Securities Litigation

In a triumph of positive statutory law over Chevron deference to the administrative state, the unanimous Supreme Court held this week that Dodd-Frank whistleblower protections require SEC reporting, because the statute defines "whistleblower" as someone who reports "to the Commission."

I'm relieved to know the Court agrees that "'When a statute includes an explicit definition, we must follow that definition,' even if it varies from a term's ordinary meaning. This principle resolves the question before us." Slip Op. § II at 9. The Ninth Circuit and the U.S. Solicitor General ...

After several years of examination focus and a series of enforcement actions, the SEC's Enforcement Division on February 12 announced a "Share Class Selection Disclosure Initiative" in an attempt to level-set industry compliance and bring investment-advisers in from the cold. See SEC Press Release No. 2018-15.

Investment advisers have a fiduciary duty to their customers. Investment Advisers Act of 1940 ("Advisers Act") § 206(2). That precludes self-interesting action and includes full disclosure of all compensation conflicts. And the Act prohibits Advisers from making ...

A pair of FINRA Rule revisions designed to protect seniors from financial exploitation become effective February 5. The Rules require member firms to request "Trusted Contact Person" information and impose short account-disbursement holds upon reasonable suspicion of financial exploitation.

FINRA Rule 2165 applies to retail accounts held by a "Specified Adult," defined as at least 65 years old, or otherwise impaired and unable to protect her own interests. The Rule allows a 15-day temporary hold on disbursements from an account upon reasonable suspicion of financial ...

On January 12, the US Supreme Court agreed to review the constitutionality of the SEC's administrative law judges.

On November 29, 2017, the SEC did an abrupt about-face, telling the Court it now regards its ALJs as inferior officers and no longer would defend the lower-court decisions against Lucia. The next day, the SEC itself ratified the appointments of its ALJs. Nevertheless, the Commission argued that the Court should grant cert, appointing an amicus to defend the D.C. Circuit's opinion and considering the "for-cause" removal requirement for current ALJs.

It remains to be seen ...

The Sixth Circuit recently affirmed that failure-to-supervise claims against a brokerage firm over outside business activities it knew nothing about nevertheless were arbitrable under FINRA Rule 12200(2) as "arising in connection with the business activities of the member" firm.

The firm's representative worked together with an outside financial advisor and others to divert a firm customer's assets from an outside bank account to a fraudulent outside business activity. The customers' funds transferred into the brokerage account, out to a bank account and from there to the ...

On November 29, the SEC did an about-face and admitted its ALJs are "inferior officers" (not merely employees) subject to the Constitution's Article II appointment provisions. The Solicitor General's brief on behalf of the Commission sided with the argument of its opponent, Raymond Lucia; DOJ urged the Supreme Court to resolve a circuit split by ruling against the SEC's litigation position below and overturning the prior decision by the Court of Appeals for the DC Circuit.

The next day, the Commission took formal action ratifying the appointment of its ALJs, thus complying with the ...

Morgan Stanley announced October 30 that it would exit the Protocol for Broker Recruiting, as part of strategy "to refocus [recruiting] resources on existing talent."

Adopted in 2004, the Protocol is a broad industry covenant-not-to-sue meant to establish basic free-fire rules for recruiting among its 1500 or so signatories. For years, firms recruited heavily from one another to boost assets under management [sometimes called "prisoner exchanges"], using techniques like front-money bonuses paid through wasting promissory notes. The Protocol was instituted to reduce the ...

The Tennessee Supreme Court recently held that Tennessee's Trust Code and broad trust-instruments authorize a Trustee's execution of a pre-dispute arbitration clause. That isn't a per se breach of fiduciary duty, but the Court left that door slightly ajar. Moreover, a third-party relying on it will have to litigate whether it binds a non-signatory beneficiary.

The Guardian of tragically injured minor child sued the Trustees and financial advisors (and their firms) for breach of fiduciary and other duties in depletion of the child's personal-injury-proceeds Trust. The ...

Cut, paste and forward ‒ just as the boss instructed. But Lorenzo's email to two clients was misleading, so the SEC filed an enforcement action. The ALJ held Lorenzo liable for violating anti-fraud provisions and imposed a C&D plus a $15,000 penalty. The full Commission reviewed the case de novo and imposed a permanent industry bar along with the $15,000 fine.

On appeal, a split panel of the D.C. Circuit affirmed on liability but remanded to the Commission for reconsideration of the penalty. The majority held Lorenzo was not a "maker" of a Rule 10b-5(b) "false statement," but his ...

The SEC announced two cyber-enforcement initiatives on September 25. The Commission will establish a Cyber Unit within the Enforcement Division to address misconduct like:

• Market manipulation through social-media "fake news";
• Hacking to obtain material nonpublic information (ahem);
• Blockchain- and bitcoin-like violations;
• Dark web misconduct;
• Hacking retail accounts;
• Cyber-threats to trading and market infrastructure.

