GREAT CRIMINAL LAW SUBMISSIONS BY OUR FOX COLLEAGUES

Posted by Ernest E. Badway on May 16, 2012

We wanted to share with you a great article co-authored y one of our partners, Alain Leibman, along with our colleague, Jana Volante.  The article's title is "Attacking Eyewitness Identification Testimony, in BNA's Criminal Law Reporter, and is located at http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294971709.

Alain also composed an ensemble piece in the ABA's journal called, Litigation, and that peice is located at http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=15032385703.

IS IT POSSIBLE TO FIND CAPITAL FORMATION SUCCESS OVERSEAS?

Posted by Ernest E. Badway on May 16, 2012

In its never ending quest to find suitable ways to address capital formation issues in the United States, the SEC’s Division of Corporation Finance is looking to see if foreign jurisdictions handle some of these issues better and if it could be applied in the United States. 

For example, the SEC is looking to see if other jurisdictions handle solicitations and advertising of private offerings differently.  Coupled with this item, Corporation Finance is also reviewing the regulation of private issuers as well.  In particular, Corporation Finance is looking at private placements and general solicitation bans in light of the new age of social media, and 24 hour news coverage.  One consideration is if the current regulatory scheme of a registered offering regime is relevant when one considers the way information is received in this type of market and the attempts to encourage investors through these communications.

The SEC is intrigued at the way foreign private issuers handle these matters overseas and if its current system should remain in place.  Historically, foreign private issuers in the United States ahd been the traditional large cap companies.  However, this model is changing, and it is unclear if the SEC’s current regulatory framework has adapted.

Finally, the SEC should be applauded for its efforts in realizing not all regulation needs to be addressed from an American standpoint, but that certain goals could be achieved by following an overseas model.

BADWAY AND SCHNAPP AUTHOR ARTICLE ON SEC OBEY-THE-LAW INJUNCTIONS

Posted by Ernest E. Badway on May 15, 2012

Ernie Badway and Dan Schnapp have authored the article, "The Problem with SEC Obey-the-Law Injnuctions and Their Chances of Survival," in the most recent edition of the Journal of Taxation and Regulation of Financial Institutions.  The link follows:  http://www.civicresearchinstitute.com/online/article_abstract.php?pid=2&aid=3846&iid=539.

THE SEC'S OCIE'S SUMMER PLANS

Posted by Ernest E. Badway on May 15, 2012

The SEC’s Office of Compliance Inspections and Examinations announced that it will increase their examinations of newly registered private fund advisers starting this summer. 

These examinations are being done in conjunction with those hedge fund and private equity advisers previously registered with the Commission as a result of the Dodd-Frank Act.  The SEC Staff made it abundantly clear that these newly registered advisers will be examined, pursuant to a set of risk factors and not by the traditional OCIE exam cycle.  The OCIE Staff will also look at the level of risk and determine the number of times new registrants will be examined in the future.  For this determination, the SEC Staff will look at past regulatory or legal violations; aberrational performance; the size of the fund determines the risk; the advisors complexity; problems internally; when the last exam occurred; and significant changes and assets for business.  Nonetheless, the SEC Staff cautioned that they will look at both quality and quantity factors, and that these risk factors are very similar to those already in place for previous registrants. 

In short, OCIE intends to utilize risk based assessment examinations in the future.

SEC STAFF HIGHLY CRITICAL OF WELLS NOTICE DODD FRANK PROVISION

Posted by Ernest E. Badway on May 14, 2012

At a recent corporate counsel meeting, the SEC’s New York Regional Director made a highly critical statment of the Dodd-Frank provision requiring the SEC either to bring a case or to inform the Enforcement Director that no case shall be filed within 180 days of a Wells Notice. 

As many are aware, the Dodd-Frank Act required that the SEC make a decision within 180 days once a Wells Notice is issued.  A Wells Notice is when the SEC Staff provides a potential person involved in an investigation with notice that it intends to recommend or is considering recommending to the Commission that some action or proceeding should be filed against that person.  The New York Regional Director seems to suggest that there is simply not enough time for the SEC Staff to decide if such an action should be brought.  He further opines that this limitation is detrimental to the SEC's enforcement program since it may be the case the SEC has not completed its factual investigation.

Apparently, the New York Regional Director simply forgot the "clock" is within the SEC Staff's control.  That is, if the investigation is not complete, the SEC Staff should not issue a Wells Notice.  Further, one wonders the reason for issuing a Wells Notice prior to the SEC Staff completing its investigation, one would think the SEC Staff would wait!!   

Clearly, as far back as the inception of the Wells process, it has always been contemplated that, before the SEC Staff issued a Wells Notice to a potential defendant or respondent, the SEC Staff was ready to proceed with the matter.  It is troubling that the New York Regional Director claims that there should be more investigation after a Wells Notice is issued.  Such an approach leaves much to be desired.

