Tuesday, October 13, 2015

SEC Won’t Appeal Koch, Announces Process for Addressing Impermissible Collateral Bars

By John M. Jascob, J.D., LL.M.

The SEC has decided not to appeal the D.C. Circuit’s ruling that the Dodd-Frank Act did not authorize retroactive application of provisions barring an individual or entity from associating with municipal advisors or statistical rating organizations. In a brief statement, the Commission announced that it would not seek further review of the July ruling in Koch v. SEC, where the D.C. Circuit held that the SEC impermissibly imposed an associational bar on an adviser for conduct that occurred before the Dodd-Frank Act took effect.

The Commission also announced that it will grant requests to vacate bars from association with municipal advisors and nationally recognized statistical rating organizations (NRSROs) that were imposed against individuals based entirely on conduct that occurred before the effective date of Dodd-Frank on July 22, 2010. Persons requesting that the SEC vacate their NRSRO and municipal advisor bars must complete and submit three copies of a form available on the Commission’s website. This process applies only to bars from associating with a municipal advisor or a NRSRO, and any other bars or suspension from association that were imposed by the Commission will remain in force.

Koch ruling. In Koch, an SEC 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 municipal advisor or NRSRO.

On appeal, the D.C. Circuit agreed that Koch had marked the close and affirmed findings that he had violated the Exchange Act and the Investment Advisers Act. The appellate court also held, however, that at the time Koch marked the close, the SEC could not bar an individual or entity from associating with municipal advisors or rating organizations. Applying the bar impermissibly attached new legal consequences to Koch’s past conduct, the appellate panel concluded.