In September, the SEC moved to tighten up the operation of clearing and settlement operations by expanding regulation of systemically important clearing agencies and proposing to shrink the period for settlement for most broker-dealer transactions from T+3 to T+2. A muzzle on the SEC’s rulemaking process related to disclosure of political spending was extended by the funding bill signed by the president, and Wells Fargo came under intense scrutiny from Congress as a result of a scandal involving the unauthorized opening of millions of accounts. As the securities law community readies for another busy month, opening soon with oral argument before the Supreme Court in Salman v. U.S., Securities Regulation Daily looks back at the top 10 stories from September.
1. CLEARANCE AND SETTLEMENT
SEC adopts enhanced framework for clearing agencies; proposes shorter trade settlement cycle
The SEC unanimously approved final rule requirements for systemically important clearing agencies and those involved in complex transactions, such as security-based swaps. The commissioners also voted to issue a proposal to broaden the scope of those requirements to include all registered clearing agencies that act as central counterparties, central securities depositories, or securities settlement systems, and approved a proposal to seek comments on shortening the settlement cycle for most broker-dealer transactions from three business days to two. See our full coverage.
2. FRAUD AND MANIPULATION
Salman decries common-law crime of insider trading
In reply to the government’s brief in his insider trading case, which argued for a broad application of the Dirks standard for tipper liability, Bassam Salman objects that an expansion of the Dirks standard for liability would retroactively punish him for conduct he did not know would become criminal. If the Supreme Court elects to preserve the crime of insider trading in the absence of legislation, it should narrowly construe Dirks to require proof that the insider sought a pecuniary benefit, Salman argued. Oral argument before the Supreme Court in this closely watched case is scheduled for October 5. See our full coverage.
Senators urge SEC investigation of Wells Fargo
Senators Jeff Merkley (D-Ore), Elizabeth Warren (D-Mass), and Bob Menendez (D-NJ) sent a letter to the SEC, urging it to investigate whether Wells Fargo and senior officials violated laws by misleading investors and firing whistleblowers while the bank oversaw the creation of millions of unauthorized, fraudulent accounts. The senators’ press release notes that Wells Fargo’s actions are already under review by the Department of Justice, state attorneys general, Department of Labor, and others, and concludes that: "The SEC should join in these efforts to ensure that Wells Fargo and its senior executives are held accountable." See our full coverage. Further coverage of Wells Fargo’s busy September can be found here and here on the issue of forfeiture of executive compensation, here on the issue of forced arbitration clauses, and here on swaps-related trouble with the CFTC. We also provided coverage of the inevitable class action filed against the bank related to the scandal.
4. LEGISLATIVE ACTIVITY
President signs funding bill with SEC politics rider
President Obama signed into law the temporary funding bill passed by the Senate and House at nearly the last chance before the federal government would have begun to shut down. The continuing resolution (H.R. 5325) will keep the government open until December 9, but it also contains a provision extending a ban on the SEC’s ability to finalize rules requiring companies to make disclosures about their political donations. The ban was part of last year’s omnibus appropriations legislation. See our full coverage.
5. FOREIGN CORRUPT PRACTICES ACT
Och-Ziff will pay nearly $200 million in SEC’s first-ever FCPA action against a hedge fund
Och-Ziff Capital Management and its executives agreed to pay hefty monetary penalties for violating the FCPA by paying bribes to high-level officials in Africa. The illegal activity came to light during the SEC’s sweep of sovereign wealth funds, according to Enforcement Director Andrew Ceresney, and resulted in the Commission’s first FCPA case against a hedge fund and financial services firm. See our full coverage.
6. FRAUD AND MANIPULATION
Royal Bank of Scotland suffers two court losses over RMBS sales
A federal court in Kansas denied cross-motions for summary judgment on whether the statute-of-limitations period had run on claims by the National Credit Union Administration involving the sale of mortgage-backed securities by Royal Bank of Scotland. The NCUA later announced a $1.1-billion settlement with the bank. The Federal Housing Finance Agency also succeeded in striking loss causation defenses to claims that the RBS and certain affiliates violated state laws by making material misrepresentations in their sales of residential mortgage-backed securities. See our coverage of the NCUA case here and the FHFA case here.
7. MUNICIPAL SECURITIES NEWS
SEC wins jury trial against City of Miami, director in bond fraud
In the first federal jury trial by the SEC against a municipality or municipal officer for violations of the federal securities laws, a jury in federal district court found the City of Miami and its former budget director liable on multiple counts of securities fraud in an SEC enforcement action in connection with 2009 bond offerings. The SEC charged the defendants with making false statements and concealing deficits in the city’s general fund, giving a misleading impression of financial health to investors, in addition to violating a previous administrative order for similar conduct. See our full coverage.
SEC: There is no statute of limitations on disgorgement
The SEC rejected an investment adviser’s argument that the five-year catch-all statute of limitations in 28 U.S.C. § 2462 barred a disgorgement claim against him. Finding that the adviser violated the Investment Advisers Act by recommending unsuitably risky investments in Madoff feeder funds without due diligence, the Commission determined that civil penalties were time-barred but equitable remedies were still on the table. The SEC ordered $3 million in disgorgement, plus interest, and barred the adviser. See our full coverage. In depth analysis of SEC enforcement actions in the post-Gabelli environment was provided by Marc Powers and his team at BakerHostetler.
Tilton explains new theory on unfairness of SEC in-house cases
Lawyers for Lynn Tilton told U.S. District Judge Ronnie Abrams that an appellate decision that ended her first law suit challenging the SEC’s administrative law judges should not bar her new lawsuit taking on the SEC’s in-house proceedings. After the Second Circuit rebuffed her Appointments Clause claims, Tilton pivoted her legal strategy to focus on the SEC’s rules of practice, which she claims are facially unfair and unequally applied. See our full coverage.
10. EXCHANGES AND MARKET REGULATION
Exchanges did not breach contracts by allowing faster market data access
The Second Circuit Court of Appeals affirmed the dismissal of a breach of contract action brought against several national exchanges for allegedly providing an unfair data advantage to high frequency traders. The court noted that, while Regulation NMS requires that exchanges transmit market data to the information processor and to preferred customers at the same time, there was no requirement that customers receive the data at the same time. See our full coverage.
MainStory: ClearanceSettlement CommodityFutures CorporateGovernance Enforcement ExchangesMarketRegulation FraudManipulation HedgeFundsNews InvestmentAdvisers MunicipalSecuritiesNews SECNewsSpeeches WhistleblowerNews
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