRB Reg. Notice 2014-05. Municipal registrants will have until August 10, 2014 to update their registration information with the MSRB, using the new forms. For more information on securities litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.
Facing an examination or investigation by the Financial Industry and Regulatory Authority (FINRA) can be a stressful and intimidating experience for even the most seasoned financial advisor. Understanding the oversight role FINRA plays and the process can help you to properly prepare and reduce the risk of adverse consequences. If you find yourself the subject of a FINRA inquiry, here are some tips to help you navigate the process:
- Determine The Subject Of The Inquiry - If you find yourself involved in an inquiry, FINRA usually will send you a letter requesting information and ...
On January 9, the SEC's Office of Compliance Inspections and Examinations ("OCIE") issued its annual "hot-topics" list of examination priorities for 2014. National Exam Program Priorities across OCIE's entire program include: 1. Fraud Detection & Prevention 2. Corporate Governance, Conflicts of Interest & Enterprise Risk Management 3. Technology 4. Dual Registrants (BD & RIA) 5. New Laws & Regulation
- Rule 506(c) Accredited Investors
- Crowd-funding
- Municipal Advisors
- New Registrants under Dodd-Frank
The SEC's new Municipal-Advisor Rules, 17 CFR § § 240.15Ba1-1 to 15Ba1-8 were to become effective Monday, January 13, 2014 but that morning were delayed until July 1. SEC Rel. 34-71288. Adopted last September, SEC Rel. 34-70462, the Rules will implement Dodd-Frank § 975 and require registration (firm-only, not individuals) and impose fiduciary duty upon MA's (and their control affiliates), subjecting MA's to SEC, FINRA and MSRB rules regarding:
- Supervision
- Conflicts
- Gifts & Entertainment
- Political Contributions
- Books & Records
- Business Communications
- Compensation and ...
The SEC announced November 12th that it has entered its first DPA (deferred prosecution agreement) with an individual respondent. In a DPA, the SEC rewards substantial assistance to an important investigation by agreeing not to prosecute so long as the cooperator complies with certain specified undertakings. DPAs are part of Enforcement's Cooperation Program, which adopted a suite of tools that are a long-standing part of the white-collar-crime canon. Those tools include:
- Cooperation Agreements -recommending some credit for substantial assistance;
- Deferred Prosecution ...