Tuesday, March 03, 2015

Corporations Are Not People in Delaware Courts, Cannot Be Expert Witnesses

[This story previously appeared in Securities Regulation Daily.]

By Joanne Cursinella, J.D.

Only a biological person can be an expert witness in Delaware under its Rules of Evidence, so the defendants in a shareholder litigation could not designate a corporation as their expert witness on the subject of a company’s value at the time of the transaction in question (In re Dole Food Co. Inc. Securities Litigation, February 27, 2015, Laster, J.).

Background. This action stems from the ligation of a breach of fiduciary duty claim that was coordinated with an appraisal proceeding (see Securities Regulation Daily Wrap up for December 10, 2014 for more on the appraisal action). Both actions arose from a take-private transaction involving Dole Food Company, Inc.

The defendants identified Stifel, Nicolaus & Company, Incorporated (Stifel), as their “expert witness” on the subject of Dole’s valuation and served an opening expert report that identified the corporation as its author. They served a rebuttal expert report that also identified Stifel. The actual humans who signed the reports were Seth Ferguson, a Stifel managing director, and Michael Securro, another Stifel employee. Neither signed in his official capacity, the court said, but rather as an authorized representative of Stifel.

When the plaintiffs noticed a deposition of the corporation, Stifel produced Ferguson as the biological person most knowledgeable about the reports. During this deposition, the plaintiffs attempted to ascertain if the defendants were really attempting to designate the corporation as their expert. When Ferguson claimed to have written the reports, defense counsel objected, claiming that Ferguson was not the expert—Stifel was.

Expert witnesses. Under Delaware Rules of Evidence, an expert witness must first be capable of serving as a witness. Rule 601 says that “[e]very person is competent to be a witness except as otherwise provided in these rules.” The plaintiffs focused on the word “person” here to claim that only biological persons were meant.

The court noted that statutory construction under the Delaware Code would appear to mandate the opposite result, that is, when a provision refers to a “person,” the term presumptively includes “corporations,” among other entities. But notwithstanding this, the Rules of Evidence make it clear that a witness must be a biological person, the court said. The court provided several examples of this, such as rules requiring that a witness must be able to testify from personal knowledge and that that a witness must be able to take an oath or make an affirmation.

A corporation is an artificial being, the court said, and having no mind, it must rely on the facilities of natural persons. Lacking a voice, the court continued, a corporation cannot testify. Lacking a mind , it cannot possess personal knowledge. Without a conscience, it cannot take an oath. “And because of its incorporeal nature, it cannot even meet Delaware’s statutory requirement that a person taking an oath do so ‘with the uplifted hand,’” the court concluded.

The court went on to say that these deficiencies cannot be finessed by testifying through an agent, as Stifel tried to do here. The court also said, however, that the inability of a corporation itself to testify does not mean that the testimony of biological persons who are agents or decision-makers of the corporation will not bind the corporation. But, given the requirements of the rules of evidence, the court concluded that a corporation could not, itself, serve as an expert witness.

Result. The court said that since a corporation cannot serve as an expert witness, Stifel cannot testify at trial. But as long as Ferguson confirms that he has adopted Stifel’s expert reports, then he will be allowed to testify about their contents. Ferguson has a body and brain, the court said, and if he is otherwise qualified, he can serve as an expert witness. Stifel has neither and cannot.

The case is C.A. No. 8703-VCL.

Monday, March 02, 2015

Whole Foods Position Creates Whole Host of Problems, Coalition Says

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

The SEC’s decision to review the Rule 14a-8(i)(9) basis for omission of shareholder proposals has drawn the ire of a coalition of 17 professional organizations, which has written to the SEC to request that it take corrective action without delay. The coalition, which includes the American Bankers Association, the Securities Industry and Financial Markets Association, and the U.S. Chamber of Commerce, said that it is alarmed at the Commission’s abrupt change to a longstanding practice under the rule.

Whole Foods letters. Paragraph (i)(9) allows a company to exclude from its proxy materials a shareholder proposal that conflicts with a management proposal. In a pair of letters to Whole Foods Market in December and January, the staff initially allowed the company’s request to exclude a proxy access proposal under (i)(9), then later withdrew that position. The SEC staff, at the direction of Chair Mary Jo White, is not ruling on (i)(9) letters in the 2015 proxy season while it reviews the issue.

The review was prompted by the controversial nature of Whole Foods’ counter proposal on proxy access. The company sought to allow access only for shareholders that held at least nine percent of the outstanding shares for five years. These requirements varied widely from the industry norm of three percent for three years, and when other companies began to put forth similarly restrictive proposals the SEC decided to pull back on (i)(9) requests until it has more thoroughly considered the matter.

Coalition’s concerns. In its letter to Chair White, the coalition said the Commission’s new stance on (i)(9) is a departure from precedent that benefits neither issuers nor investors. The group urged the agency to pursue policies that provide predictability and do not advance the goals of a small minority of special-interest activists.

The coalition decried the timing of the announcement, which it said came at the height of the proxy season after the deadline for submission of no-action requests for many companies had passed, and after the boards of some companies had already taken action. The group expressed particular concern that the policy applies to all shareholder proposals that may conflict with a management proposal, and not just those on proxy access. This will adversely impact companies with no stake in the proxy access debate, but who want staff guidance on unrelated questions, the coalition warned.

Also of concern to the group is that the Commission made the policy decision apparently without the input of the four other SEC commissioners. The coalition believes that changes of this magnitude should be made in a formal action by the full Commission. The Commission should be careful not to damage the trust of issuers and investors by making significant changes without providing the opportunity for public comment, the group said.

The coalition said that when an agency such as the SEC has announced its interpretation of a regulation, and private parties have relied on that interpretation, the Administrative Procedure Act requires the agency to give notice before changing course. This procedure protects the interests of the regulated community and gives agencies the feedback they need to regulate in a factually sound and publicly accountable manner, the coalition stated.

Poor alternatives. The coalition’s final concern is that the SEC’s position leaves companies and shareholders with no acceptable options under (i)(9). Companies that want to present their own proposals for consideration, but which cannot get no-action assurance, are left to decide whether to exclude the shareholder proposal in favor of their own, risk confusion by including them both, or seek declaratory relief in federal district court since the staff will not to take a position on (i)(9). These are some of the unintended consequences the SEC’s January announcement may cause, the coalition concluded.

