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.
On June 27, 2016, SEC Administrative Law Judge Carol Fox Foelak dismissed the Division of Enforcement’s charges against IRA custodian Equity Trust Company in connection with the company’s processing of investments marketed by two convicted fraudsters. Judge Foelak’s decision—a complete defense victory for Equity Trust—shows that while the Division of Enforcement may still win most of its cases in administrative proceedings, it doesn’t win them all.
After four failed attempts at persuading federal appellate courts to hear constitutional challenges to SEC administrative courts, it is increasingly clear that defendants in SEC in-house proceedings will not be able to pursue an early out because of the manner in which SEC administrative judges are appointed. The latest loss came on June 17, when the Eleventh Circuit in consolidated cases Gray Financial Group Inc. et al. v. SEC, No. 15-13738 (11th Cir. Jun. 17, 2016), and Charles L. Hill v. SEC, No. 15-12831 (11th Cir. Jun. 17, 2016), agreed with the Second Circuit’s decision of three weeks ago in Tilton v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016) (which we covered here) in ruling that respondents in an SEC administrative enforcement cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds. A different decision from the Eleventh Circuit would have created a circuit split and a heightened possibility of Supreme Court review, but instead it joined the Second, Seventh, and D.C. Circuits in an approach that is unanimous among the circuit courts to have considered the question. The constitutional legitimacy of SEC administrative law judges is thus likely to continue unchallenged, at least for now.
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.”
On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).
Last week, the SEC’s Office of Inspector General (“OIG”) released its semiannual report to Congress, which details the OIG’s independent and objective audits, evaluations, investigations and other reviews of the SEC’s programs and operations in order to prevent and detect fraud, waste and abuse in SEC programs and operations, and other vulnerabilities the SEC faces. In the most recent report, the OIG was critical of various programs, but most notably: (1) recommended a new framework to increase the Office of Compliance Inspections and Examinations coverage of registered investment advisors, and (2) informed Congress it was conducting a further evaluation on the SEC’s enforcement investigations to ensure that investigations are coordinated internally and across SEC divisions and offices.
On Thursday, May 19, 2016, the U.S. Attorney’s Office for the Southern District of New York announced the arrest of renowned sports bettor William “Billy” T. Walters on an alleged years-long insider trading scheme conducted with his friend and business partner, Thomas C. Davis. According to the indictment, from 2008 to 2014, Mr. Walters executed a series of profitable stock trades in Dean Foods and Darden Restaurants based on inside information repeatedly and systematically provided to him by Mr. Davis. The U.S. Attorney’s Office alleges that these trades netted Mr. Walters over $40 million and charged him with conspiracy, securities fraud, and wire fraud.
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.
On May 3, 2016, the Financial Industry Regulatory Authority announced that MetLife Securities, Inc. agreed to pay $25 million to settle allegations that the company misled its customers in tens of thousands of variable annuity replacement applications. The sanction represents FINRA’s largest fine related to variable annuities.
Variable annuities (“VAs”) are highly complex and highly regulated insurance contracts that guarantee their holders—typically retirees—a minimum payment at the end of an accumulation stage. When a consumer seeks to replace one VA for another, her broker must complete an Annuity Replacement and Transfer Disclosure (ARTD) setting forth the comparative cost and guarantee information about existing and proposed annuity contracts. In New York, brokers must also complete a “Regulation 60 Disclosure,” which contains a hypothetical illustration of death benefits and surrender values for existing and proposed contracts under various hypothetical market growth rates.
On April 13, 2016, the SEC published a concept release discussing and seeking public comment on modernizing certain business and financial disclosures required by Regulation S-K, which lays out reporting requirements for various public company SEC filings. The release focuses on whether the disclosure requirements – many of which have seen little change in decades – continue to elicit the information that investors need for investment and voting decisions, and whether any of the relevant rules have become outdated or unnecessary. It also seeks input on how registrants can most effectively present material information, including how the Commission can assist with improving the readability and navigability of SEC filings. As SEC Chair Mary Jo White explained in an April 13, 2016 statement regarding the release, “[w]e want to make sure that [the Commission’s disclosure] rules are facilitating both timely, material disclosure by companies and shareholders’ access to that information. And we want to make sure that our requirements are as efficient as they can be.”