Dodd-Frank Act

Dodd-Frank Re-Write—the House of Representatives Edition

The House has approved major changes to signature aspects of Dodd-Frank. While those changes are unlikely to survive intact, they are certainly worthy of close attention. We’ve studied the nearly 600-page bill so you don’t have to.

On June 8, 2017, the House passed H.R. 10, entitled the Financial CHOICE Act of 2017. Sponsored by Rep. Jen Hensarling (R-Texas), the bill advances to the Senate after a largely party-line vote, 233 to 186. All but one Republican supported the bill, while all Democrats opposed.

The bill extensively amends the Dodd-Frank Wall Street Reform and Consumer Protection Act, the landmark 2010 legislation passed by a Democrat-controlled Congress in the wake of the Lehman Brothers collapse and ensuing financial crisis.

Key changes include:

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The Potential Declawing of the SEC: The Financial CHOICE Act

Gavel and Hundred-Dollar Bill

The Financial CHOICE Act (or “CHOICE Act 2.0”), which would significantly narrow the SEC’s ability to bring enforcement actions and make it more challenging for it to prevail in such actions, is inching its way towards becoming law. On May 4, 2017, the Financial Services Committee passed the Act and it is now slated to be introduced to the House in the coming weeks. As part of the push by the current administration to deregulate, this bill aims to repeal key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including those directed towards the SEC.  Although the Act has a long way to go before it is enacted, many of its provisions would have far-reaching consequences and would change the way the SEC operates as we know it.

Should the CHOICE Act 2.0 become law, the following are some of the more important effects it would have on the SEC’s enforcement abilities:

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Circuit Split on Whistleblower Protections Widens

On March 8, 2017, a divided panel of the Ninth Circuit issued an opinion in Somers v. Digital Realty Trust Inc. that further widened a circuit split on the issue of whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to whistleblowers who claim retaliation after reporting internally or instead only to those who report information to the SEC.  Following the Second Circuit’s 2015 decision in Berman v. [email protected] LLC, the Ninth Circuit panel held that Dodd-Frank protections apply to internal whistleblowers.  By contrast, the Fifth Circuit considered this issue in its 2013 decision in Asadi v. G.E. Energy (USA), LLC and found that the Dodd-Frank anti-retaliation provisions unambiguously protect only those whistleblowers who report directly to the SEC.

Plaintiff Paul Somers alleged that Digital Realty Trust fired him after he made several reports to senior management regarding possible securities law violations. Somers only reported these possible violations internally at the company, and not to the SEC.  After his employment was terminated, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the whistleblower protections under Dodd-Frank.  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank.  The district court denied the motion, deferring to the SEC’s interpretation that internal reporters are also protected from retaliation under Dodd-Frank.

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SEC Continues to Target Private Equity Firms, Entering Into $52 Million Settlement with Apollo Global Management

settlement

On August 23, 2016, the SEC entered into a settlement that reflects a continuation of its recent trend of increasingly active pursuit of private equity firms, particularly for failing to disclose conflicts of interests and other material information to investors.  The SEC entered into a $52.5 million settlement with four private equity fund advisers affiliated with Apollo Global Management LLC (collectively “Apollo”) arising out of insufficient disclosures and supervisory failures.

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Will It Be Enough?: SEC Amends Rules to Look More Like Federal Court

In a move that will make Securities and Exchange Commission administrative proceedings look more like civil litigation in federal court, on July 13, 2016, the SEC announced that it had adopted amendments to its rules of practice.  These rules appear similar to those the Commission proposed last September.  For critics of the amendments, they may not go far enough, but the expanded discovery and clarifications regarding dispositive motion practice may address some of the issues previously raised regarding the Commission’s perceived home-court advantage.

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The Whistle Blows Again: SEC Pays Second Largest Whistleblower Bounty Award

whistleblower

On June 9, 2016, the Securities and Exchange Commission (‘SEC”) awarded the second largest whistleblower bounty – $17 million – granted under the Dodd-Frank whistleblower rules to date.  Previously, the highest whistleblower awards were a $30 million award in September 2014 and a $14 million award in October 2013.  The $17 million award comes on the heels of $26 million in whistleblower awards given to five anonymous individuals over the last month alone.  These awards serve as a warning to companies that the SEC takes its whistleblower program seriously and will continue to encourage and reward company insiders for coming forward with information that leads to successful enforcement actions.  As Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower – a department created by the SEC to give whistleblowers a place to submit their tips – said, “[W]e hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

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Here’s a Tip: “Substantial and Important Contributions” to Pre-Existing SEC Investigations Can Pay Off For Whistleblowers

In a move evidencing the SEC’s continued commitment to its whistleblower program, the Commission announced on Friday that it has awarded a whistleblower over $3.5 million for providing information that did not lead to a new investigation, but rather only served to bolster an ongoing investigation.  This decision came after the SEC’s Claims Review Staff preliminarily determined that the SEC should deny the whistleblower claim because the information provided by the individual did not appear to “cause Enforcement staff to open the investigation or to inquire into different conduct, nor . . . to have significantly contributed to the success” of the action.  But after reviewing the whistleblower’s written response for reconsideration, in addition to factual information from staff in the Division of Enforcement, the Commission changed course, determining that the information indeed “significantly contributed” to the success of the SEC’s action, and approving the award.

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Even Whistleblowers Must Pay the Piper

In a heavily redacted decision issued on April 5, 2016, the SEC approved the claim of one whistleblower and denied the claim of another for providing information related to an unidentified enforcement action.  The SEC awarded $275,000 to the primary claimant (Claimant 1) but offset that amount by the monetary obligations due related to a separate Final Judgment.  Although the April 5 order was heavily redacted, the publicly available information confirms that the $275,000 award was based on a percentage of the monetary sanctions from both the SEC case and a related criminal action.  This is the first time an SEC order has required a tipster to spend whistleblower proceeds to settle a court-ordered debt.

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SEC Eliminates References to Credit Ratings in Money Market Fund Rules

On September 16, 2015, the Securities and Exchange Commission (“SEC”) adopted revisions to Rule 2a-7, the primary rule governing money market funds.  The amendments implement provisions of the Dodd-Frank Act that require federal agencies to replace references to credit ratings in regulations with alternative standards of credit-worthiness, and are consistent with the SEC’s goal of reducing its reliance on credit ratings.

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Second Circuit Splits With Fifth Circuit Setting Up Possible Supreme Court Review: Are Internal Whistleblowers Protected Under Dodd-Frank?

On September 10, 2015, a divided panel of the Second Circuit issued an opinion in Berman v. [email protected] LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015), creating a split with the Fifth Circuit on an issue that has also divided lower federal courts: whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to tipsters who claim retaliation after reporting internally, or only to those retaliated against after reporting information to the SEC.  The Second Circuit, granting Chevron deference to SEC interpretive guidance, held that Dodd-Frank protections apply to internal whistleblowers.  This stands in contrast to the Fifth Circuit’s holding in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), where that court found that on their face, the Dodd-Frank anti-retaliation provisions unambiguously limited protection to whistleblowers reporting to the SEC, and that, therefore, the SEC’s contrary guidance was not entitled to deference.  Given this Circuit split, Supreme Court review is possible.

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