D.C. Circuit to Re-Consider Whether SEC Disclosure Rule Aimed at Curbing Human Rights Abuses in the Democratic Republic of the Congo Violates the First Amendment

In an interesting and uncommon intersection between securities law, curbing human rights abuses and freedom of speech under the First Amendment, the United States Court of Appeals for the District of Columbia recently agreed to re-consider whether the SEC can require companies to disclose whether their products contain “conflict minerals.” The term “Conflict Minerals” is defined in Section 1502(e)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and refers to certain minerals originating from the Democratic Republic of the Congo (“DRC”), or an adjoining country, that have been used by armed groups to help finance violent conflicts and human rights abuses in those countries. These minerals currently include gold, tin, tatalum, tungsten, and may include any other mineral the Secretary of State determines is being used to finance conflict in the DRC or an adjoining country.

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When the Whistle Blows, What Follows?

Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.

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There’s No Place Like Home: The Constitutionality of the SEC’s In-House Courts

Until recently, it was extremely rare for the SEC to bring enforcement actions against unregulated entities or persons in its administrative court rather than in federal court. However, as a result of the Dodd-Frank Act (and perhaps the SEC’s lackluster record in federal court trials over the past few years), the SEC is committed to bringing, and has in fact brought, more administrative proceedings against individuals that previously would be filed in federal court. Many have questioned the constitutionality of these administrative proceedings. As U.S. District Judge Jed Rakoff remarked in August 2014: “[o]ne might wonder: From where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” Several recent SEC targets agree with Judge Rakoff, and have filed federal court suits challenging the constitutionality of the SEC’s administrative proceedings. (Notably, in a 2011 order regarding the SEC’s first attempt to use its expanded Dodd-Frank powers to bring more administrative cases, Judge Rakoff denied a motion to dismiss a constitutional challenge to the SEC’s decision to bring an administrative proceeding in an insider trading case against an unregulated person, following which the SEC terminated that proceeding and litigated in federal court.)

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Is Your Bank Stressed Out? OCC Follows Fed on Proposed Stress-Test Changes

On September 10, the Office of the Comptroller of the Currency (“OCC”) published proposed revisions to its information collecting regulations related to the Dodd-Frank Act’s “stress test” for large national banks and federal savings associations.

Section 165(i)(2) of the Act requires certain financial institutions, including national banks and federal savings associations that have at least $10 billion in total consolidated assets (“covered institutions”), to conduct annual “stress tests” and report the findings to the Federal Reserve System and the institution’s primary governing regulatory agency. In July, the Fed proposed changes to its stress test rules, including revisions to almost twenty schedules that must be completed by covered institutions with over $50 billion in total consolidated assets, and changes to the institutions’ filing deadlines. The OCC’s proposed revisions would bring its reporting requirements in line with the Fed’s proposed requirements. Read More

SEC Charges Hedge Fund Adviser with Whistleblower Retaliation under Dodd-Frank

On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” Read More

Money, Gold and Judges: D.C. Circuit Holds SEC’s Conflict Minerals Rule Violates the First Amendment

On April 14, 2014, a divided panel of the U.S. Court of Appeals for the District of Columbia held in National Assoc. of Mfg., et al. v. SEC that the required disclosures pursuant to the SEC’s Conflict Minerals Rule violated the First Amendment’s prohibition against compelled speech, throwing that rule into uncertainty and possibly opening the door to constitutional challenges to similar disclosure rules.

The Conflict Minerals Rule requires companies and foreign private issuers in the U.S. to disclose their use of “conflict minerals” both to the SEC and on their websites.  The Rule, which was adopted pursuant to Section 1502 of the Dodd-Frank Act as a response to the Congo War, defines “conflict minerals” as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo (“DRC”) or an adjoining country, which directly or indirectly financed or benefited armed groups in those countries.  The deadline for satisfying the Rule, which became effective in November 2012, is May 31, 2014.  The National Association of Manufacturers, along with Business Roundtable and the U.S. Chamber of Commerce, challenged the Rule in the district court and then appealed to the Circuit Court. Read More

SEC Speaks, Cuban Tweets

The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C.  The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers.  In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference.  During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.

From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More

Investors Get a Voice at the Regulator: SEC Names Its First Head of the Office of the Investor Advocate

Though investors might have assumed that the entire Securities and Exchange Commission was their advocate to begin with, on February 12th the agency announced that it had hired Rick Fleming to be its very first Investor Advocate in the recently created Office of the Investor Advocate (“OIA”).

In hiring Fleming, the SEC is implementing Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended the Securities Exchange Act of 1934 by creating, among other things, an Investor Advisory Committee, the OIA, and an ombudsman to be appointed by the Investor Advocate.  Fleming comes to the SEC from his most recent job as Deputy General Counsel at the North American Securities Administrators Association where he advocated for state securities regulators in matters before Congress and the SEC.  Fleming previously spent several years in Kansas state government, including some fifteen years in the state’s Office of the Securities Commissioner. Read More

For Whom the Whistle Tolls in 2014

Momentum for the SEC’s Dodd Frank whistleblower program is growing, and 2014 can be expected to bring continued expansion of the program and the number and types of whistleblower actions initiated by the SEC.  The SEC’s annual report to Congress reported that 3,238 whistleblower tips were received in 2013, up almost 10% from 2012, and awards to whistleblowers who provide information to the SEC are increasing as more substantive tips are received.

An investigation by the SEC into a whistleblower tip can take several years to culminate in an enforcement action, so the last year likely saw just the beginning of a wave of enforcement actions.  Despite the fact that over 6,000 tips have been received through 2013, the SEC has issued only six separate awards to tipsters.  Those awards have ranged from $125,000 to a record $14 million, representing 10 to 30 percent of the overall funds recovered by the SEC in these whistleblower cases. Read More

The Volcker Rule: Great Expectations for Regulating Risk

On Tuesday, December 10, five federal regulatory agencies, the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller and the Commodity Futures Trading Commission, jointly released the long awaited and hotly contested “Final Rules Implementing the Volcker Rule.”   The Rules and supplement, together more than 900 pages long, are already generating comment and controversy for their complexity and severity—or lack thereof, depending on who you ask.  The Rules become effective on April 1, 2014 with final conformance expected by July 21, 2015.

A Product of Hard Times

Paul Volcker, an economist, former Federal Reserve Chairman and former chairman of the Economic Recovery Advisory Board, initially proposed a (seemingly) simple rule restricting certain risk-taking activity by American banks in a 3-page letter to President Obama in 2009.  Speculative activity, for example, proprietary trading, was believed to have contributed to the “too big to fail” position that the nation’s largest banks found themselves in at the height of the Financial Crisis in 2008 and 2009.  The Volcker rule thus proposed prohibiting banks from engaging in short-term proprietary trading on their own account.  It also proposed limiting the relationships that banks could have with hedge funds and other private equity entities.  Not long after its proposal, the rule was made into law in Section 619 of the 2010 Dodd-Frank Wall Street Reform Act, to take effect upon the issuance of implementing regulations.   Read More