Securities Regulation Daily SEC may not apply Dodd-Frank collateral bar retroactively
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Wednesday, January 18, 2017

SEC may not apply Dodd-Frank collateral bar retroactively

A D.C. Circuit panel has concluded that the SEC applied a collateral bar order in an impermissibly retroactive manner. The Commission had imposed an industry-wide bar from association against an individual for conduct occurring before the Dodd-Frank Act empowered it to impose collateral bars. Because the Commission attached new legal consequences to events occurring before the enactment of Dodd-Frank, the collateral bar was an impermissibly retroactive penalty (Bartko v. SEC, January 17, 2017, Henderson, K.).

Between 2004 and 2005, Gregory Bartko was behind a scheme to defraud investors through the sale of securities. In 2010, Bartko received a 23-year prison sentence upon being convicted of conspiracy, mail fraud, and selling unregistered securities. After his conviction, the Commission instituted a follow-on administrative proceeding in which Bartko was permanently barred from association with every class of securities market participants.

Collateral bar. In 2010, the Dodd-Frank Act (Section 925) gave the Commission the power to impose collateral bars. Before that, the D.C. Circuit had found that the Commission could not bar an individual from a class with which he had no association. The Act also added two new classes to the Commission's purview: municipal advisors and nationally recognized statistical rating organizations (NRSROs). Post-Dodd-Frank, then, the Commission has the ability to bar a securities market participant from six listed classes based on misconduct in one class.

Bartko argued that the imposition of the collateral bar constituted an impermissibly retroactive penalty because it was premised on pre-Dodd-Frank conduct. The panel agreed, noting that the presumption against retroactive legislation has deep roots, including being embedded in several Constitutional provisions. Not all retroactive application is impermissible, however, and the question then becomes whether the rule established an interpretation that changes the legal landscape.

Koch v. SEC. The D.C. Circuit applied these principles in a similar case in 2015. Koch v. SEC involved an investment adviser who had been barred from associating with all six classes of market participants, including municipal advisors and NRSROs, for conduct occurring before Dodd-Frank's enactment. The panel held that the bar was impermissibly retroactive because it attached new legal consequences to the adviser's conduct and because Congress did not explicitly authorize retroactive application of Dodd-Frank. The Commission later announced that it would not appeal Koch and that it would grant requests to vacate bars from association with municipal advisors and NRSROs that were imposed based on conduct before the effective date of Dodd-Frank.

No association. In this case, Bartko had no cognizable association with the investment adviser, municipal securities dealer, or transfer agent classes when his misconduct occurred. The Commission, however, barred him from association with those classes. As it did in Koch, the panel concluded that the Commission's use of the collateral bar was an impermissibly retroactive penalty, stating that it constituted a quintessential example of attaching new legal consequences to events before Dodd-Frank's enactment.

The Commission argued that Koch, which addressed only the newly-regulated municipal advisor and NRSRO classes, implicitly allowed the retroactive application of a collateral bar on the other four classes. The panel disagreed, stating that such a bar has undeniable impermissibly retroactive ramification and that the changes after Dodd-Frank were new legal consequences going beyond permissible procedural changes.

Unclean hands? The panel went on to reject Bartko's argument that the Commission erred in failing to consider his unclean hands defense. Bartko maintained that the government had "unclean hands" based on its misconduct during his criminal trial and on improper collusion between the governmental authorities and argued that the Commission should have been barred from using his conviction as the basis of its follow-on action. The panel noted that there is a high bar to invoking the unclean hands defense against a governmental agency and that it was not met in this case. There was nothing in the record, the panel explained, to cast doubt on the conclusion that any prejudice stemming from government misconduct during Bartko's investigation and prosecution failed to rise to a constitutional level.

The case is No. 14-1070.

Attorneys: Gregory Bartko, pro se. Daniel Matro for the SEC.

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