The Department of Labor has received OMB certification, and sought expedited notice-and-comment, for a rule change that would postpone the full implementation deadline for its Fiduciary Rule from January 1, 2018 until July 1, 2019.
The DOL's Fiduciary Rule became effective June 9, but its transition-period deadline for full implementation of the Best Interest Contract and other requirements was set for January 1, 2018.
This week, the agency published, for quick comment, a proposed rule change extending that full-implementation through July 1, 2019. DOL says it needs the ...
In August 2017, the SEC's Office of Compliance Inspections and Examinations issued a Cybersecurity risk alert directed at financial advisory firms. As part of the SEC's 2014 Cybersecurity Initiative, seventy-five firms, including broker-dealers, financial advisors, and funds, were audited between September 2015 and June 2016 in order to assess their Cybersecurity preparedness.
The assessment focused on six pillars of Cybersecurity: (1) company policies and procedures; (2) access rights and controls; (3) data loss prevention; (4) vendor / third party management; (5 ...
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 ...
Effective April 3, 2017, all FINRA arbitration participants (except pro se parties) must use FINRA's web-based DR-Portal to file and serve documents in both customer and industry arbitrations.
Pro se parties may elect to use the Portal or opt-out, using traditional filing and service methods instead.
Exceptions to Portal service include most items involving new or non-parties, documents produced and permanent injunction claims:
- pro se customers who do not elect to use the Party Portal;
- documents produced in response to discovery requests or pursuant to the Discovery Guide;
In 2016, the U.S. Department of Labor (DOL) issued its final rule expanding the "investment advice fiduciary" definition under ERISA and modified the complex of prohibited transaction exemptions for investment activities as a result of the expanded definition. The new rule is scheduled to be implemented starting on April 10, 2017.
There are many opponents to the new rule, who argue that it is one of the most costly, burdensome regulations to be implemented. Joe Wilson, a Republican Congressman from South Carolina, has recently introduced the Protecting American Families ...
After markets closed on Friday the 13th, the U.S. Department of Justice ("DOJ") announced an $864 million settlement regarding Moody's credit ratings of residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs") leading up to the financial crisis.
Moody's will pay a $437.5 civil penalty to DOJ to resolve civil FIRREA claims and another $426.3 million to resolve potential claims by 21 State Attorneys General. The agreement also requires Moody's to implement additional compliance measures.
Moody's release said the settlement "removes ...
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 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 ...
On January 4, new President and CEO Richard Cook issued FINRA's Annual Regulatory and Examination Priorities Letter. This year's list in summary is:
New for 2017:
Targeted electronic off-site reviews "on select firms not scheduled for cycle exams."
An annual summary report of key exam findings on selected issues
More resources for small firms, including:
- Compliance calendar;
- Compliance service provide directory.
High-Risk / Recidivist Brokers
Dedicated exam group
Supervisory procedures and due-diligence
Seniors: fraud and abuse; ...
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 ...
In late October, FINRA issued a sweep exam, commanding firms to produce 15 categories of documents about firm's cross-selling programs over a 5-year span. The sweep seeks information on cross-selling, including incentives and compensation, tracking and performance metrics, complaints and discipline, compliance and supervision, among others. The letter also imposes a November 15 response deadline.
The sweep letter does not expressly refer to the recent Wells Fargo cross-selling scandal or to Senator Warren's ensuing broad-side calling for SEC Chair White's resignation ...
The Public Investors Arbitration Bar Association (PIABA) renewed its criticism of FINRA's Broker-Check® system in a report issued in late October. PIABA was especially critical of the system's
- Lack of synchronization with state-regulator databases that often contain more fulsome information (including, e.g., CRD information such as reasons for broker termination, bankruptcy filings and tax liens);
- Lack of comparative, contextual data such as the total number of brokers and percentage of those with similar numbers of disciplinary results;
- Inaccessibility to the public ...
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 Sixth Circuit this week declined the SEC's request to dismiss a Constitutional challenge to the new MSRB pay-to-play rules. Instead, the Court ordered the case to a merits panel for consideration. The Republican parties of Tennessee, Georgia and New York are challenging the regulations in consolidated actions.
The SEC argued that its tacit "deemed approval" of new MSRB pay-to-play rules didn't constitute agency action. The SEC's "no we didn't" argument was an attempt to avoid judicial review of the agency's [in]action that allowed the rules to become effective. I discussed the ...