In sum, the Dodd-Frank Act provision seems reasonable in light of accepted practice, and should be considered as a method for ensuring actions proceed expeditiously.

FINRA As The SRO For RIAs, Not So Fast

Posted by Joshua Horn on May 14, 2012

The battle lines are being drawn over Congressman Bachus' bill which would authorize one or more self-regulatory organizations for investments advisers.  Many have believed that FINRA would be the obvious choice to take on this new role.  Not Congresswoman Maxine Waters, the second-highest ranking Democrat on the Financial Services Committee; she favors the SEC keeping oversight over investment advisers.  Her stated preference is to properly fund the SEC so that it can effectuate proper oversight of investments advisers.

Congresswoman Waters thinks that the SEC charging a reasonable user fee would be the most cost effective approach.  This approach was also endorsed through the cost analysis of Boston Consulting Group who concluded that funding a new SRO or having FINRA serve in that capacity would be significantly more expensive than properly funding the SEC.  Conversely, FINRA has circulated its own cost analysis, which attacks the Boston Consulting Group study arguing that it underestimated FINRA's ability to leverage existing staff, district offices and technology.  In other words, the ramp-up costs for FINRA to be the SRO are not as great as that being claimed.

As the debate heats up, cost will likely be a driving factor to the decision regarding who will serve as the SRO for investment advisers.  Considering the institutional knowledge that the SEC has over investment advisers, it seems to me that the most likely and cost effective approach will be a better funded SEC serving as the SRO.  The one thing that has remained clear throughout the debate, however, is that investment advisers will have an SRO at some point.  That will surely be a reality.

Volcker Rule Conformance Period Clarified

Posted by Amit Shah on May 11, 2012

The Board of Governors of the Federal Reserve, the SEC and the CFTC jointly confirmed recently that entities subject to the Volcker Rule would the have the full two year period provided by Section 619 of the Dodd-Frank Act to fully conform its activities and investments, unless the Board extends the conformance period.  Banking entities now have until July 21, 2014 to fully conform their activities and investments to the Volcker Rule. 

The Volcker Rule has caused significant debate among politicians, regulators and Wall Street, making it possible, if not probable, that the conformance period may be extended in the future.  However, some regulators have stated that they expect a final Volcker Rule to be completed by September and possibly earlier.  

OCIE'S PLAN TO REGULATE PRIVATE FUND ADVISORS

Posted by Ernest E. Badway on May 11, 2012

OCIE is intending to review newly registered hedge and private equity fund advisers by focusing in on certain priorities.

In particular, OCIE will review due diligence practices; fraud indicators; unknown service providers; problem custody arrangements; insider trading and front running issues; and preferential treatment to determine if there are conflicts of interest.  OCIE also intends to take a global approach and not look at any one particular issue.  OCIE's focus will, most certainly, focus in on complex entities with high frequency trading.  Such a review will include an SEC staff examination of fund governance; compliance, audit and management functions; protection of assets; and the transmission of performance data and advertising. 

These principals will guide the OCIE staff in conducting examinations along with the new OCIE examination manual. 

SEC'S POSITION ON PRIVATE SUITS AFTER MORRISON

Posted by Ernest E. Badway on May 10, 2012

In response to the Supreme Court’s decision in Morrison v. National Australia Bank where the Supreme Court said that there was no private right of action for lawsuits that involved transnational fraud, the SEC has taken a position that has angered some. 

As many know, the Dodd-Frank Act confirmed the SEC's jurisdiction as it relates to potential foreign involvement.  However, the SEC was not so quick to support such a stance for private litigants.  In particular, the SEC believes that Congress could either clarify the Morrison test or take no action.

This no action position has engendered much criticism from SEC Commissioner Aguilar.  Commissioner Aguilar believes that Congress should revert to the pre Morrison test of conduct and effect, and ignore the Supreme Court’s s decision.

Accordingly, it will be interesting to see if Congress responds to this recommendation from the SEC, since it required the SEC , through the Dodd-Frank Act, to conduct this study and make this report to Congress. 

FINRA ARBITRATORS AND COUNTERCLAIMS

Posted by Ernest E. Badway on May 09, 2012

The United States District Court for the District of Massachusetts, recently, ruled that a FINRA Arbitrator must consider any counterclaims in an action brought against Trustees of a profit sharing plan. 

The Federal Court had refused the argument advanced by the Plan's Trustees that naming them individually was improper under FINRA’s rules.  The Court found that such claims were actually being brought in their capacity as Trustees, and, as such, were subject to a counterclaim in the FINRA Arbitration.  The Court believed that such counterclaims should be heard in a FINRA proceeding.

This decision evidences the reach that Courts will traverse to ensure that arbitration is the preferred forum for these matters, and not piecemeal litigation in courts.