Category Archives: Securities and Exchange Commission (SEC)

Willfulness and Negligence are Mutually Exclusive Standards of Liability (Something We All Intuitively Knew Already)

Greg Morvillo and Christine Hanley

Rudyard Kipling famously quipped “Oh, East is East and West is West and never the twain shall meet.”  Although crafted in 1889, this sentiment is newly applicable to a D.C. Circuit Court of Appeals opinion in The Robare Group v. S.E.C, 922 F.3d 468, 479-80 (D.C. Cir. 2019).  The D.C. Circuit essentially held that Willfulness is Willfulness and Negligence is Negligence, and never the twain shall meet, only less poetically.  This potentially landmark decision held that willfulness and negligence are mutually exclusive standards of liability – one requiring intent to commit wrongdoing and the other requiring a lack of intent to commit wrongdoing – and the SEC cannot impose civil liability under both standards for the same conduct. 

Robare arose out of a 2014 administrative cease and desist proceeding against The Robare Group (“TRG”), an investment advisory firm, and its principals and co-owners, Mark L. Robare and Jack L. Jones.  The complaint alleged that respondents received a fee from Fidelity Investments (“Fidelity”), which provided clearing services for TRG’s advisory clients, whenever TRG’s clients invested in certain funds offered on Fidelity’s online platform.  The SEC further alleged that TRG failed to disclose this fee and that TRG had a conflict of interest arising from the revenue-sharing arrangement between TRG and Fidelity.  Continue reading

Lorenzo v. SEC — Supreme Court Issues Decision on “Scheme Liability” Under Rule 10b-5

by Sullivan & Cromwell LLP

U.S. Supreme Court Rules That Defendants Can Be Held Primarily Liable for Securities Scheme Fraud for Knowingly Disseminating the Misstatements of Others

Summary

Yesterday, in a widely watched securities case, the U.S. Supreme Court held in Lorenzo v. SEC[1] that a defendant who disseminates the material misstatement of another—and thus cannot be liable under SEC Rule 10b-5(b) for “making” the statement—can nevertheless be liable under other provisions of the securities laws that proscribe “any device, scheme, or artifice to defraud” or “any act, practice or course of business which operates or would operate as a fraud or deceit.”  The Court’s decision may affect long-standing case law in various federal circuits—including those covering New York and California—which had held that alleged frauds solely involving material misstatements or omissions could not be pursued under provisions other than Rule 10b-5(b).  Although Lorenzo potentially broadens the scope of conduct subject to securities fraud liability based on dissemination of material misstatements, the opinion emphasizes certain factual circumstances present in this case that may limit its future application in other circumstances. Continue reading

How SEC Enforcement is Getting Back to Basics

by Russell G. Ryan

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:

Better Accountability

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

Tenth Circuit Affirms SEC’s Extraterritorial Reach

by Mary Jo White, Kara Brockmeyer, Andrew J. Ceresney, Matthew E. Kaplan, Robert B. Kaplan, Julie M. Riewe, Jonathan R. Tuttle, and Ada Fernandez Johnson

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.[1] 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

SEC’s Misguided “Solution” In Search Of A Problem: Proposed Rule Would Hurt Whistleblower Program

by Sean X. McKessy

The US Securities and Exchange Commission has long hailed its whistleblower program as a success, with the former SEC chair, Mary Jo White, calling it a “game changer” in enforcement and current Chairman Jay Clayton saying “the strength of our whistleblower program is a critical component in our investor protection toolbox.”

So it makes no sense for the SEC to adopt certain proposed rules (PDF: 837 KB) that would inject into the program uncertainty for whistleblowers and discourage those with detailed knowledge of massive fraud from stepping forward. Yet that’s what the SEC is considering doing by arbitrarily cutting awards for the most valuable whistleblowers to less than what they should be entitled to under the statute and current rules.

Rewards are a major reason for the SEC whistleblower program’s success. They have ranged from $50,000 to $50 million. Continue reading

Court Upholds SEC Authority and Finds Broker-Dealer Liable for Thousands of Suspicious Activity Reporting Violations

by H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, David S. HuntingtonBrad 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.[1] 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).[2]

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[3]—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.[4]

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”[5] 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.”[6] Continue reading

SEC Adopts Disclosure Rules on Hedging Policies

by Heather L. Coleman, Matthew M. Friestedt, and Marc Treviño

Requires Description of any Hedging Policies or Practices Adopted, Not Specified Transactions; Will Apply to Most Companies Beginning in 2020

SUMMARY

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

SEC’s First “Red Flags” Enforcement Case Focuses on Board’s Role

by Craig A. Newman

A little-noticed consent decree entered into by the U.S. Securities and Exchange Commission earlier this year should be setting off alarm bells for financial firms and their boards of directors.

In a cease and desist order against Voya Financial Advisors, the investment advisory unit of Voya Financial, the SEC – for the first time – enforced its “Identity Theft Red Flags Rule” in punishing the firm for allegedly lackluster data security practices. The SEC charged that hackers were able to access sensitive client information including Social Security Numbers, account balances and even details of client investment accounts. The commission called out the company’s board of directors for failing to “administer and oversee” compliance with the rule. Continue reading

Sustainable Finance and ESG reporting – EU pushing ahead, SEC cautious

by Dr. Katja Langenbucher

The market for “sustainable finance” has grown exponentially over the last few years.  The term usually denotes investment approaches that consider environmental, social and governance factors (“ESG”) in portfolio selection and management.  Following up on the Paris Agreement of 2016, the European Union has ambitious plans to mobilize private capital for contribution to sustainability concerns such as climate change and pollution.

In January 2018, the EU High-Level Expert Group on Sustainable Finance published its final report. [1]  It suggests focusing on common taxonomy and standards, investor duties, transparency of asset managers, governance of companies, and enhanced powers of the European Supervisory Authorities.  In March 2018, the European Commission went ahead with an action plan, announcing a number of short and long-term legislative steps that should be taken. Continue reading

Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report

by Nowell Bamberger, Robin Bergen, and Emily Michael

On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (PDF: 1.95 MB) (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting.  The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year.  While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement.  Continue reading