The Commission also announced a Retail Strategy Task Force to identify and respond to cyber-threats targeting retail investors.

The SEC's release ...

In an Opinion highlighting the Circuit split over the constitutionality of SEC administrative law judges ("ALJs"), the Fifth Circuit recently stayed an FDIC civil-penalty and bar order against a Bank director, pending complete judicial review.

Petitioner Burgess is a bank director (and former officer) prosecuted administratively by the FDIC for improper expense practices and misuse of bank property. An FDIC ALJ conducted the hearing and recommended civil penalties and a banking bar. The FDIC largely adopted those findings and conclusions. Burgess moved to stay ...

The Department of Labor has received OMB certification, and sought expedited notice-and-comment, for a rule change that would postpone the full implementation deadline for its Fiduciary Rule from January 1, 2018 until July 1, 2019.

The DOL's Fiduciary Rule became effective June 9, but its transition-period deadline for full implementation of the Best Interest Contract and other requirements was set for January 1, 2018.

This week, the agency published, for quick comment, a proposed rule change extending that full-implementation through July 1, 2019. DOL says it needs the ...

A Second Circuit Panel held that the Supreme Court's Salman decision abrogated the Circuit's Newman requirement of a "close personal relationship" under the "gift theory" of insider-trading; the dissent claims the Panel decision instead abrogates Dirks' "trading relative or friend" limitation.

Martoma was a portfolio manager at SAC Capital, who traded and tipped Cohen on inside information from scientists developing a potential Alzheimer's drug at Wyeth and Elan. He was convicted of insider-trading under the "gift theory" recognized by the Supreme Court's Dirks opinion ...

Trader Joseph Ruggieri finally prevailed last week, when SEC Commissioners Stein and Piwowar split on whether Enforcement proved his four trades (in 2010-2011) were made on inside information.

In September of 2015, SEC ALJ Patil held for Ruggieri, finding that two of the six accused trades were independently justified and the other four lacked proof of tipper-benefit (applying Newman). See T. Potter, SEC's Home Court Loss Undermines DOJ's Newman Argument, Law360 (Sept. 17, 2015) and here.

The Enforcement Staff sought Commission review, which was granted in December 2015 ...

Last week, the MSRB issued "guidance" on the application of Rule G-42 conduct standards for Municipal Advisors in conduit issues. The "guidance" highlights ambiguities from the "for or on behalf" language in the MA Rule when applied to conduit issues (where the MA interacts with both the municipal issuer and the conduit borrower).

Beyond issue-spotting though, the "guidance" merely urges care and defers to the SEC for after-the-fact "facts and circumstances" determinations. In fact, it includes a "don't ask us" disclaimer: These "are interpretive issues that are solely within ...

The Sixth Circuit Court of Appeals today dismissed a suit by the Tennessee, Georgia and New York Republican parties challenging the constitutionality of an MSRB extending pay-to-play prohibition to municipal advisors. The Court held the GOP lacked standing to challenge the rules.

MSRB Rule G-37 prohibits pay-to-play practices in connection with the issuance of municipal securities. It's been in place since 1994 and survived prior court challenges.

In Dodd-Frank, Congress mandated a municipal-advisor registration and regulatory regime to reach those advisers in the ...

A unanimous Supreme Court held June 5 that SEC disgorgement is a "penalty" subject to five-year limitations under 28 U.S.C. §2462 and Gabelli v. SEC, 568 U.S. 442 (2013)(5-year limitations applies to civil monetary penalties).

Justice Sotomayor's Opinion started with the premise that a "penalty is a punishment … imposed and enforced by the State," redressing a public wrong for punishment and deterrence, rather than victim compensation. Slip Op. at 5-7. She rejected all three of the SEC's standard arguments.

First, the Court held that deterrence is not a legitimate non-punitive ...

On June 1, new SEC Chair Clayton returned the SEC to the arena in the policy debate surrounding the DOL's Fiduciary Rule. Clayton's public statement responded to a direct invitation for SEC participation by DOL Secretary Acosta in his Wall St. Journal op-ed last week. Acosta used the article to announce there would be no further delay in the DOL Rule, despite continuing study.

In a masterful understatement without apparent irony, the Chair noted: "The SEC has been reviewing this area for some time, including through the RAND study of investor perspectives commissioned in 2006, the ...

Last week Labor Secretary Acosta chose a Wall Street Journal op-ed to announce DOL's decision not to delay the "fiduciary rule" past the once-extended June 9 effective date. See A. Acosta, Deregulators Must Follow the Law, so Regulators Will Too¸ Wall St. J. at A19 (May 23, 2017); our blog, here: blogs/securities-litigation/2017/05/25/dol-wont-delay-fiduciary-rule-past-june-9/

This week, opponents answered, with the lead counsel for the industry's litigation challenge summarizing those arguments on the same op-ed page. See E. Scalia, Godzilla (the Fiduciary Rule) Ate ...

