Friday, April 17, 2015

Gallagher Lambastes FSB’s ‘Coercive’ Global Regulation Tactics

By Amy Leisinger, J.D.

In recent remarks, SEC Commissioner Daniel M. Gallagher addressed the tenuous relationship between global and domestic regulation of the financial industry. He questioned the effects of mandates by the G-20 and the Financial Stability Board (FSB) on national sovereignty and economic freedom and suggested that efforts toward “regulatory harmonization” have moved from facilitating cooperation among regulators to imposing a “top-down, forcible imposition of one-size-fits-all regulatory standards on sovereign nations.” To be truly effective, the official explained, these entities and their members must refocus on regulatory equivalence and substituted compliance. “There is usually more than one way to achieve any given regulatory objective, and it’s not always clear which way is ‘best,’” he noted.

Instead of coordinating the efforts of national regulators, Gallagher continued, the FSB is coercing national authorities to implement its own policies, and “while such regulators may get some things right, they will most certainly get some things wrong—and, having coerced the world to do it all one way, it will go wrong everywhere.” Citing the Financial Stability Oversight Council’s quick following of FSB decisions and policies regarding designation of systemically important financial institutions and imposition of “bank-like” capital requirements on money market funds, the commissioner warned that hasty decisions of “unelected bureaucrats” could have a tremendous impact on the U.S. economy and ultimately be counter-productive.

Advocating a renewed focus on avoiding duplicative standards and overregulation, Gallagher urged regulators to find “common ground” with international counterparts and to acknowledge similarities and quality in regulatory goals and approaches across borders. By acknowledging that there is more than one way to achieve a goal, regulators can provide greater certainty to participants in cross-border transactions and encourage innovation in capital markets, the commissioner said.

 In the U.S., he continued, lawmakers and regulators need to move away from the approach of “regulate first and ask questions later” The domestic capital markets are losing market share to other international financial centers, and this shift may, in fact be “self-inflicted,” Gallagher explained. Increasingly expensive compliance burdens and threats of litigation are likely driving financial business to other jurisdictions, particularly Middle Eastern and Asian markets with regulatory regimes intended to entice issuers and investors. The SEC and other financial regulators should focus less on “de-risking” markets and investments and more on eliminating barriers preventing access to capital markets, he concluded.

Thursday, April 16, 2015

Massachusetts Permanently Adopts Emergency Crowdfunding Exemption

By Jay Fishman, J.D.

The Massachusetts Securities Division permanently adopted an emergency intrastate crowdfunding exemption permitting job growth by helping Massachusetts small and early-stage businesses find investors and gain greater access to capital with fewer restrictions.

Benefits. The exemption, available to Massachusetts-based corporations, LLPs, and LLCs, allows the issuers to: (1) offer both equity and debt securities on the Internet; and (2) raise up to $1 million if the issuer did not make available to the secretary of state and prospective investors its most recent fiscal year’s GAAP-prepared financial audit, or up to $2 million if the issuer did make available to the secretary of state and prospective investors its most recent fiscal year’s GAAP-prepared financial audit.

The exemption allows an investor to purchase an amount of securities not exceeding the greater of: (1) $2,000 or 5 percent of the investor’s annual income or net worth, whichever is greater, if both the annual income and net worth are less than $100,000; and (2) 10 percent of the investor’s annual income or net worth, whichever is greater, but not to exceed an amount sold of $100,000, if either the investor’s annual income or net worth is $100,000 or more.

Qualifications and disqualifications. Issuers, to be eligible for the exemption, must be Massachusetts-formed entities authorized to do business in the state whose principal place of business is in the state. Issuers must ensure that their transactions comply with Securities Act Sec. 3(a)(11) and SEC Rule 147.

Issuers whose officers, directors, or beneficial owners are subject to specified “bad boy” provisions, such as securities fraud or misrepresentation, are disqualified from the exemption. The exemption is also prohibited for blind pool and blank check offerings, investment companies, hedge funds, commodity pools, and oil, gas or mining exploration industries.

Restrictions. The following restrictions apply:
  • Securities may be offered and sold only to Massachusetts residents. 
  • Commissions (or other remuneration) may not be paid to any person for soliciting prospective purchasers, unless the person is a Massachusetts-registered broker-dealer or agent. 
Requirements. The following requirements apply. Issuers must:
  • File a prescribed notice with the secretary of state no later than 15 days after the first Massachusetts sale of a security under the exemption. 
  • Disclose all material facts pertaining to the company and offering, along with the fact that the offering is not registered under federal or state law. 
  • Set a minimum amount to be raised under the exemption. 
  • Place all funds received from investors in an escrow account at a Massachusetts-authorized insured bank or depository institution. Investor funds must remain at this institution until the minimum offering amount is reached.

Wednesday, April 15, 2015

TriBeCa Developer Settles with AG's Office over Unregistered Real Estate Securities

By Rodney F. Tonkovic, J.D.

New York Attorney General Eric Schneiderman has announced that his office reached a settlement with a real estate developer for failing to register numerous real estate investments. The settlement was reached with 39 Lispenard Project, LLC and its former principal, architect Peter Moore, who were charged with failing to register syndications under the Martin Act. The AG's office found that Moore solicited and offered syndications in 39 Lispenard Project, LLC to members of the public without making the necessary filings. Under the Martin Act, syndications and the offer of condominium units require the filing of prospectuses, which must be provided to investors and purchasers before they decide to invest or buy a condominium unit (In the Matter of the Investigation of 39 Lispenard Project, LLC, AOD No. 15-050, April 12, 2015).

Background. According to the complaint, 39 Lispenard acted as an unregistered syndicator of securities with regard to two buildings in TriBeCa, New York, NY. 39 Lispenard acted as an unregistered sponsor of realty in the offering and sale of condominium units in those buildings without filing an offering plan as required under New York law. According to the office's press release, Moore blatantly procured investors in an unregistered syndication, hiring a prominent real estate firm in order to reach a wide audience. At the time, Moore swore that the building was vacant, but there were tenants who were slated to be evicted several months later; Moore was required to deliver a vacant building.

Sanctions. Moore agreed to a six-month bar from offering or selling securities in the New York, in addition to making the required syndication filings with the AG's office. Moore also agreed to conduct his business affairs legally in the future, and if he should violate any term of the settlement agreement, he will be barred from offering or selling securities permanently. Moore will also pay a fine of $50,000.

Schneiderman remarked that “promoters of real estate investments need to follow the rules and if they don’t, they will be held accountable." Moore, he said, will face "permanent consequences" if he fails to follow the Martin Act in the future.

