Securities and Exchange Commission

SEC Announces Settlement with State Street – and a Suit Against a Big Law Partner – for Pay-to-Play Scheme

Gavel and Hundred-Dollar Bill

On January 14, 2016, the SEC entered into two no-admit, no deny settlements regarding an alleged pay-to-play scheme to obtain contracts from the Treasury Office for the State of Ohio.  The first was with State Street Bank and Trust Company (“State Street” or “the Bank”) – a custodian bank that provides asset servicing to institutional clients, and  the second with Vincent DeBaggis, a former State Street executive.  On the same day, the SEC filed suit against attorney Robert Crowe for his role in the scheme which allegedly involved causing concealed campaign contributions to be made to the Ohio Treasury Office to influence the awarding of contracts to State Street.  Mr. Crowe is a partner at the law firm of Nelson Mullins Riley & Scarborough and a former lobbyist for the Bank.

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New Year, New Priorities for the SEC’s Office of Compliance Inspections and Examinations

On January 11, 2016, the SEC announced its Office of Compliance Inspections and Examinations (OCIE) priorities for the year .   The announcement included several new areas of focus, including liquidity controls, public pension advisers, exchange-traded funds (ETFs), product promotion, and variable annuities.   Hedge fund and mutual fund managers, private equity firms, and broker-dealers – in particular those that deal with retirement investments – would be wise to take note of these new areas of interest.  As in past years, enforcement actions in these areas are likely to follow.

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SEC Enforcement Director Tells House Judiciary Committee That Investigation Agencies Should Not Need Warrants to Access Email Data Directly from Internet Service Providers

On Tuesday, Andrew Ceresney, Director of the Securities and Exchange Commission’s Division of Enforcement, told the House Judiciary Committee that the Email Privacy Act (H.R. 699) and the Electronic Communications Privacy Amendments Act (S. 356) should not be amended to require prosecutors and civil enforcement agencies to obtain criminal warrants when requesting emails and other electronic data directly from internet service providers (“ISPs”), which include cloud-based storage services.  READ MORE

Investment Firms and Compliance Professionals Beware: SEC Finds Risks Associated with Outsourcing Compliance Function

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.

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Investing in the Next “Big Thing” Just Got Easier – SEC Promulgates New Crowdfunding Rules

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.

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SEC Eliminates References to Credit Ratings in Money Market Fund Rules

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.

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Having the Last Word on the Last Word: SEC Says Its ALJs are “Mere Employees”

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.

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International Hacking and Insider Trading Scheme Exposes Cybersecurity Vulnerabilities at Third-Party Vendors

On August 11, 2015, the SEC announced that it was bringing fraud charges against 32 defendants for their alleged participation in a five-year, international hacking and insider trading scheme.  According to the SEC, two Ukrainian men hacked into at least two major newswire services, stole non-public copies of embargoed corporate announcements containing quarterly and annual earnings data, and provided the announcements to 30 other defendants, who traded off the information.  In parallel actions, the U.S. Attorney’s Offices for the District of New Jersey and the Eastern District of New York also announced criminal charges against some defendants named in the SEC’s action.  The SEC’s enforcement action may be a harbinger of events to come.  As we have written, cybersecurity is emerging as the SEC’s newest area of focus for enforcement actions.

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The Boss Makes HOW much more than me? SEC Issues Final Pay Ratio Rule

On August 5, 2015, the Securities and Exchange Commission approved its final rule subjecting most public companies to the so-called “Pay Ratio Disclosure” mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  The SEC voted 3-2 to approve the measure, with the panel’s two Republican members opposing it.  In the split vote, the SEC finally put into place one of the most controversial rules mandated by Dodd-Frank.  In the years since the SEC began working on the rule, it has attracted an intense measure of both public scrutiny and advocacy, drawing more than 286,000 public comments.

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SEC Guidance Supports its Position That Internal Whistleblowers are Protected Under Dodd-Frank

On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC.  The guidance reflects that there is a split among federal courts over whether Dodd-Frank’s whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to that of the Commission in Rule 21F, the regulation the SEC adopted to implement the whistleblower legislation, holding that internal reports are not protected by Dodd-Frank. Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd Frank provides enhanced recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than would be available under the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002.

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