During the course of the last month, the Securities and Exchange Commission (“SEC”) brought two enforcement actions related to inadequate disclosure of perquisites. In early July, the SEC issued an order finding that, from 2011 through 2015, an issuer failed to follow the SEC’s perquisite disclosure standard, which resulted in a failure to disclose approximately $3 million in named executive officer perquisites. In addition to the imposition of a $1.75 million civil penalty, the SEC order mandated that the issuer retain an independent consultant (at its own expense) for a period of one year to conduct a review of its policies, procedures, controls and training related to the evaluation of whether payments and expense reimbursements should be disclosed as perquisites, and to adopt and implement all recommendations made by such consultant. Continue Reading Recent SEC Enforcement Actions on Inadequate Perquisite Disclosure
On July 11, 2018 the U.S. Department of Justice (“DOJ”), Bureau of Consumer Financial Protection (“CFPB”), the Securities and Exchange Commission (“SEC”) and the Federal Trade Commission (“FTC”) announced the establishment of a new Task Force on Market Integrity and Consumer Fraud (the “Task Force”). Deputy Attorney General Rod Rosenstein made the announcement on behalf of the Task Force, joined by Acting Director Mick Mulvaney of the CFPB, Chairman Jay Clayton of the SEC and Chairman Joe Simons of the FTC. Continue Reading DOJ Announces New Inter-Agency Task Force on Market Integrity and Consumer Fraud
Last week, the Supreme Court ruled in Lucia v. SEC that SEC Administrative Law Judges are “officers” for the purposes of the Constitution’s Appointments Clause. Not only does the decision require the rehearing of the petitioner’s case, but it leaves unanswered questions for the SEC and other agencies moving forward. Indeed, another trip up to the Supreme Court on a related constitutional issue involving the ALJs’ civil service protections seems likely. In the meantime, the SEC and other agencies will be forced to grapple with the legitimacy of their administrative proceedings, potentially impacting their enforcement efforts.
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One year ago, the U.S. Supreme Court ruled in Kokesh v. SEC that the U.S. Securities and Exchange Commission’s disgorgement remedy constitutes a “penalty,” and is therefore subject to the five-year statute of limitations in 28 U.S.C. § 2462. As a result, the SEC can no longer seek disgorgement of ill-gotten gains older than five years. The SEC’s Enforcement Division has traditionally relied heavily on the agency’s virtually unfettered disgorgement power in its settled and litigated cases. As expected, Kokesh has forced the division to trim its disgorgement demands in certain cases and to abandon it outright in others. To date, however, the most dire predictions of Kokesh’s impact — that it would lead to the wholesale elimination of the SEC’s disgorgement power and place strict limitations upon other types of so-called “equitable” remedies — have not come to pass. That said, many of the issues commentators raised in the immediate aftermath of Kokesh have not yet percolated up through the appellate courts, and significant uncertainty concerning its full impact remains. What is clear, however, is that, absent congressional intervention, the SEC will face challenges in obtaining the full measure of ill-gotten gains in long-running, resource-intensive investigations.
On April 18, 2018, the Securities and Exchange Commission (“SEC”) proposed Regulation Best Interest under the Securities Exchange Act of 1934 to establish a new “best interest” standard of conduct for broker-dealers when making a recommendation of any transaction or investment strategy involving securities to a retail customer. The SEC also proposed an interpretation to reiterate and clarify the fiduciary duty applicable to investment advisers under the Investment Advisers Act of 1940. Finally, the SEC proposed a new disclosure form for investment advisers and broker-dealers to provide to retail investors.
In proposing the new Regulation Best Interest and the Guidance, the SEC has attempted to more closely align the standards of conduct applicable to broker-dealers and investment advisers while recognizing the fundamental differences between the services each provides and maintaining investor choice.
Please click here to read the full alert memorandum.
