This Annual Conference is an important opportunity for representatives of NASAA and the SEC to come together to discuss how best to accomplish our common goal of protecting investors. These annual conferences provide an opportunity to increase collaboration, communication, and cooperation for the benefit of investors, and to promote fair and orderly markets. I have been honored to have served as the SEC’s liaison to NASAA for the past four years. I know and appreciate NASAA’s mission of protecting main street investors and the critical role that state securities regulators play in the enforcement of the securities laws. You are often the first to receive complaints from investors and identify the latest scams devised to steal from investors.

I want to take this opportunity to highlight some of the recent achievements of NASAA’s members. According to the latest statistics, as of October 2012:

…continue reading: Fighting on Behalf of Investors Despite Efforts to Weaken Protections

About a year ago, we published A New Playbook for Global Securities Litigation and Regulation, in which we detailed dramatic changes in the global securities regulatory and litigation arena driven by various factors, including not only the financial crisis of 2007-2008, but also changes in tolerance in the United States to litigation brought by foreign investors against public companies listed on non-U.S. exchanges.

One year later, the regulatory environment continues to revamp with new rules being issued constantly in the United States to conform to the legislative mandates set forth in the Dodd Frank Act. The United Kingdom and European Union also seek to reinforce previous global initiatives to reform and strengthen the Pan-European financial markets.

What is more ever-present, however, is the marked increase in global enforcement activities by regulators in the United Kingdom, Canada, and the European Union, which are attempts to give teeth to the global financial reforms each jurisdiction felt necessary to potentially prevent a “repeat” of the financial crisis. This article seeks to address the increase in global securities enforcement activity and concludes that continued cooperation and coordination in enforcement activities will be required to seamlessly address the desire to strengthen global regulatory initiatives aimed at harmonizing and centralizing international securities regulation to create safer, more fundamentally sound financial markets for investors.

…continue reading: A New Playbook Part 2 — Global Securities Enforcement Stepping Up

As a public company executive officer or general counsel, how should you deal with a disgruntled employee who is or could be an award-seeking SEC whistleblower?

The short answer is, of course, very carefully. For the longer answer, read on.

The SEC’s Cultivation of Whistleblowers

Corporate managers and the SEC tend to have very different views of employees complaining of possible violations. Corporations frequently have painful experiences with troubled employees who see violations that don’t exist. Although the SEC has had similar internal experiences, when it comes to employees of public companies and financial institutions, the SEC is, in the first instance, inclined to believe the employee and not the company.

The Commission and its enforcement staff are unabashedly enthusiastic about rewarding and protecting individual whistleblowers. Congress did not impose the whistleblower award provisions in the Dodd-Frank Act on the Commission. The Commission asked for those provisions, because it believes that many companies are not adequately policed by themselves or their auditors or attorneys, and will not willingly self-report possible violations of the federal securities laws.

…continue reading: Dealing with the SEC’s Focus on Protecting Whistleblowers

Gabelli v. Sec. & Exch. Comm’n, No. 11-1274 (U.S. Feb. 27, 2013)

In a unanimous opinion authored by Chief Justice Roberts, the U.S. Supreme Court held that the five-year limitations period that governs SEC enforcement actions begins to run when the alleged fraud is complete. The Court reversed the Second Circuit on the issue, which had held that the discovery rule applied in cases where the defendant allegedly committed fraud. The SEC alleged that two mutual fund managers allowed one of the fund’s investors to engage in market timing in the fund in exchange for an investment in a separate hedge fund, but the SEC filed the action more than five years after the conduct was alleged to have taken place. The Court explained that limitations periods ordinarily begin to run upon a party’s injury, but in cases of fraud — when the injury itself is concealed — courts have developed the discovery rule to protect individuals, who are after all not required to be in a constant state of investigation. That rationale however does not apply to the SEC, whose mission is to investigate (and prevent) fraud and which has statutory authority to demand detailed records, including those extra-judicial subpoenas. Therefore, the Court concluded the discovery rule does not apply to the SEC.

Click here to view the opinion.

Anyone watching white collar and regulatory enforcement developments unfold during 2012 knows that the government’s appetite for bringing huge cases against major companies, including massive fines, extensive remedial undertakings, and extended monitorships, has continued unabated. It is, admittedly, a gloomy picture, and most commentators (and law firms) have tended to outdo each other in stressing the storm clouds and challenges.

In this treacherous environment, making investments that may help to avoid criminal problems is a wise strategy. We have previously written about the many elements of an effective corporate compliance program, and such programs can materially reduce the risk of a severe and potentially crippling white collar criminal or regulatory enforcement proceeding. In our experience, however, the single most important element of such a program is a searching and well-informed survey, conducted periodically, aimed at identifying potential compliance risks. Nowadays, virtually every well-run corporation has training programs, a code of conduct, and a comprehensive set of compliance policies; the real distinguishing features of the best programs, in our view, are the capacity of a firm to (1) spot intelligently and quickly potential risks inherent in its business and then timely implement appropriate preventive measures before serious problems arise, and (2) respond promptly and appropriately if such a program detects potential wrongdoing.

…continue reading: White Collar and Regulatory Enforcement: Emerging Trends

In many respects, 2012 was another year of aggressive SEC enforcement. The SEC’s Division of Enforcement again logged a near record number of enforcement actions. More important, the cases reflected a marked increase in the number and proportion of actions against registered investment advisers and broker-dealers, and their associated persons. This increased focus derives from a culmination of factors, including Enforcement’s creation of specialized units for the asset management industry and for structured products, the hiring of industry experts, and the close collaboration between staff from Enforcement and the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). With the expansion of the registered private fund adviser population under financial reform legislation, and the launch of an initiative to conduct focused, risk-based examinations of these new registrants, this trend will likely continue for the foreseeable future.

