On September 23, U.S. District Judge William Pauley refused to approve a settlement between the CFTC and Deutsche Bank covering the bank’s failure to report swaps properly. Instead of rubber-stamping the settlement, the judge asked the parties for additional briefing. With that move, Judge Pauley followed in the footsteps of two of his colleagues in the Southern District of New York, judges Jed Rakoff and Victor Marrero, and several other district court judges around the country.
As I describe in more detail in an essay recently published in the Yale Law Journal Forum, “Securities Settlements in the Shadows,” and available … Read more
“Nice merger you’ve got here. It would be a shame if anything was to happen to it.”
In antitrust and related areas of economic regulation, private leveraging is risky business. Large firms that use substantial market power in one product to distort competition for a second product are attractive targets for claims of illegal tying or monopolization.
What if the actor leveraging its power is not a private company, but a government agency? Leveraging enables a regulator to use its gatekeeping authority to secure concessions that it might not have been able to achieve otherwise. Should we applaud or … Read more
The Securities and Exchange Commission announced on October 11 that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.
The new single year high for SEC enforcement actions for the fiscal year that ended September 30 included the most-ever cases involving investment advisers or investment companies (160) and the most-ever independent or standalone cases involving investment advisers or investment companies (98). The agency also reached new highs for … Read more
Oral argument in the insider trading case, Salman v. United States, prompted dozens of questions related to the key issue before the U.S Supreme Court: whether an investment banker personally benefitted directly or indirectly when he disclosed to his brother confidential information about upcoming mergers and acquisitions involving Citigroup clients, knowing that his brother was using that information to trade securities. The brother also relayed the information to the petitioner, who was a close friend and later an in-law, and the two profited mightily by purchasing stock and options to buy stock in four acquisition targets on the basis of … Read more
Last week, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced its second whistleblower retaliation case since the enactment of Dodd-Frank’s anti-retaliation provisions in 2011. The In the Matter of International Game Technology  case is also the first enforcement action to allege retaliation based on whistleblower activity that did not lead to a settlement of a substantive violation of the securities laws. The case is a stark reminder of the importance of implementing robust anti-retaliation policies that are consistently applied to alleged whistleblowers, even in those cases where the claims raised by the whistleblowers turn out … Read more
On September 27, 2016, in related appeals arising from a long-pending securities fraud class action against Vivendi, the Second Circuit ruled on several important issues, including the proof necessary to both sustain and defeat the fraud-on-the-market presumption of reliance.
Most significantly, in In re Vivendi, S.A. Securities Litigation, Nos. 15-180-cv(L), 15-208-cv(XAP) (2d Cir.), the Second Circuit rejected defendants’ per se challenge to the so-called “price maintenance” theory, which posits that confirmatory misstatements can fraudulently maintain an artificially high stock price by preventing the stock price from declining. The Second Circuit held that misstatements that do not cause stock price … Read more
The U.S. Supreme Court heard oral arguments today — transcript here — in U.S. v. Salman, the first insider trading case to land before the justices in almost 20 years. The issue: What counts as the “personal benefit” to the insider required under Dirks v. SEC for there to be illegal insider trading? Is it “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit said in U.S. v. Newman in 2014? Or is the satisfaction of helping a close relative enough, as the Ninth Circuit … Read more
Regulatory compliance is time consuming and expensive for both financial institutions and regulators—and the complexity and cost is increasing. According to Federal Financial Analytics, a policy analysis firm, the six largest U.S. banks spent $70.2 billion on compliance in 2013, twice the $34.7 billion spent in 2007.
As we explain in our recent report “Regtech rising: Automating regulation for financial institutions,” regulatory technology—regtech—has emerged to address these and other challenges.
An outgrowth of fintech, regtech uses digital technologies—including big data analytics, cloud computing and machine learning—to facilitate regulatory compliance. Regtech applications automate risk management and compliance processes, enable … Read more
The U.S. Supreme Court has a number of options when it considers its first insider trading case in almost 20 years. The case is Salman v. United States, and oral argument will be held on October 5. The facts of Salman involve Maher Kara, an investment banker at Citigroup, who shared material nonpublic information from his job with his brother, Michael, in violation of firm policy. Maher knew that his brother would use that information to trade securities. The issue the Court has agreed to address is whether passing information from one brother to another can trigger insider trading … Read more
Good morning and thank you for that very kind introduction. It’s a pleasure to speak with you all today. Before I start, I must give our standard disclaimer that the views I express today are my own and do not necessarily reflect the views of the Commission or its staff.