Friday, February 27, 2015

Chair Massad Highlights Recent CFTC Actions and Priorities

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

The global financial crisis demonstrated how excessive risk in the over-the-counter (OTC) derivatives market can contribute to systemic risk, according to CFTC Chair Timothy G. Massad. However, regulators must also make sure markets are able to function well and enable end-users to hedge risk. Massad discussed the CFTC’s efforts to achieve this balance in a recent speech to the Coalition for Derivatives End-Users.

Rule on margin for uncleared swaps. In September, the CFTC voted to propose a rule on margin for swaps that are not cleared through a central counterparty. At the time of the proposal, Massad said that the importance of international harmonization cannot be understated, a view he echoed in his speech. He stressed the importance of ensuring that the U.S. rules are as similar as possible to rules being considered by Europe and Japan. Massad said that the CFTC should be willing to consider changes to the proposed rule to ensure such consistency. He noted that the threshold for when margin is required under the proposed rule is lower than in the European and Japan proposals. Massad feels that even if it means increasing the threshold under the CFTC’s proposed rule, it should be harmonized with the overseas proposals. Massad expects the rule, which should be finalized by the summer, to incorporate a slight delay in its implementation timetable.

Cybersecurity. Massad also addressed the issue of cybersecurity, which he called “perhaps the single most important new risk to market integrity and financial stability.” According to Massad, the nature of the interconnectedness of financial institutions and market participants could lead to massive repercussions throughout the system in the event of an attack on a single institution.

While acknowledging the importance of implementing an effective cybersecurity policy, Massad said that the CFTC faces obstacles in doing so. He noted that many financial institutions spend more on cybersecurity than the Commission’s entire budget. Despite these limitations, the CFTC is taking steps to address cyber concerns, such as making them part of the core principles that trading platforms and clearinghouses must meet. Massad reported that the CFTC is also requiring those entities to develop and maintain risk management programs that meet certain standards. In addition, examinations have made cyber issues a focus by asking questions about whether the board of directors is focused on cybersecurity, if there is a culture present where cybersecurity is given priority, and if the policies adopted by the entity are actually being observed and enforced, Massad said.

Commercial end-users. Massad also highlighted several actions taken by the Commission that demonstrate that it has made it a priority to address the concerns of commercial end-users. Following the financial crisis, the agency was given many new responsibilities, including overseeing the implementation of a new regulatory framework for the OTC swaps market. Massad said that the CFTC is focused on fine-tuning the rules to make sure they work for commercial end-users. In September, the CFTC voted to amend its rules to benefit local, publicly owned utilities in the energy swaps market. The CFTC has also proposed rules addressing concerns of the agricultural community and the posting of collateral by smaller customers, and, after hearing concerns from market participants on some aspects of the rules, Massad said he expects that the rules will incorporate those concerns by the time they are finalized. In addition, Massad pointed out that Commission staff, having recognized that immediate reporting can undermine a company’s ability to hedge, recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts.

Thursday, February 26, 2015

Commission Puts the Brakes on Goodyear FCPA Violations

[This story previously appeared in Securities Regulation Daily.]

By Rodney F. Tonkovic, J.D.

The Goodyear Tire & Rubber Company will pay over $16 million to settle charges of FCPA violations arising from bribes paid by subsidiaries in Africa. According to the Commission, Goodyear subsidiaries in Kenya and Angola paid more than $3.2 million in bribes to both government entities and private companies to obtain tire sales. These payments were recorded as legitimate business expenses in the subsidiaries' books and records and then consolidated, without being detected, into Goodyear's books and records. In addition to paying disgorgement and prejudgment interest, Goodyear was ordered to cease and desist from its violations of the books and records provisions (In the Matter of The Goodyear Tire & Rubber Company, Release No. 34-74356, February 24, 2015).

Background. From 2007 through 2011, Goodyear subsidiaries in Angola and Kenya routinely paid bribes to employees of government-owned or affiliated entities, and private companies in return for their business. The bribes were falsely recorded in the subsidiaries books as legitimate business expenses. The Commission found that Goodyear failed to detect the bribes because it failed to implement adequate FCPA compliance training and controls at the subsidiaries.

"Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books," Scott W. Friestad, Associate Director of the SEC’s Enforcement Division said. He added: "This settlement ensures that Goodyear must forfeit all of the illicit profits from business obtained through bribes to foreign officials as well as employees at commercial companies in Angola and Kenya."

Sanctions. Goodyear was ordered to cease and desist from violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The company will pay disgorgement of $14,122,525 and prejudgment interest of $2,105,540. The Commission took into account Goodyear's cooperation and remedial acts, including promptly halting the improper payments and reporting the matter to the Commission. Goodyear also divested itself of its Kenyan subsidiary and is in the process of divesting the Angolan subsidiary.

The release is No. 34-74356.

Wednesday, February 25, 2015

IM Guidance Recommends Policy Updates to Guard Against Buyoffs

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

The SEC’s Division of Investment Management has issued guidance to caution investment advisers regarding the conflict of interest that arises when an adviser’s personnel are presented with gifts or other forms of consideration from persons or entities doing business, or hoping to do business, with an advised fund. In the guidance update, the staff reminds industry participants that the receipt of gifts or entertainment, among others items and services, may implicate the compensation prohibition of Section 17(e)(1) of the Investment Company Act.

Section 17(e)(1). Section 17(e)(1) generally prohibits a fund’s investment adviser and its officers, directors, and employees from accepting compensation other than regular salary or wages for the purchase or sale property to or on behalf of a registered investment company. As an example, the guidance notes that, if a fund’s portfolio manager accepts a gift from a broker-dealer for the purchase or sale of the fund’s portfolio securities, that individual has violated Section 17(e)(1). The prohibition is designed to ensure that a fund is managed with regard to the best interest of shareholders, as opposed to the interest of the adviser or its affiliates, the guidance states.

Recommendations. Many advisers and funds expressly address this particular conflict of interest in their respective codes of ethics, the guidance notes, but the issue should also be considered within the compliance policies and procedures adopted and implemented by funds and their advisers pursuant to Rule 38a-1. The appropriate limitations concerning the receipt of gifts or other consideration will vary based on the nature of an adviser’s business; some funds and advisers may choose to impose a blanket prohibition while others may conclude that pre-clearance assessment of each particular situation is more suitable, according to the guidance.

However, the guidance cautions, the mere receipt of compensation in connection with the purchase or sale of property constitutes the violation of Section 17(e)(1), even without proof of inappropriate influence or injury to the fund. As such, the guidance suggests that funds and advisers should review their compliance policies and procedures to ensure they adequately protect against potential violations.