The case is AOD No. 15-050.

Tuesday, April 14, 2015

Kroger Shareholders Withdraw Proposal on Agricultural Workers

By Amanda Maine, J.D.

Grocery retailer The Kroger Co. has informed the SEC that proponents of a shareholder proposal that would urge the company to purchase produce from growers that comply with the Fair Food Program have withdrawn the proposal.

Proposal. Kroger shareholders Glenmary Home Missioners and Mary H. DuPree (Proponents) submitted a shareholder proposal to be included in the company’s proxy for its 2015 annual meeting of shareholders that urged the board of directors to take the necessary steps to join the Fair Food Program. According to the proposal, Kroger’s current Vendor Code of Conduct is inadequate to protect the brand because it is based heavily on compliance with the law, and U.S. agricultural workers are excluded from many of the labor laws that apply to other U.S. workers. The proponents also cited Justice Department prosecutions of cases amounting to “modern-day slavery” in the U.S. agriculture industry.

According to the Proponents, the Fair Food Program is an internationally recognized program based on strict compliance with a human rights-based code of conduct that prevents forced labor of any type. Adopting the Fair Food Program’s code of conduct can help prevent violations of human rights in Kroger’s supply chain, which can lead public protests, a loss of consumer confidence, and a negative impact on shareholder value, the Proponents stated.

Withdrawal of proposal. In its letter to the SEC requesting that it be allowed to omit the proposal from its proxy, Kroger argued that the proposal sought to micromanage the company by enabling shareholders to dictate Kroger’s relationships with suppliers. As such, the proposal is excludable under Rule 14a-8(i)(7) because it infringes on the board’s and on management’s ability to control the day-to-day operations of the company, according to Kroger.

However, Calvert Investments, writing on behalf of the Proponents, sent a letter to Kroger indicating that they have agreed to withdraw the proposal. In the letter, Calvert cited “the positive steps the company is taking to improve the standards within the company,” including changes to Kroger’s Vendor Code of Conduct. The letter added that the Proponents look forward to working with Kroger to improve its supply chain audits, especially regarding social responsibility.

Kroger informed the Division of Corporate Finance of the Proponents’ withdrawal of their proposal. The Division acknowledged the withdrawal and stated it would have no further comment on the matter.

Monday, April 13, 2015

Payment in Domestic Stocks Saves Foreign Fraud Case from Morrison Dismissal

By Anne Sherry, J.D.

In an allegedly fraudulent stock sale, the plaintiff’s provision of consideration in the form of its own NASDAQ-listed securities was enough of a domestic nexus to overcome the Morrison hurdle, at least in the Ninth Circuit. The court dismissed, with leave to amend, the Exchange Act claims against the defendants for failure to sufficiently plead scienter or to plead fraud with particularity and offered to certify the case for interlocutory appeal, noting a potential circuit split on Morrison’s reach (Motorcar Parts of America, Inc. v. FAPL Holdings Inc., April 8, 2015, Wu, G.).

Background. Motorcar Parts of America, Inc. sued FAPL Holdings Inc. and four of FAPL’s principals for fraud based on the plaintiff’s purchase of capital stock of Fenwick Automotive Products Ltd. (Fenco) and its affiliate and subsidiaries. The plaintiff paid for the Fenco stock with shares of its own common stock, which are listed on NASDAQ.

Morrison argument. The defendants sought to dismiss the Exchange Act claims under an interpretation of the Supreme Court’s Morrison decision that would require, for the U.S. securities laws to apply, that the plaintiff establish that the transaction occurred on a domestic exchange, that title to the security was transferred in the United States, or that irrevocable liability was incurred in the United States. The plaintiff did not attempt to argue either of those scenarios, rather, emphasizing the listing of its own stock on NASDAQ.

Ordinarily, starting from a blank slate, the court would find it a stretch to characterize the transaction at issue as the purchase or sale of the plaintiff’s stock. The language of the purchase agreement leading to all of the plaintiff’s claims defined FAPL as the vendor and the plaintiff as the purchaser, and the transaction was described in terms of the transfer of Fenco shares. But the court explained that the case law directs courts to look at the substance of transactions rather than to their form in determining whether a purchase or sale has occurred.

The defendants also reasoned that if the U.S. securities laws were to apply here, American companies could submit any transaction, anywhere in the world, to the U.S. securities laws by having part of the consideration consist of their domestic stock. But the court estimated that the Supreme Court would likely consider this issue one best left to Congress—especially given that Morrison was “a rumination on Congressional silence” on extraterritoriality of the securities laws.

Second Circuit decisions. Several Second Circuit decisions construing Morrison more narrowly lent credence to the defendants’ argument, but the court ultimately determined that the Morrison test as enunciated reaches “transactions in securities listed on domestic exchanges,” a criterion satisfied in this case. The Ninth Circuit is not bound by the Second Circuit precedent, and none of those circuit’s decisions involved similar facts. Finding that Morrison did not bar the Exchange Act claim, but acknowledging that the outcome may have been different had the case arisen in the Second Circuit, the court expressed a willingness to certify the case for interlocutory appeal.

Dismissal with leave to amend. In the end, the court granted the defendants’ motion to dismiss, but on the basis that the plaintiff failed sufficiently to plead scienter or to plead fraud with particularity. The plaintiff was allowed leave to amend both the Section 10(b) claim and the Section 20(a) claim.

The case is No. 2:14-cv-01153-GW-JEM.

Saturday, April 11, 2015

BATS Exclusive Listing Plan on to Something, or Just Batty?

By Mark S. Nelson, J.D.

Newly installed BATS CEO Chris Concannon said this week he is ready to push for a rule change that would let BATS keep thinly-traded stocks off the company’s exchange. The “BATS Exclusive Listing Proposal” (as Concannon calls it) would apply to illiquid stocks that have their primary listing on another U.S. exchange. Taking this approach, he said, would “concentrate” liquidity for these stocks on just one exchange.

Concannon said BATS plans to submit a rule change proposal to the SEC later this month seeking the agency’s blessing to move ahead with exclusive listings for some stocks. He said the rule may help to de-fragment trading volumes for these stocks. The rule will define what an illiquid stock is, but Concannon said BATS will not press for a trade-at rule. Still, the proposal will need to be examined carefully to see how it would “graduate” stocks that become more liquid from a single to a multiple-exchange environment.

According to Concannon, the forthcoming proposal is in line with BATS’s prior efforts to change how exchanges deal with access fees and rebates. He cast BATS as a “problem solver” within its industry, although he reiterated that the exclusive listings proposal would only “help” fix existing problems.