On October 5, 2016, the Supreme Court in Salman v. United States will hear oral argument on its first insider trading case in nearly 20 years. At issue is whether a tipper must receive a pecuniary benefit for a tipper and tippee to be held criminally liable under 10b-5, or whether disclosure by itself can trigger liability. This case will resolve a circuit split that ranges from the broad view that a tipper and tippee are liable if the disclosed inside information is a "gift" to the narrow view that the tipper must receive a tangible pecuniary benefit in exchange for the inside information.
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 Securities Division of Tennessee's Department of Commerce and Industry has increased its enforcement activity during 2016. The recent actions include:
Final Administrative Orders:
Clifton Alexander and HugeROI.com - May 30, 2016
Anthony Dean Myers, Sr. - May 24, 2016
Cease & Desist Orders:
Broad Street Ventures - August 12, 2016
Cumulus Financial - October 29, 2015
Wortham Laboratories - August 12, 2016
Charles Sims, Jr. - August 3, 2016
Scott B. Chitwood - July 21, 2016
The Homes Email Business Corp. - May 23, 2016
Black Gold Resources, Inc ...
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 ...
Within weeks, the Second and Third Circuits reached opposite conclusions over federal jurisdiction to confirm, modify or vacate arbitration awards. The Second Circuit now allows courts to look through the face of the petition to assess the federal-question jurisdictional merit of the underlying dispute; the Third Circuit doesn't (along with the DC and Seventh Circuits).
In 2009, the Supreme Court held the text of Section 4 of the Federal Arbitration Act required "look-through" assessment of the underlying dispute in motions to compel arbitration, based on the statute's text:
The SEC announced its second enforcement action in a week against a company using severance or confidentiality agreements requiring employees to waive whistleblower bounties or their right to bring a qui tam action.
In this week's settled action, the SEC fined publicly-traded Health Net $340,000 for having used severance agreements (over 4 years) that expressly allowed government reporting and cooperation in investigations but required waiver of monetary awards and qui tam actions. The offending agreements included waivers of:
"the right to file an application for award for ...
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 ...
In a July 22 Notice, FINRA took umbrage at a growing line of Court decisions suggesting that a later or more-specific forum selection clause in an agreement between the parties may override a prior customer arbitration agreement. FINRA defended it arbitral forum, pointing out that members are subject to discipline for restricting a customer's right (or even request) to arbitrate.
An expanding line of precedent holds that a later forum-selection provision (limiting disputes to a particular court) may supersede a prior arbitration provision between the same two parties. See, e.g ...
The Federal Reserve announced on August 3, 2016, that it would fine Goldman Sachs $36.3 million in connection with a leak of confidential information from its New York branch. The leak was discovered and reported by Goldman Sachs in 2014 after Goldman learned that a junior executive had received information from a contact at the New York Fed. Both the junior executive and one of his supervisors were fired as a result.
The fine once again brings to bear the importance of maintaining and enforcing compliance programs. In addition to the clear benefits of having infrastructure in place to ...
In an August 1 release, the MSRB said it has scratched a proposed rule that would have required reporting of direct-purchases and bank loans by municipal issuers.
In the March concept release (MSRB Reg. Notice 2016-11) , the MSRB noted concerns that municipal borrowings in the form of direct purchases or bank loans increased the risk to investors in municipal securities if the other borrowings remained undisclosed. The Board's concept release proposed rule-making that would require municipal advisors and others to disclose such borrowings. That proposal, though, posed potential ...
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 ...
Last month, the 6th Circuit joined the majority view recognizing the "materialization of the risk" theory of loss-causation as an alternative to "corrective-disclosure" in securities litigation under Rule 10b-5.
The Public Securities Litigation Reform Act ("PSLRA") and federal jurisprudence (Tw-Iqbal) require pleading specific factual allegations of each element of Rule 10b-5 claim, including loss-causation (a proximate causal relationship between not merely the alleged misrepresentation or omission and the transaction, but also the plaintiffs' loss). Dura-Pharm
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 ...
Last week, industry groups filed two suits seeking to block the Labor Department's new fiduciary rule governing IRA and other retirement-fund investment recommendations.
