Securities Exchange Act

SEC Charges Rating Agency Morningstar with Failures of Disclosure and Internal Controls in CMBS Rating Model Adjustments


On February 16, the Securities and Exchange Commission (SEC) filed a civil action in federal district court in the Southern District of New York against the former credit ratings agency, Morningstar Credit Ratings LLC, regarding alleged failure to disclose and maintaining internal control provisions in violation of federal securities law in its CMBS ratings practice. The complaint alleges that, in 30 transactions rated by Morningstar between 2015 and 2016, Morningstar failed to disclose that its rating criteria permitted analysts to adjust property cash flow and valuation stresses on a “loan-specific basis,” which resulted in lower expected losses on CMBS classes and the assignment of credit ratings and failed to adequately maintain a system of internal controls to ensure adherence to its ratings criteria. The complaint alleges violations of the Securities Exchange Act of 1934 against Morningstar and seeks injunctive relief, disgorgement and civil penalties. Release.

SEC Proposes Rule to Require Broker-Dealers Active in Off-Exchange Market to Become Members of National Securities Association

On March 25, the SEC proposed to narrow Rule 15b9-1 under the Securities Exchange Act, which exempts certain brokers or dealers from membership in a registered national securities association, in an effort to enhance regulatory oversight of active proprietary trading firms, such as high frequency traders.  ReleaseProposed Rule.

Court Reverses Itself and Dismisses RMBS Fraud Complaint Against Several Banks

On September 30, Judge Sam Lindsay of the U.S. District Court for the Northern District of Texas granted a motion to dismiss plaintiff Town North Bank’s amended complaint against UBS, Morgan Stanley, Merrill Lynch, and J.P. Morgan, among others. Town North Bank asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and the Texas Securities Act. In March 2013, Judge Lindsay had denied the defendants’ motion to dismiss but reviewed the briefs anew when the defendants filed a motion for interlocutory appeal. Upon that review, Judge Lindsay sua sponte vacated the March 2013 order and granted the motion to dismiss. In particular, Judge Lindsay found claims related to certain of the alleged misstatements time barred under the applicable statute of repose found in 28 U.S.C. § 1658(b). As to the remaining statements, Judge Lindsay found that Town North Bank had not adequately alleged that the Defendants “made” the statements in light of the U.S. Supreme Court’s recent ruling in Janus Capital Group v. First Derivative Traders. The court also concluded that Town North Bank did not allege scienter with sufficient particularity because the amended complaint lacked factual allegations from which the court could reasonably infer that Defendants were aware of any false statements at the time they were made. Order.

SEC Fee Rate Advisory #2 for Fiscal Year 2015

On October 1, the SEC fiscal year 2015 started. The SEC will be operating under a continuing resolution that will extend until December 11. Accordingly, the fees paid under Section 31 of the Securities Exchange Act will remain at their current rate until 60 days after the enactment of a regular appropriation for the SEC. Release.

SEC Issues FAQs Regarding Rule 15a-6 and Foreign-Broker Dealers

On March 21, the Staff of the  Division of Trading & Markets of the SEC published a set of FAQs on Rule 15a-6 under the Securities Exchange Act of 1934, which provides conditional exemptions from Exchange Act broker-dealer registration requirements for foreign broker-dealers that engage in specified activities involving U.S. investors.  Among the topics covered are distribution of research to U.S. institutional investors, delivery of confirmations and account statements directly to U.S. counterparties, and the application of prior no-action guidance to chaperoning arrangements with non-affiliated broker-dealers.  SEC FAQs.

Letter from the SEC to Rep. Darrell Issa on Capital Formation and Section 12(g) of the Securities Exchange Act

On April 6, SEC Chairman Schapiro issued a public letter to Rep. Darrell Issa, Chairman of the Committee on Oversight and Governmental Reform, in response to his letter on March 22 concerning the SEC and capital formation. Among the items discussed in the letter, Chairman Schapiro addressed Section 12(g) of the Exchange Act and the limit of 500 holders of record before a company must register its securities with the SEC. In light of the burdensome nature of registering the securities of smaller companies as well as the ability of much larger companies to aggregate multiple shareholders under a single holder of record, thereby avoiding registration, Chairman Schapiro stated, “I believe that both the question of how holders are counted and how many holders should trigger registration need to be examined.” SEC Letter.