At the same time, in the latter half of 2012 the SEC confronted significant challenges in litigating previously filed enforcement actions against individuals in cases related to the financial crisis. Whether these cases will cause the SEC to reevaluate its approach with respect to charging decisions in the future is unknown. However, in the short term, Enforcement seems undeterred by individual litigation results in its pursuit of continued enforcement actions.

The last six months of 2012 mark the beginning of another transition for the SEC generally, and for Enforcement in particular. As the year drew to a close, Mary Schapiro announced her departure as Chairman, followed by several division directors. Most notably, on January 9, 2013, the SEC announced that Robert Khuzami would step down as Director of Enforcement. As we look ahead to 2013, a new leadership team at the SEC and in Enforcement will seek to make their own imprint on the SEC’s priorities and processes. In addition, as more time has passed since the depth of the financial crisis, Enforcement’s priorities will shift to more recent conduct and emerging industry risks.

…continue reading: 2012 Year-End Securities Enforcement Update

I plan to speak about the Enforcement Division’s and in particular the Asset Management Unit’s priorities in the hedge fund space. I’ll discuss the importance of specialization and expertise to this effort; the risks for investors; how these risks are informed by the hedge fund operating model; and how a hedge fund manager’s business may be at odds with the manager’s fiduciary duty to the fund. I’ll also discuss the types of misconduct we’ve seen crossing our desks in the Asset Management Unit, and I’ll conclude with certain best practices to avoid the specter of an enforcement referral or inquiry.

…continue reading: Enforcement Priorities in the Alternative Space

Last week, the Criminal Division of the Department of Justice and the Enforcement Division of the Securities and Exchange Commission released their long-awaited guidance on the application and enforcement of the U.S. Foreign Corrupt Practices Act. The release—a 120-page “Resource Guide”—confirms that FCPA enforcement remains a central priority of the U.S. government while simultaneously and most importantly identifying the circumstances when the government may decline to pursue an enforcement action. It is available at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.

Compliance Program Guidance

While much of the guidance reaffirms statutory interpretations that practitioners have gathered from published government settlements and opinion releases, it also provides a useful tool for companies seeking to develop FCPA compliance programs that will minimize the risk of enforcement action or severe penalties in the event those systems fail to prevent a violation. Having such a compliance program in place is particularly important given the SEC’s announcement last week that it received more than 3,000 whistleblower complaints in the first year of the new whistleblower program implemented under the Dodd-Frank Act.

The Guide identifies the hallmarks of strong compliance programs generally and addresses the elements of effective FCPA controls, reiterating that there is no “one-size-fits-all” program; an effective FCPA compliance program addresses corruption risks specific to the organization and includes meaningful unique controls to mitigate those risks. Some possible risk-based compliance controls that the Guide suggests are:

…continue reading: DOJ and SEC Issue FCPA Guidance

On September 27, 2012, the Staff of the SEC’s Office of Compliance Inspections and Examinations published a summary of examinations conducted by the SEC, the NYSE and FINRA of information barriers and practices of nineteen broker-dealers, including six of the largest broker-dealers. FINRA’s examinations included a review of the practices of smaller broker-dealers that focus on PIPE transactions. The review focused on the information walls and other systems in place to ensure compliance with regulatory requirements related to the handling of material nonpublic information, or MNPI. Mishandling of MNPI may result not only in exposure to regulatory charges, but also to civil liability and reputational damage. While the report does not constitute an order or finding by the SEC, it provides valuable insight into the Staff’s views, which will likely be reflected in future examination reports (and possibly enforcement actions) by the SEC, FINRA and the NYSE.

The report cites a number of specific concerns, including: informal and undocumented interaction between groups having MNPI and internal and external groups that have sales and trading responsibilities; senior executives designated as “above-the-wall” receiving MNPI without being subject to any monitoring or restrictions despite their managerial responsibilities for business units involved in sales and trading; the lack of a review process to evaluate trading that occurred after MNPI was provided to sales, trading or research personnel for business purposes; and gaps in oversight coverage.

…continue reading: Good Walls, Better Compliance: OCIE’s Report

Across the globe, many view insider trading as a threat to stock market integrity and efficiency. This is evidenced by the fact that, as of 2000, eighty-seven countries had enacted insider trading legislation and thirty-eight had prosecuted insider trading at least once. However, these laws vary in stringency and many of them were enacted only recently. Enforcement intensity also varies across countries, with some countries regularly enforcing insider trading laws and others allowing insiders to trade with impunity notwithstanding the laws on the books. The aim of this study, The Political Economy of Insider Trading Law and Enforcement: Law vs. Politics? International Evidence, is to provide a greater understanding of the political and economic determinants of the differential timing of insider trading legislation and enforcement across countries.

Those who oppose insider trading regulation often rely on the private interest theory of regulation to explain how these laws, despite their presumed inefficiency, are enacted to satisfy influential private interests. In contrast, those who support insider trading restrictions rely on the public interest theory of regulation to explain how insider trading regulation is enacted to address market failures. The two theories are rarely merged into a single framework. However, because insider trading and its regulation concern the distribution of property rights to use private corporate information, the issue has both private (distributional) and public (efficiency) dimensions. I take both dimensions into account in this study.

…continue reading: The Political Economy of Insider Trading Law and Enforcement