Finally, there's voice of reason entering the policy harangue over the Department of Labor's Fiduciary Rule ... even if it's coming through an unusual outlet. In a May 23 Wall Street Journal opinion piece, new Labor Secretary Acosta announced that DOL won't further delay the implementation of DOL's Fiduciary Rule past June 9.

To recap the bidding:

Tired of foot-dragging by the SEC and Wall Street on adopting an industry-wide fiduciary standard (notwithstanding everyone's agreement in principle), the Obama administration spent over 6 years forging ahead through the Department of ...

On Monday, May 22, the SEC stayed all its administrative proceedings assigned to an ALJ in which a Respondent has an option for review by the 10^th Circuit. (Securities laws provide appellate review of SEC administrative proceedings in the Respondent's choice of the Circuit for her State of residence or the D.C. Circuit). The stay will remain in place until Supreme Court action on the agency's expected cert petition in Bandimere or further Commission order.

In Bandimere v. SEC, 844 F. 3d 11689 (10^th Cir. 2016), reh'g denied, 2017 WL 1717498 (May 3, 2017)(No. 15-9586), the Tenth Circuit ...

The Department of Labor yesterday adopted a rule delaying the April 10 effective date of its "Fiduciary Rule" for 60 days. The delay gives Labor time to complete the re-study mandated by Trump's February executive order.

DOL could only delay the Rule through a formal rule making process. It did so, even though public comments ran 12:1 against delay. It will need further formal rule making for any other changes.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has ...

The IRS released guidance this week announcing that it will not apply IRC § 4975 excise taxes (15% on prohibited transactions) and related reporting requirements "with respect to any transaction or agreement to which the DOL's temporary enforcement policy, or other subsequent related enforcement guidance, would apply."

On March 13, DOL issued its Field Assistance Bulletin saying it would forbear enforcement of the Fiduciary Duty Rule if Labor hasn't finished its review by the April 10 effective date. The review (and potential delay in implementation) of the Rule was ordered by an ...

The Department of Labor's "fiduciary duty" Rule continues to get more bollixed up. DOL announced a temporary enforcement policy that will give a "free pass" for any violations (a) in the gap between effective date and delay, or (b) tardy good-faith compliance if there's no delay.

The Rule becomes effective on April 10, requiring among others a fiduciary acknowledgement (even though full BIC contract compliance won't be required until January 1, 2018). DOL published a proposed delay for 15-day comment on March 2, with a broader "merits" comment period extending thereafter. If ...

The two remaining SEC Commissioners agreed March 1 to propose amendments "requiring" municipal securities issuers to disclose non-security financial obligations and material events occurring in other outstanding obligations.

The Municipal Securities Rulemaking Board ("MSRB") and other market participants have argued for years that undisclosed bank loans, direct participations, and material events occurring with an issuer's other outstanding obligations remained "blind spots" to market transparency, and to investors' ability to evaluate issuers' financial status ...

The US Department of Labor today proposed a 60-day extension (through June 9) for the effective date of its Fiduciary Duty Rule and related exemptions.

The extension would give DOL some time to complete the re-analyses directed in the President's February 3 Memo. The Memo directs DOL to examine whether the Rule "may adversely affect access to retirement advice and requires an updated economic and legal impact analysis. We discussed that Memo here: 2017/02/09/dol-fiduciary-rule-still-april-10-implementation/

The Department will collect public comment on the proposed ...

The Department of Labor's Fiduciary Duty Rule remains on track for April 10 implementation, notwithstanding a maelstrom of hype about it.

Nearly everyone expected the new administration would delay the Rule - and many reported that done. The opposition claimed delay was Wall Street's license to steal from your grandparents' retirement savings.

But when actually signed, the Presidential Memorandum did not direct DOL to delay implementation of the Rule. Instead, it instructed DOL to study it to see if it posed unintended adverse consequences for investors by reduced access or ...

Effective April 3, 2017, all FINRA arbitration participants (except pro se parties) must use FINRA's web-based DR-Portal to file and serve documents in both customer and industry arbitrations.

Pro se parties may elect to use the Portal or opt-out, using traditional filing and service methods instead.

Exceptions to Portal service include most items involving new or non-parties, documents produced and permanent injunction claims:

• pro se customers who do not elect to use the Party Portal;
• documents produced in response to discovery requests or pursuant to the Discovery Guide;

After markets closed on Friday the 13^th, the U.S. Department of Justice ("DOJ") announced an $864 million settlement regarding Moody's credit ratings of residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs") leading up to the financial crisis.