Tuesday, February 24, 2015

SEC Litigators Discuss Impact of Newman, Halliburton

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

Andrew Ceresney, Director of the SEC’s Division of Enforcement, was joined by his staff and staff from the SEC’s Office of the General Counsel at this year’s SEC Speaks conference to discuss a record year for enforcement actions, as well as notable opinions from the Supreme Court and Second Circuit that are impacting both the SEC’s enforcement program and private securities fraud litigation.

Matthew Solomon, Chief Litigation Counsel for the Division of Enforcement, recounted that the division brought a record number of actions in 2014 and participated in the most trials in 10 years. He also noted that the Division has won 10 of its last 12 jury trials in federal court. Two thirds of the Division’s trials have been in federal court, he said, with the remainder taking place before an Administrative Law Judge.

Impact of Newman. Insider trading prosecution efforts were dealt a setback in December by the Second Circuit in U.S. v. Newman, which vacated the criminal convictions of two hedge fund portfolio managers. The court held that the U.S. Attorneys prosecuting the case did not present sufficient evidence that the portfolio managers knew they were trading on tips obtained from insiders, or that those insiders received any benefit in exchange for the tips.

SEC Solicitor Jacob Stillman said the Newman decision would lead to confusion because it altered the recognized standard for the personal benefit that must be shown to establish insider liability. Newman found that personal friendship is not enough, which is inconsistent with the broader interpretation of “benefit” previously applied, he argued.

Deputy Director of Enforcement Stephanie Avakian said that the Second Circuit’s decision impacted only a subset of the Commission’s insider trading cases, but could still affect its ability to bring some cases, and, therefore, could hurt efforts to maintain investor confidence in the fairness and integrity of the markets. The SEC has filed an amicus brief supporting the U.S. Attorney’s office in its effort to obtain a rehearing en banc of the case. The case has had some impact on lower court cases. The guilty pleas of four insiders targeted in U.S. v. Conradt were vacated by Southern District of New York Judge Andrew Carter in January, in reliance on Newman.

Former Commissioner Paul Atkins said that, in his opinion, the case would have a positive effect because it would serve to deter prosecutors from going after “headlines” instead of justice. Atkins thought the targeting of remote tippees showed questionable prosecutorial judgment, and referring to the insider trading jurisprudence generally, he commented, “Remember, this is completely judicially-made law.” Former Commissioner Roberta Karmel and former Chairman David Ruder floated the possibility that the SEC could further define insider trading by rule, as it has attempted to do in Rules 10b5-1 and 10b5-2.

It was noted that a decision on the cert petition filed in U.S. v. McGee, seeking high court review of Rule 10b5-2, would be expected sometime this week, and it in fact was denied today. The rule defines a “duty of trust or confidence” for purposes of the misappropriation theory of insider trading. The petitioners argued that it directly conflicted with the Supreme Court's holdings in U.S. v. O'Hagan, Dirks v. SEC, and Chiarella v. U.S., and consequently was invalidly promulgated.

Halliburton. Commentator Roberta Karmel noted that she had difficulty reconciling the Supreme Court’s decision in 2013 opinion in Amgen v. Connecticut Retirement Plans and Trust Fund, which held that plaintiffs in 10b-5 litigation need not prove the materiality of alleged misrepresentations at the class certification stage, with its June 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc., which established that a defendant may present evidence of a lack of price impact to rebut the fraud-on-the-market presumption before class certification.

Deputy General Counsel Michael Conley seemed to agree with Karmel’s assessment, noting that evidence showing materiality would be the same as evidence showing price impact. Karmel opined that the simple answer was that there was a “political decision” made to respect stare decisis in the Halliburton case. “Same as healthcare,” noted former Commissioners Atkins, apparently referring to the Court's decision is National Federation of Independent Business v. Sebelius. Chief Justice John Roberts was the author of both opinions.

Monday, February 23, 2015

Best Defense a Good Offense? Wells Notice Recipient Brings Constitutional Challenge

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

An investment adviser who received Wells notices of a potential SEC administrative proceeding is seeking injunctive and declaratory relief preventing the enforcement action. According to the complaint, SEC administrative proceedings violate Article II of the Constitution and give the agency an unfair advantage (Gray Financial Group, Inc. v. SEC, February 19, 2015).

The plaintiffs are closely-held Gray Financial Group and two of its officers. Following an “onerous” investigation, SEC staff made a preliminary determination to recommend enforcement action against the plaintiffs, in the form of an administrative proceeding, for alleged fraud in the marketing of funds of funds to Georgia pension plans. The plaintiffs are asking for an injunction against the prospective administrative proceeding and a declaratory judgment that the statutory and regulatory provisions on the positions and tenure protections of administrative law judges are unconstitutional.

According to the complaint, Article II, as interpreted by the Supreme Court, permits only one layer of tenure protection for executive branch officers. Administrative law judges, however, enjoy at least two layers of tenure protection. Administrative proceedings also offer advantages to the SEC that federal court proceedings do not, including the lack of a jury, the inapplicability of federal rules of civil procedure and evidence, and limited discovery. The plaintiffs cite a recent study finding that the SEC has prevailed on its last 219 decisions in administrative proceedings but has lost several high-profile cases in federal court.

The complaint rides the tide of a series of recent challenges to administrative proceedings. Last month, the Commission directed its Enforcement Division and the respondents in an administrative proceeding to file supplemental briefs on the executive power issue.

The case is No. 15-cv-00492.

Friday, February 20, 2015

Senate Bill Prevents Federal Agency Settlements from Being Written Off Taxes

In an effort to protect taxpayers, hold corporate wrongdoers accountable, and deter future fraud and abuse, Senators Jack Reed (D-RI) and Charles Grassley (R-IA) introduced bipartisan legislation to rescind tax write-offs for illegal corporate behavior. The Government Settlement Transparency & Reform Act would close a loophole that has allowed some corporations to reap tax benefits from payments made at government direction stemming from settling misdeeds.

Corporations accused of illegal activity routinely settle legal disputes with the federal agencies out of court because it allows both the company and the government to avoid the time, expense, and uncertainty of going to trial.

Federal law prohibits companies from deducting public fines and penalties from their taxable income. But under current law, companies may often write off any portion of a settlement that is not paid directly to the government as a penalty or fine for violation of the law. This allows some companies to lower their tax bill by claiming settlement payments to non-federal entities as tax deductible business expenses. The Senators emphasized that defrauding investors shouldn’t be classified as a business expense.