BATS announced the appointment of Concannon to the CEO post in February. He takes over for Joe Ratterman, who will succeed Paul Atkins as Chairman of BATS’s board of directors.

Friday, April 10, 2015

Stanford Investors Stuck with Pershing’s Injunction Against Arbitration

By Anne Sherry, J.D.

Victims of the Stanford Ponzi scheme lost their appeal seeking to compel Pershing, L.L.C., to submit to FINRA arbitration of their claims against the clearing broker. The investors’ lack of any contractual relationship with Pershing precluded the application of two estoppel-based exceptions to the general rule that Pershing could not be compelled to arbitrate (Pershing, L.L.C. v. Bevis, April 8, 2015, per curiam).

Background and relationship among parties. After the collapse of the Stanford Ponzi scheme, a group of 100 investors initiated an arbitration proceeding against Pershing before FINRA, alleging that Pershing played a material role in defrauding them. Of the 100, 84 investors had used Pershing’s services in the course of purchasing CDs from Stanford Group Company and had signed client and margin agreements with Pershing, which contained arbitration provisions. Because Pershing directly contracted with these investors, it did not challenge their right to arbitrate. However, it secured an injunction preventing the remaining 16 investors (the “Bevis Investors”) from asserting claims in FINRA arbitration on the basis that it had no contractual relationship with them and they could not establish a relationship through any estoppel theory.

Compelling arbitration. Absent an exception, the general rule that a party cannot be compelled to arbitrate unless it agreed to would hold. The investors argued that two theories of equitable estoppel—alternative and direct-benefit estoppel—acted as such exceptions. But the court rejected both theories as applied to the facts.

Alternative estoppel. Alternative estoppel permits a nonsignatory to an arbitration agreement to compel a signatory to arbitrate a claim in two situations: first, where the signatory has asserted a contractual claim against a nonsignatory and then refused to honor an arbitration provision contained in that contract, and second, where the signatory asserts a claim of “substantially interdependent and concerted misconduct” by the nonsignatory and another signatory. Neither of these situations was germane. Pershing explicitly disclaimed any contractual relationship with the investors and did not bring any contract-based claims against them, nor had it raised allegations of interdependent and concerted misconduct between the investors and a contract signatory.

Direct-benefit estoppel. The second estoppel argument would hold if the investors could establish that they are party to a contract containing an arbitration clause which Pershing “embraced,” even though it was a non-signatory. Pershing executed an agreement to provide clearing services to the Stanford Group Company between 2005 and 2009, but had no relationship with any other Stanford entity. Even if the court were to assume that the investors could pierce the corporate veil to establish their own contractual relationship with Stanford Group Company, and therefore establish that they were party to a contract containing a FINRA arbitration clause, the direct-benefit estoppel argument would still fail because Pershing neither knowingly exploited nor directly benefited from that contract.

The case is No. 14-30525.

Thursday, April 09, 2015

In-Law Is Family Under “Family Office” Exception, Application Claims

By Amy Leisinger, J.D.

D-W Investments LLC, a multi-generational single-family office providing services to the family and descendants of Myron A. Wick, Jr., has requested an SEC order declaring it to be a person not within the intent of the Investment Advisers Act to the extent that it cannot satisfy all of the conditions to be a “family office” as defined in Rule 202(a)(11)(G)-1 under the Act. The application notes that, other than the provision of services to the sister of a spouse of a lineal descendant and her membership interest, the office complies with the conditions of the “family office” rule. Moreover, the application states, the additional client has long been treated as an immediate member of the Wick family and has been receiving advisory services from the office for many years (In re D-W Investments LLC, File No. 803-00226, March 30, 2015).

The “family office” rule provides three general conditions for exclusion from the definition of “investment adviser” and regulation under the Advisers Act: (1) each of the persons served by the office must be a “family client” and the office must have no investment advisory clients other than the family clients; (2) the office must be owned and controlled by “family members” and/or “family entities” as described in the rule; and (3) the office must not hold itself out to the public as an investment adviser.

Other than the provision of services to the sister-in-law of a lineal descendant and her membership interest in the office itself, the application states, the office meets the requirements of the “family office” rule. The application noted that the sister-in-law has less than a 3 percent membership interest in the office and that her trust has less than a 2 percent interest in the office and stressed that neither has a management role in, or exercises control over, the office. This client is an integral part of the Wick Family, which “knows, trusts and respects her as if a member of the immediate family,” the application states, and including her in the definition of “family” for the purpose of the “family office” rule “simply recognizes and memorializes the familial ties and intra-familial relationships that already exist.”

Absent relief, the application explained, the office would be required to register under Advisers Act Sec. 203(a), even though it does not hold itself out to the public as an investment adviser or market non-public offerings to any person or entity other than family clients. Adding the sister-in-law as a family client will not change the nature of the office into that of a commercial advisory firm and there is no public interest to be served by requiring the office to register, according to the application, because the office will not offer its services to anyone other than the “extended” Wick Family.

Citing previous SEC orders exempting similar family arrangements, the office requests an exception in the form of a Commission order declaring it not to be a person within the intent of the Advisers Act.

The application is No. 803-00226.

Wednesday, April 08, 2015

SEC Fails to Establish Regulation D Violations

By Matthew Garza, J.D.

The SEC made a prima facie showing that partnership interests sold by a San Diego company represented a sale of unregistered securities in violation of Securities Act Section 5, but did not meet its burden on a motion for summary judgment to show that the sales did not qualify for a Regulation D exemption (SEC v. Schooler, April 3, 2015, Curiel, G.).

Background. The SEC first targeted Western Financial Planning Corporation (Western) and Louis Schooler in September 2012 for allegedly running a real estate investment fraud. The agency obtained an asset freeze and accused the company of selling unregistered securities in the form of units of ownership in partnerships that were organized to buy undeveloped land in Nevada. The partnerships paid exorbitant prices for the land and failed to disclose to investors that much of the land was encumbered by mortgages that Western used to finance the purchase of the land, the SEC said. “Comps” used by the company to demonstrate the value of the land to investors were in no way comparable, and Schooler paid off investors who discovered the scam in order to allow it to continue. The scheme attracted $153 million in investments from approximately 3,400 investors. This opinion addressed the SEC’s motion for summary judgment and disgorgement; earlier opinions in the case were issued on July 1, 2013, April 25, 2014, and July 30, 2014.