In a February post, we discussed in detail recent changes to the U.S. tax rules governing the deductibility of settlement payments and court-ordered damages payments. The IRS has now released some limited guidance on this new law (IRS Notice 2018-23), and this post addresses what is in this guidance (the “Notice”).
To recap, under the new law: a settlement or court-ordered payment made to (or at the direction of) a government in relation to the violation of any law (or the investigation or inquiry by such government into the potential violation of any law) is not deductible for U.S. tax purposes unless the payment constitutes “restitution (or remediation of property) ” or “a payment for the purpose of coming into compliance with a law”.
Investigations into potential violations of U.S. and non-U.S. securities laws are often resolved by a settlement requiring the business to make one or more large settlement payments. We have seen settlements paid to the DOJ, the SEC, other U.S. and non-U.S. regulators, and private plaintiffs. An important question is whether the payment will be deductible for tax purposes. Since 1969, the U.S. tax law has denied a deduction for “any fine or similar penalty paid to a government for the violation of any law.”[i] This limitation was significantly changed by the U.S. tax reform law enacted in December of 2017 (known as the Tax Cuts & Jobs Act or “TCJA”). These changes, which had been proposed in Congress over 30 times since 2003 but not enacted until now, respond in part to disputes the IRS has had with taxpayers in the past. Continue Reading Settlement Payments Under the New Tax Reform Law
2017 brought marked challenges to the SEC’s ability to aggressively enforce the securities laws, including the Supreme Court limiting the SEC’s ability to seek disgorgement and court action endangering the validity of its oft-used administrative proceedings. 2017 also saw a decrease in the SEC’s total enforcement statistics. However, there is reason to believe that 2018 will see an uptick in enforcement actions and perhaps some clarity on the use of administrative proceedings. The SEC enters 2018 with a full complement of Commissioners and most senior Enforcement leadership positions filled, and it now has clearly articulated areas of focus, including protecting retail investors and prosecuting cyber cases. A recent Supreme Court cert grant should also help move to closure questions surrounding the use of administrative proceedings, historically an important enforcement mechanism. Below are a few observations from the past year, as well as key enforcement areas to keep an eye on in 2018. Continue Reading SEC Year-in-Review and a Look Ahead
As the Securities and Exchange Commission Division of Enforcement signaled in its recent annual report, policing the asset management industry will be a key priority in its continuing focus on protecting retail investors. This renewed emphasis reaffirms the view that if a significant error or misconduct is detected, firms generally should not wait for SEC scrutiny to take corrective steps and mitigate investor harm. Voluntary remediation must be considered as part of any strategy for managing regulatory exposure as well as reputational and litigation risk. Where a firm does decide to remediate, it must proceed carefully to avoid pitfalls that could lead to fresh scrutiny from regulators or even private civil litigation.
This post provides guidance to regulated firms on managing risks once they determine to voluntarily remediate – as distinct from the fact-specific issue of whether to “self-report” errors or misconduct – in the SEC context. It begins with an overview of the benefits and risks of voluntary remediation and common types of remedial measures. It then identifies potential issues that can arise when undertaking remediation. Finally, it advises on structuring and implementing remedial measures to minimize risks of regulatory or litigation exposure. Continue Reading Voluntary Remediation in the SEC Context: Avoiding Common Pitfalls
On November 15, 2017, the Securities and Exchange Commission Division of Enforcement released its annual report detailing its priorities for the coming year and evaluating enforcement actions that occurred during Fiscal Year (“FY”) 2017. The Report captures the SEC during a period of transition—Chairman Jay Clayton assumed the helm of the Commission in May 20172 and Stephanie Avakian and Steven Peikin were named co-directors of the Enforcement Division soon thereafter.3 The Report provides insight into changes in the SEC’s approach to enforcement actions and a glimpse into its priorities for the coming year. The following summarizes key shifts from FY 2016, outlines the Enforcement Division’s current priorities, and, in view of its stated focus on the conduct of investment professionals and protection of retail investors, provides guidance to the investment management industry as it gears up for the coming year.
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