This morning, I want to discuss our enforcement work in the area of auditing, a topic that is sure to be of interest to all of you. There is no doubt that the work of auditors, who function as critical gatekeepers in the area of issuer reporting and disclosure, … Read more
Registrants, particularly those involved in highly regulated industries, frequently must determine whether and when a government investigation and related pending or threatened litigation must be disclosed in its periodic reports filed with the Securities and Exchange Commission (“SEC”). On September 9, 2016, the SEC filed a complaint against a company and its general counsel that should serve as a reminder for any registrant subject to a government investigation to ensure that it has robust procedures in place to review disclosure requirements in connection with government investigations in light of the facts uncovered by any internal investigation and the course of … Read more
The avalanche of accounting scandals in the late 1990s and early 2000s triggered major changes in the corporate accounting world. The Sarbanes-Oxley Act of 2002 (SOX) stampeded in, promising tightened audit regulation aimed at easing the minds of frightened market participants. Given heightened concern over excessively “chummy” relationships between corporate management and its auditors, one rule set forth in SOX requires more frequent client rotation of audit partners (every five years rather than seven) and greater time required before partners may return to the same client (five years rather than two).
While there is little doubt that this rule was … Read more
On September 13, 2016, the New York State Department of Financial Services (DFS) proposed a broad set of cybersecurity regulations for banks, insurers, and other financial institutions. The proposal is largely consistent with existing guidance (e.g., under the NIST Cybersecurity Framework or the FFIEC IT Handbook), but it goes further in some ways.
The proposed rule is the result of DFS’ focus on cybersecurity over the past several years, in which DFS conducted three industry surveys, held cybersecurity discussions with various financial institutions, and issued a letter to US regulators asking for feedback on potential cyber-specific requirements.… Read more
Designing a regulatory framework that ensures the safety of users and the public while facilitating the commercial use and consumer enjoyment of disruptive innovation is a challenging undertaking. This is particularly true in contemporary settings, where innovation is quicker and the global dissemination of that technology is much faster. The so-called “pacing problem” between innovation and regulation suggests that innovation driven by science and technology is accelerating, yet, simultaneously, federal and state agencies’ regulatory processes have slowed down as I discuss here. Given the intensifying pacing problem between regulation and innovation, regulators often struggle to keep up. The last … Read more
On August 25, 2016, the Securities and Exchange Commission (the “SEC”) adopted amendments to Form ADV to modernize and enhance information reported by investment advisers (the “Amendments” or the “Form ADV Amendments”). Among other changes, advisers will be required to use a new Schedule R for each relying adviser when using umbrella registration for multiple entities in a single advisory business and will be required to provide additional information about separately managed accounts. The adopting release also amends Rule 204-2 (the “Books and Records Rule”) under the Investment Advisers Act of … Read more
In their recent article, Jeff Schwartz and Alexandra Nelson critique the Securities and Exchange Commission’s cost-benefit analysis accompanying the Conflict Minerals Rule. This rule requires public companies using conflict minerals in their production to annually disclose whether the minerals come from certain war-torn areas such as the Democratic Republic of Congo. Schwartz and Nelson contend that the SEC’s estimate of $3-4 billion in compliance costs was grossly overstated due to numerous flaws. They point to early evidence estimating actual compliance costs at $710 million to support their criticism. The article also chastises the SEC for failing to quantify expected … Read more
In June 2014, the Supreme Court issued its second decision in the Halliburton securities fraud litigation.[i] Halliburton II reaffirmed the court’s prior decision in Basic Inc. v. Levinson,[ii] which provided plaintiffs in federal securities fraud litigation with a presumption of reliance based on the fraud on the market theory. Halliburton II also heightened the importance for both plaintiffs and defendants of using event studies at the class certification stage in order to address price impact. Price impact concerns whether allegedly fraudulent statements significantly affected market price. Event studies had already become a critical litigation tool for establishing … Read more
Courts handling shareholder class actions and other types of securities litigation have expressed different views about how often stocks should respond to material news. Despite the importance of this issue in determining whether shares trade in an efficient market, these views are not attributed to any empirical evidence. My new study, available here, examines how often companies in the S&P 500 Index exhibit a statistically significant response to earnings announcements, documenting that the typical company has a statistically significant response on either the day of or the day following the earnings announcement only about 50 percent of the time. Thus, … Read more
Financial reform has driven many changes in American governance, but the most dramatic one may prove to be the government’s cautious, but wide-ranging, embrace of a revised global regime to regulate international finance. That reform has moved the equilibrium of the separation of powers in foreign affairs towards Congress and uses the informal way that financial regulatory standards spread across the globe to do the work that customary international law used to do.
Both of these developments derive from the way that international financial cooperation has evolved. The agencies charged with implementing Dodd-Frank have embraced “soft law” in their international … Read more
The Sarbanes-Oxley Act (SOX) was enacted by the U.S. Congress in 2002 in the aftermath of a series of corporate scandals. It aims to strengthen investor protection by promoting better corporate governance and auditor independence. In particular, Sections 302 and 404 require top management to assess and certify the effectiveness of internal controls over financial reporting and an external auditor to attest to the validity of management’s assessment. Firms that cannot do so must disclose the existence and nature of their internal control weaknesses (ICWs). While a number of academic studies have documented associations between ICWs and suboptimal corporate behaviors … Read more