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.
On December 8, the SEC fined a computer programmer $68,387.07 for operating two separate online exchanges that traded securities using virtual currency without registering the businesses as broker dealers. Further, the SEC charged that the programmer failed to register the online enterprises as exchanges as required by SEC regulations. Without admitting or denying the allegations, the programmer agreed to be barred from the securities industry for two years.
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.
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.
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. Read more…
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.”
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.
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.
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.
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.
This month, FINRA issued guidance notice 14-40 to remind firms that “it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.” Additionally, the notice addresses FINRA’s Code of Arbitration Procedure for Customer Disputes, emphasizing that the parties involved in the arbitration discovery process must “cooperate with each other to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process.” FINRA further specifies that “stipulations between the parties or confidentiality orders issued by an arbitrator as part of the discovery process regarding the non-disclosure of the documents in question outside the arbitration of the particular case do not restrict or prohibit the disclosure of the documents to the SEC, FINRA, any other self-regulatory organization, or any other state or federal regulatory authority.”
On September 26, the SEC amended its rules to delegate authority to its CFO, Kenneth Johnson, to request that the Treasury Secretary invest a portion of the SEC’s Investor Protection Fund. The fund, comprised of over $439 million as of FY 2013, is used to award whistleblowers and fund certain IG activities. Johnson’s discretion includes determining what portion of the Fund’s monies are not required to meet current needs and thus available for investment as well as which investment maturities are most suitable. The SEC anticipates this amendment, effective September 29, 2014, will “streamline” its operations.
On September 22, the SEC announced that it expects to award more than $30 million to a whistleblower who provided key information in connection with an ongoing fraud enforcement action. The award will be the largest to date for the SEC’s whistleblower program and the fourth award to a whistleblower living overseas. The program offers rewards to whistleblowers who provide high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Awards are funded by an investor protection fund established by Congress and financed by sanctions imposed on securities law violators. Awards can range from ten to thirty percent of the money collected from the enforcement action.
On September 24, the SEC issued a final rule adopting significant revisions to regulations governing the disclosure, reporting, registration and the offering process for asset-backed securities (“ABS”). The revised rules aim to increase investor protection in the ABS market by making it easier for investors to review and analyze the credit risk of ABS, and limit reliance on the ratings provided by credit agencies. The rule mandates that issuers provide standardized asset-level disclosures for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities at the time of the offering and on an ongoing basis. The rule also modifies asset-level disclosures for RMBS and securities backed by auto loans and leases in order to reduce potential privacy risks to obligors. The rule requires ABS issuers using a shelf registration statement to file a preliminary prospectus at least three business days before the first sale of securities in the offering. Further, the regulations revise the eligibility requirements for ABS shelf offerings and require additional changes to the procedures and forms related to shelf offerings. Specifically, the rules adopt four transaction requirements for ABS shelf eligibility (certification by the CEO, asset review provision, dispute resolution provision, and disclosure of investors’ requests to communicate) and remove the prior investment-grade rating requirement in order to reduce undue reliance on credit ratings. The rule will become effective on November 24, 2014.