Regulation D. Using SEC v. Murphy, a Ninth Circuit case from 1980, as a guide, the court pointed out that the SEC had made out a prima facie case under Section 5 because it established the offer or sale of an unregistered security through interstate commerce. But since the SEC was moving for summary judgment and the defendant argued that the unregistered sales qualified for an exemption under Regulation D Rule 506(b), it was the SEC’s burden to show that the exemption did not apply.

The court initially held that although Western had sold 86 general partnership units in 23 different properties, the sales represented a single, integrated offering. With regard to the Regulation D limit of 35 investors, excluding accredited investors, the court found that the SEC had not carried its burden of showing that more than 35 of the 3,400 total investors counted against the Rule 506(b) purchaser limit because the SEC provided no evidence showing the net worth of any of the investors. The SEC also failed to show that the company had not provided the financial information required in a Regulation D offering because of the same lack of evidence regarding accredited investors. This requirement does not apply to accredited investors, the court pointed out, and the SEC did not establish the number of accredited investors.

General solicitation. Although the SEC cited evidence to show that Western engaged in general solicitation of the general partnership units, the court found that the evidence did not demonstrate sufficiently that the units were generally solicited or advertised. Statements by Schooler regarding cold calls and phone lists did not show that the partnership interests were sold in this manner. Schooler said he obtained clients this way, but this method is allowed under the SEC’s position in a 1985 no-action letter issued to E.F. Hutton & Co. Western additionally argued that any cold calls made were done by a separate entity separate from Western, and the SEC did not show that the agent was acting on Western’s behalf. Other evidence offered by the SEC was also not sufficient to establish a general solicitation.

The case is No. 3:12-cv-2164-GPC-JMA.

Tuesday, April 07, 2015

New White Paper: Second Wave of States Address Crowdfunding

Wolters Kluwer Senior Writer/Analyst Jay Fishman has authored a new white paper: Second Wave of States Address Crowdfunding. Although the SEC has yet to adopt the federal crowdfunding rules mandated by the JOBS Act, an increasing number of states have now proposed or adopted their own intra-state crowdfunding exemptions. Jay's white paper examines the second wave of jurisdictions—the District of Columbia, Idaho, Indiana, Massachusetts, New Mexico, Oregon and Pennsylvania—that have taken the lead to achieve the JOBS Act’s goals of creating jobs and facilitating small business capital formation.

Amedisys Asks Justices to Fix Circuit Split on Loss Causation

By Mark S. Nelson, J.D.

Lawyers for Amedisys, Inc. recently asked the Supreme Court to once again take up the issue of loss causation in order to fix a burgeoning circuit split that prompted the Fifth Circuit to revive a securities class suit that had been tossed by the district judge because the plaintiffs failed to plead loss causation. The company said this is an “ideal” case for the justices to revisit the Court’s Dura opinion in the context of FRCP 9(b). Amedisys said the federal appeals courts are just as divided on this point as they were over the issues in the Amgen and Halliburton I cases, both of which the Court decided (Amedisys, Inc. v. Public Employees’ Retirement System of Mississippi, March 30, 2015).

According to Amedysis’s petition, the specific question is this: Does FRCP 9(b) require particularized pleading of loss causation? The plaintiffs, a group of public pension funds, had sued Amedisys for allegedly misleading investors by omitting details about a Medicare billing scheme from the company’s SEC filings and other public statements. The lower courts both applied FRCP 8(a)’s lower hurdle, but the district judge ended up dismissing the case, while the Fifth Circuit brought it back to life.

The Fifth Circuit said that five separate disclosures (revealed over two years) cited by the plaintiffs may collectively function as a corrective disclosure that is sufficient to meet the plaintiffs’ burden of pleading loss causation. Specifically, the appeals court characterized as too strict the “actual fraud” test the district judge had used to evaluate the alleged corrective disclosures. The Fifth Circuit described its holding as one in which “the whole is greater than the sum of its parts.”

Amedisys’s petition to the Supreme Court emphasized how it believes the Fifth Circuit’s whole-greater-than-the-parts theory got it wrong. For one, the company said the Fifth Circuit’s opinion left too much to the imagination regarding the “when” of the corrective disclosures there. The five-year class period and the 25-month duration of the alleged series of corrective disclosures could make it more likely that other factors pushed Amedisys’s stock price down.

Amedisys also said that imposing FRCP 9(b)’s heightened pleading requirement would help to give companies better notice of the loss causation allegations to which they must respond in securities class suits. Amedisys said the vagaries inherent in FRCP 8(a)’s lower plausibility standard hinder its ability to prepare a defense. Moreover, Amedisys said a decision on whether loss causation requires plausible or particularized pleading would be “outcome-determinative” because, at least in the company’s view, the complaint here would fail under the tougher standard used by the Fourth and Ninth Circuits.

The case is No. 14-1200.

Monday, April 06, 2015

Kraft Foods Earned a Tasty Profit by Manipulating Wheat Futures, Says CFTC

By Lene Powell, J.D.

The CFTC charged Kraft Foods Group and its former affiliate Mondelēz Global with manipulating and attempting to manipulate the price of cash wheat and wheat futures. In a move approved by senior management, Kraft allegedly bought $90 million of wheat futures—about six months’ supply—without intending to take delivery, correctly calculating that this would depress cash wheat prices and increase wheat futures prices. The strategy allegedly earned Kraft over $5.4 million in profits (CFTC v. Kraft Foods Group, Inc., April 1, 2015).

The complaint also alleges that Kraft violated speculative position limits and conducted non-competitive, off-exchange futures trades.

“A market participant who is not happy with cash prices available to it may not resort to manipulative trading strategies in an attempt to artificially lower that price,” said CFTC Director of Enforcement Aitan Goelman in a statement.

In an SEC filing on the same day, Kraft disclosed that the CFTC had filed a complaint against it, but said the allegations involve the business now owned and operated by Mondelēz, which was spun off in 2012. An agreement between Kraft and Mondelēz provides that the latter will predominantly bear any costs and penalties, so Kraft does not expect the case to have a material adverse effect on its financial condition, operations or business.

Manipulative conduct. According to the complaint, Kraft uses about 30 million bushels of wheat per year in products like Oreo cookies and Triscuit crackers. Kraft is one of the largest domestic end users of #2 Soft Red Winter Wheat, the variety of wheat deliverable against the CBOT wheat futures contract.

Cash wheat prices were high in the late summer of 2011, and Kraft allegedly used a manipulative strategy to depress them. In October of that year, wheat procurement staff suggested to senior management that Kraft should buy $90 million of December 2011 wheat futures in early December 2011. Kraft did not have a bona fide commercial need for this massive amount of wheat, and did not intend to take delivery of it. The expectation was that the futures market would react to Kraft’s enormous long position by increasing the price of the December 2011 futures contract while reducing the differential between the December futures price and the price of the cash market wheat.

