By Brad Rosen, J.D.
In November, the CFTC made significant changes to it proposed Regulation AT which seeks to broaden the Commission’s authority over electronic and algorithmic trading. Also during the month, the 7th Circuit wrestled with the application of recently enacted anti-spoofing provisions under the Commodity Exchange Act in an appeal by the first criminal defendant prosecuted under those revisions. Meanwhile, the U.S Supreme Court has been asked to resolve a split among the circuits regarding the standards for pleading loss causation, an important element in securities fraud litigation. As the securities and derivative law community heads towards the year-end and readies for the Trump Administration to take power and the inevitable changes that will bring, Securities Regulation Daily looks back at the top 10 stories from November.
1. CFTC NEWS AND SPEECHES
CFTC significantly revises Regulation AT proposal By a 2-1 vote of the Commission, the CFTC issued a Supplemental Proposal making significant changes to Regulation Automated Trading (AT), the proposed rules issued in late 2015. The Supplemental Proposal would substantially revise proposed risk control requirements, including broadening the scope from algorithmic trading to all electronic trading and changing the types of market participants required to maintain risk controls. Other proposed revisions include reduced reporting requirements, the addition of a volume-based test to a proposed registration requirement for proprietary traders, and a change in the way the CFTC would obtain algorithmic trading software or "source code" from trading firms.See our full coverage.
2. DIRECTORS AND OFFICERS
Senators: Did Wells Fargo retaliate against whistleblowers?
In a letter to Wells Fargo's new CEO, Timothy J. Sloan, Sens. Elizabeth Warren (D-Mass), Ron Wyden (D-Ore), and Bob Menendez (D-NJ) questioned whether the bank’s filings with the Financial Industry Regulatory Authority, relating to the termination of employees for creating more than two million unauthorized checking and credit card accounts, reveal that the company took retaliatory action by reporting defamatory information on whistleblowers. The senators wrote that new information obtained from FINRA revealed that from 2011 to 2015, Wells Fargo filed over 200 termination reports (Form U5) with FINRA for employees who were fired for actions related to the unauthorized accounts scandal. See our full coverage.
3. FRAUD AND MANIPULATION 9th Cir.: Studies that smelled a rat about drug's safety should have been disclosed
A drug company that referred to positive animal study results was obligated to disclose negative results as well, a Ninth Circuit panel said. When the company affirmatively represented that, based on all of the animal studies that had been completed, a weight-loss drug was safe and likely to be approved by the FDA, it was obligated to disclose that rats given the drug got cancer. While there may have been a good-faith scientific disagreement about the study's results, the FDA's concerns about it were material to the market's assessment of the likelihood of the drug's approval (Schueneman v. Arena Pharmaceuticals, Inc., October 26, 2016, Bybee, J.). See our full coverage.
4. FRAUD AND MANIPULATION
7th Cir.: Judges ponder if Coscia’s commodities spoofing was criminal or just smart The first commodities trader prosecuted under the Commodity Exchange Act’s spoofing provision urged the Seventh Circuit to reverse his conviction on vagueness grounds. At oral argument, Michael Coscia’s counsel argued that the statute does not adequately define the conduct that constitutes the crime of spoofing. Counsel for the government stressed that the statute’s language either defines spoofing or gives an example; either way, Coscia was on notice (U.S. v. Coscia, November 10, 2016). See our full coverage.
5. BROKER DEALERS
6th Cir.: Republican groups press case over MSRB political spending rule
Three state Republican committee groups recently filed their opening brief in a case challenging the Municipal Securities Rulemaking Board’s pay-to-play rule. The MSRB’s rule imposed new limits on political spending by municipal advisers and dealers, but the Republican groups claim the rule is unconstitutional, contravenes existing federal election law, and ran afoul of the FY2016 omnibus appropriations legislation (Tennessee Republican Party v. SEC, November 16, 2016). See our full coverage.
6. SUPREME COURT DOCKET
U.S.: High Court is asked to address standards for pleading loss causation
A petition for certiorari has been filed asking the Supreme Court to look into the prerequisites for pleading loss causation. The petitioner takes issue with the 11th Circuit's rules for pleading loss causation and notes a circuit split regarding pleading loss causation based on the disclosure of a government investigation or based on reports analyzing information that is already in the public domain (Norfolk County Retirement System v. Health Management Associates, Inc., November 21, 2016). See our full coverage.7. ACCOUNTING AND AUDITING
Commission approves plan for consolidated audit trail
The SEC voted unanimously to approve a proposed national market system (NMS) plan to create, implement, and maintain a consolidated audit trail (CAT) that will allow regulators to track all activity throughout the U.S. markets in NMS securities. Chair Mary Jo White said that the central repository for trade and order data will improve regulators’ ability to conduct market research, reconstruct market events, and identify and investigate market misconduct. See our full coverage.
8. BENEFICIAL OWNERSHIP
2d Cir.: A standard lock-up agreement does not make a 'group'
A standard lock-up agreement between lead underwriters and pre-IPO shareholders is not sufficient by itself to render those parties a "group" subject to Section 16(b) disgorgement. A Second Circuit panel affirmed that the lock-up agreements in this case did not establish a "group," where there were no allegations of coordination between parties to the agreement with implications for changes in control beyond what is inherent in an IPO (Lowinger v. Morgan Stanley & Co. LLC, November 3, 2016, Winter, R.). See our full coverage.
9. FIDUCIARY DUTIES
DOL fiduciary rule withstands annuity group’s challenge
The D.C. District Court would not enjoin the Department of Labor’s fiduciary rule or otherwise sustain a challenge by the National Association for Fixed Annuities. NAFA had argued that the agency exceeded its statutory authority and improperly categorized insurance agents as fiduciaries. But the new fiduciary rule was, if anything, more compliant with the statute than the five-part test under the 1975 fiduciary regulation, and the fact that commission-based compensation is standard practice among sellers of fixed annuities does not impermissibly convert the best interest contract exemption (BICE) into a mandate (The National Association for Fixed Annuities v. Perez, November 4, 2016, Moss, R.). See our full coverage.
Commission reverses ALJ, finds failure to disclose conflicts of interest
The SEC has reversed an administrative law judge's decision finding that the failure to disclose conflicts of interest was neither intentional nor negligent. The Commission agreed that the record did not support a finding of scienter, but found that an investment adviser and its co-owners were negligent in failing to fully and fairly disclose material conflicts of interest to their clients. Each of the respondents was ordered to pay a $50,000 civil penalty (In the Matter of The Robare Group, Ltd. Mark L. Robare, and Jack L. Jones, Jr., Release No. IA-4566, November 7, 2016). See our full coverage.
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