In the first, the U.S. and several local Texas Chambers of Commerce and the Securities & Financial Markets Association filed suit in Dallas (in the conservative Fifth Circuit). The suit calls the rule-making a usurpation of SEC authority (and Dodd-Frank's specific authorization of the SEC to promulgate uniform fiduciary standard) that deliberately adopts an unworkable rule, then conditions exemptions from ...
Congress voted this week to de-rail the Department of Labor's sweeping fiduciary-duty suite of rule-making, but doesn't have the votes to override the President's threatened veto. The Rule (over a 1,000 pages in all) imposes a sweeping definition of who owes fiduciary duties to retirement investors in retail IRA, HSA, Roth, Coverdell and other "qualified money" situations and prohibits conflicted transactions (including differential compensation), unless they comply with a series of exceptions, carve-outs and exemptions. Industry groups say the compliance and paperwork ...
It's hornbook law that a later intentional breach of contract, alone, doesn't equal promissory fraud.
Holding it therefore cannot establish mail or wire fraud, the Second Circuit reversed the Government's $1.2 Billion FIRREA judgment against Countrywide, Bank of America and others, with instructions to dismiss the case. The case started as a qui tam action alleging that Countrywide's "high-speed swim lane" process delivered substandard mortgage loans to GSEs (Fannie, Freddie) during performance of master mortgage-loan sales agreements ("MLSAs") executed earlier. The ...
Starting June 23, municipal advisors will be subject to revised Rule 42 and its heightened engagement letter and disclosure obligations. SIFMA has released exposure drafts of compliance documents to help MAs meet those requirements. The drafts include a model engagement letter, disclosure statements for both new and continuing engagements and a client -intake checklist. They are here. Broadly speaking, the amended Rule imposes upon municipal advisors
- A fiduciary duty of care and loyalty to municipal entity clients - but only a duty of care to obligated persons (like conduit ...
Affirming dismissal of some lingering Morgan Keegan bond fund actions, the Sixth Circuit joined the Second in holding that American Pipe class-action tolling does not affect the expiration of a statute of repose. The Court reasoned that, whether equitable or procedural, American Pipe cannot supersede the substantive extinction of a legal right by repose. The Tenth Circuit has held that American Pipe tolls statutes of repose pending class certification. Joseph v. Wiles, 223 F. 3d 1155 (10th Cir. 2000). The Second Circuit said not. Police & Fire Ret. Sys. Of City of Detroit v. IndyMac ...
The Supreme Court held May 16 that the exclusive federal jurisdiction provision of the 1934 Securities Exchange Act means the same as the "arising under" test for federal-question jurisdiction and does not pre-empt state law claims unless they require proving a violation of a rule or regulation under the Act.
Manning and other shareholder plaintiffs filed suit against Merrill Lynch and others in New Jersey state court alleging naked short selling in violation of SEC Regulation SHO (which requires a "good locate" at the time of a short trade to prevent naked shorting). But ...
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 MSRB's amended Rule G-42 becomes effective June 23, prescribing new conduct standards for municipal advisors and for the underwriters working with them. In advance of the effective date, the MSRB has published interpretive guidance on the new Rule:
- A fiduciary duty of care and loyalty to municipal entity clients - but only a duty of care to obligated persons (like conduit borrowers);
- A written engagement-letter and conflict-disclosure regime;
Richard Ketchum, the retiring CEO of FINRA, said that the regulator intends to expand the reporting available through its BrokerCheck ® web tool to include relative concentrations of disciplined brokers in industry firms.
Some studies have found that brokers terminated for misconduct often are hired by firms having a higher incidence of their own misconduct. "There are firms that hire from the predatory firms that go out of business. That is your biggest risk," said Ketchum. Ketchum also said that FINRA is considering making its underlying BrokerCheck data available for bulk ...
On April 29, the United States Court of Appeals entered an amended order (previously decided on March 17, 2016) that affirmed the decision of the United States District Court for the Southern District of New York in DeKalb County Pension Fund v. Transocean Ltd., Robert L. Long, Jon A. Marshall, and Transocean Inc.
The central issues in the case were (i) what statute of repose applies to a § 14(a) claim under the Securities Exchange Act of 1934? and (ii) when does the statute of repose began to run? This was a particularly thorny question because the private right of action in § 14(a) is ...
Tennessee fraudulent misrepresentation claims - and "investment contract" claims under the State's Blue Sky Law - fail the "reasonable reliance" requirement, where the plaintiff himself asserts it's a fraud because nobody would believe such a thing.