Management approved the strategy, and staff then executed the strategy. According to the CFTC, Kraft’s actions caused cash wheat prices in Toledo to decline and the December 2011/March 2012 wheat futures spread to narrow, which was favorable to Kraft. As a result, Kraft earned over $5.4 million in profits.

Position limits violations. A CFTC regulation on position limits restricts wheat futures positions to 600 contracts in the spot month, 5,000 contracts for any single contract month, or 6,500 contracts for all months combined. CBOT has the same levels. Hedge exemptions are available upon application, but Kraft had not renewed its one-year exemption, and also did not have a bona fide exemption. Kraft and Mondelēz held long positions in December 2011 wheat that exceeded the CBOT’s 600-contract speculative spot month position limit by as much as 2,110 contracts, said the CFTC.

Fictitious trades. According to the CFTC, Kraft conducted an off-exchange transaction between two Kraft accounts carrying long and short positions for its wheat futures, in which Kraft’s short position was offset by its long position. These transactions were cleared as EFP or “exchange for physical” transactions, in which futures are exchanged for the physical commodity. EFPs are allowed only if they are between independent parties and are conducted and cleared on-exchange, and must be documented.

Kraft did not actually transfer physical wheat in connection with any of the EFP transactions, and also did not create any of the required documentation. Therefore, the EFPs were impermissible and Kraft violated Section 4c(a) and Regulation 1.38(a), the CFTC argued.

Sanctions requested. The CFTC asked the district court to enter an order of permanent injunction and impose a civil monetary penalty and disgorgement.

The case is No. 15-2881.

Friday, April 03, 2015

Delaware Rapid Arbitration Bill Sails Through Legislature, Heads to Governor’s Desk

By John M. Jascob, J.D.

The Delaware Senate this week unanimously approved a bill that seeks to avoid the constitutional infirmities in the state’s previous program for the confidential arbitration of disputes between businesses. By a vote of 21-0, the state Senate on March 31 approved the Delaware Rapid Arbitration Act (H.B. 49), which aims to give Delaware business entities greater capacity to resolve business disputes in an efficient manner through voluntary arbitration under strict timelines. The bill now heads to Governor Jack Markell for his signature, after previously having passed the Delaware House by a vote of 36-1 on March 19.

The proposed legislation comes in response to a Third Circuit ruling in October 2013 which held that the public had a First Amendment right of access to the state-sponsored business arbitrations established under a program of the Delaware Chancery Court. The Delaware Coalition for Open Government had sued the Chancery Court, individual chancellors, and the state, arguing that the public’s right of access to arbitrations conducted by state judges in state courthouses was violated by the confidentiality requirements of the law and implementing rules. Although five chancellors petitioned the U.S. Supreme Court for review, arguing along with business groups that removing confidentiality would effectively destroy arbitration’s viability as a dispute resolution method, the Supreme Court declined to grant certiorari in March 2014.

Swift resolution of business disputes. Sponsored by Rep. Melanie Smith, H.B. 49 is intended to provide an additional option for sophisticated entities to swiftly resolve their business disputes through arbitration. The bill expressly states that nothing in the Act is intended to impair the ability of business entities to use other voluntary arbitration procedures. Businesses are thus free to opt for arbitration procedures that may allow lengthier proceedings or permit more extensive discovery.

To ensure that no person is subject to the arbitration without giving express and voluntary consent, a written agreement must be signed by the parties. As a consumer protection measure, at least one party to the agreement must be a business entity formed or organized under Delaware law or having its principal place of business in Delaware; no party may be a consumer (as defined by statute). The written agreement must also provide that it will be governed by the laws of Delaware, and must include an express reference to the “Delaware Rapid Arbitration Act.”

The bill requires arbitrators to issue a final award within the time fixed by the agreement or, if not fixed by the agreement, within 120 days. The parties may extend the time for the final award by unanimous consent in writing, but the extension may not exceed 60 days. The Act also imposes financial penalties on arbitrators who fail to decide disputes within the time frames specified by the statute.

Role of the Delaware courts. The bill attempts to step around the constitutional issues concerning public access by carefully circumscribing the role of the Delaware courts. Although the Chancery Court has the authority to appoint an arbitrator in the event that the parties fail to do so, or the arbitrator chosen is unable or unwilling to serve, judges themselves do not act as arbitrators under the Act. While the Chancery Court may enter relief in aid of arbitration until the arbitrator is appointed, determinations regarding the scope of the arbitration are left exclusively to the arbitrator. The State of Delaware serves as the seat of the arbitration, but arbitrators may hold hearings within or without Delaware or the United States.

Challenges to final awards may be made only to the Delaware Supreme Court, unless the parties have either agreed to have them heard by an appellate arbitral panel or have waived them altogether. If a challenge to a final award is taken to the Delaware Supreme Court, the proceedings will be public and limited to review under the standards of the Federal Arbitration Act.

The Delaware Supreme Court does not have jurisdiction, however, to hear appeals concerning the appointment of an arbitrator; the determination of an arbitrator’s fees; the issuance or denial of an injunction in aid of arbitration; or the grant or denial of an order enforcing a subpoena. A party to any agreement under the Act will be deemed to have waived the right to such appeals.

Thursday, April 02, 2015

ISDA Urges CFTC to Make Swap Execution Rules More Flexible

By Lene Powell, J.D.

Warning that different derivatives regulatory regimes between the U.S. and Europe have fractured liquidity in swaps markets, the International Swaps and Derivatives Association (ISDA) recommended that certain CFTC rules be revised to allow greater flexibility in the execution of swap trades. Specifically, the CFTC should revisit its “made available to trade” process that determines which swaps must be traded on-exchange, and ease restrictions on trade execution methods including executing trades by phone. The CFTC should also reconsider imposing SRO obligations on swap execution facilities (SEFs).

“ISDA and its members believe that targeted regulatory corrections in the US can improve the utilization of SEFs and enhance the likelihood of coordination with European transaction rules currently under development,” said Scott O’Malia, the current head of ISDA and a former CFTC commissioner.

ISDA cautioned that failure to reconcile rule sets between the U.S. and Europe could broaden market fragmentation and lead to intractable negotiations over which rule set should prevail. This will become even more challenging as Asian regulators begin to implement their own swap execution rules. For example, Japan’s execution and exchange registration rules are set to take effect this September.