Moody's will pay a $437.5 civil penalty to DOJ to resolve civil FIRREA claims and another $426.3 million to resolve potential claims by 21 State Attorneys General. The agreement also requires Moody's to implement additional compliance measures.

Moody's release said the settlement "removes ...

One of three counts in Volkswagen's recent $4.3 billion guilty-plea was for obstruction of justice arising from a litigation-hold botched by house counsel.

As VW prepared to admit the defeat-device problems to US regulators, VW Group of America ("GOA") informed VW AG of a forthcoming litigation hold. The litigation holds were not issued simultaneously across the enterprise: VW GOA proposed its hold on August 26, 2015 but issued it on August 28. VW AG's corresponding hold was proposed on August 31, and issued September 1.

In the interim, in-house counsel Attorney A communicated with ...

On Friday, January 13, the Supreme Court granted certiorari to resolve a Circuit split on the extent to which SEC enforcement actions are restricted by the five-year statute of limitations in 28 U.S.C. § 2462.

Section 2462 sets a five-year limitations period "for the enforcement of any civil fine, penalty, or forfeiture." The Supreme Court has held those limitations accrue when the violation occurs and the SEC does not benefit from a "discovery rule." Gabelli v. SEC, 133 S. Ct. 1216, 1220 (2013).

But there's disagreement over whether it applies to the commonly-sought disgorgement and ...

OCIE released its 2017 exam priorities on January 12. The priorities list was most notable for being shorter than prior years. But that likely means only more focus, rather than less vigor. Here is the list with some quick takes on its content:

Retail Investors:

Robo-adviser and wrap-fee programs (under scrutiny too for the DOL fiduciary rule - whether it stays or goes)

ETFs (due to increasing popularity)

Un-examined IA's (recognizing resource scarcity and the growth of SEC-registered IAs)

Recidivist Reps (the subject of several Wall St. Journal articles last year)

Multi-branch ...

The Port Authority of New York and New Jersey has admitted wrongdoing and agreed to pay a $400,000 penalty to settle SEC charges that it failed to adequately disclose project risks to investors purchasing $2.3 billion in bonds to fund the Pulaski Skyway. The settlement includes additional remedial measures.

The Authority's internal discussions raised substantial doubts about the project's lawful authorization, and risks of bondholder challenges. Yet, the issuer's offering documents made no mention of those risks and represented the proceeds would be used for projects ...

On January 4, new President and CEO Richard Cook issued FINRA's Annual Regulatory and Examination Priorities Letter. This year's list in summary is:

New for 2017:

Targeted electronic off-site reviews "on select firms not scheduled for cycle exams."
An annual summary report of key exam findings on selected issues
More resources for small firms, including:
- Compliance calendar;
- Compliance service provide directory.

High-Risk / Recidivist Brokers

Dedicated exam group
Supervisory procedures and due-diligence
Branch inspections

Sales Practices

Seniors: fraud and abuse; ...

The Tenth Circuit recently held that the SEC's in-house judges are "inferior officers" hired in violation of Article II's Appointment Clauses, creating a split with the D.C. Circuit over the issue.

The Tenth Circuit held that the SEC's ALJs were (1) positions "established by law," with (2) "duties, salary, and means of appointment … specified by statute," and (3) "exercise significant discretion" in "carrying out important functions." Thus, they were similar to the special tax judges held inferior officers in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991). See ...

A unanimous Supreme Court reaffirmed the "gifting" theory of insider trading under Dirks and rejected Newman "to the extent" it required more.

The Court's long-standing rule in Dirks v. SEC, 463 U.S. 646, 664 (1983) allows a jury to infer a tipper's personal benefit "where the tipper receives something of value in exchange for the tip or 'makes a fit of confidential information to a trading relative or friend.'"

Recently, the Second Circuit appeared to limit the "gifting" theory. In United States v. Newman, 773 F.3d 438, 452 (2^nd Cir. 2014), cert. denied, 577 U.S. ___ (2015), the Court ...

In late October, FINRA issued a sweep exam, commanding firms to produce 15 categories of documents about firm's cross-selling programs over a 5-year span. The sweep seeks information on cross-selling, including incentives and compensation, tracking and performance metrics, complaints and discipline, compliance and supervision, among others. The letter also imposes a November 15 response deadline.

The sweep letter does not expressly refer to the recent Wells Fargo cross-selling scandal or to Senator Warren's ensuing broad-side calling for SEC Chair White's resignation ...

The Public Investors Arbitration Bar Association (PIABA) renewed its criticism of FINRA's Broker-Check® system in a report issued in late October. PIABA was especially critical of the system's

• Lack of synchronization with state-regulator databases that often contain more fulsome information (including, e.g., CRD information such as reasons for broker termination, bankruptcy filings and tax liens);
• Lack of comparative, contextual data such as the total number of brokers and percentage of those with similar numbers of disciplinary results;
• Inaccessibility to the public ...

