InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
SEC Adopts New Rules to Strengthen Systems Compliance and Integrity
On November 19, the SEC announced that the agency voted to adopt new rules intended to improve the technology infrastructure of the U.S. securities markets. The new rules, titled Regulation Systems Compliance and Integrity (Regulation SCI), will require comprehensive new controls for the technology systems employed by certain market participants. According to the press release, the rules will (i) provide a “corrective action” framework for entities to take when encountering issues with their systems; (ii) provide “notifications and reports to the SEC regarding systems problems and systems changes;” (iii) provide information on systems issues to participants and members; (iv) conduct business continuity testing; and (v) conduct reviews of automated systems annually. Regulation SCI will be effective 60 days after publication in the Federal Register.
SEC Settles with Broker-Dealer over Market Access Allegations
On November 20, the SEC announced that a California based broker dealer agreed to settle alleged market access violations by paying a $2.44 million penalty. The SEC alleged that the broker-dealer failed to implement adequate risk controls before providing customers with access to the market. In addition to the penalty, two former senior employees agreed to settle allegations, without admitting or denying wrongdoing, against them for their alleged roles in causing the violations for a combined total of more than $85,000. Notably, the two employees were the first individuals the SEC had charged with violations of the market access rule.
Justice Scalia Places Renewed Focus on Lenity in Hybrid Civil-Criminal Statutes
On November 10, 2014, the Supreme Court denied Douglas Whitman’s petition for a writ of certiorari in Whitman v. United States, No. 14-29; Justice Antonin Scalia, joined by Justice Clarence Thomas, issued a brief statement specifically highlighting their view of the role that the doctrine of lenity should play in the interpretation of criminal statutes. Whitman asked the high court to review his 2012 conviction for securities fraud and conspiracy under the Securities Exchange Act of 1934. The Second Circuit appeared to defer to the SEC’s interpretation of ambiguous language in the Act—according to Justice Scalia, such an approach would disregard the “many cases . . . holding that, if a law has both criminal and civil applications, the rule of lenity governs its interpretation in both settings.” Justice Scalia further noted that it was the exclusive province of the legislature to create criminal laws, and to defer to the SEC’s interpretation of a criminal statute would “upend ordinary principles of interpretation.” Justice Scalia’s approach may indicate potential adjustments in the ongoing effort to strike the right balance between the due process rights of targets of enforcement actions to know what the law prohibits, and deference to enforcement agencies to interpret federal statutes flexibly. BuckleySandler discussed the tension between lenity and Chevron deference earlier this year in a January 16 article, Lenity, Chevron Deference, and Consumer Protection Laws.
Medical Company Settles FCPA Claims With SEC and DOJ
On November 3, a medical company agreed to pay a total of $55 million to settle DOJ and SEC allegations that the company violated the FCPA in Russia, Thailand, and Vietnam. According to the SEC’s cease-and-desist order, subsidiaries of the bio-medical instrument manufacturer paid $7.5 million in bribes in Russia, Thailand, and Vietnam from 2005 to 2010 in order to win business in violation of Section 30A of the FCPA, which resulted in $35 million in improper profits for the company. Some of the payments were disguised as commissions to foreign agents, in situations where the “agents had no employees and no capacity to perform the purported services for [a medical company].” The company also allegedly had an “atmosphere of secrecy.” The company self-disclosed the violations to the government in 2010.
As part of the resolution, the company reached a Non-Prosecution Agreement with the DOJ regarding activities in Russia and agreed to a $14.35 million criminal penalty related to books and records and internal controls violations. The resolution with the SEC involved the payment of $40.7 million in disgorgement and pre-judgment interest regarding anti-bribery, books and records, and internal controls violations related to Russia, Thailand, and Vietnam.
Of note, and continuing the trend of cross-border cooperation, the SEC in its press release disclosed that numerous international entities had assisted its investigation, including the “Bank of Lithuania, Financial and Capital Market Commission of Latvia, and British Virgin Islands Financial Services Commission.” Underscoring the issue, following public disclosure of the company’s settlement with the SEC regarding alleged payments in Vietnam, news reports indicate that Vietnam’s Ministry of Health has ordered a review of hospital purchases from the company, and asked for information and assistance from US authorities.
