Friday, July 24, 2015

Commissioners Urge SEC to Address Impermissible Retroactive Collateral Bars

By John Filar Atwood

Saying that they feel vindicated by the recent decision by the U.S. Court of Appeals for the District of Columbia Circuit in Koch v. SEC, Commissioners Daniel Gallagher and Michael Piwowar have called on the Commission to address retroactive collateral bars that have been entered since the enactment of the Dodd-Frank Act. Gallagher and Piwowar have dissented from every vote to impose retroactive collateral bars since they joined the Commission.

Court decision. In its recent ruling, the court held that the SEC cannot apply a Dodd-Frank Act provision to bar an individual from associating with municipal advisers and nationally recognized statistical rating organizations based on pre-Dodd-Frank conduct. In the court’s view, the application of that provision in that manner is impermissibly retroactive.

Case history. As noted in previous coverage in Securities Regulation Daily, an administrative law judge found that Donald Koch, an investment adviser, marked the close for three small bank stocks between September and December 2009 in order to give the appearance that his clients’ accounts were retaining their value. The SEC affirmed the order and issued five remedial orders, one of which barred Koch from associating with “any investment adviser, broker, dealer, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization.”

On appeal, the D.C. Circuit agreed that Koch marked the close, and was unpersuaded by his argument that he could not be liable under the Exchange Act and Investment Advisers Act in the absence of a finding of market impact. However, the court concurred with the argument that the SEC impermissibly applied the Dodd-Frank Act retroactively.

Gallagher and Piwowar issued a statement applauding the Circuit Court’s decision, claiming that it vindicates their opposition to such bars. In addition to voting against the imposition of retroactive collateral bars, the Commissioners have publicly criticized the legal analysis with respect to the imposition of the bars. The Commissioners also noted that former Commissioners Kathleen Casey and Troy Parades were also outspoken on the topic of the retroactive application of the securities laws.

SEC should take action. In their statement, Gallagher and Piwowar said that the SEC should promptly take action to address all impermissibly retroactive collateral bars that have been misapplied since the Dodd-Frank Act was implemented.