In a case the Court of Appeals charitably called "astonishing," a lawyer and his successful businessman friend and client paid large amounts of cash over time to a promoter running a "Black Money" scam that also borrowed elements from the "Nigerian Prince" script. The scammers obtained money from both Lambert and ...
The Municipal Securities Rulemaking Board ("MSRB") issued a concept release last month suggesting that market transparency trumps the direct Congressional prohibition against federal regulations requiring filing of information by (or by broker-dealers, from) municipal issuers (the "Tower Amendment").
Regulators are concerned that direct purchases of municipal debt (akin to private placements) and bank loans to municipal entities might avoid the municipal securities regulatory regime, yet affect the priority and integrity of municipal securities:
The MSRB has ...
An article in this weekend's Wall Street Journal called for FINRA to make the database underlying its BrokerCheck ® system (of reports on stockbroker registration and disciplinary history) more widely available for data mining and analysis by public-sector participants.
The article roundly criticized FINRA's interface that limits public access to peep-show, one-broker-at-a-time reports: "In the age of Big Data, it is time to liberate the BrokerCheck files. Only when information is set free can it turn into insight." J. Zweig, "Is Your Stockbroker Great or Mediocre?" Wall ...
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 ...
The Fifth Circuit Bar Association's summary reports: "Appellants were investors who suffered financial losses as a result of R. Allen Stanford's Ponzi scheme. In their arbitration complaint, they sought $80 million in damages. After a two week hearing, a Financial Industry Regulatory Authority panel rejected Appellants' claims, but it awarded them $10,000 in compensation for certain arbitration-related expenses. "On November 7, 2014, Appellee filed, pursuant to Section 9 of the Federal Arbitration Act, a motion to confirm the arbitration award. Because the arbitration ...
On March 1, 2016, the Eleventh Circuit Court of Appeals affirmed the Southern District of Florida in Fried v. Stiefel Labs., Inc., No. 14-14790, 2016 WL 787986 (11th Cir. Mar. 1, 2016), holding that the District Court had properly refused to give a portion of a jury instruction requested by the Plaintiff/Appellant Richard Fried concerning Rule 10b-5(b). Fried is the former CFO of Stiefel Labs. After resigning in 1997, Fried held 30.7881 share of common stock in an Employee Stock Bonus Plan and 10 shares of stock outside of the plan. In August 2007, Fried learned that Stiefel Labs had ...
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 ...
The MSRB's Rule G-37 amendments applying pay-to-play prohibitions to Municipal Advisors and their third-party solicitors will become effective August 17, 2016. 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 exclusion to officials for whom a contributor can vote;
- Prohibiting soliciting, coordinating ("bundling"), and contributions to state/local ...
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 ...
FINRA reported that, for 2015, Claimants won about half of private securities arbitrations: 47% for all-public panel decisions; 45% for majority-public panels. A colleague and securities mediator, Dana Pescosolido, recently studied FINRA's 2015 private securities arbitrations to see just what the results are when Claimants "win." The study can illuminate mediation (and other risk-assessment) expectations. FINRA Securities Arbitrations Of the 3,435 securities arbitrations filed in 2015, 2,341 (68%) were customer cases and 1,094 (32%) were intra-industry disputes ...
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 ...
FINRA released its annual Regulatory and Examination Priorities Letter (so-called "Errico Letter") on January 5. FINRA's top five priorities:
- Firm Culture. FINRA's been pushing "culture of compliance" for years, but in 2016 will take it to the next level: "FINRA will formalize our assessment of firm culture while continuing our focus on conflicts of interest and ethics." In looking at a firm's culture, FINRA will focus on "Five Factors" to assess whether:
- policy or control breaches are tolerated;
- control functions are valued within the organization;
- managers are ...
As 2015 ended, FINRA fined Barclays Capital $13.75 million for mutual-fund switching and breakpoint supervisory failures that might have been avoided if that part of Barclay's WSPs had been properly calibrated and/or part of their annual compliance testing. The lapses stemmed in part from an inaccurate definition of switching in Barclay's WSPs and those undetected problems mounted over the years. A five-year look back review uncovered over 6100 unsuitable switches with customer harm of about $8.63 million; a similar six-month look back revealed 1,723 unsuitable mutual-fund ...
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 ...