Senate Banking Committee Urges SEC To Investigate Time Disparity In Electronic Filings
On November 3, Senators Johnson (D-SD) and Crapo (R-ID) of the Committee on Banking, Housing, and Urban Affairs sent a letter to The Honorable Mary Jo White, Chair of the SEC, regarding an academic study showing that company filings submitted electronically to the SEC are, more often than not, available to private subscribers before the general public. The letter highlights the concern that some investors receive real-time information before it is widely available, and requests that the agency provide the steps it is taking to ensure that such unequal access to trading data is eliminated. Finally, the letter requests an outline of “what [it has] previously done to address any similar issues, how [it] will review for any other discrepancies in SEC systems and how [it] will monitor to avoid such issues in the future.”
Cable Company Announces FCPA Internal Investigation Near Completion
Just a month after announcing its internal investigation of possible FCPA violations, news reports indicate that a major cable company's review will be completed or substantially completed by the first quarter of 2015. The company also announced that it “plans to exit all of its Asia Pacific and African manufacturing operations,” although it did not link the exit – which affects nine plants in Asia and five plants in Africa, and approximately 17% of its total sales – to its FCPA investigation.
In September, the Kentucky-based cable manufacturer announced that it was investigating its payment practices with respect to employees of public utility companies in Angola, Thailand, India and Portugal due to possible FCPA concerns. News reports indicate that, to date, the company has spent millions on the review, which has included a review of over 450,000 documents and interviews of over 20 individuals. The company also disclosed that it was cooperating with investigations by the DOJ and SEC.
SEC Promotes Agency Official to Lead Regional Office Investment Adviser/Investment Company Exam Program
On October 28, the SEC announced Steven Levine as the Associate Director for the Investment Adviser/Investment Company examination program in its Chicago office. Levine, who joined the agency in 2010, had served as one of its two acting Associate Directors since March 2013. Levine will oversee the IA/IC exam program spanning nine Midwestern states, including a staff of approximately 65 examiner, accountants, and attorneys.
Regulators Jointly Approve Final Risk Retention Rule
On October 22, coordinated by the Department of Treasury, six federal agencies – the Board of Governors, HUD, FDIC, FHFA, OCC, and SEC – approved a final rule requiring sponsors of securitized transactions, such as asset-backed securities (ABS), to retain at least 5 percent of the credit risk of the assets collateralizing the ABS issuance. The final rule, which largely mirrors the proposed rule issued in August 2013, defines a “qualified residential mortgage” (QRM) and exempts securitized QRMs from the new risk retention requirement. Government-controlled Fannie and Freddie are exempt from the rule. Most notably, the final rule’s definition of a QRM parallels with that of a qualified mortgage as defined by the CFPB. Further, initially part of the proposed rule, the final rule does not include down payment provisions for borrowers. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities, and two years after publication for all other types of securitized assets.
SEC Finalizes Rule To Adopt Updated EDGAR Filer Manual
Recently, the SEC issued a final rule to update its EDGAR system to support changes to the disclosure, reporting, and offering process for asset-backed securities. Specifically, EDGAR will be revised to update Volume I: General Information, Volume II: EDGAR Filing, and Volume III: N-SAR Supplement. The EDGAR system is scheduled to reflect the updates on October 20.
SEC Appoints Marc Wyatt As Deputy Director Of National Exam Program
On October 20, the SEC appointed Marc Wyatt as the Deputy Director of the agency’s Office of Compliance and Inspection Examinations (OCIE). In September 2012, Wyatt joined the SEC as a senior specialized examiner with a concentration on examinations of advisers to private equity funds and hedge funds. In his new role working with the OCIE staff, Wyatt will oversee the examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents. Prior to joining the SEC, Wyatt served as Stark Investments’ chief executive, in addition to spending time at Merrill Lynch UK and at Alex. Brown as a senior investment banker.