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U.S. Senators Introduce Legislation Seeking to Increase SEC Penalty Amounts
On July 9, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced Senate bill 1730, the Stronger Enforcement of Civil Penalties Act of 2015 (SECPA), aimed at increasing the SEC’s ability to combat securities’ laws violations to better protect investors and bolster oversight and accountability. Specifically, the SECPA “increase[es] the statutory limits on civil monetary penalties, directly linking the size of these penalties to the scope of harm and associated investor losses, and substantially raising the financial stakes for repeat securities law violators.” In addition, the legislation calls for expanded penalty authority for violations of previously imposed injunctions or bars, and would categorize individual injunction violations as separate charges.
SEC Requests Public Feedback On Exchange-Traded Products
On June 12, the SEC issued a press release announcing that it is seeking public comment on how it should regulate exchange-traded products (ETPs), on how broker-dealers sell the securities, especially to retail investors, and on investors’ understanding of the nature and use of ETPs. In particular, the securities regulator is requesting public feedback on arbitrage mechanisms and market pricing for ETPs, legal exemptions, and other regulations related to the listing standards and trading of ETPs. Comments will be received for 60 days following publication in the Federal Register.
Georgia District Court Rules SEC's Use of Administrative Law Judges In Insider Trading Case "Likely Unconstitutional"
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.
Net 1 Announces Closure of SEC FCPA Investigation
On June 8, Net 1 UEPS Technologies, Inc., a South Africa-based mobile payments company incorporated in Florida, announced that the SEC had closed a FCPA investigation arising out of a contract with the South African Social Security Agency. The SEC and the DOJ opened parallel investigations in November 2012, and the DOJ investigation remains ongoing. Net 1 has asserted that the investigation was instigated by one of the losing bidders on the contract.
Agencies Finalize Diversity Policy Statement
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.
Oil and Gas Company with Republic of Guinea Operations Announces Conclusion of DOJ Investigation
Houston-based Hyperdynamics Corp. announced in an 8-K filed on May 26 that the DOJ had closed its investigation into alleged FCPA violations by the company in the Republic of Guinea. A parallel investigation by the SEC remains ongoing. The DOJ investigation was originally disclosed by the company in 2013, and was stated to relate to concession rights and relationships with charitable organizations.
The investigation and declination raise two notable issues. First, the investigation into relationships with charitable organizations continues the government’s focus on the potential use of charitable organizations to influence acts of foreign officials. Second, the declination letter from the DOJ to Hyperdynamics was released by the company and noted its “cooperation with investigations,” including through providing information and the results of the company’s internal investigation to the government, as well as how much the DOJ values cooperation. Recent speeches by the DOJ have sought to reassure companies that extensive cooperation can theoretically result in a declination.
SEC Releases Agenda For Upcoming Advisory Committee Meeting
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 Imposes $25 Million Penalty for FCPA Violations at 2008 Summer Olympics
On May 20, the SEC announced that it had instituted and settled administrative proceedings against a global resources company to resolve alleged FCPA violations during the 2008 Summer Olympics. According to the SEC’s administrative order, the company invited over 175 government officials and employees of state-owned enterprises, many from countries in Africa and Asia with a “well-known history of corruption,” to attend the Games at its expense. Those who accepted were provided with “hospitality packages” that included event tickets, luxury hotel accommodations, meals and, in many cases, business class airfare. Even though the company was aware that providing high-end hospitality packages to government officials created a heightened risk of violating anti-corruption laws, its internal controls were “insufficient” because there was no independent legal or compliance review of the invited guests or enhanced training of employees regarding the corruption risks. As a result, the company invited “government officials who were directly involved in, or in a position to influence, pending contract negotiations, efforts to obtain access rights, regulatory actions, or business dealings affecting [the company] in multiple countries.” Additionally, the company violated the books and records provisions of the FCPA because its records relating to the hospitality packages “did not, in reasonable detail, accurately and fairly reflect pending negotiations or business dealings between [the company] and government officials invited to the Olympics.” However, the SEC credited the company for retaining outside counsel to conduct an “extensive” internal investigation and for instituting “significant remedial actions” relating to its anti-corruption compliance program. While neither admitting nor denying the SEC’s allegations, the company agreed to pay a $25 million civil money penalty and to provide reports to the SEC for one year regarding its compliance program.
SEC Publishes Cybersecurity Guidance for Registered Investment Companies and Advisers
On April 30, the SEC’s Division of Investment Management issued IM Guidance Update No. 2015-02 which highlights measures that investment companies and advisers may wish to consider in addressing cybersecurity risks. The guidance urges firms to adopt a three-pronged approach including, among other things: Conducting a periodic assessment of (1) the nature, sensitivity and location of information that the firm collects, processes and/or stores, and the technology systems it uses; (2) internal and external cybersecurity threats to and vulnerabilities of the firm’s information and technology systems; (3) security controls and processes currently in place; (4) the impact should the information or technology systems become compromised; and (5) the effectiveness of the governance structure for the management of cybersecurity risk. Second, creating a strategy designed to prevent, detect, and respond to cybersecurity threats, and third, implementing the strategy through written policies and procedures. The Division’s guidance also warned investment companies and advisers about third-party vendor agreements that could potentially lead to unauthorized access of investors’ information.
SEC Votes to Propose Executive Compensation Rules
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.