Swap execution requirements. Following the 2008 financial crisis, the G-20 agreed on a number of objectives to reform over-the-counter derivatives markets. The accord required that all standardized derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate. After the Dodd-Frank Act, the CFTC adopted rules to implement this trade execution mandate. In Europe, the European Securities and Markets Authority (ESMA) is working on rules to implement the revised Markets in Financial Instruments Directive (MIFID II).

Under CFTC rules that took effect in October 2013, electronic venues that provide access to U.S. persons must register with the CFTC. In February 2014, the agency provided no-action relief allowing U.S. entities to continue trading on European multilateral trading facilities (MTFs) that had not registered as SEFs with the CFTC — as long as the European trading platforms met CFTC requirements. However, European venues found the requirements too onerous, so this workaround did not gain traction, said ISDA.

In addition, the CFTC implemented the trade execution mandate using a process called “made available to trade.” In this process, called the “MAT determination,” a designated contract market (DCM) or SEF can certify that a specific swap contract is available to trade. If the CFTC certifies the MAT determination, then that swap may no longer be traded bilaterally and must be traded on a DCM or SEF in the future. In theory, this should lead to a gradual migration of standardized derivatives trades from over-the-counter execution onto regulated derivatives exchanges. The first derivatives products were mandated under this process in February 2014 for certain interest rate products submitted by Javelin SEF. Rules regarding the trade execution mandate are not yet in place outside the U.S.

Fragmented markets. According to ISDA, as a result of these differing regimes between the U.S. and Europe, a clear split in liquidity has emerged. For example, in the euro interest rate swaps (IRS) market, the percentage of euro IRS transactions traded between European entities increased from 71% in September 2013, when the SEF rules went into effect, to 85% of transactions in December 2014.

Recommended revision of CFTC rules. In a paper called “Path Forward for Centralized Execution of Swaps,” ISDA called on the CFTC to make “regulatory adjustments.” First, the CFTC should make the MAT determinations itself, as ESMA plans to do, rather than leaving it up to self-certifications by SEFs. This would eliminate the competitive motivation for one SEF to force other SEFs to list a given product as a mandatory traded swap. Second, the MAT determination should be based on objective liquidity criteria — global minimum volumes of daily trading over a significant period of time for each swap, to be periodically re-evaluated.

In addition, said ISDA, the CFTC should eliminate unnecessary restrictions on swap execution mechanisms to bring CFTC rules closer to the contemplated ESMA regime. In particular, the CFTC should not force transactions to be traded by order book or minimum “request for quote” method, which may not be possible for certain swaps and could lead to artificially wide spreads. Regarding package trades, which consist of a combination of swaps that are subject to the execution mandate and swaps that are not, the CFTC should clarify that for a package trade to qualify as a block trade, only the MAT swap component needs to meet the block trade requirement. Also, the whole package transaction should be subject to a time delay.

Other recommendations included simplifying SEF confirmation requirements for non-cleared swaps traded on a SEF and reconsidering SEF financial resource and market monitoring requirements. SEFs should be allowed to include more assets in the financial resources calculation and should not be required to monitor other markets for manipulation, said ISDA.

Wednesday, April 01, 2015

Caterpillar Must Include Human Rights Proposal

By Matthew Garza, J.D.

A shareholder proposal, which requests that the management of Caterpillar Inc. review its policies related to human rights to assess areas in which the company may need to adopt and implement additional policies, and report its findings, may not be excluded from the company's proxy materials under Rule 14a-8(i)(10). Division of Corporation Finance staff disagreed that the company had substantially implemented the proposal. Caterpillar also could not exclude the proposal under Rule 14a-8(i)(11) because the staff said the proposal did not substantially duplicate a proposal submitted by Mercy Investment Services, Inc.

The heavy equipment manufacturer received the proxy proposal from the National Center for Public Policy in December of last year. The organization requested that it be included in Caterpillar’s proxy material for the 2015 annual meeting.

Caterpillar argued that it had addressed the proposal’s “essential objectives” because a board committee is expected in the near future to review company policies related to human rights and consider whether amendments are necessary. The staff responded that the company’s policies “do not compare favorably with the guidelines of the proposal” and could not be considered substantially implemented. Caterpillar’s assertion that it intended to include a substantially duplicate proposal from Mercy Investment Services, Inc. and Jewish Voice for Peace was also dismissed by the staff.

Tuesday, March 31, 2015

Gallagher Praises New Reg A+ Framework, but Wants Further Action

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

SEC Commissioner Daniel M. Gallagher said that he is thrilled with the Commission’s recent adoption of changes revitalizing Regulation A (known as Regulation A+) as required by the JOBS Act. However, Gallagher believes that that the SEC can do more to encourage capital formation, especially by smaller issuers. Gallagher made his remarks at Vanderbilt Law School’s Annual Law and Business Conference.

Improvements to Regulation A. Gallagher applauded the amendments to Regulation A, noting that the cap on the size of Regulation A offerings has been raised to $50 million and that “Tier 2” issuers now escape the review process of over 50 state securities regulators. However, he warned that the SEC has its work ahead of it in order to make Regulation A+ a success. Gallagher would have preferred that the offering limit be raised to $75 million, which the SEC had authority to do under the JOBS Act.

Gallagher noted that the recent changes were designed to enhance the primary issuance of securities, but urged the SEC to explore how to invigorate Regulation A further by enhancing secondary market liquidity. Venture exchanges, Gallagher said, can be the answer to this “secondary market liquidity conundrum.” However, if the Commission does not pursue the creation of venture exchanges for smaller issuers, Gallagher observed that Congress could act to spur the Commission to take action, as it did when it passed the JOBS Act.

Gallagher also criticized the new rules as not facilitating capital formation for “Tier 1” issuers, which includes offerings of up to $20 million in a 12-month period. In addition to SEC review and qualification, Tier 1 issuers must still navigate state blue sky law qualification, he said. The increased size may help issuers that wish to raise between $5 million and $20 million, but issuers looking to raise up to $5 million should probably seek other solutions because even with the changes, for the smallest offerings Regulation A+ is too expensive and burdensome for smaller companies, according to Gallagher.

Smaller offerings. Raising under $5 million in capital should not be so hard, Gallagher said. The obvious solution is crowdfunding, which has taken off for accredited investors with the lifting of the general solicitation ban under the JOBS Act, while crowdfunding to non-accredited investors is mired in “SEC rulemaking limbo,” Gallagher lamented. He said that Rule 506(c) has given rise to a robust crowdfunding industry. Despite critics who have characterized the weakened rules as the “Wild West,” Gallagher pointed out that safeguards for investors remain in place, including that antifraud laws still apply, accredited investor verification must still be complied with, no “bad actors” can be involved, and a Form D must be filed.

