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SEC Fills Enforcement Director, General Counsel Positions
On April 22, the SEC announced that George Canellos and Andrew Ceresney will share responsibilities as co-directors of the SEC’s Division of Enforcement. Mr. Canellos has been serving as Acting Enforcement Director since January. He previously had been the division’s Deputy Enforcement Director since June 2012, prior to which he served as Director of the SEC’s New York Regional Office. Mr. Ceresney previously served as a Deputy Chief Appellate Attorney in the United States Attorney's Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. Most recently, he was in private practice with recently-confirmed SEC Chairman Mary Jo White. On April 23, the SEC named Anne Small as General Counsel. Ms. Small is a former Special Assistant to the President and Associate Counsel in the White House Counsel’s Office where she advised on legal policy questions with a focus on economic issues. She previously worked at the SEC as Deputy General Counsel for Litigation and Adjudication and now becomes the first woman to be named General Counsel.
Federal Authorities Announce FCPA Action, First SEC Non-Prosecution Agreement
On April 22, the DOJ and the SEC announced parallel actions against a clothing company to resolve allegations that a subsidiary of the company paid bribes to Argentine officials over a several-year period to obtain improper customs clearance of merchandise. The SEC action included the agency’s first non-prosecution agreement (NPA) related to FCPA misconduct, which the SEC determined was appropriate given “the company's prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC's investigation.” According to the SEC’s NPA, the company’s cooperation involved (i) reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts, (ii) voluntarily and expeditiously producing documents, (iii) providing English language translations of documents to the staff, (iv) summarizing witness interviews that the company's investigators conducted overseas, and (v) making overseas witnesses available for staff interviews and bringing witnesses to the U.S. The SEC agreement also required the company to pay over $700,000 in disgorgement and prejudgment interest, while the DOJ required the company to pay a nearly $900,000 penalty.
SEC Charges Bank for Understating Auto Loan Losses
On April 24, the SEC released an order charging a financial institution and two senior executives for allegedly understating millions of dollars in auto loan losses during the period leading up to the financial crisis. The SEC stated that an investigation identified an alleged failure by the institution to incorporate internal loss forecasts into financial reporting, resulting in the institution understating loan loss expense. The institution did not admit the allegations, but agreed to pay $3.5 million to resolve the charges. The SEC also alleged that the two executives caused the understatements by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. The two executives did not admit the allegations, but agreed to pay a combined $135,000 to resolve the investigation, and to cease and desist from committing or causing any violations of the relevant federal securities laws.
CFPB Report Urges Adoption of Standards for Marketing Financial Adviser Services to Seniors
On April 18, the CFPB issued a report that reviews the marketing of investment adviser services to older Americans. The CFPB found that financial advisers use more than 50 different designations to market expertise in financial issues affecting seniors, which the CFPB claims creates confusion in the marketplace. The report includes detailed recommendations for the SEC and Congress related to (i) consumer education and disclosures, (ii) standards for the acquisition of senior designations, (iii) standards for senior designee conduct, and (iv) enforcement related to the misuse of senior designations. Among the recommendations, the CFPB suggests that policymakers consider requiring adviser education and standardized testing prior to obtaining a senior designation. The CFPB also suggests that the SEC and state policymakers consider increasing enforcement of misleading or other improper conduct by a holder of a senior designation and that state policymakers consider providing consumers with a private right of action to seek relief for the improper use of senior designations.
SEC Approves Final Investor Privacy Rule
On April 10, the SEC voted unanimously to adopt a final rule requiring broker-dealers, mutual funds, investment advisers, and other regulated entities to implement programs designed to detect and prevent identity theft. The final rule applies to SEC-regulated entities that meet the definition of “financial institution” or “creditor” under the FCRA. The final rule will take effect 30 days after publication in the Federal Register and give covered firms six months from the effective date to comply. Under the final rule, covered firms must establish policies and procedures designed to (i) identify relevant types of identity theft red flags, (ii) detect the occurrence of those red flags, (iii) respond appropriately to the detected red flags, and (iv) periodically update the identity theft program. The rule requires covered firms to provide staff training and oversight of service providers, and provides guidelines and examples of red flags to help firms administer their programs. Further, the rule requires covered firms that issue debit cards or credit cards to take certain precautionary actions when they receive a request for a new card soon after notification of a change of address for a consumer’s account.