The Reed-Grassley bill would require the federal agency and the settling party to reach pre-filing agreements on how the settlement payments should be treated for tax purposes. The bill clarifies the rules about what settlement payments are punitive and therefore non-deductible and increases transparency by requiring the government to file a return at the time of settlement to accurately reflect the tax treatment of the amounts that will be paid by the offending party.

Federal agencies can take a more active, effective role in protecting taxpayers. Several federal entities have included specific clauses in their settlement agreements to prohibit penalties associated with the settlement from being deducted as a business expense. Senator Reed urged more agencies to follow suit and publicly disclose the true value of these agreements.”

Specifically, the bill would amend the tax code to deny tax deductions for certain fines, penalties, and other amounts related to a violation or investigation or inquiry into the potential violation of any law. It amends subsection (f) of Section 162 of the Internal Revenue Code. Amounts paid by corporations, which constitute restitution for damage caused by the violation of any law are exempted and remain deductible. The bill requires that nongovernmental entities which exercise self-regulatory powers be treated as government entities for purposes of disallowing deductions under this section. It also requires the government to stipulate the tax treatment of the settlement agreement.

FASB Streamlines Consolidation Guidance

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The Financial Accounting Standards Board (FASB) said it has streamlined its consolidation guidance. The accounting standard setter said this week that ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, deals with the consolidation of legal entities, including limited partnerships, limited liability corporations, and securitization structures.

Specifically, the new guidance cuts the number of consolidation models from four to two and clarifies that risk of loss is a key factor in deciding if a controlling financial interest exists, rather than just looking to fee arrangements. Other clarifications impact the treatment of variable interest entities.

FASB Chairman Russell G. Golden said accounting professionals will find the guidance “simplifies” the consolidation analysis. “Stakeholders were concerned that current guidance in certain consolidation situations does not provide useful information — resulting in users requesting supplemental deconsolidated financial statements to analyze the reporting company’s economic and operational results,” said Golden.

The guidance is effective for public companies for periods after December 15, 2015. Private companies and nonprofits will follow the guidance for annual periods starting after December 15, 2016 (interim periods after December 15, 2017). The FASB said early adoption is permitted.

Thursday, February 19, 2015

Texas Adopts Mergers/Acquisitions Dealer Exemption

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Texas States Securities Board adopted a mergers and acquisitions dealer exemption.

Qualifications. Mergers and acquisitions (M&A) dealers and their agents are exempt from registration when effecting a qualified M&A transaction. The M&A transaction is "qualified" if: (1) it is a transfer of ownership and control of a “privately-held company,” as defined, to a buyer through the purchase, sale, exchange, issuance, repurchase, or redemption of securities, or a business combination involving the company's securities or assets; (2) the buyer (or group of buyers), on completing the qualifying M&A transaction, actively operate the company or the business using the company's assets; (3) no qualifying M&A transaction involves a public offering of securities but, will instead be effected in reliance on an applicable Texas Securities Act exemption from registration; (4) no party to a qualifying M&A transaction is a shell company, unless it is a "Business Combination Related Shell Company," as defined; (5) the buyer (or group of buyers) must, on completing the qualifying M&A transaction, control the company; (6) no qualifying M&A transaction may result in a securities transfer to a passive buyer (or group of passive buyers); and (7) any securities received by the buyer or M&A dealer in a qualifying M&A transaction are "restricted securities" as defined in the Securities Act of 1933, Rule 144A.

Permitted activities. M&A dealers may advertise a privately held company for sale with information such as the business description, general location and price range, so long as the dealers do not include an offer to sell securities. M&A dealers may also facilitate a qualifying M&A transaction with a group of buyers but only if the group is formed without the M&A dealers' assistance.

Prohibited activities. M&A dealers may not: (1) bind a party to a qualifying M&A transaction; (2) provide financing for a qualifying M&A transaction, either directly or indirectly through the dealers’ affiliates; or (3) retain custody, control or possession of funds or securities issued or exchanged to effect a qualifying M&A transaction (or other securities transaction) for others' accounts.

Disclosures. M&A dealers representing both buyers and sellers must, in writing, clearly disclose the parties the M&A dealer represents, and must obtain the buyers' and sellers' written consent to the joint representation. Additionally, M&A dealers helping buyers obtain unaffiliated third party financing must comply with applicable legal requirements, and disclose to the buyer in writing any compensation the M&A dealer will receive.

Disqualifications. M&A dealers subject to federal Regulation A, Rule 262 securities violations and other prescribed "bad boy" provisions are prohibited from claiming the exemption.

Recordkeeping. M&A dealers must maintain and preserve for three years all communications, agreements or contracts with buyers and/or sellers pertaining to transactions for which the M&A dealers received compensation. M&A dealers must make these records available to the Texas Securities Commissioner on request, or forfeit the exemption.

Definitions. An "M&A dealer" is a person engaged in the business of effecting securities transactions solely in connection with a qualifying M&A transaction. "Actively operate," "privately-held company," "shell company," and a "business combination related shell company" are also defined.

Wednesday, February 18, 2015

FHFA 3 for 3 on Challenges to RMBS Defendants’ Experts

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

The Federal Housing Finance Agency has prevailed on a series of procedural motions in its remaining case against financial institutions over residential mortgage-backed securities (RMBS) sales. In a trio of opinions, the court agreed with the conservator that portions of the defendants’ experts’ reports and testimony had to be stricken or excluded (FHFA v. Nomura Holding America, Inc., February 13, 2015, Cote, D.).

Background. The lawsuit represents the sole remaining action in a series of similar, coordinated actions brought in the Southern District of New York by FHFA against banks and related persons to recover losses experienced by government-sponsored enterprises Fannie Mae and Freddie Mac (collectively, the GSEs) from their purchases of RMBS. Among other things, FHFA alleged that the defendants misstated the extent to which the loan groups supporting the RMBS complied with relevant underwriting guidelines. FHFA also alleged that credit rating agencies gave inflated ratings to the mortgage pass-through certificates as a result of the defendants providing these agencies with incorrect data concerning the attributes of the loans.

Reliance and materiality. FHFA has filed a number of procedural motions challenging the defendants’ experts’ testimony and reports. In one, the conservator sought to exclude the testimony of John J. Richard, a professional investor, who was offered as an expert on the RMBS industry. In the opinion granting this motion in part, the court distinguished between the elements of reliance and materiality. Reliance is not an element of claims brought under Sec.12 of the Securities Act, which is a strict liability statute. Accordingly, the parties could offer evidence at trial going to the materiality of the type of information at issue, but not evidence or argument for the purpose of proving that the GSEs did not rely on any specific misrepresentations.

