Month: September 2012

Supreme Court to Resolve Split on Timing for SEC Penalty Actions

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Today, the Supreme Court granted a petition for certiorari in Gabelli v. Securities and Exchange Commission (11-1274). In the appeal from a Second Circuit opinion, the Court will decide whether a governmental claim for penalties accrues on the date that the underlying violation occurs, or when the SEC discovers (or reasonably could have discovered) the violation, for purposes of the 5-year statute of limitations for governmental penalty actions embodied in 28 U.S.C. s. 2462. The precise question presented is:

“When Congress has not enacted a separate controlling provision, does the government’s claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. s. 2462 when the government can first bring the action for a penalty?”

The Second Circuit, in an opinion adopting the SEC’s position, held that the discovery rule applies to SEC enforcement actions rooted in fraud. Under that rubric, the SEC could bring an enforcement action within five years of learning about a fraud, which, in many cases, can be far more than five years after the underlying violation occurred. The Supreme Court’s decision to take the case follows closely on the heels of the Fifth Circuit’s August 7, 2012 decision in SEC v. Bartek, previously discussed here. In Bartek, the Fifth Circuit held that the statute of limitations for penalties in SEC enforcement actions began to run on the date of the underlying in violation, and that the discovery rule does not apply to 28 U.S.C. s. 2462. The Bartek decision therefore created a clear Circuit split that the Supreme Court is poised to resolve next term.

Tim Pawlenty To Champion Deregulation at Financial Services Roundtable

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On September 20, 2012, the Financial Services Roundtable (FSR), a trade organization representing the 100 largest financial services companies in the country, announced that former Minnesota Governor Tim Pawlenty will become its new President and Chief Executive Officer on November 1. Pawlenty will succeed Steve Bartlett, who announced his retirement plans in March. Pawlenty spent 15 years as a labor lawyer before serving as a state representative and later Governor of Minnesota.

FSR actively lobbies for changes to the Dodd-Frank Act and its supporting regulations. Its goals include defeating Dodd-Frank’s price controls on debit card fees, the Volcker Rule, and whistleblower provisions. Dodd-Frank requires the drafting of over 300 new regulations that will apply to banks and other financial firms. FSR took the lead on past deregulation efforts, including some of the efforts to repeal the Glass-Steagall restrictions on affiliations between banks and insurance companies. FSR has also filed amici briefs in several important financial cases at both the appellate and Supreme Court level. READ MORE →

CFTC Tightens Hold on Swap Participants

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On September 10, 2012, the CFTC issued rules mandating new record-keeping and registration requirements for swap dealers and major swap participants in the $700 trillion derivative global market. The rules were published in the Federal Register on September 11, 2012 and will take effect on November 13, 2012. The issuance finalizes rules adopted in a 5 to 0 CFTC vote on August 27, 2012. The rules were issued under Section 731 of the Dodd Frank Act, which amended the Commodity Exchange Act to require the adoption of standards relating to the confirmation, processing, netting, documentation, and valuation of swaps. Through these regulations, CFTC aims to effectively regulate swap dealers and major swap participants, and impose rigorous clearing and trade execution requirements on a previously unchecked derivatives market.

A swap is a derivative product in which counterparties exchange the cash flows of their financial instrument for the cash flows of the other party’s instrument. Swaps can include currency swaps, interest rates swaps, and, more recently, credit default swaps.

The final rules require swap dealers and major swap participants to timely and accurately confirm swap transactions by the end of the first business day following the date of execution. The rules also mandate portfolio reconciliation on a daily, weekly, and quarterly basis, and portfolio compression as a risk management tool. Furthermore, swap dealers and participants must now establish and enforce policies and procedures that are reasonably designed to ensure that each dealer and participant and its counterparties agree to all of the terms in the swap trading relationship documentation. The rules also require dealers and participants to agree with their counterparties regarding the methods, procedures, rules, and inputs for swap valuations. READ MORE →

Can We Be Classmates?

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On September 6, the Second Circuit expanded class standing in a mortgage-backed securities class action suit for alleged misrepresentations in a shelf registration statement. NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No. 11-2763 (2d Cir. Sept. 6, 2012). The plaintiff, an investment fund, sued Goldman Sachs & Co. (“Goldman”) and GS Mortgage Securities Corp. (“GS”) alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 on behalf of a putative class of persons who acquired mortgage-backed certificates underwritten by Goldman and issued by GS. The plaintiff alleged that a single shelf registration statement connected with 17 separate offerings sold by 17 separate trusts contained false and misleading statements concerning underwriting guidelines, property appraisals, and risks and that these alleged misstatements were repeated in prospectus supplements.

The lower court had granted the defendants’ motion to dismiss, holding that the plaintiff—who had purchased securities from only two of the seventeen trusts—lacked standing to bring claims on behalf of purchasers of securities of the other fifteen trusts.

The Second Circuit disagreed that the plaintiff lacked class standing. Although the plaintiff had individual standing only as to the securities it purchased from the two trusts, the court held that the analysis for class standing is different. According to the court, to assert class standing, a plaintiff has to allege (1) that he personally suffered an injury due to the defendant’s illegal conduct and (2) that the defendant’s conduct implicates the “same set of concerns” as the conduct that caused injury to other members of the putative class. READ MORE →