The SEC reports it brought 868 enforcement actions in the fiscal year ended September 30, 2016 -- more than ever before, and for the third year in a row. But a Wall Street Journal article this week attributes it to playing "small ball" with little, easily-won cases.

In the Journal's analysis, the SEC's enforcement numbers would have remained relatively flat (up some) if not for the addition of 91 smaller cases under Chair White's "broken windows" mandate. The mandate derives from community policing models (and a 1982 article by political scientist James Q. Wilson) that posit overall ...

The Sixth Circuit this week declined the SEC's request to dismiss a Constitutional challenge to the new MSRB pay-to-play rules. Instead, the Court ordered the case to a merits panel for consideration. The Republican parties of Tennessee, Georgia and New York are challenging the regulations in consolidated actions.

The SEC argued that its tacit "deemed approval" of new MSRB pay-to-play rules didn't constitute agency action. The SEC's "no we didn't" argument was an attempt to avoid judicial review of the agency's [in]action that allowed the rules to become effective. I discussed the ...

Having lost her initial suit (and appeal) to enjoin an SEC administrative enforcement action against her, the so-called "diva of distressed," Lynn Tilton recently filed another lawsuit trying to halt her upcoming October 24 hearing before an SEC administrative law judge.

In her last suit, Tilton argued the SEC's administrative forum - particularly the selection of the ALJs who hear the proceedings - was unconstitutional under the Appointments Clause. Her new suit raises different arguments, claiming that SEC has a pattern and practice of depriving respondents of their Fifth ...

The Securities Division of Tennessee's Department of Commerce and Industry has increased its enforcement activity during 2016. The recent actions include:

Final Administrative Orders:
Clifton Alexander and HugeROI.com - May 30, 2016
Anthony Dean Myers, Sr. - May 24, 2016

Cease & Desist Orders:
Broad Street Ventures - August 12, 2016
Cumulus Financial - October 29, 2015

Consent Orders:
Wortham Laboratories - August 12, 2016
Charles Sims, Jr. - August 3, 2016
Scott B. Chitwood - July 21, 2016
The Homes Email Business Corp. - May 23, 2016

Initial Orders:
Black Gold Resources, Inc ...

The SEC announced August 25 that it approved FINRA's pay-to-play rules governing placement-agent or solicitor broker-dealers and was "prepared" to approve the extension of MSRB Rule G-37 to municipal advisors as well.

The two rule proposals would complete the pay-to-play suite of rules across municipal securities dealers, investment advisors, broker-dealers, and municipal advisors. The bedrock Rule - MSRB's Rule G-37 governing municipal finance professionals and dealers - has been in place since 1994. After Dodd-Frank's expansion of municipal-advisory regulation, the ...

On August 24, the SEC announced settled administrative actions against 71 state and local issuers arising from $3.7 trillion in municipal securities offerings. The Commission alleged the issuers made false statements claiming they had complied with their continuing disclosure obligations under prior debt issues from 2011-2014. Each settled action imposed a cease-and-desist order and compliance undertakings.

The settlements appear to be the last leg of the Commission's Municipal Continuing Disclosure Cooperation ("MCDC") initiative, under which the SEC offered ...

Within weeks, the Second and Third Circuits reached opposite conclusions over federal jurisdiction to confirm, modify or vacate arbitration awards. The Second Circuit now allows courts to look through the face of the petition to assess the federal-question jurisdictional merit of the underlying dispute; the Third Circuit doesn't (along with the DC and Seventh Circuits).

In 2009, the Supreme Court held the text of Section 4 of the Federal Arbitration Act required "look-through" assessment of the underlying dispute in motions to compel arbitration, based on the statute's text:

"A ...

The SEC announced its second enforcement action in a week against a company using severance or confidentiality agreements requiring employees to waive whistleblower bounties or their right to bring a qui tam action.

In this week's settled action, the SEC fined publicly-traded Health Net $340,000 for having used severance agreements (over 4 years) that expressly allowed government reporting and cooperation in investigations but required waiver of monetary awards and qui tam actions. The offending agreements included waivers of:

"the right to file an application for award for ...

The SEC has fined an Atlanta company $265,000 for using various severance agreements restricting whistleblower activities.

The Dodd-Frank Act added '34 Act § 21F encouraging whistleblower programs. The SEC adopted Rule 21F-17 providing:

(a) No person may take any action to impede an individual from communicating

directly with the Commission staff about a possible securities law violation,

including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

The Company's severance agreements contained confidentiality and ...

