On February 12, 2019, the Commodity Futures Trading Commission (CFTC or Commission) published for the first time its examination priorities for the coming year. The release of the priorities will provide legal and compliance staff of CFTC-regulated entities greater insight into the Commission’s examination programs and assist them in better preparing for, and successfully navigating, an examination. The Commission bases its priorities on four pillars: (1) effective communication, (2) a risk-based determination of priorities, (3) continuous improvement and (4) efficiency. Continue reading
In a recent submission (PDF: 2.36 MB) to Congress, the U.S. Securities & Exchange Commission (SEC) reported that, for fiscal year 2018, the SEC paid the largest whistleblower awards since the institution of its program in 2012 following the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Specifically, in FY 2018, the SEC awarded 13 individuals over $168 million collectively for tips that led to actions by the SEC to protect investors.
Other statutes likewise provide financial incentives to whistleblowing. Under the False Claims Act (FCA), for example, persons who report fraud in government contracting can receive up to 30 percent of the government’s recovery in an action. Many states, including New York, have enacted state-level equivalents of the FCA. For many decades, the FCA has contributed to large recoveries to the U.S. Treasury, with an expansion of recoveries in part due to the reporting of violations by whistleblowers. Continue reading
In 2014, the Securities and Futures Commission (the “SFC”) commenced an investigation into share trades undertaken by the First Applicant in 2013, after receiving a report from another licensed corporation indicating suspected market manipulation activities by a fund managed by the First Applicant. The trades concerned shares in Nitto Denko Corporation, a Japanese company listed on the Tokyo Stock Exchange.
During the course of the investigation, the SFC sought and obtained various materials from the First Applicant and its majority shareholder and responsible officer, the Second Applicant, pursuant to section 181 of the Securities and Futures Ordinance (the “SFO”). This section empowers the SFC to require the production of information including information about a client, details of a transaction and instructions relating to a transaction from a licensed person. Failure to comply with a demand from the SFC under section 181 without a reasonable excuse is a criminal offence.
In July 2014, the SFC received and acceded to a request for assistance from two Japanese regulators, the Financial Services Agency (the “FSA”) and the Securities and Exchange Surveillance Commission (the “SESC”). In particular, the SFC permitted the Japanese regulators to attend an SFC interview with the Second Applicant and provided them with materials previously disclosed by the Applicants in response to the SFC’s requests for information. Continue reading
New cyber regulations, such as the California Consumer Privacy Act, have companies concerned about expanding potential liability. Companies fear that private rights of action are being created that will allow consumers to sue by alleging that the companies failed to protect their personal information. But attention should also be paid to plaintiffs’ recent successes in applying existing legal frameworks—such as basic tort law—to cyber cases. We have previously written about the use of state consumer protection acts to recover in data breach cases. Recently, plaintiffs have also made some significant inroads in bringing negligence actions against companies that have experienced cyber events.
On January 28, 2019, the U.S. District Court for the Northern District of Georgia issued a decision in the Equifax Consolidated Consumer Class Action, allowing the consumers’ negligence claims against Equifax to move forward. Judge Thrash found that the consumers had sufficiently alleged injuries resulting from the breach, pointing to the “unauthorized charges on their payment cards as a result of the Data Breach” as actual, concrete injuries that are legally cognizable under Georgia law. The Court rejected Equifax’s arguments that the consumer’s injuries should be attributed to the hackers and could have been caused by data breaches at other companies. The Court noted that allowing companies “to rely on other data breaches to defeat a causal connection would ‘create a perverse incentive for companies: so long as enough data breaches take place, individual companies will never be found liable.’” Critically, the Court found that, given the foreseeable risk of a data breach, Equifax owed consumers an independent legal duty of care to take reasonable measures to safeguard their personal information in Equifax’s custody. In doing so, the Court found that the economic loss doctrine was not a bar to the consumers’ recovery because Equifax owed an independent duty to safeguard personal information. Continue reading
Since leaving the Securities and Exchange Commission in 2004, I’ve done my share of critiquing SEC enforcement policy. So it’s only fair, nearly two years into the tenure of current SEC leadership, to give credit where it’s due.
And as it happens, plenty of credit is due in at least six areas of SEC enforcement policy:
About ten years ago, the SEC departed from historical practice by delegating to senior enforcement staff the commissioners’ legal responsibility for launching formal investigations and unleashing the power to issue subpoenas. Some of us publicly expressed concerns at the time about this dilution of political accountability, given the severe reputational harm and financial expense that can result from investigations, even if no wrongdoing is ever uncovered. Continue reading
By Avi Gesser, David Popkin, and Michael Washington
Until recently, biometric privacy was a niche area of the law that had little application to most companies. But with the rapid growth in commercial biometric data collection, including voice samples, fingerprints, retina scans, and facial geometry, as well as some recent developments in the applicable case law, it’s probably time for companies to start paying attention. Indeed, one of our top privacy law predictions for 2019 was a judicial expansion of the notion of harm, which happened quicker than we anticipated in the context of gathering biometric data.
On January 25, 2019, the Illinois Supreme Court decided Rosenbach v. Six Flags Entertainment Corporation, 2019 IL 123186 (PDF: 61.7 KB), unanimously finding that plaintiffs could bring a private cause of action for violations of the notice and consent requirements of the state’s biometric privacy law without any showing of harm. In Six Flags, a mother sued the owner of a theme park on behalf of her teenaged son after he was fingerprinted in connection with the purchase of a season pass to the park. Neither the son nor the mother consented in writing to the taking of the fingerprint or signed any written release. Further, the park did not provide any documentation about their retention schedule or guidelines for retaining and then destroying the data. The court found that individuals possess a right to privacy in and control over their biometric identifiers. Continue reading
All views here represent the authors’ own views and not their organizations.
