By James Hamilton, J.D., LL.M.
The House has passed legislation, HR 2623, expressly authorizing the SEC to bring actions against persons formerly associated with a regulated or supervised entity, such as an investment company or an SRO, for misconduct that occurred during that association. The bill passed the House unanimously by voice vote. The legislation closes a loophole in the securities laws allowing those who engage in misconduct while working for an entity regulated by the SEC, like a stock exchange, to resign and avoid being held accountable for their wrongdoing.
According to sponsor Rep. Kevin McCarthy, the measure is directed at ensuring that former employees of organizations like the New York Stock Exchange or the Financial Industry Regulatory Authority can be held accountable by the SEC for any misconduct while an employee at these organizations. By clarifying the SEC’s authority to sanction formerly associated persons, he noted, employees at regulated or supervised entities would be held accountable for their actions while in those positions, even if they have moved on to another job.
The legislation was included in a larger piece of securities legislation from the 110th Congress, H.R. 6513, Securities Act of 2008, which passed the House but died in the Senate. The legislation is also included in H.R. 3310, the Consumer Protection and Regulatory Enhancement Act, introduced by Ranking Member Spencer Bachus, who supported HR 2623.
Many provisions of the federal securities laws authorizing the sanctioning of a person who engages in misconduct while associated with a regulated or supervised entity explicitly provide that such authority exists even if the person is no longer associated with that entity and has left his or her job. But according to Rep. McCarthy, there are confusing loopholes so that employees at some regulated or supervised organizations cannot be sanctioned by the SEC after they leave their positions.
The legislation amends the Exchange Act and the Investment Company Act to ensure that the SEC has unambiguous statutory authority to investigate individuals suspected of violating the securities laws, to bring enforcement cases, and have those cases considered on the merits and not be dismissed on an ambiguity because a statute is confusing. No one should be able to violate the securities laws and resign their position knowing that the SEC cannot proceed against them, emphasized Rep. McCarthy, who added that the legislation does not expand or alter the SEC’s current authority, it clarifies it.
According to Rep. McCarthy, the need for the legislation was cast into stark relief by an SEC administrative proceeding against a former AMEX CEO after he had left AMEX. An SEC administrative law judge dismissed the charges after finding that Section 19 (h)(4) of the Exchange Act allows the SEC to sanction individuals while they were still associated with the SRO; but does not provide for sanctioning a former officer or director. The judge specifically noted that Congress has drafted statutes authorizing the SEC to sanction individuals formerly associated with any number of entities, but not in this case. In the Matter of Salvatore Saldano, Aug 20, 2007, Admin Proc File No. 3-12596
The law judge also noted that Section 19(h)(4) of the Exchange Act is unambiguous on its face, referring to the officers and directors of an SRO only in the present. By omitting reference to former officers or directors, in comparison to wording in other parts of the securities laws, the intent of Congress is clear that this section applies only to those who currently hold the position. Both Section 15(b)(6)(A) of the Exchange Act and Section 203(f) of the Advisers Act explicitly cover “any person who is associated, or, at the time of the alleged misconduct, who was associated or was seeking to become associated” with a broker dealer or investment adviser, respectively. When Congress wants to construct a statute to apply to individuals formerly associated with an entity, observed the law judge, it knows how to do so.
Further, the remedies provided in the statute further demonstrated that it applies only to current officers and directors. Section 19(h)(4) provides for removal from office and censure. One who is no longer in office clearly cannot be removed from office, reasoned the law judge, and thus this remedy only applies to current officers and directors. Given the definition of censure as an official reprimand or condemnation, and the order in which the remedies are listed, it is plain from the statutory construction that Congress’s inclusion of censure in Section 19(h)(4) provides a less severe alternative remedy when sanctioning an incumbent officer and director. However, it does not justify expanding the definitions of “officer or director” to those who formerly held the positions, concluded the judge.