The court concluded that Richard was qualified to provide expert testimony regarding the private-label securities market generally and the practices of RMBS investors. However, FHFA succeeded in showing that Richard’s proposed testimony regarding the GSEs was not admissible because he had no experience qualifying him to testify as an expert regarding the GSEs. Most of his report regarding the GSEs simply recited passages from their own documents and depositions and much of that was irrelevant. Nevertheless, Richard would be permitted to use the evidence about the GSEs learned through discovery to support his well-founded expert opinions about general industry practices and the materiality of loan characteristics to RMBS investment decisions. Finally, the portions of Richard’s report presenting a critique of the FHFA’s three experts were stricken, because his discussion pertained to the issue of the GSE’s reliance on the alleged misrepresentations.

Damages. The court also granted in part the motion to exclude the testimony of Timothy J. Riddiough, whom the defendants intended to testify regarding damages. Riddiough’s damage calculation incorporated an error by calculating interest on income; because Sec. 12(a)(2) expressly provides that interest may be calculated on “consideration paid” but does not so provide regarding “income received,” principles of statutory interpretation compelled the conclusion that interest should not be calculated on income. Because the defendants’ interpretation of Sec. 12(a)(2) was incorrect as a matter of law and the conclusions drawn from that interpretation could not help the trier of fact to determine a fact in issue, Rule 702 and Daubert required excluding the expert’s testimony.

Accounting issues. Finally, FHFA moved to exclude the testimony of Stephen Ryan, who was retained to give an opinion on issues connected to the GSEs’ accounting for the losses of fair value and their accounting treatments for the certificates. Ultimately, the court determined, the only two issues remaining to be tried in order for FHFA to make out a prima facie strict liability claim under Sec. 12(a)(2) and the Blue Sky laws were falsity and materiality of the alleged misrepresentations. Ryan’s testimony on the GSEs’ accounting practices was wholly irrelevant to the FHFA’s prima facie case. Indeed, the court noted, the falsity and materiality elements could be satisfied even if the GSEs had not incurred losses. While the testimony may address the defendants’ loss causation affirmative defense, it has “such minimal probative value that it is easily substantially outweighed by even the slightest danger of undue delay and wasting time,” the court wrote.

The case is No. 11cv6201.

Tuesday, February 17, 2015

Inadequate Item 303 Disclosure May Serve as Basis for 10(b) Liability, Cert Petition Argues

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

An investor has petitioned the U.S. Supreme Court to resolve a question as to whether Item 303 of Regulation S-K can form the basis of a duty to disclose material information for the purposes of liability under Exchange Act Section 10(b) and Rule 10b-5. According to the petitioner, the Ninth Circuit’s holding affirming dismissal of his fraud action conflicts with other circuits’ decisions finding that a regulation can give rise to a duty to disclose material information under the Exchange Act, and the Court should grant certiorari to prevent the nullification of federal regulations resulting from the Ninth Circuit’s determination (Cohen v. NVDIA Corp., February 9, 2015).

Background. In 2008, NVDIA Corp., a publicly traded semiconductor company, disclosed information to investors about defects in two of its products and later stated that it would take a $150-$200 million charge to cover costs. NVIDIA’s share price thereafter dropped 31 percent. Between November 2007 and May 2008, NVIDIA filed several forms with the SEC routinely including a statement explaining that “[its] products may contain defects or flaws,” and warning investors that “[it] may be required to reimburse customers for costs to repair or replace the affected products.”

In their complaint, the plaintiffs alleged that NVIDIA knew of and should have informed investors of product defects earlier and that, absent such a disclosure, the company’s intervening statements were misleading to investors. The district court dismissed the complaint, specifically holding that the plaintiffs failed to sufficiently plead scienter.

A Ninth Circuit panel affirmed a district court’s dismissal of a securities fraud action against NVIDIA Corporation and other defendants under Exchange Act Sections 10(b) and 20(a) and Rule 10b-5. In its opinion (covered in the Securities Regulation Daily Wrap Up for October 2, 2014), the panel stated that the plaintiffs failed adequately to allege facts giving rise to a strong inference of scienter. The panel rejected the plaintiffs’ argument that the district court erred by failing to consider their allegations of scienter in the context of Item 303 of Regulation S-K, which requires disclosure of information concerning known trends or uncertainties reasonably expected to have an impact on financial performance. The court found that Item 303 does not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5. “Because the materiality standards for Rule 10b-5 and [Item 303] differ significantly, the ‘demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b-5,’” the court explained.

Petition for certiorari. According to the petitioner, failure to make adequate disclosures under Item 303 can provide the basis for a material omission for a claim under Section 10(b) and Rule 10b-5. The Ninth Circuit’s conclusion that Item 303 does not create a duty to disclose for Section 10(b) purposes conflicts with the determinations of other circuits, the petitioner explains, noting that both the Second and Third Circuits have found that an Item 303 violation can establish an actionable omission under Section 10(b) if the information is material and other elements of a fraud claim are present. These courts recognize an affirmative duty to disclose when a statute or regulation requires disclosure, according the petitioner, and the precedent cited by the Ninth Circuit only says that an Item 303 violation does not “automatically give rise to a material omission.”

The petitioner also contends that the Ninth Circuit’s decision undermines the SEC’s rulemaking authority by hindering enforcement and protecting those committing disclosure failures from liability under federal regulations. “The civil enforceability of those rules and regulations is essential to realizing the central goal underlying the disclosure provisions of the securities markets,” the petitioner explains.

The case is No. 14-975.

Sunday, February 15, 2015

New WK Banking & Finance Law Blog!

Follow the all new WK Banking & Finance Law Blog. The WK Banking & Finance Law Blog provides news and commentary on recent happenings in the banking and finance law practice area, and is brought to you by the editors of the Wolters Kluwer Banking and Finance Law Daily—created by attorneys, for attorneys. You can also follow the WK Banking & Finance Law Blog on Twitter @WK_BankingNews.

Friday, February 13, 2015

Senate Chair Seeks Dialogue Between SEC and DOL on Revised Fiduciary Standard

Senator Ron Johnson, (R-WI) Chair of the Homeland Security and Government Affairs Committee ask the Department of Labor to provide all communications with the SEC on changing the fiduciary standard under ERISA. In a letter to DOL, ed conflicts of interest in this area, including any role DOL had in drafting or advising on the conflict of interest memo issued by the Council of Economic Advisers. Importantly, he also wants DOL to explain how it will ensure how rulemaking relating to fiduciary rules for investment advisers to retirement accounts will not adversely impact middle and lower income groups. The Senator wants a response from DOL on these requests by February 19.

