On July 18, 2018, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) voted to approve a final rule (the “Final Rule”) amending Regulation Alternative Trading System (“Regulation ATS”) to require alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks (“NMS Stock ATSs”) to file with the SEC new Form ATS-N to begin operations or, for currently operating ATSs, to continue operations. Form ATS-N will provide for enhanced disclosures regarding the ATS’s operations and relationship with its broker-dealer operator relative to current Form ATS and will be publicly available. Importantly, unlike under the November 2015 proposal (the “Proposed Rule”), the SEC would automatically deem the Form ATS-N submissions to be effective after the review period, unless the Commission found it to be ineffective. Continue Reading SEC Reforms Regulation ATS to Improve Trading Transparency
A federal district court in California has become the latest court to hold that the 10-year statute of limitations under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) for offenses “affecting a financial institution” extends to offenses committed by banks and their employees, not just offenses committed against them. The decision is the latest chapter in a long-running debate between the Government and financial institutions that has played out in a series of federal court decisions over the last three years regarding interpretation of FIRREA. While this is not the first decision to hold that the 10-year limitations period applies to offenses by financial institutions, it is the first outside of the Second Circuit. Continue Reading California District Court Holds that FIRREA’s 10-Year Statute of Limitations Reaches Risks Caused to Financial Institutions by Their Own Employees
On July 11, 2018, the Securities and Exchange Commission’s (“Commission”) Office of Compliance Inspections and Examinations (“OCIE”) published a risk alert describing common deficiencies that OCIE staff observed in recent examinations regarding advisers’ compliance with their obligation under the Investment Advisers Act of 1940 (the “Advisers Act”) to seek “best execution” of client transactions. This obligation is a specific component of advisers’ general fiduciary duties owed to clients and requires an adviser to execute transactions so that “the client’s total cost of proceeds in each transaction is the most favorable under the circumstances.” Though what constitutes “best execution” lacks a uniform definition, the staff continues to maintain the well-settled principle that an analysis of whether a broker-dealer provides best execution should be qualitative based on the nature of the broker-dealer’s services, and that the lowest price does not necessarily equate to best execution. The risk alert nonetheless clarifies and reiterates particular practices that the staff considers inconsistent with an adviser’s best execution obligation. Continue Reading OCIE Risk Alert Focuses on “Best Execution” and Investment Advisers
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
Last month, the Supreme Court granted a writ of certiorari in Lorenzo v. SEC, a case where Francis Lorenzo, a registered representative of a broker-dealer, allegedly emailed false and misleading statements to investors that were originally drafted by his boss. After administrative and Commission findings of liability, a divided panel of the D.C. Circuit determined that, while Lorenzo was not the “maker” of the statements, he did use them to deceive investors, and thereby violated the so-called scheme liability provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As described in the petitioner’s motion seeking certiorari, the case presents the question whether, under the Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision, the scheme liability provisions of Rule 10b-5(a) and (c) may be used to find liability in connection with false or misleading statements by persons who are not themselves the maker of those statements and, thus, not liable under the false-and-misleading statements provision of Rule 10b-5(b). The answer to this question could have implications for the Securities and Exchange Commission’s (“SEC” or “Commission”) Enforcement Division as well as potentially significant implications for private securities litigants who principally rely on Section 10(b) to bring private causes of action sounding in fraud. Continue Reading Lorenzo v. SEC: Will the Supreme Court Further Curtail Rule 10b-5?
On July 12 and 16, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) announced two awards to whistleblowers, one its largest-ever award, approximately $30 million, and another its first award to a whistleblower living in a foreign country. These awards—along with recent proposed changes meant to bolster the Securities and Exchange Commission’s (“SEC” or “Commission”) own whistleblower regime—demonstrate that such programs likely will continue to be significant parts of the enforcement programs of both agencies and necessarily help shape their enforcement agendas in the coming years. Continue Reading CFTC Announces Two Significant Awards by Whistleblower Program
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
When the U.S. Department of Justice opened an investigation against Volkswagen AG (“VW“) and its subsidiaries Audi AG (“Audi”) and Volkswagen Group of America, VW instructed an international law firm to conduct an internal investigation and to represent it (i.e., only VW) before the U.S. Department of Justice. The lawyers, including German lawyers based in the firm’s Munich office, conducted the internal investigation throughout the Volkswagen group. Audi, though not a client of the law firm, allowed the internal investigation within its sphere and accessed the internal investigation’s findings via VW. In January 2017, VW and the U.S. Department of Justice concluded a plea agreement covering 2.0 liter diesel engines designed and produced by VW and installed in VW and Audi vehicles and 3.0 liter engines designed and produced by Audi and installed in VW vehicles. Continue Reading German Federal Constitutional Court: Seizure of Documents Relating to an Internal Investigation at German Office of International Law Firm Found Not to Violate Constitutional Rights
Yesterday the U.S. Department of Justice (“DOJ”) announced a non-prosecution agreement (“NPA”) with a Hong Kong-based subsidiary of Credit Suisse Group AG arising out of the so-called “princelings” scandals of recent years—the practice of hiring unqualified, but politically-connected, relatives of Chinese officials to garner business from state-owned firms. Per Credit Suisse’s admissions, “bankers discussed and approved the hiring of close friends and family of Chinese officials in order to secure business,” resulting in $46 million “in profits from business mandates with Chinese” state-owned enterprises. As part of the resolution, Credit Suisse agreed to a $47 million criminal penalty, to continue to cooperate with DOJ, and to enhance its compliance program, including adopting additional controls around hiring. In addition, Credit Suisse agreed to pay nearly $25 million in disgorgement and $4.8 million in prejudgment interest to the Securities and Exchange Commission (“SEC”). In its press release, DOJ stated that it was giving Credit Suisse a 15 percent discount from the bottom end of the U.S. Sentencing Guidelines for its cooperation in the investigation, while also (as discussed more below) noting steps the firm did not take that worked to limit the amount of such cooperation credit. While this is hardly the first of the “princelings” cases, it does demonstrate DOJ’s continued commitment to the cooperation framework it laid out in its FCPA Corporate Enforcement Policy (“Enforcement Policy”) late last year.
On June 27, 2018, Equifax Inc., the credit reporting agency, agreed to implement stronger data security measures under a consent order with the New York State Department of Financial Services (“NYDFS”) and seven other state banking regulators. The order imposes detailed duties on Equifax’s Board of Directors in response to criticisms raised by the regulators during an examination of Equifax’s cybersecurity and internal audit functions. The examination followed the company’s massive 2017 data breach, which exposed sensitive personal information of nearly 148 million customers. Equifax agreed to the order without admitting or denying any charges of “unsafe or unsound information security practices.” Continue Reading State Regulators Reach Settlement With Equifax in Connection With Massive Data Breach