Securities and Exchange Commission leadership and staff members addressed the public on February 20-21 at the annual “SEC Speaks” conference in Washington, D.C. Common themes among the numerous presentations included the Commission’s increasing use of data analytics, the Commission’s focus on gatekeepers such as accountants and attorneys, and the Commission’s still incomplete rulemakings mandated by both the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.
In an amicus brief filed earlier this month in Berman v. Neo@Ogilvy LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.
We first heard about the SEC’s increased focus on high-frequency trading in June 2014 when the SEC announced its desire to promulgate new rules on high frequency trading to address the lack of transparency in dark pools and alternative exchanges and to curtail the use of aggressive, destabilizing trading strategies in vulnerable market conditions. However, the SEC and other regulators may not need to rely on new rules to regulate high frequency trading. The United States Commodity Futures Trading Commission special counsel Greg Scopino recently published an article in the Connecticut Law Review arguing that certain high frequency trading tactics violate federal laws against spoofing and wash trading.
On February 3, 2015, the U.S. Securities and Exchange Commission released a Risk Alert addressing cybersecurity issues at brokerage and advisory firms, along with suggestions to investors on ways they can protect themselves and their online accounts. FINRA issued a similar, more extensive “Report on Cybersecurity Practices” on the same day.
The National Exam Program Risk Alert, “Cybersecurity Examination Sweep Summary” summarizes cybersecurity practices and policies of 57 registered broker-dealers, and 49 registered investment advisers based on examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). These findings should be reviewed by CISOs and CIOs who have responsibility for cybersecurity protection because they highlight best practices and areas ripe for improvement. It is reasonable to assume that both the SEC and FINRA will expect firms to review the findings and tailor their own internal assessments and practices to improve their cybersecurity posture, accordingly. They also underscore that the simplest cyber-related scams (phishing, fraudulent e-mail scams, etc.) are still remarkably successful.
Today, the Securities and Exchange Commission (“SEC” or “Commission”) announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the “Big Four” international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC’s Rules of Practice over requests made by the SEC for the production of audit work papers located in China.
A federal court’s recent dismissal of Securities Exchange Act claims against the auditor of a Chinese company prompted us to examine the state of recent U.S. civil securities litigation against accounting firms that audited China-based companies that were listed on US exchanges.
Last week, a New York federal judge struck another blow to prosecutorial efforts to secure insider trading convictions in tipper-tippee cases. As discussed in detail here, the U.S. Attorney’s Office for the Southern District of New York suffered a high-profile defeat in an insider trading case last month, when the Second Circuit issued its decision in U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014). In Newman, the Second Circuit found that prosecutors in tipper-tippee cases must prove both that the tipper (the individual disclosing inside information in breach of a duty) received a personal benefit in exchange for the disclosure, and that the tippee (the individual receiving and trading on the information) knew about the tipper’s receipt of that benefit. In the wake of Newman, U.S. Attorney Preet Bharara and others expressed concerns that the decision could limit future insider trading prosecutions.
On January 14, 2015, the U.S. House of Representatives passed a bill that loosens certain Dodd-Frank requirements and reduces the scope of the SEC’s regulatory authority over certain private equity firms, small businesses, and emerging companies. The bill is part of a larger fight between Democrats and Republicans over the scope of Dodd-Frank and government oversight over financial institutions generally.
The need to detect and investigate reported allegations of wrongdoing within a corporation has long been a fact of corporate life. In the last 15 years, however, a combination of circumstances has contributed to an explosion of activity in this area. Among the contributing factors was Congress’ passage of laws and related agency regulations encouraging and, in some cases, mandating that employees report suspected corporate misconduct; creating financial incentives for employees to do so; and prohibiting retaliation against those who report. For companies, understanding their obligations pursuant to this statutory regime and the unsettled issues still surrounding it is crucial both for purposes of complying with applicable law and responding appropriately to alleged wrongdoing. Recently Orrick attorneys drafted an article for the Review of Securities & Commodities Regulation that discusses certain significant whistleblowing provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), as well as best practices for responding to tips where these statutes apply.
To view the full article, please click here.
On December 10, 2014, the Second Circuit issued an important decision (U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014)) that will make it more difficult in that Circuit for prosecutors, and most likely the SEC, to prevail on a “tippee” theory of insider trading liability. Characterizing the government’s recent tippee insider trading prosecutions as “novel” in targeting “remote tippees many levels removed from corporate insiders,” the court reversed the convictions of two investment fund managers upon concluding that the lower court gave erroneous jury instructions and finding insufficient evidence to sustain the convictions. The court held, contrary to the government’s position, that tippee liability requires that the tippee trade on information he or she knows to have been disclosed by the tipper: (i) in violation of a fiduciary duty, and (ii) in exchange for a meaningful personal benefit. Absent such knowledge, the tippee is not liable for trading on the information.