Congress has been greatly concerned with the upcoming revision of the fiduciary standard, In 2013, the House passed legislation that would have prevented DOL from exercising its authority under ERISA to issue a rule defining the circumstances under which an individual is considered a fiduciary until 60 days after the SEC issues a final rule relating to standards of conduct governing broker-dealers under Section 15(k) of the Exchange Act. The Retail Investor Protection Act, H.R. 2374, would also have prevented the SEC from issuing any rule without first finding that retail customers are being systematically harmed or disadvantaged due to broker-dealers operating under different standards of care than those applicable to investment advisers. The Act passed by a vote of 254 to 166. While thirty House Democrats voted for the bill, the Senate never too it up.

Section 913 of the Dodd-Frank Act authorizes, but does not require, the SEC to promulgate rules to extend the fiduciary standard of conduct applicable to investment advisers to broker-dealers when advising retail customers about securities.

Also in 2013, in a letter to DOL, over 30 members of the House of Representatives expressed concern that a new and restrictive definition of fiduciary could add a barrier to accessing qualified retirement planning services. As the DOL considers a reproposed fiduciary standard, the goal must be to increase investor protection without reducing investor access to financial products and services, said the members. Further, any changes to the existing standard should be executed carefully, prudently, and in conjunction with the SEC in order to avoid uncertainty and disruption in the marketplace.

Thursday, February 12, 2015

Current and Former SEC Officials Discuss Financial Fraud Developments

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

The SEC’s whistleblower program has been a “game changer” as a source for financial fraud cases, according to the Division of Enforcement’s chief accountant, Michael Maloney. Maloney made his remarks at a program sponsored by the D.C. Bar and was joined by Senior Legal Advisor Charles Wright, as well as former Enforcement chief accountants Howard Scheck and Susan Markel.

Although the Division still finds potential cases through traditional sources such as restatements, SEC filings, self-reporting, and internal and external referrals, tips received through the SEC’s whistleblower program have been a helpful development, Maloney said. It allows the staff a birds-eye view how events potentially implicating financial fraud occurred and sometimes the staff is able to receive information from whistleblowers in real time.
Maloney also said he was “pleasantly surprised” by large companies self-reporting on complex issues. Markel, now at AlixPartners, voiced her concerns about self-reporting, advising that some companies do not want to “put their neck in a noose” by self-reporting possible financial statement irregularities. She wondered if companies could be incentivized to self-report in a system similar to the whistleblower program.

Cooperation and collaboration. Wright said that communication with the PCAOB is important in the chief accountant’s office. The staff reviews the board’s accounting standards and concept releases and provides feedback from an enforcement perspective. The enforcement divisions of the respective organizations have also collaborated by bringing cases together, such as the 2011 enforcement actions against PricewaterhouseCooper’s India affiliates for deficient audits, as well as recent sanctions against auditors of broker-dealers that violated auditor independence rules, he said.

Enforcement’s Office of the Chief Accountant also works with the Commission’s Office of the Chief Accountant (OCA), including consulting with OCA on action memoranda to the Commission, which set forth Division recommendations and provide a comprehensive explanation of the recommendations’ factual and legal foundations. One audience member inquired how Enforcement’s chief accountant staff resolves differences with OCA. Maloney said that the two offices generally work through any disagreements and, at the end of the day, the Commission itself has the final say. Scheck, now with KPMG, advised that the two offices will make sure that contentious issues are resolved before the action memo stage.

At what stage in an investigation Enforcement will reach out to other offices within the SEC or agencies outside the SEC may depend on what kind of accounting issue is involved, Scheck said. For issues considered to be “close calls,” the staff will reach out earlier. Wright added that for risk-based investigations, Enforcement is more likely to seek input from others.

Defense counsel. Another audience member asked how receptive the staff is to receiving input from accounting experts hired by defense counsel. Maloney said that having an expert explain opinions can be helpful to understanding how the individuals being investigated arrived at their decisions, even if the staff doesn’t necessarily agree with the opinions. Scheck cautioned, however, that the opinion of an expert is only helpful if he or she is realistic about an issuer’s weakness, and is not there just to “offer spin.”

The panel was also asked about the use of “pre-Wells submissions” or white papers, and whether they are helpful to an SEC investigation. Wright said that these submissions can be useful, particularly for inquiring about the use of an expert prior to the Wells stage. He warned that a series of several white papers is less useful, however.

Trends. Revenue recognition issues continue to top the list of problem areas encountered by his office, Maloney said. Expense recognition and valuation issues also arise frequently. He also highlighted the importance of maintaining effective internal controls, noting that important cases that involve frequent issues in financial statements often implicate the effectiveness of a company’s internal controls over financial reporting.

Wednesday, February 11, 2015

Banks Manipulated Swiss Franc LIBOR, Class Action Asserts

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.

A New York-based investment fund sued a group of major banks in a putative class action, alleging that they conspired to restrain trade in and manipulate the Swiss franc London Inter-bank Offered Rate (LIBOR), from 2005 through at least 2009. This caused the fund to engage in derivatives transactions based on the benchmark rate at artificial prices, resulting in injury. The suit requests unspecified damages (Sonterra Master Capital Fund Ltd. v. Credit Suisse Group AG, et al., Feb. 5, 2015).

Price manipulation. A widely used benchmark interest rate, LIBOR is calculated based on the submissions of a panel of contributor banks. LIBOR is meant to reflect the cost of borrowing funds in the inter-bank market just before 11 am in London time. During the relevant time, LIBORs were published each day for 10 currencies, including Swiss francs.

Sonterra Capital Master Fund, Ltd., an investment fund headquartered in New York, NY, alleged that instead of accurately reporting their borrowing costs, four banks altered their Swiss franc LIBOR submissions to manipulate the prices of financial instruments that were priced, benchmarked, or settled based on Swiss franc LIBOR for their own financial benefit. The banks, including UBS AG, Royal Bank of Scotland plc (RBS), JPMorgan & Chase Co, and Credit Suisse Group AG previously agreed to settlements with various regulators to resolve charges of manipulation and restraint of trade. The settlements, entered into with the CFTC, DOJ, UK Financial Services Authority, and European Commission, resulted in over $2 billion in fines, as well as key admissions of wrongdoing. The complaint also named a number of John Does as defendants including other banks, cash brokers, and other co-conspirators.

