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.
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.
In an interesting and uncommon intersection between securities law, curbing human rights abuses and freedom of speech under the First Amendment, the United States Court of Appeals for the District of Columbia recently agreed to re-consider whether the SEC can require companies to disclose whether their products contain “conflict minerals.” The term “Conflict Minerals” is defined in Section 1502(e)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and refers to certain minerals originating from the Democratic Republic of the Congo (“DRC”), or an adjoining country, that have been used by armed groups to help finance violent conflicts and human rights abuses in those countries. These minerals currently include gold, tin, tatalum, tungsten, and may include any other mineral the Secretary of State determines is being used to finance conflict in the DRC or an adjoining country.
Until recently, it was extremely rare for the SEC to bring enforcement actions against unregulated entities or persons in its administrative court rather than in federal court. However, as a result of the Dodd-Frank Act (and perhaps the SEC’s lackluster record in federal court trials over the past few years), the SEC is committed to bringing, and has in fact brought, more administrative proceedings against individuals that previously would be filed in federal court. Many have questioned the constitutionality of these administrative proceedings. As U.S. District Judge Jed Rakoff remarked in August 2014: “[o]ne might wonder: From where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” Several recent SEC targets agree with Judge Rakoff, and have filed federal court suits challenging the constitutionality of the SEC’s administrative proceedings. (Notably, in a 2011 order regarding the SEC’s first attempt to use its expanded Dodd-Frank powers to bring more administrative cases, Judge Rakoff denied a motion to dismiss a constitutional challenge to the SEC’s decision to bring an administrative proceeding in an insider trading case against an unregulated person, following which the SEC terminated that proceeding and litigated in federal court.)
On September 10, the Office of the Comptroller of the Currency (“OCC”) published proposed revisions to its information collecting regulations related to the Dodd-Frank Act’s “stress test” for large national banks and federal savings associations.
Section 165(i)(2) of the Act requires certain financial institutions, including national banks and federal savings associations that have at least $10 billion in total consolidated assets (“covered institutions”), to conduct annual “stress tests” and report the findings to the Federal Reserve System and the institution’s primary governing regulatory agency. In July, the Fed proposed changes to its stress test rules, including revisions to almost twenty schedules that must be completed by covered institutions with over $50 billion in total consolidated assets, and changes to the institutions’ filing deadlines. The OCC’s proposed revisions would bring its reporting requirements in line with the Fed’s proposed requirements. READ MORE
On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” READ MORE
On April 14, 2014, a divided panel of the U.S. Court of Appeals for the District of Columbia held in National Assoc. of Mfg., et al. v. SEC that the required disclosures pursuant to the SEC’s Conflict Minerals Rule violated the First Amendment’s prohibition against compelled speech, throwing that rule into uncertainty and possibly opening the door to constitutional challenges to similar disclosure rules.
The Conflict Minerals Rule requires companies and foreign private issuers in the U.S. to disclose their use of “conflict minerals” both to the SEC and on their websites. The Rule, which was adopted pursuant to Section 1502 of the Dodd-Frank Act as a response to the Congo War, defines “conflict minerals” as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo (“DRC”) or an adjoining country, which directly or indirectly financed or benefited armed groups in those countries. The deadline for satisfying the Rule, which became effective in November 2012, is May 31, 2014. The National Association of Manufacturers, along with Business Roundtable and the U.S. Chamber of Commerce, challenged the Rule in the district court and then appealed to the Circuit Court. READ MORE
The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C. The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers. In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference. During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.
From a litigation and enforcement perspective, key takeaways from the conference include the following: READ MORE
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
Momentum for the SEC’s Dodd Frank whistleblower program is growing, and 2014 can be expected to bring continued expansion of the program and the number and types of whistleblower actions initiated by the SEC. The SEC’s annual report to Congress reported that 3,238 whistleblower tips were received in 2013, up almost 10% from 2012, and awards to whistleblowers who provide information to the SEC are increasing as more substantive tips are received.
An investigation by the SEC into a whistleblower tip can take several years to culminate in an enforcement action, so the last year likely saw just the beginning of a wave of enforcement actions. Despite the fact that over 6,000 tips have been received through 2013, the SEC has issued only six separate awards to tipsters. Those awards have ranged from $125,000 to a record $14 million, representing 10 to 30 percent of the overall funds recovered by the SEC in these whistleblower cases. READ MORE