There is a cultural moment in the world of corporate compliance. Following recent major corporate scandals, there is now growing recognition among corporate boards and beyond that truly changing corporate misconduct means addressing the toxic elements within cultures.
The central question for companies and regulators is how to assess toxic cultural elements.
Toxic corporate culture exists when organizations, whose chief business and business means are legal, develop structural violations of rules over a period of time.
Our recent paper (PDF: 1.06 MB), published in Administrative Science, offers an in-depth analysis of what toxic cultural elements played a role in three major corporate scandals: BP’s polluting and unsafe oil exploration practices, VW’s diesel emission cheating practices, and Wells Fargo’s fake and unauthorized accounts schemes. In all three cases, the illegal behavior spanned over a decade and investigators concluded that corporate culture was to blame. Yet in all three cases, no one had yet systematically sought to understand what toxic cultural elements sustained the illegal conduct. We developed an analytical framework to examine toxicity in organizational cultures on three levels: structures, values, and practices (see Table 1 below). Continue reading
Last week, in a much-anticipated decision, the U.S. Court of Appeals for the Tenth Circuit held in SEC v. Scoville et al. that Congress “clearly intended” Section 929P(b) of the Dodd-Frank Act to grant the U.S. Securities and Exchange Commission (“SEC”) authority to enforce the anti-fraud provisions of the federal securities laws abroad where there is sufficient conduct or effect in the United States. In affirming the lower court’s decision, the Tenth Circuit undertook a thorough analysis of the legislative history of Section 929P(b) and concluded that Congress “affirmatively and unmistakably” intended to grant extraterritorial authority to the SEC where either “significant steps” are taken in the U.S. to further a violation of the anti-fraud provisions, or conduct outside the U.S. has a “foreseeable substantial effect” within the U.S.
The Scoville decision thus provides judicial affirmation of the SEC’s ability to bring enforcement actions under what is essentially the same “conduct-and-effects” test that the Supreme Court rejected for private securities litigation in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010). The Tenth Circuit’s decision, though not entirely unexpected, is significant in that it represents the first Circuit Court decision to directly address the SEC’s authority to enforce the federal securities laws extraterritorially after the Supreme Court’s rejection of the “conduct-and-effects” test in Morrison. Continue reading
by H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, David S. Huntington, Brad S. Karp, Raphael M. Russo, Richard S. Elliott, Rachel M. Fiorill, Karen R. King, Anand Sithian, and Katherine S. Stewart
Decision Provides Rare Judicial Guidance on SAR Filing Requirements
On December 11, 2018, the Securities and Exchange Commission (SEC) obtained a victory in its enforcement action against Alpine Securities Corporation, a broker that cleared transactions for microcap securities that were allegedly used in manipulative schemes to harm investors. Judge Cote of the U.S. District Court for the Southern District of New York issued a 100-page opinion partially granting the SEC’s motion for summary judgment and finding Alpine liable for thousands of violations of its obligation to file Suspicious Activity Reports (SARs).
Because most SAR-related enforcement actions are resolved without litigation, this decision is a rare instance of a court’s detailed examination of SAR filing requirements. The decision began by rejecting—for a second time—Alpine’s argument that the SEC lacks authority to pursue SAR violations. The court then engaged in a number of line-drawing exercises, finding that various pieces of information, as a matter of law, triggered Alpine’s SAR filing obligations and should have been included in the SAR narratives. This mode of analysis, which applies the SAR rules under the traditional summary judgment standard, may appear to contrast with regulatory guidance recognizing that SARs involve subjective, discretionary judgments.
Although the decision has particular relevance in the microcap context, all broker-dealers—and potentially other entities subject to SAR filing requirements—may wish to review the court’s reasoning for insight on a number of SAR issues, including the adequacy of SAR narratives and the inclusion of “red flag” information. Among other cautions, the decision illustrates the dangers of relying on SAR “template narratives” that lack adequate detail.
More broadly, the SEC’s action against Alpine is another indicator of heightened federal interest in ensuring broker-dealer compliance with Bank Secrecy Act (BSA) requirements. For example, last month the U.S. Attorney for the Southern District of New York brought the first-ever criminal BSA charge against a broker-dealer, noting that this charge “makes clear that all actors governed by the Bank Secrecy Act—not only banks—must uphold their obligations.” Continue reading
Requires Description of any Hedging Policies or Practices Adopted, Not Specified Transactions; Will Apply to Most Companies Beginning in 2020
On December 18, 2018, the SEC adopted rules requiring disclosure of policies and practices regarding hedging for directors, officers and employees of U.S. public companies. These rules require public companies to describe, in any proxy or information statement relating to director elections, any practices or policies they have adopted regarding the ability of its directors, officers or employees to engage in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities of the public company or its affiliates. The rules cover both equity securities granted as part of compensation and those otherwise held directly or indirectly.
The final rules do not require any company to prohibit hedging transactions or to otherwise adopt hedging policies and do not require disclosure of any particular hedging transactions.
These rules will generally apply to proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019, although there is a one-year transition period for emerging growth companies and smaller reporting companies. Continue reading