In contrast to the Wild West of rule 506(c), Gallagher said that the JOBS Act Title III crowdfunding provision, which was weighed down by “nanny state investor protections,” is more akin to 1970s East Germany, where the heavy hand of the state is “omnipresent and smothering.” Even if the Title III crowdfunding provisions are adopted as proposed, Gallagher said that it is widely expected to be too burdensome for the smallest companies. In addition, Rules 504 and 505 under Regulation D are infrequently used because issuers prefer to use Rule 506 for offerings of any size, according to Gallagher.

Gallagher voiced his skepticism that the Commission would be eager, without action from Congress, to adopt his ideas for easier capital formation for smaller companies. These ideas include further segmenting small companies into “nanocap” and “microcap” bands and radically scaling reporting requirements for the smallest issuers. Even though the Commission has implemented Regulation A+, Gallagher stated he could only award it a grade of “incomplete” at this time regarding its treatment of capital formation issues.

Monday, March 30, 2015

Congressman Proposes to Make Insider Trading a Federal Crime

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

Insider trading would be classified as a federal crime under a new legislative proposal introduced by Rep. Jim Himes (D-Conn). The bill, drafted under the working title The Insider Trading Prohibition Act, would establish an explicit statutory ban on insider trading, relieving the SEC and Department of Justice of the need to rely on anti-fraud statutes and case law to prosecute these cases.

Bill’s provisions. The legislation proposes to make it unlawful for a person to trade on material, nonpublic information when the information was wrongfully obtained, or when the use of that information to make a trade would be deemed wrongful. It also would make it unlawful for a person who wrongfully obtains material, nonpublic information to communicate that tip to another person when it is reasonably foreseeable that the person is likely to trade on the information.

Himes’ bill defines “wrongful” as information that has been obtained through “theft, bribery, misrepresentation or espionage, a violation of any federal law protecting computer data or the intellectual property or privacy of computer users, conversion, misappropriation or other unauthorized and deceptive taking of such information, or a breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”

Case law. Himes noted in a press release that the development of the law over time on a case-by-case basis has resulted in legal standards that have become ambiguous. In U.S. v. Newman, for example, the Second Circuit Court of Appeals reversed the 2013 insider trading convictions of two hedge fund managers who traded on inside information because the government could not prove that the information was passed along by someone who received a personal benefit for doing so.

Himes proposes to remove the requirement outlined in Newman that a person who receives a tip (a tippee) and trades on that information have any knowledge that the tipper received a personal benefit, as long as the tippee was aware, or recklessly disregarded, that the information was wrongfully obtained or communicated.

The legislation also authorizes the SEC to exempt any person or transaction from liability under the bill at the agency’s discretion. The bill is co-sponsored by Reps. Steve Womack (R-Ark), Carolyn Maloney (D-NY) and Emanuel Cleaver (D-Mo).

Columbia Law School Professor John Coffee, Jr. applauded the proposed legislation, noting that it closes the Newman loophole and updates the law to cover computer hacking and other newer forms of misappropriation.

Saturday, March 28, 2015

SEC Investor Advocate to Keynote NASAA’s Public Policy Conference

[This story previously appeared in Securities Regulation Daily.]

By John M. Jascob, J.D.

NASAA has announced that SEC Investor Advocate Rick Fleming will keynote NASAA’s 30th Annual Public Policy Conference next month in Washington, D.C. This year’s conference, "Progress Through Innovation," will focus on the steps that states and Canadian provinces are taking to protect investors while fostering local entrepreneurial initiatives and economic growth.

Appointed to the position last year by Chair Mary Jo White, Fleming became the first person to lead the SEC’s Office of the Investor Advocate, which was created under the Dodd-Frank Act. Immediately prior to his current appointment, Fleming had served as NASAA’s Deputy General Counsel from 2011 to 2014. Fleming has also been General Counsel for the Office of the Kansas Securities Commissioner. A native of Kansas, Fleming holds degrees from Washburn University and Wake Forest School of Law.

In addition to the luncheon featuring Fleming’s keynote address, the conference will feature two panel discussions with financial and regulatory experts. The first panel, "Laboratories of Capital Innovation," will examine the innovative local solutions provided by NASAA member jurisdictions to spur capital formation. The second panel, "Balancing the Risks and Rewards of Technological Financial Innovation," will explore how technological financial innovation and investor protection can coexist to fully benefit investors and firms alike.

The conference will be held on Tuesday, April 14, at the Mayflower Renaissance Hotel in Washington, D.C. Prospective attendees may register on NASAA’s website.

Friday, March 27, 2015

CFTC Commissioner Bowen Addresses Risk Management

[This story previously appeared in Securities Regulation Daily.]

By R. Jason Howard, J.D.

CFTC Commissioner Sharon Y. Bowen spoke before the 17th Annual OpRisk North America on March 25th to discuss operational risk, an issue she described as being very near to her heart.

In her speech she lays out the major trends in operational risks that she believes the market is facing at present. She also provided some thoughts on what needs to be done to address those risks. She also provided some specific insights into a major CFTC rule and explained how she views the CFTC's new regulation governing the risk management practices of swap dealers and major swap participants.

Cybersecurity. Commissioner Bowen began the discussion on cybersecurity by first reminding the audience that “trading is effectively entirely electronic.” Even when two traders are booking a deal over the phone, it is being logged and finalized via electronic communications, she said. The result, she continued, is that financial actors have become storehouses for massive amounts of sensitive data, from information about trading strategies to client’s social security numbers. Intuitively, the damage that could be done via a major cyberattack on an exchange, clearinghouse, Swap Execution Facility (SEF), or systemically important financial institution is almost incalculable.

At the end of the day, the Commissioner explained, regulators and the industry are allied in the fight to prevent and mitigate cyberattacks. We have to be working together. Because this threat is constantly changing and new entities are continually developing new strategies, we all need to adopt a stance of constant improvement.

Technology. The trend of technology breaking was Commissioner Bowen’s second risk trend topic. As finance has become an industry that is really housed in cyberspace, she explained, there is a risk that these new technologies may not fully be understood by the people who are using them, particularly with regard to high frequency trading. An example she cited was the ‘flash crash’ of 2010, which was an accident but, she continued, the risk of massive technological failure affecting clearinghouses is not going away. Therefore she thinks that entities that are using, for instance, high frequency trading algorithms in the futures market should at least be required to inform the CFTC that they are using those technologies, just as other registrants often inform the CFTC if they are implementing major new technological changes; doing so she says, will help ensure that industry participants fully understand the tools that they are using to trade.

