[This story previously appeared in Securities Regulation Daily.]
By Matthew Garza, J.D.
Commissioner Daniel Gallagher laid out his argument against the retroactive application of collateral bars from association with municipal securities advisors and Nationally Recognized Statistical Ratings Organizations (NRSROs) in a dissenting opinion in the SEC’s case against John Lawton, an investment adviser subjected to a full collateral bar in a December 13, 2012 Commission opinion.
Gallagher noted that collateral bars were freely imposed by the SEC before 1999, when the D.C. Circuit put in place a high bar for their application in Teicher v. SEC. The SEC then refrained from imposing collateral bars until Dodd-Frank Act Sec. 925 gave it express authority to do so in 2010. Dodd-Frank allowed the SEC to impose bars from association with municipal securities advisors, which were created by the Dodd-Frank Act, and NRSROs, which had been placed under the SEC’s authority in 2006 by the Credit Rating Agency Reform Act.
The central question of the Lawton case, as framed by Commissioner Gallagher, was: even if the Commission does have the authority to impose certain bars collaterally and retrospectively, would the retrospective imposition of the two new Dodd-Frank bars -- based entirely on pre-Dodd-Frank conduct -- give impermissible retroactive effect to Sec. 925 of the Dodd-Frank Act? Gallagher concluded that it would and dissented from the imposition of the bars against Lawton.
Supreme Court precedent. Citing to the 1994 Supreme Court case Landgraf v. USI Film Products, which reasoned that it was an “elementary consideration of fairness” that people be given notice of the law before being expected to conform their conduct to it, Gallagher pointed out that Dodd-Frank Sec. 925 itself is silent on the issue of its retroactive application and did not become effective until July 22, 2010. The conduct that gave rise to the SEC’s full collateral bar took place in 2008 and 2009. Absent “an express command” from Congress, Landgraf requires the SEC to determine if the new provision attaches new legal consequences to events completed before enactment of Dodd-Frank, Gallagher said.
Lawton was on notice that the SEC could impose collateral broker, dealer, municipal securities dealer, and transfer agent bars for pre-Dodd-Frank conduct and those bars were proper, but prior to Dodd-Frank the SEC had no power to impose NRSRO or municipal advisor bars and, thus, Lawton could not have been on notice that his conduct could lead to a bar from those industries, Gallagher said.
In Landgraf, the Supreme Court set out an exception to the presumption against retroactivity for measures that constitute “prospective relief,” such as statues that affect, in future, injunctive relief. Although the majority of the SEC relied heavily on that exception, Gallagher said, he believes this argument is a red herring.
Failure to supervise case. The majority places undue emphasis on what he described as a “tangential discussion” and “an exchange of dicta between competing opinions” in Landgraf, which does not answer the questions in the Lawton case, according to the commissioner. Gallagher instead cited to what he believes is a more applicable case, the D.C. Circuit’s opinion in Johnson v. SEC, which addressed a six-month supervisory bar for failure to supervise a broker who misappropriated customer funds. This case, which he says was given “short shrift” by the majority, largely answers the questions at hand.
Using the reasoning of the D.C. Circuit in Johnson, the municipal advisor and NRSRO bars: (1) inflict collateral consequences beyond merely remedying the harm; (2) punish Lawton by restricting his occupational freedom; and (3) are punitive in effect, even if the purpose is remedial. If the six-month bar was considered a penalty in Johnson, Gallagher argued, two permanent industry bars must be considered penalties, and the Johnson opinion should have been given more weight by the majority.
The refusal of the SEC to apply retroactivity to the whistleblower provisions in the Dodd-Frank act are further support for his position, according to Gallagher. The same analysis used by the Commission in its Order Denying Whistleblower Award Claim in Release No. 34-70772 should apply to the Lawton matter, he asserted. “Both logic and the interpretive canon of expressio unius est exclusio alterius compel the conclusion that Congress did not intend for Sec. 925 of the Dodd-Frank Act to apply retroactively,” concluded the Commissioner.