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
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
The SEC released its Fiscal Year 2013 Annual Report (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on November 15, 2013. The Report analyzes the tips received over the last twelve months by the SEC’s Office of the Whistleblower (“OWB”) and provides additional information about the whistleblower award evaluation process.
Breakdown of Tips Received in FY 2013
The OWB reported a modest increase in the number of whistleblower tips and complaints that it received in 2013 – 3,238 tips in 2013 compared to 3,001 in 2012. Overall, the 2013 whistleblower tips were similar in number, type, and geographic source to the whistleblower tips reported in 2012. As in 2012, the most common types of allegations in 2013 were: Corporate Disclosure and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%). Most whistleblowers, however, selected “Other” when asked to describe their allegations. In 2012, the most common complaint categories reported were also Corporate Disclosure and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%). See Appendix B to the Report, listing tips by allegation type and comparing tips received in 2013 to those received in 2012. Read More
Today the SEC announced that it is issuing a whistleblower award of over $14 million to a whistleblower who provided information that resulted in the recovery of investor funds. The significant whistleblower award comes after many critics have questioned the success of the SEC’s whistleblower award program which, to date, has only issued two much smaller awards since the program’s inception in 2011. The first award payment was issued in August 2012 for approximately $50,000. The second award, paid to three whistleblowers for information that stopped a sham hedge fund, has paid out approximately $25,000 with an expected total payout of $125,000. Read More
On September 18, 2013, the SEC voted to propose a new rule that would require public companies to disclose the ratio of compensation of its CEO to the median compensation of its employees.
The new rule, required under the Dodd-Frank Act, gives companies flexibility to determine the median annual total compensation of its employees in any way that best suits their particular circumstances when calculating the ratio. SEC Chair, Mary Jo White stated that the SEC is very interested in receiving comments to the proposed approach and the flexibility it provides.
SEC Commissioner Michael S. Piwowar, in a strongly worded statement, expressed his dissatisfaction with the proposed rule. Quoting from Charles Dickens’ A Tale of Two Cities – “it was the best of times, it was the worst of times” – Piwowar declared that the pay ratio disclosure proposal “represents what is worst about our current rulemaking agenda.” Piwowar’s concerns were twofold. First, that the pay ratio disclosure could harm investors. Piwowar expressed his concern that investors using pay ratios to compare companies risked being distracted from material investment information and mislead by the conclusions offered by the ratios. Additionally, he noted that investors may also be harmed if pressure to maintain a low pay ratio curtails expansion of business operations into regions with lower labor costs. Second, he was troubled by his observation that the pay ratio rule could have a negative effect on compensation, efficiency, and capital formation because the competitive impacts of the disclosure would disproportionally fall on U.S. companies with large workforces and global operations and could influence how companies structure their business, leading to inefficiencies, higher cost of capital and fewer jobs. Read More
On July 17, 2013, the Fifth Circuit issued the first circuit court decision interpreting Dodd-Frank’s anti-retaliation provision. In Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit held that, to be protected under Dodd-Frank’s anti-retaliation provision, an individual must be a “whistleblower,” which is defined by the statute as an individual who has made a report to the SEC. Notably, this holding directly conflicts with the SEC’s regulations interpreting the Act, as well as five district court decisions that had all held that employees who make internal reports to company management are protected under Dodd-Frank even if they did not make reports to the SEC.
Click here to read Orrick’s full client alert.
On November 15, 2012, the Securities and Exchange Commission released its Fiscal Year 2012 Annual Report on the Dodd-Frank Whistleblower Program (the “Report”), the first full-year report issued since the enactment of Dodd-Frank. The Report analyzes the 3,001 tips received over the last twelve months by the Commission’s Office of the Whistleblower (“OWB”) , which is responsible for the implementation and execution of the Commission’s whistleblower program. The Report also provides additional information on the whistleblower award evaluation process that resulted in its first (and only) award issuance in August 2012.