Guidelines in place during the relevant period provided that the Swiss franc LIBOR must be based on offered inter-bank deposit rates representing the cost of borrowing unsecured funds in the Swiss franc market. Contributor banks are not allowed to consider costs unrelated to the cost of funding, e.g., the value of their Swiss franc LIBOR-based derivatives positions. However, the plaintiffs alleged that through instant messages and chat rooms, the banks’ derivatives traders shared information regarding their Swiss franc LIBOR-based derivatives positions, including Swiss franc currency futures contracts and forward agreements. The traders asked one another for submissions that would manipulate the prices of those derivatives for their benefit.

According to the complaint, the practice of nudging the rate to benefit traders’ positions was commonplace, and frequently joked about. In one exchange, an RBS submitter pretended he would not agree with a request, but let himself be persuaded by an offer of day-old sushi. At least two banks reorganized their trading desks so that derivatives traders and money market makers, some of whom were also LIBOR submitters, would share the same location in the firm, so they could share information more easily.

Collusion. The European Commission found that in 2007, the four banks participated in a cartel to fix the prices of Swiss franc LIBOR-based derivatives, said the complaint. Cartel members agreed to quote wider, collusive, bid-ask spreads for certain categories of derivatives for non-members, while maintaining narrower spreads for trades among themselves. This allowed the cartel members to reduce their transaction costs and maintain liquidity among cartel members, and prevented other dealers in the Swiss franc derivatives market from competing on the same terms. This anti-competitive combination of four of the biggest dealers caused injury to the plaintiffs and others who transacted in Swiss-franc LIBOR-based derivatives at artificial prices, the complaint asserted.

Claims. The plaintiffs argued that the defendants’ conduct was a conspiracy to restrain trade in violation of Section 1 of the Sherman Act. The conduct was a per se violation, or alternatively, the conspiracy resulted in substantial anticompetitive effects. There was no legitimate business justification or pro-competitive effects of the conspiracy.
The plaintiffs also contended that the defendants were liable for price manipulation under Sections 6(c), 9, and 22 of the Commodity Exchange Act, as well as multiple provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO). Finally, the plaintiffs asserted a common-law claim of unjust enrichment.

The case is No. 15 cv 0871.

Tuesday, February 10, 2015

SEC Advances New Argument to Bolster Whistleblower Rule

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

The SEC has added a new argument to its amicus briefing urging Chevron deference to its rule implementing Dodd-Frank’s whistleblower protections. Unlike the statute, the SEC rule does not require that a whistleblower report misconduct to the SEC. The brief is significantly duplicative of the amicus briefs the Commission has filed in other whistleblower appeals, but additionally argues that a failure to defer to the rule could arbitrarily and irrationally deny Dodd-Frank protections to whistleblowers who first report potential securities law violations to the Department of Justice (DOJ) or FINRA (Berman v. Neo@Ogilvy LLC, February 6, 2015).

Underlying allegations. As finance director of Neo@Ogilvy North America (Neo), Daniel Berman was responsible for financial reporting and compliance with GAAP and the accounting policies of Neo’s parent. Berman alleged that he detected accounting irregularities, fraud, and material compliance failures and attempted to correct these issues, in some cases by reporting the transactions to his supervisors and having them canceled, and in other cases by correcting the company’s books. After he was terminated on April 30, 2013, he reported the violations to senior management, to Neo’s counsel, and to the parent company’s audit committee. Finally, on October 31, 2013, Berman reported the violations to the SEC. He later sued his employer for, among other things, violating Dodd-Frank’s provisions against retaliation.

Southern District ruling. Although the magistrate judge had concluded that deference to the SEC rule was appropriate in light of an ambiguity in the statute, the Southern District of New York disagreed and declined to adopt the recommendations. Instead, the district court adopted the Fifth Circuit’s reasoning in Asadi v. G.E. Energy (USA), L.L.C., the leading case to hold that Dodd-Frank’s anti-retaliation provisions are limited to a whistleblower who provided information to the SEC.

Amicus brief. The first 30 pages of the brief are substantially identical to amicus briefs the SEC has filed in other whistleblower appeals, including another in the Second Circuit. The SEC argues that Dodd-Frank is ambiguous in part because, although the defined term “whistleblower” means an individual who reports wrongdoing to the SEC, one of the protected categories of reporting seems to include internal reporting. Under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. (U.S. 1984), the SEC urges, because of this ambiguity, the court should defer to the SEC’s rule as long as it is a reasonable interpretation of the statute. The rule intentionally omits to require that a whistleblower have reported misconduct to the SEC.

Defending its rulemaking in its amicus brief, the agency stresses the importance of internal company reporting in deterring, detecting, and stopping unlawful conduct that may harm investors. It argues that its rulemaking implementing Dodd-Frank’s monetary award provisions was carefully calibrated not to disincentivize employees from reporting internally, and the agency likewise clarified the statute’s anti-retaliation prohibition to protect an employee who engages in whistleblowing whether or not the employee separately reports to the Commission.

New argument. The latest iteration of the agency’s brief argues that a failure to defer to the rule could arbitrarily and irrationally deny the Dodd-Frank anti-retaliation protections to individuals who first report misconduct to the DOJ or to self-regulatory organizations (SROs) such as FINRA. The SEC points out that Dodd-Frank’s whistleblower award program directs the Commission to pay an informant an award based on the monetary sanctions collected in a “related action,” which includes a judicial or administrative action brought by the Justice Department, federal banking regulators, and self-regulatory organizations. The anti-retaliation protections are generally coextensive with the award provision, the agency argues, and there is no basis to believe that Congress had intended for “disparate treatment based purely on the happenstance of which agency the individual reported to first,” given the SEC and DOJ’s dual responsibility for enforcing the securities laws.

Furthermore, endorsing the Asadi viewpoint would deny any legal recourse under either Dodd-Frank or Sarbanes-Oxley to an individual making a covered disclosure to an SRO, such as FINRA, who is fired before being able to make a similar report to the SEC. This is “deeply problematic,” the SEC urges, because SROs were congressionally designed to have a role in regulating the securities industry by enforcing compliance by their members and persons associated with their members. Given this role, the Commission concludes, individuals frequently report violations to the SROs in the first instance.

The case is No. 14-4626.

Monday, February 09, 2015

Staff Will Not Judge Adviser Status of Website That Recommends LendingClub Securities

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

The staff of the SEC’s Division of Investment Management has declined to express an opinion on whether a new website business that recommends securities available through LendingClub.com is an investment adviser. The staff said that no-action request on behalf of the Wyoming-based business did not include enough facts and legal analysis for the staff to determine whether the business meets the definition of “investment adviser” in Investment Advisers Act Section 202(a)(11).

