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 Securities Act of 1933's catchall for defining a security is the "investment contract." The landmark case, SEC v Howey, explained that "an investment contract for the purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely form the efforts of the promoter or a third party …" Here, the Howey Court held that selling shares in a citrus farm managed by the promoter was an investment contract. Under the Howey test, staking sports, poker, or fantasy sports gamblers (or a related ...
A unanimous Supreme Court reaffirmed the "gifting" theory of insider trading under Dirks and rejected Newman "to the extent" it required more.
The Court's long-standing rule in Dirks v. SEC, 463 U.S. 646, 664 (1983) allows a jury to infer a tipper's personal benefit "where the tipper receives something of value in exchange for the tip or 'makes a fit of confidential information to a trading relative or friend.'"
Recently, the Second Circuit appeared to limit the "gifting" theory. In United States v. Newman, 773 F.3d 438, 452 (2nd Cir. 2014), cert. denied, 577 U.S. ___ (2015), the Court ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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
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 ...
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 ...
- FINRA 2023 Exam Priorities
- FINRA Proposal Modernizes Supervision Rule to Recognize WFH
- FINRA Report Denies Arbitrator Selection Manipulation
- FINRA Warns Against Russian-Sponsored Cyber Attacks
- SIFMA’s After-Action Report on Quantum Dawn VI Cybersecurity Exercise
- FINRA Clarifies CCO Supervisory Liability
- SEC Proposes Cybersecurity Disclosure Rule For Public Companies
- FINRA Urges Firms to Heed CISA/FBI “Shields Up” Warning on Russia
- SEC Proposes Cybersecurity Rule for Advisers, Investment Companies
- FINRA’S 2022 Report on Examination & Risk Monitoring Program
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