White Sworn In as SEC Chair
On April 10, the SEC announced that Mary Jo White was sworn in as the 31st Chair of the SEC, two days after the Senate confirmed her for the position. The announcement notes that Chairman White most recently led the litigation department of a large law firm. Prior to her time in private practice, Chairman White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases in her position as the U.S. Attorney for the Southern District of New York from 1993 to 2002. She also served as the First Assistant U.S. Attorney and later Acting U.S. Attorney for the Eastern District of New York from 1990 to 1993 and as an Assistant U.S. Attorney for the Southern District of New York from 1978 to 1981, where she became Chief Appellate Attorney of the Criminal Division.
SEC Approves Use of Social Media for Company Announcements
On April 2, the SEC issued a report that allows companies to use social media outlets to announce key information in compliance with Regulation Fair Disclosure (Regulation FD), provided investors have been alerted about which social media will be used to disseminate such information. The report reviews 2008 SEC guidance that clarified that websites can serve as an effective means for disseminating information to investors if the investors have been made aware in advance. The report determined that the policy is equally applicable to current and evolving social media communication channels. The report states that disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to comply with existing regulations, even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time.
New York Federal Court Holds Dodd-Frank Rule Does Not Bar Late SEC Suits
On March 24, the U.S. District Court for the Eastern District of New York held that a Dodd-Frank Act rule requiring the SEC, within 180 days of notifying a target of the pendency of an investigation, to file an action or obtain an extension of time from an SEC director, does not provide for the dismissal of an enforcement action that does not comply with the rule. SEC v. NIR Group, LLC, No. 11-4723, slip op. (E.D.N.Y. Mar. 24, 2013). In deciding a motion in which the SEC sought to halt discovery into its compliance with the rule, the court explained that the statute does not explicitly provide for dismissal of an enforcement action that does not comply with the 180-day requirement, but that the absence of such a remedy does not render the provision superfluous. The court determined that evidence concerning compliance with the internal deadline is not relevant to the action. For that and other reasons, the court held that the evidence sought was not discoverable.
Senate Banking Committee Approves Nominees for Top CFPB, SEC Spots
On March 19, the Senate Banking Committee approved Mary Jo White to serve as SEC Commissioner/Chair through June 2014, and Richard Cordray to serve a five-year term as CFPB Director. The vote on Ms. White was 20-1. Senator Sherrod Brown (D-OH) was the lone dissenter, citing his general concern with nominees who previously worked for the industry they are intended to regulate. Mr. Cordray was approved on party lines, 12-10. In an opening statement Ranking Member Michael Crapo (R-ID) reiterated Republican opposition to any nominee until structural changes are made to the CFPB.
Senate Banking Committee Holds Confirmation Hearing for CFPB Director, SEC Commissioner
On March 12, the Senate Banking Committee held a confirmation hearing for Richard Cordray to serve as CFPB Director, and for Mary Jo White to serve as SEC Commissioner/Chairman. While majority and minority committee members commended Mr. Cordray for his leadership of the CFPB to date, the basic disagreement over the structure of the agency itself remains. Democrats maintain that Mr. Cordray deserves a confirmation vote, citing the facts that Congress already approved the structure of the CFPB, that it is the only financial regulator subject to a funding cap and whose rules are subject to a veto. Republicans argue that the CFPB lacks transparency and accountability, and that it should be changed to a commission structure and subject to congressional appropriations. In his testimony, Mr. Cordray stressed his efforts to be transparent and accountable, and Chairman Johnson (D-ND) entered into the record a letter from Rep. Stivers (R-OH) to the Committee calling on members to confirm Mr. Cordray as someone who could help bridge the gap on policy differences. Committee members also generally supported Ms. White. In her testimony, Ms. White addressed concerns from Senators on both sides about potential conflicts of interest given her recent work as a defense attorney, and stated her primary focus will be to finalize rules required by the Dodd-Frank Act and the JOBS Act. Additional priorities identified by committee members that Ms. White agreed should be agency priorities included finalizing rules for (i) credit rating agency conflicts of interest, (ii) money market funds, (iii) CEO pay versus median employee pay disclosures, (iv) high frequency trading, and (vi) crowd funding. Ms. White also pledged to vigorously enforce existing laws. The committee is scheduled to vote on both nominees on March 19, 2013.