FINRA's Dispute Resolution Task Force issued its Final Report in mid-December. The Report reflects the group's consideration of wide-ranging issues affecting the nation's principle dispute-resolution forum for broker-dealers, their associated persons and customers. The Task Force made 51 recommendations for changes to FINRA Arbitrations, including: Improve Arbitrator Quality by:
- Increasing compensation;
- Improving recruitment for depth and diversity;
- Improving selection to provide a pool of 30 in all-public arbitrator cases; achieve earlier and better conflict ...
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 Supreme Court Monday re-affirmed the enforceability of class-waivers in arbitration agreements. The five-justice majority felt the need to rebuke the California courts for trying to end-run Federal preemption through a latent "States-rights" nullification approach. Two of the three dissenters saw the case as a consumerist crusade against big business. But the biggest take away for businesses using arbitration clauses just might lie hidden within the opinion. DirectTV's Conditional Class-Waiver. DirectTV's consumer contracts contained a conditional class waiver ...
The Tennessee Supreme Court released a December 14 decision reviewing personal jurisdiction over non-resident defendants. First Community Bank, NA v. First Tennessee Bank, NA, No. 2012-01422-SC-R110CV (Tenn. Dec. 14, 2015). The case involved a Virginia bank's securities claims against a host of defendants, among them a couple Tennessee-resident firms and three non-resident Ratings Agencies having rated various collateralized-debt-obligation securities - some of which had Tennessee securities as a small portion of their underlying portfolio assets. The trial and ...
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 ...
There's a developing circuit split over whistleblower standing for retaliation claims. A decision this week extended that split to U.S. district courts within Tennessee, too. In Verble v. Morgan Stanley Smith Barney, LLC, No. 3:15-CV-74-TAV-CCS (Dec. 8, 2015 USDC EDTN), the Eastern District of Tennessee joined with the Fifth Circuit view that Dodd-Frank whistleblowers must report to the SEC to have standing. An earlier decision from the Middle District of Tennessee had sided with the Second Circuit's view, deferring to the broader language of the SEC regulations that would ...
Speaking to a November 16 Money Laundering conference jointly sponsored by the American Banking and Bar Associations, Deputy AG Sally Yates unveiled revisions to the Department of Justice's U.S. Attorneys' Manual ("USAM"). The revisions implement the new focus on individual wrongdoing in the corporate criminal context first announced September 9 in the "Yates Memo." The revisions principally involve (1) the Filip Factors, (2) extend the Yates Memo to civil investigations, and (3) address coordination in parallel proceedings.
- Filip Factor Revisions.
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 ...
Last Thursday, November 12, the MSRB published its Compliance Advisory for Municipal Advisors ("MA's"). The new MA regulatory regime was imposed by Dodd-Frank and implemented by the MSRB and SEC over the past several years. The Advisory highlights some of fundamental regulatory requirements for MA's and identifies some potential compliance risks, including, for example:
- Failing to register;
- Failing to ensure MA associated persons are Series 50 qualified (still in pilot);
- Failing to implement an MA-specific compliance program under Rule G-44;
- Failing to distinguish ...
On December 1, 2015, amendments to the Federal Rules of Civil Procedure adopted by the United States Supreme Court will be effective (absent action by Congress). The amendments to the Rules should be duly noted by litigation practitioners as certain of the amended rules appear to represent an increased focus on limiting discovery and even a departure from prior practice. If the intent of these changes are actually followed, these amendments should have an impact not only on securities cases but on any case filed and litigated in federal court.
One of the most significant changes is the ...
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 ...
Recent decisions try to clarify insider trading liability, but may have caused more confusion. In United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Second Circuit explained that to be convicted of insider trading, the tippee must have knowledge that the insider tipper disclosed information in exchange for a personal benefit. What does this mean? In Newman, the tipper and tippee attended business school together and had been colleagues, but they were not "close." The tippee provided career advice and assistance to tipper, but the advice began before the tipper gave 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 ...
Unless you live under a rock, you've heard about "Deflategate:" The Patriots' use of allegedly under-inflated footballs during their 45-7 win over the Colts in last-year's AFC Championship. In a 40-page opinion issued September 3, Southern District of New York federal Judge Richard Berman overturned the NFL's four-game suspension of Patriot quarterback, Tom Brady. Commissioner Goodell said the League will appeal. Deflategate also proves that it's not impossible to overturn an adverse arbitration award under Federal Arbitration Act ("FAA"). Cross-Motions on an ...
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