The D.C. Circuit has affirmed that SEC ALJs are not constitutional Officers subject to the Appointments Clause, rejecting perhaps the strongest of the constitutional challenges to the Commission's administrative forum. The ruling is the first case to decide the issue on its merits instead of rejecting it on procedural grounds (as the 2^nd, 7^th, 11^th and D.C. Circuits previously did).

The Court held the Commission's right of discretionary review, coupled with the requirement to issue an affirmative order declining it (where not exercised), means its ALJs do not issue final ...

In a July 22 Notice, FINRA took umbrage at a growing line of Court decisions suggesting that a later or more-specific forum selection clause in an agreement between the parties may override a prior customer arbitration agreement. FINRA defended it arbitral forum, pointing out that members are subject to discipline for restricting a customer's right (or even request) to arbitrate.

An expanding line of precedent holds that a later forum-selection provision (limiting disputes to a particular court) may supersede a prior arbitration provision between the same two parties. See, e.g ...

In an August 1 release, the MSRB said it has scratched a proposed rule that would have required reporting of direct-purchases and bank loans by municipal issuers.

In the March concept release (MSRB Reg. Notice 2016-11) , the MSRB noted concerns that municipal borrowings in the form of direct purchases or bank loans increased the risk to investors in municipal securities if the other borrowings remained undisclosed. The Board's concept release proposed rule-making that would require municipal advisors and others to disclose such borrowings. That proposal, though, posed potential ...

This SRO gamesmanship is making a mockery of governing.

The latest is the SEC's position that it didn't take any action on the new MSRB Rules extending pay-to-play prohibitions to municipal advisors, so it can't be sued to stop the implementation of the regulations implemented by the MSRB under the SEC's jurisdiction. Making it only worse, the SEC says that it's because Congress prohibited the Agency from spending any money on this part of the Dodd-Frank mandate Congress required.

Whaaat?!? So hold onto your hat, as we go down the rabbit hole to explain this:

The MSRB: The SEC's ...

Last month, the 6^th Circuit joined the majority view recognizing the "materialization of the risk" theory of loss-causation as an alternative to "corrective-disclosure" in securities litigation under Rule 10b-5.

The Public Securities Litigation Reform Act ("PSLRA") and federal jurisprudence (Tw-Iqbal) require pleading specific factual allegations of each element of Rule 10b-5 claim, including loss-causation (a proximate causal relationship between not merely the alleged misrepresentation or omission and the transaction, but also the plaintiffs' loss). Dura-Pharm

The Eleventh Circuit Friday joined three others in concluding that Congress intended Respondents must wait until appeal from the Commission to have a Court consider their challenges to the Constitutionality of the SEC's administrative forum.

Following the Thunder Basin line of cases, the Eleventh Circuit held that federal courts do not have jurisdiction to short-circuit the SEC's administrative process to hear claims that the process is not constitutional. Instead, Respondents must raise their arguments twice before the very tribunals they claim aren't Constitutional ...

For years, self-regulatory agencies (like FINRA or the Exchanges) have wielded the statutory authority granted them by Congress - and backed by the SEC - exercising governmental power to compel testimony, impose fines and punishments, and even bar a person or firm from an entire industry.

At the same time, they declaim that they're just membership organizations, so don't owe anyone Constitutional protections (like Fifth Amendment Due Process) and aren't subject to Equal Access to Justice Act claims for your litigation expenses when they lose.

So SROs essentially are the ...

Last week, industry groups filed two suits seeking to block the Labor Department's new fiduciary rule governing IRA and other retirement-fund investment recommendations.

In the first, the U.S. and several local Texas Chambers of Commerce and the Securities & Financial Markets Association filed suit in Dallas (in the conservative Fifth Circuit). The suit calls the rule-making a usurpation of SEC authority (and Dodd-Frank's specific authorization of the SEC to promulgate uniform fiduciary standard) that deliberately adopts an unworkable rule, then conditions exemptions from ...

In a recent new release, the Tennessee Securities Division urged investors to ask tough questions of their investment advisors, and about their compensation, account arrangements and educational / regulatory history.

The May 26 release is here.

SEC-registered investment advisors are required to provide the answers to those (and other) questions on their ADV Part 2, which is kept on file with the SEC and publicly-available through the Commission's IA Public Disclosure Portal, here. Information on registered broker-dealers and their associated persons is available through ...

Congress voted this week to de-rail the Department of Labor's sweeping fiduciary-duty suite of rule-making, but doesn't have the votes to override the President's threatened veto. The Rule (over a 1,000 pages in all) imposes a sweeping definition of who owes fiduciary duties to retirement investors in retail IRA, HSA, Roth, Coverdell and other "qualified money" situations and prohibits conflicted transactions (including differential compensation), unless they comply with a series of exceptions, carve-outs and exemptions. Industry groups say the compliance and paperwork ...