Activities of the Commission’s OWB
The OWB was created pursuant to Section 924(d) of the Dodd-Frank Act. OWB reviews and processes whistleblower tips through the Commission’s Tips, Complaints, and Referrals (“TCR”) System, leveraging resources of the Commission’s Office of Market Intelligence to evaluate tips and assign them to the appropriate division. OWB works closely with the Enforcement Division throughout the investigative process, serving as a liaison between the whistleblowers or their counsel and Enforcement staff. OWB arranges meetings between whistleblowers and investigators or subject matter experts within Enforcement to advance investigations. OWB also communicates with other agencies’ whistleblower offices, including the IRS, Department of Justice, Commodity Futures Trading Commission, and the Department of Labor’s OSHA. Read More
The U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) can breathe a little easier after President Barak Obama’s re-election on Tuesday, November 6, 2012, according to legal scholars and attorneys.
Presidential Candidate Mitt Romney voiced his criticisms of the Dodd-Frank Act during the October 3, 2012, presidential debate, promising to repeal and replace Dodd-Frank. While the political climate in the United States Congress made repeal of Dodd-Frank unlikely, Romney’s administration may have eliminated or weakened provisions of the Act, appointed SEC and CFTC heads who were less interested in aggressive enforcement, and reduced both agencies’ funding.
Legal scholars and attorneys predict that President Obama’s re-election will allow the SEC and the CFTC to continue their aggressive enforcement campaigns of 2011. President Obama’s re-election is particularly important for the CFTC, which Dodd-Frank awarded new oversight powers. The Romney administration may have eliminated key provisions of the Act, returning the CFTC to the limited role it exercised under President George W. Bush. Under President Obama, the CFTC is likely to continue its expanded watchdog role and receive the funding necessary to do so. Read More
Congress continues to struggle with the issue of proper oversight for investment advisors. Despite catastrophes like the Bernie Madoff scheme, SEC budget constrictions have resulted in only a handful of investment advisors being reviewed by the Commission each year (as compared to over half of all broker-dealers). Various bills have been floated to remedy the situation.
In April, the Investment Adviser Oversight Act of 2012 was introduced in the House. Proposed as an amendment to the 1940 Investment Adviser Oversight Act, the new act seeks to regulate investment advisors by requiring them to join a new self-regulatory organization (SRO) that would be funded by their membership fees. Though not explicitly set forth by the Act, the Financial Industry Regulatory Authority (FINRA) was expected to create and oversee the new governing SRO. Read More
A recent report released by the Government Accountability Office (“GAO”) last week concluded that the SEC can improve its oversight of the Financial Industry Regulatory Authority (“FINRA”), a self-regulatory organization charged with policing securities broker-dealers. The GAO’s criticism of the SEC is a politically hot issue because Congress is currently considering whether to shift authority for overseeing investment advisors from the SEC to FINRA—the subordinate organization the SEC is purportedly doing a poor job of overseeing.
The GAO report was a product of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required the GAO to study the SEC’s oversight of FINRA. In particular, the report examined (1) how the SEC has conducted its oversight of FINRA in the past; including FINRA rule proposals and the effectiveness of its rules; and (2) how the SEC plans to enhance its oversight of FINRA.
The report concluded that that while the SEC routinely inspects many of FINRA’s programs, it does not conduct any retrospective review, i.e., it does not review whether FINRA’s rules are actually effective. In fact, the report concluded that the SEC does not even have a process for retrospective review.
Significantly, the GAO report also concluded that the SEC had conducted virtually no review of FINRA operations aimed at executive compensation and corporate governance issues. The SEC claimed it had purposefully overlooked compensation and governance operations because of competing priorities and resource constraints, and instead had focused its resources on FINRA’s regulatory departments, which the SEC perceived as programs with the greatest impact on investors.
Given these and other conclusions, the GAO recommended that the SEC “encourage FINRA to conduct retrospective reviews of its rules” as well as establish its own process for examining FINRA reviews. It further recommended that the SEC utilize a risk-management framework in developing its future oversight plans.