New business plan. The new website will provide a list of securities available on LendingClub that the website’s operators believe are good investments. According to the request letter, which was submitted by Jonathon Hendricks, the list will be available all the time and will update based on securities currently available on LendingClub. Any user can create an account on the site at no charge.

Hendricks noted that all users see the same list, and it is not personalized for any particular user. The list provides partial information for free, but the site will charge a flat fee if users want to see complete details on the recommended securities. The website operators do not know if users purchased any reviewed securities, and do not receive any fees based upon a user’s purchase of securities. According to Hendricks, the website operators do not have access to a user’s account on LendingClub.

Newsletter exemption. Hendricks requested the SEC staff’s assurance that the new business does need to register with the Commission as an investment adviser. He believes that the business may rely on the exemption provided to investment newsletters.

In its response, the staff advised Hendricks that he did not provide enough facts and analysis to determine whether business meets the elements of an exclusion from the definition of investment adviser. However, the staff provided some guidance to assist the new business in making the determination itself.

The staff noted that Investment Advisers Act Section 202(a)(11)(D) excludes from the definition of investment adviser a “publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” The U.S. Supreme Court has interpreted this exclusion to include publications that offer impersonal investment advice to the general public on a regular basis, the staff stated.

Exemption criteria. To qualify for the Section 202(a)(11)(D) exclusion, the publication or website must meet three criteria. It must be of a general and impersonal nature, in that the advice provided is not adapted to any specific portfolio or any client’s particular needs. It must be “bona fide” or genuine, in that it contains disinterested commentary and analysis as opposed to promotional material, and it must be of general and regular circulation, in that it is not timed to specific market activity or to events affecting, or having the ability to affect, the securities industry.

The staff advised Hendricks that if the new website business meets the definition of investment adviser but qualifies for the publisher’s exclusion, it would not be required to register with the Commission. If the business meets the definition of investment adviser but does not qualify for the publisher’s exclusion, the staff added, then it would be required to register with the Commission because the State of Wyoming, which is the website’s principal place of business, does not regulate investment advisers.

Friday, February 06, 2015

House Passes Bill Improving Regulation of Small Business

The House passed the Small Business Regulatory Flexibility Improvements Act, H.R. 527, by a bi-partisan vote of 260 to 163, with 19 Democrats voting for the bill. The Act requires more detailed analysis of proposed regulations, provides greater small business input into the regulatory process, and ensures that federal agencies will review existing regulations for their impact on small business. H.R. 527 provides needed reforms to the Regulatory Flexibility Act of 1980 (RFA) and the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). The RFA and SBREFA attempted to require agencies to account better for the impacts of proposed regulations on small businesses and other small entities and to tailor final regulations to minimize adverse impacts on these entities, but have not commanded full agency compliance.

H.R. 527 updates the RFA and SBREFA to close loopholes and more effectively reduce the disproportionate burden that over-regulation places on small entities, thereby enhancing job creation.

The Act would also expand the use of advocacy review panels to all federal agencies, including independent regulatory agencies such as the SEC and CFTC, for any major rule or for any rule that will have a significant economic impact on a substantial number of small entities. The Act clarifies the type of information the agency must provide to the Office of Advocacy and describes the content and focus of the report itself, which is to be drafted by the Chief Counsel for Advocacy in consultation with other panel members. Rather than simply listing concerns raised by small entities in the panel process, the report should discuss what will minimize costs or maximize benefits.

In a Statement of Policy, the Administration said that H.R. 527 would impose unneeded and costly analytical and procedural requirements on agencies that would prevent them from performing their statutory responsibilities. It would also create needless regulatory and legal uncertainty and costs for businesses. The bill would impose unnecessary new procedures on agencies and invite frivolous litigation. When a Federal agency promulgates a regulation, explained the Administration, the agency must adhere to the robust and well understood procedural requirements of the Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act, as well as the Administrative Procedure Act and other Federal statutes such as the Unfunded Mandates Reform Act and the Paperwork Reduction Act.

Furthermore, the Administration's noted its deep commitment to promoting small business and ensuring that regulations do not unduly burden the Nation's small businesses is reflected in Executive Orders 13563 and 13610. These Executive Orders require agencies to examine existing regulations and to eliminate, streamline, or alter them where they are excessively burdensome. In particular, Executive Order 13610 directs agencies to give special consideration to initiatives that would reduce unjustified regulatory burdens or simplify or harmonize regulatory requirements imposed on small businesses. In response to these Executive Orders, twice a year agencies develop and publish their retrospective review plans for public comment.

Thursday, February 05, 2015

Aguilar, Stein Say SEC’s Bad Actor Wavier “Blind” to Oppenheimer’s Misdeeds

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

A week after Oppenheimer & Co. Inc. agreed to pay $20 million to end enforcement actions by the SEC and the Treasury Department’s Financial Crimes Enforcement Network, SEC commissioners Luis A. Aguilar and Kara M. Stein have gone public with their objections to the bad actor waiver the Commission granted in the matter. They said the Commission majority cast a “blind eye” to the gravity of Oppenheimer’s misconduct in a lengthy a joint dissent issued earlier today.

Aguilar and Stein pointed to Oppenheimer’s knowledge of problems with penny stock sales and the number of times the firm seemed to repeat similar acts. “It is difficult to conceive of a better justification for the bad actor disqualification under Rule 506, or a better reason to act with great care and caution in analyzing whether ‘good cause’ may exist to waive this automatic disqualification,” said the commissioners.

The Commission had granted the waiver based on its assessment that Oppenheimer would comply with remedial measures. But according to Aguilar and Stein, the Commission “unacceptab[ly]” stayed from its prior waiver decisions and instead opted not to require Oppenheimer to retain a law firm to consult with it that is either qualified or independent. They also said the wavier does nothing to get Oppenheimer’s top managers involved in compliance efforts, nor does it require the firm to report back to the SEC on its progress that would justify continuing the wavier.

As Aguilar and Stein see it, Oppenheimer’s “entrenched culture of non-compliance” warranted stronger Commission action. “The Commission is this firm's primary regulator, and with this action a majority of the Commission is telling the public that this firm should not be labeled a ‘bad actor.’ Given the long record of broken promises, the Commission must demand more accountability from this firm and its leadership,” said Aguilar and Stein.