It's hornbook law that a later intentional breach of contract, alone, doesn't equal promissory fraud.

Holding it therefore cannot establish mail or wire fraud, the Second Circuit reversed the Government's $1.2 Billion FIRREA judgment against Countrywide, Bank of America and others, with instructions to dismiss the case. The case started as a qui tam action alleging that Countrywide's "high-speed swim lane" process delivered substandard mortgage loans to GSEs (Fannie, Freddie) during performance of master mortgage-loan sales agreements ("MLSAs") executed earlier. The ...

Starting June 23, municipal advisors will be subject to revised Rule 42 and its heightened engagement letter and disclosure obligations. SIFMA has released exposure drafts of compliance documents to help MAs meet those requirements. The drafts include a model engagement letter, disclosure statements for both new and continuing engagements and a client -intake checklist. They are here. Broadly speaking, the amended Rule imposes upon municipal advisors

• A fiduciary duty of care and loyalty to municipal entity clients - but only a duty of care to obligated persons (like conduit ...

Affirming dismissal of some lingering Morgan Keegan bond fund actions, the Sixth Circuit joined the Second in holding that American Pipe class-action tolling does not affect the expiration of a statute of repose. The Court reasoned that, whether equitable or procedural, American Pipe cannot supersede the substantive extinction of a legal right by repose. The Tenth Circuit has held that American Pipe tolls statutes of repose pending class certification. Joseph v. Wiles, 223 F. 3d 1155 (10^th Cir. 2000). The Second Circuit said not. Police & Fire Ret. Sys. Of City of Detroit v. IndyMac ...

The Supreme Court held May 16 that the exclusive federal jurisdiction provision of the 1934 Securities Exchange Act means the same as the "arising under" test for federal-question jurisdiction and does not pre-empt state law claims unless they require proving a violation of a rule or regulation under the Act.

Manning and other shareholder plaintiffs filed suit against Merrill Lynch and others in New Jersey state court alleging naked short selling in violation of SEC Regulation SHO (which requires a "good locate" at the time of a short trade to prevent naked shorting). But ...

The MSRB's amended Rule G-42 becomes effective June 23, prescribing new conduct standards for municipal advisors and for the underwriters working with them. In advance of the effective date, the MSRB has published interpretive guidance on the new Rule:

For MAs, here. For Underwriters, here. On-demand webinar, here.

• A fiduciary duty of care and loyalty to municipal entity clients - but only a duty of care to obligated persons (like conduit borrowers);
• A written engagement-letter and conflict-disclosure regime;

The Securities Division of the Tennessee Department of Commerce and Insurance issued a May 2 press release encouraging consumers to report financial-services misconduct to its Financial Services Investigations Unit.

"The FSIU investigates complaints involving allegations of securities and insurance fraud and other violations of the Tennessee Securities and Insurance Acts," said TDCI Assistant Commissioner for Securities Frank Borger-Gilligan. "Common violations include: fraud, misappropriation of funds, misrepresentations, unregistered or unlicensed ...

Richard Ketchum, the retiring CEO of FINRA, said that the regulator intends to expand the reporting available through its BrokerCheck ® web tool to include relative concentrations of disciplined brokers in industry firms.

Some studies have found that brokers terminated for misconduct often are hired by firms having a higher incidence of their own misconduct. "There are firms that hire from the predatory firms that go out of business. That is your biggest risk," said Ketchum. Ketchum also said that FINRA is considering making its underlying BrokerCheck data available for bulk ...

Tennessee fraudulent misrepresentation claims - and "investment contract" claims under the State's Blue Sky Law - fail the "reasonable reliance" requirement, where the plaintiff himself asserts it's a fraud because nobody would believe such a thing.

In a case the Court of Appeals charitably called "astonishing," a lawyer and his successful businessman friend and client paid large amounts of cash over time to a promoter running a "Black Money" scam that also borrowed elements from the "Nigerian Prince" script. The scammers obtained money from both Lambert and ...

The Municipal Securities Rulemaking Board ("MSRB") issued a concept release last month suggesting that market transparency trumps the direct Congressional prohibition against federal regulations requiring filing of information by (or by broker-dealers, from) municipal issuers (the "Tower Amendment").

Regulators are concerned that direct purchases of municipal debt (akin to private placements) and bank loans to municipal entities might avoid the municipal securities regulatory regime, yet affect the priority and integrity of municipal securities:

The MSRB has ...

An article in this weekend's Wall Street Journal called for FINRA to make the database underlying its BrokerCheck ® system (of reports on stockbroker registration and disciplinary history) more widely available for data mining and analysis by public-sector participants.

