On Monday, November 9, 2015, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) released results from its evaluation of investment adviser firms’ use of third parties for compliance functions, including outsourced chief compliance officers (“CCO”). Outside CCOs often perform important compliance responsibilities, including updating firm policies and procedures, preparing regulatory filings, and conducting annual compliance reviews. Despite the importance of these functions, the Risk Alert (“Risk Alert” or “Alert”) indicated that several of the outsourced CCOs examined had not implemented effective compliance programs. The Alert, available here, sends a cautionary signal to investment adviser firms considering outsourcing compliance functions. This warning is particularly timely since government agencies, including the SEC, have increased their focus on financial firms’ compliance programs, and on CCOs in particular.
On October 30, 2015, the United States Securities and Exchange Commission (“SEC”) moved forward in implementing Title III of the JOBS Act and adopted new rules permitting companies to offer and sell securities to all potential investors through crowdfunding. Crowdfunding is the use of small amounts of capital from a large number of investors to finance new business ventures. This method of investment, typically conducted over the internet, is aimed at assisting smaller companies with capital formation by accessing a greater pool of potential investors. The SEC had previously opened crowdfunding investment to “accredited investors” (investors meeting certain net worth and/or investment experience criteria) but these rules permit non-accredited investors, i.e., everyone else, to participate while providing them with additional protection under the federal securities laws. Title III and these rules come in response to the enormous growth of equity crowdfunding through financing platforms such as GoFundMe, Kickstarter or Indiegogo.
On September 29, 2015, the D.C. Circuit, the second federal appellate court to recently weigh in on the ongoing debate over SEC administrative actions, ruled in favor of the SEC in Jarkesy v. SEC, holding that federal courts do not have subject matter jurisdiction over challenges to ongoing SEC administrative enforcement proceedings. Notably, and in accord with the Seventh Circuit’s recent decision in Bebo v. SEC, the D.C. Circuit’s decision was narrowly tailored – focusing only on the issue of subject-matter jurisdiction – but not the substantive viability of Jarkesy’s constitutional challenges. The three-judge panel unanimously held that a party to a pending administrative proceeding must first defend against that proceeding, and only once the SEC proceeding concludes may the party seek review by a federal court.
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.
In what will surely not be the last word on this continuing controversy, on September 3, 2015, a majority of the members of the Securities and Exchange Commission held that the appointment process for the Commission’s administrative law judges (“ALJ”) does not violate the Constitution. As we reported just last month, a federal judge in the Southern District of New York preliminarily enjoined a separate SEC administrative proceeding based in part on the judge’s view that the SEC ALJ appointment process is likely unconstitutional. In light of the key role ALJs play in SEC proceedings and the number of administrative cases brought each year, the question is likely to be addressed at the appellate level and could have significant implications for the securities defense bar.
On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+. The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia. The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”
Coming on the heels of the SEC’s first wave of settlements with underwriters as part of its Municipalities Continuing Disclosure Cooperation (“MCDC”) initiative, the agency has brought yet another precedent-setting enforcement action against an underwriter in the municipal bond market. On August 13, 2015, the SEC brought a settled enforcement action against the brokerage firm Edward Jones, in which the firm agreed to pay more than $20 million to settle charges that it overcharged customers in connection with the sale of municipal bonds in the primary market. Edward Jones settled without admitting or denying the SEC’s findings.
United States District Court Judge Richard M. Berman of the Southern District of New York has been making headlines in recent weeks as he presides over the highly publicized case between the National Football League (“NFL”) and National Football League Players Association (“NFLPA”) regarding the suspension of New England Patriots star quarterback Tom Brady over his alleged role in “Deflategate.” Taking a page from the Patriot’s playbook, Judge Berman recently deflated the United States Securities and Exchange Commission (“SEC”) and its controversial administrative court forum.
Last Thursday, the SEC announced it reached settlement agreements with 36 municipal securities underwriting firms pursuant to its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. These settlements mark the first enforcement actions against underwriters of municipal securities under the MCDC Initiative. Read More
The defense bar recently won a significant victory in the battle to challenge the SEC’s expanded use of administrative proceedings, following the 2010 enactment of the Dodd-Frank Act, to seek penalties against unregulated individuals and entities. As we previously wrote in SEC’s Administrative Proceedings: Where One Stands Appears to Depend on Where One Sits and There’s No Place Like Home: The Constitutionality of the SEC’s In-House Courts, SEC administrative proceedings have recently faced growing scrutiny, including skepticism about whether the administrative law judges (ALJs) presiding over these cases are inherently biased in favor of the SEC’s Division of Enforcement. The Wall Street Journal recently reported that ALJs rule in favor of the SEC 90% of the time in administrative proceedings. Administrative proceedings have also been criticized for the ways in which they differ from federal court actions, including that respondents are generally barred from taking depositions, counterclaims are not permissible, there is no equivalent of Rule 12(b) motions to test the allegations’ sufficiency, and there is no right to a jury trial.