For now, she explained, she wants to encourage consideration of the dangers that technologies could fail or malfunction and suggest that be part of overall risk management. That includes getting a fulsome grounding in how the technology works and getting the input of technical experts on the flaws in the present technology being used.

Culture. Culture, the Commissioner explained, is a trend that has received a lot of attention lately as she has witnessed a significant number of settlements and alleged violations of our laws and regulations in just the last nine months and, all too often, she continued, those settlements and alleged violations are coming from large actors who have previously run afoul of the rules, endangering the reputation of those actors and the trust that undergirds the larger financial system.

On this topic, the Commissioner encouraged all attending to do what they can both to assess their risks of having a bad culture and to improve their organization’s culture as fast as they can. Unlike cybersecurity, she stated, this is a problem that can be solved by each individual firm.

Lack of regulatory clarity. This was the fourth risk trend that Commissioner Bowen spoke about, saying that this topic is typically talked about in the context of the risk that regulators will change previously finalized rules without giving sufficient notice to industry but it also applies to situations where rules required by Congress remain unfinished for long periods of time and therefore in a state of flux, as well as applying to situations where a regulator relies too much on issuing guidance and no-action letters for previously finalized rules. To this she said that she believes regulations should be changed, as much as possible, via the ordinary process of notice and comment and resist the temptation to craft a regulatory regime primarily through no-action letters.

Risk management policies. Here, Commissioner Bowen discussed the final rule the CFTC released a few years ago: the CFTC regulation requiring risk management programs for swap dealers and major swap participants, known as Section 23.600. The rule states that each swap dealer and major swap participant needs to establish and enforce a system of risk management policies associated with its swaps activities.

Commissioner Bowen explained that the written policy needs to be approved by the governing body of the swap dealer or major swap participant and it has to be provided to the Commission; the swap dealer or MSP also has to establish and maintain an independent risk management unit that will carry out the risk management program and it has to report directly to senior management; the program has to cover, among other things, a number of risk categories: market risks, credit risks, legal risks, and, of course, operational risk; and the program also must include a policy for identifying and taking into account the risks of new products before they are used in transactions.

List of risks not all-inclusive. Because CFTC Section 23.600 is a “dense regulation,” Commissioner Bowen explained that the list of risks to be considered is not all-inclusive and the items that swap participants must consider are not “check-the-box” exercises, rather, it states only the risks that must be included in the risk management programs. Those plans that deal only with the explicit requirements, said Commissioner Bowen, should not be viewed as complete and she went on to suggest that “systemic” risk would be an appropriate category to include.

Risk categories not all-inclusive. The Commissioner’s second point about Section 23.600 was that the risk categories themselves are not all-inclusive. In the case of each category, she continued, the rule states that programs and policies to address a specific risk shall include two or three explicit risks, among other things. Her example was on operational risk, where the CFTC has explicitly stated that a risk management program has to take into account secure, reliable, and independent operating systems, safeguards against deficiencies in operation and information systems, and reconciliation of all data in operating systems. This, the Commissioner believes, only begins to scratch at the surface of operational risk.

Senior management involvement. Third, Commissioner Bowen said that the implementation and enforcement of the risk management plan is to be carried out by an independent unit that has direct access to senior management. Senior management, she continued, needs to really consider and engage with the process of creating and updating the risk management plan so that senior management has a vested interest in the success and usefulness of the risk management program.

Independent. The Commissioner’s fourth point was that the risk management unit needs to be truly independent, the Commissioner said. Ideally, she explained, each risk management program would have a majority of people in it who, when they arrive at the risk management unit, have no prior work experience in the company. Moreover, she continued, suggesting that distance will help ensure that the unit looks at issues with fresh eyes and reduce the risk that the risk management unit simply ratifies prior analyses without really considering the costs and benefits of doing so.

The Commissioner suggested that the plans be dynamic and she encouraged the attendees “seriously rethink everything about your overall risk management plans with some frequency.”

Operational risk critically important to finance. Commissioner Bowen reiterated her thoughts from earlier in the speech, saying that she thinks operational risk is a critically important part of finance. “It’s by considering operational risk in advance, she explained, that a smart company is able to be flexible in a tough market or weather a storm...and while there will always be black swan events that do come out of nowhere, the more companies take into account as many of their real risks as is possible, the better each individual company and our financial system generally will be able to withstand unforeseen events.”

Conclusion. Commissioner Bowen concluded by saying that major financial actors need to fully implement requirements regarding risk management programs, sufficient protections need to be in place to prevent against hacking and cyberattacks, and major financial institutions need to change their culture so that there are far fewer violations of our laws and regulations.

Thursday, March 26, 2015

NYC Comptroller Urges Fiduciary Transparency Law

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

New York City Comptroller Scott M. Stringer announced his plans to ask state legislators to enact a law that would help consumers to better grasp the standard of care their financial advisers must live up to. The debate over whether federal regulators should do the same has been ongoing since Congress authorized the SEC to adopt a uniform fiduciary standard under a provision in the Dodd-Frank Act. But the issue persists because advisers subject to the Investment Advisers Act are treated as fiduciaries, while broker-dealers are held to the lower suitability standard.

Stringer’s proposal is essentially a disclosure requirement. According to a press release, the proposed law would require any financial adviser who abides by the suitability standard to explicitly state to their customers that they are not a fiduciary and can still recommend investment options that are not in the customer’s best interest.

Stringer emphasized the harms possible under the current dual system of advisers who are fiduciaries and those who are not. “Hard-working New Yorkers should not be penalized by a system that doesn’t adequately address potential conflicts of interests and financial mismanagement.” He also cited a report by his office that details changes in the marketplace that can result in consumer confusion over the roles played by different types of financial advisers.

But Stringer noted a few signs of change, including recent efforts by the Department of Labor to define “fiduciary” under the Employee Retirement Income Security Act of 1974. He also noted some movement by SEC Chair Mary Jo White toward a uniform fiduciary standard.

White said in her testimony to the House Financial Services Committee yesterday that the SEC had provided “technical assistance” to the DOL regarding the definition of fiduciary. She also suggested that she may put the SEC on a path similar to the one the DOL has taken.

“After significant study and consideration, I believe that broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors,” said White. But she also noted some barriers to implementing a uniform standard, including how to define the standard, what guidance to give about permitted and banned practices, and how to enforce a new standard.