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  • Georgia District Court Rules SEC's Use of Administrative Law Judges In Insider Trading Case "Likely Unconstitutional"

    Securities

    On June 8, in Hill v. Securities And Exchange Commission, Civ. Action No. 1:15-CV-1801-LMM, a Georgia federal judge ruled that the Securities and Exchange Commission’s use of an in-house Administrative Law Judge (“ALJ”) to preside over an insider-trading case was “likely unconstitutional.” In Hill, after a nearly two-year investigation, the Securities and Exchange Commission (“SEC”) served Charles Hill, a self-employed real estate developer who was not registered with the SEC, with an Order Instituting Cease-And-Desist Proceedings under Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), alleging liability for insider trading in violation of Section 14(e) of the Exchange Act and Rule 14e-3. The SEC alleged that Hill, using inside information he received, purchased and then sold a large quantity of Radiant Systems, Inc. stock, profiting approximately $744,000. In addition to the cease-and-desist order, the SEC sought a civil penalty and disgorgement from Mr. Hill. The SEC sought to collect the civil penalty through an administrative hearing using an in-house ALJ. Mr. Hill filed this action to challenge the SEC’s decision to use an administrative proceeding, and asked the Court to (i) declare the proceeding unconstitutional; and (ii) enjoin the proceeding from occurring until the Court issues its ruling. The Court granted, in part, and denied, in part, his request. After rejecting the SEC’s argument that the Court lacked subject matter jurisdiction over Mr. Hill’s constitutional claims, the Court rejected Mr. Hill’s arguments that the Dodd-Frank Act, which delegates to the SEC the power to choose between an administrative forum and a federal district court to adjudicate violations of the Exchange Act, constituted an unconstitutional delegation of legislative power, and that the SEC’s decision to prosecute claims against him administratively violated his Seventh Amendment right to a jury trial. However, the Court determined that the SEC’s manner of appointment of administrative judges likely violated the Appointments Clause, because those judges are “inferior officers” that the President or an agency head must appoint. Because the ALJ in this case had not been so appointed, the Court found that Mr. Hill had a likelihood of success on his claims, and entered a preliminary injunction enjoining the SEC administrative proceeding. The Court, however, noted that its decision “may seem unduly technical” because the SEC could easily cure the issue by having the SEC Commissioners appoint the ALJ, or by presiding over the matter themselves.

    SEC

  • Agencies Finalize Diversity Policy Statement

    Securities

    On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.

    FDIC CFPB Dodd-Frank Federal Reserve OCC NCUA SEC Diversity Agency Rule-Making & Guidance

  • SEC Releases Agenda For Upcoming Advisory Committee Meeting

    Securities

    On May 28, the SEC released the agenda for its upcoming Advisory Committee on Small and Emerging Companies meeting, which is scheduled to occur on June 3. The meeting will focus on public company disclosure effectiveness, intrastate crowdfunding, venture exchanges, and the treatment of “finders.” The Advisory Committee also is expected to vote on a recommendation to the SEC with respect to the “Section 4(a)(1½) exemption,” which shareholders may use to resell privately issued securities. The meeting will be held at the SEC headquarters, and is open to the public.

    SEC

  • SEC Votes to Propose Executive Compensation Rules

    Securities

    On April 29, the SEC voted 3-2 to propose rules that would implement Dodd Frank’s pay-versus-performance provision by requiring companies to disclose the relationship between their financial performance and executive compensation. According to SEC Chair Mary Jo White, the proposed rules “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.” All executive officers currently submitting their financials in the summary compensation table must abide by the proposed rules’ disclosure requirements. The rules would require that all reporting companies, except smaller companies, disclose the relevant compensation information for the last five fiscal years; smaller reporting companies will only be required to disclose the information for the past three fiscal years. Foreign private issuers, registered investment companies, and emerging growth companies will be exempt from the relevant Dodd-Frank statutory requirement. The comment period for the proposed rules will be open for 60 days after publication in the Federal Register.

    Dodd-Frank SEC Compensation

  • SEC Announces Whistleblower Award to Compliance Officer, Over $1 Million Dollars

    Securities

    On April 22, the SEC announced an award of more than $1 million to a compliance officer for providing the agency with information on the company’s misconduct. The Dodd-Frank Act whistleblower regime is designed to encourage employees to submit evidence of securities fraud. When sanctions of a successful enforcement action exceed $1 million, the program allows for up to 30 percent of the money collected to be provided to the whistleblower. Since the program began in 2011, 16 whistleblowers have received upwards of $50 million from an investor protection fund, which was established by Congress and is financed through the monetary sanctions the SEC receives from securities law violators.

    Dodd-Frank SEC Whistleblower

  • SEC Announces Key Departures

    Securities

    This week, the SEC announced two key senior management departures. On April 7, the securities regulator announced that Andrew Bowden, its current director of the Office of Compliance Inspections and Examinations (OCIE), will leave the agency at the end of April to return to the private sector. Since joining the SEC in 2011, Bowden has served as OCIE’s National Associate for the Investment Adviser/Investment Company examination program, Deputy Director of OCIE, and Director of OCIE. The SEC separately announced that Gregg Berman, Associate Director of the Office of Analytics and Research within the Division of Trading and Markets, will depart the agency later this month.

    SEC

  • SEC Adopts Rule Giving Access to Capital for Smaller Companies

    Securities

    On March 25, the SEC adopted final rules to amend Regulation A, a current exemption from registration for smaller companies issuing securities.  The new rules, which allow smaller companies to offer and sell up to $50 million of securities within a twelve-month period – subject to certain eligibility, disclosure, and reporting requirements – expand Regulation A into two tiers for offering securities. Tier 1 allows eligible issuers to sell up to $20 million of securities without registration so long as security-holders who are affiliates of such issuers sell no more than $6 million in securities, whereas Tier 2 permits such issuers to sell up to $50 million of securities yet caps affiliate sales at $15 million. Moreover, Tier 2 offerings are subject to further supplementary disclosure and reporting requirements (e.g., requiring eligible issuers to provide audited financial statements and file annual and semiannual current event reports), and allow eligible issuers to preempt state registration and qualification requirements for securities sold to “qualified purchasers,” as such term is defined in the rules. The new rules will be effective 60 days after publication in the Federal Register.

    SEC Agency Rule-Making & Guidance

  • D.C. Federal District Court Dismisses Lawsuit Seeking to Block $13 Billion DOJ Settlement

    Securities

    On March 18, the U.S. District Court for the District of Columbia dismissed a lawsuit brought by a non-profit organization challenging the $13 billion global settlement agreement entered by the U.S. Department of Justice (DOJ) and a national financial services firm and banking institution arising out of the 2008 financial crisis. Better Markets, Inc. v. U.S. Dept. of Justice, No. CV 14-190 (BAH), 2015 WL 1246104 (D.D.C. Mar. 18, 2015). The plaintiff—an advocacy group founded to “promote the public interest in the financial markets”—alleged that the DOJ’s decision to enter into the 2013 settlement agreement with the firm was in violation of the Constitution, the Administrative Procedure Act, and FIRREA. The court dismissed the lawsuit on grounds that the advocacy group lacked standing, concluding that the group had failed to show “a cognizable harm, or that the relief it seeks will redress its alleged injuries.”

    DOJ False Claims Act / FIRREA MBS

  • Fed and OCC Assert Bank Examination Privilege in Mortgage-Backed Securities Class Action

    Securities

    On March 23, the Federal Reserve and the Office of the Comptroller of the Currency – both non-parties in the suit – filed briefs requesting that a district court reject a motion to compel discovery of over 30,000 documents held by a large bank.  Arguing that the documents contain confidential supervisory information, the regulators asserted the bank examination privilege – “a qualified privilege that protects communications between banks and their examiners in order to preserve absolute candor essential to the effective supervision of banks.”  As for scope, the regulators argued that the privilege covers the documents because they provide agency opinion, not merely fact, and that any factual information was nonetheless “inextricably linked” with their opinions.  Additionally, they contended that the privilege is not strictly limited to communications from the regulator to the bank – instead, it may also cover communications made from the bank to the regulator and communications within the bank.  As for procedure, the regulators claimed that a plaintiff is required to request the disclosure of privileged documents through administrative processes before seeking judicial relief, a requirement they contend exists even where a defendant bank also holds copies of the documents. Finally, the regulators argued in the alternative that the lead plaintiff has not shown good cause to override the qualified privilege, as the interests of the government in protecting the supervisory information outweighs the interest of the plaintiffs in production.

    Federal Reserve Class Action OCC Bank Supervision Bank Privilege SDNY

  • FINRA Announces $1.5 Million Sanction Against Broker-Dealer and Bars President for Fraud

    Securities

    On March 12, FINRA announced an order requiring a New York-based broker-dealer to pay over $1 million in restitution and $500,000 in fines for alleged fraud in sales of a private placement offering. According to the Order, from January 2011 to October 2011, the firm defrauded its customers by claiming – without performing sufficient due diligence – they would benefit from investing in the pre-initial public offering shares of a California-based automaker, but failed to disclose the criminal and adverse regulatory background of a key individual connected to the automaker. In addition to the $500,000 fine against the broker-dealer, its president has been barred from the securities industry. Under the settlement agreement, the broker-dealer and its president neither admitted nor denied the allegations.

    FINRA Enforcement

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