The article roundly criticized FINRA's interface that limits public access to peep-show, one-broker-at-a-time reports: "In the age of Big Data, it is time to liberate the BrokerCheck files. Only when information is set free can it turn into insight." J. Zweig, "Is Your Stockbroker Great or Mediocre?" Wall ...

The SEC recently affirmed its ALJ's ruling barring Alan Stanford's former CCO from the industry and ordering monetary penalties of $260,000 together with $591,992 in disgorgement.

The Commission held the CCO approved false and/or misleading marketing and training materials in the face of red flags and without adequate due diligence or verification, instead relying upon superficial explanations of other company insiders.

"But the evidence shows that Young approved material misrepresentations without verifying them or establishing any reasonable or independent basis for ...

On April 12, the Tennessee Republican Party filed a petition in the US Sixth Circuit Court of Appeals, seeking to invalidate the SEC's approval of new rules extending the MSRB's long-standing "pay-to-play" prohibitions to new municipal advisors.

The MSRB has prohibited "pay-to-play" practices in the municipal securities space since its Rule G-37 was promulgated in 1994. The Rule does not prohibit political contributions by bond dealers outright, but instead prohibits them from doing business with issuers to who's elected officials a dealer has made political ...

The Fifth Circuit Bar Association's summary reports: "Appellants were investors who suffered financial losses as a result of R. Allen Stanford's Ponzi scheme. In their arbitration complaint, they sought $80 million in damages. After a two week hearing, a Financial Industry Regulatory Authority panel rejected Appellants' claims, but it awarded them $10,000 in compensation for certain arbitration-related expenses. "On November 7, 2014, Appellee filed, pursuant to Section 9 of the Federal Arbitration Act, a motion to confirm the arbitration award. Because the arbitration ...

The Tennessee Court of Appeals recently held that a trustee's signature of brokerage account agreement containing a pre-dispute arbitration clause did not bind the trust's minor beneficiary. The Court held that an "all powers allowed by law" clause in the trust agreement did not authorize the Trustee to enter a pre-dispute arbitration agreement. Instead, another more specific clause providing the "Trustee may settle, by compromise, arbitration or otherwise any and all claims" limited the grant of that authority only to claims that have arisen. See Tenn. Code Ann. § ...

In a January 21, 2016 Report of Investigation, the Inspector General for the Securities Exchange Commission found no evidence to substantiate allegations of pro-agency bias among SEC administrative law judges. The allegations of bias by a retired SEC ALJ appeared in a May 2015 Wall St. Journal article; the article's statistical analysis also revealed the SEC won 90% of contested cases brought in its "home court" administrative forum. The SEC's administrative forum has been under fire ever since Dodd-Frank expanded its jurisdiction to include non-registered persons. Then ...

The MSRB's Rule G-37 amendments applying pay-to-play prohibitions to Municipal Advisors and their third-party solicitors will become effective August 17, 2016. The proposed amendments extend Rule G-37 to municipal advisers and third-party solicitors:

• Imposing a two-year ban on business with municipal entities after any contribution to an issuer official who can influence municipal-advisory business, subject to $250 de minimis exclusion to officials for whom a contributor can vote;
• Prohibiting soliciting, coordinating ("bundling"), and contributions to state/local ...

White House officials this week said that President Obama's fiscal 2017 budget will seek major increases in funding for Wall Street regulators in the near term, and proposes to double their funding by 2021. The President's budget proposal would provide an 11% increase for the SEC (of $1.8 billion) and a 33% increase for the CFTC (of $330 million). The SEC reportedly plans to use the additional funding to hire 250 new staffers, about half devoted to investment-advisor examinations. The SEC also plans to add 52 new enforcement positions, and add a lawyer to its Municipal Securities staff ...

FINRA reported that, for 2015, Claimants won about half of private securities arbitrations: 47% for all-public panel decisions; 45% for majority-public panels. A colleague and securities mediator, Dana Pescosolido, recently studied FINRA's 2015 private securities arbitrations to see just what the results are when Claimants "win." The study can illuminate mediation (and other risk-assessment) expectations. FINRA Securities Arbitrations Of the 3,435 securities arbitrations filed in 2015, 2,341 (68%) were customer cases and 1,094 (32%) were intra-industry disputes ...

The SEC's Office of Compliance Inspections and Examinations ("OCIE") announced the agency's priorities for this year on January 11. Commission staff will focus on three broad areas: Retail Investors, Market-Wide Risks, and increased used of Data Analytics. Retail Investors Seniors top the list in this category, as the SEC continues its "ReTIRE" initiative announced last June. A nod to the aging boomer bubble, the ReTIRE program is a multi-year effort focusing on investment-adviser and broker-dealer issues in the retirement savings context, including: reasonable-basis ...

FINRA released its annual Regulatory and Examination Priorities Letter (so-called "Errico Letter") on January 5. FINRA's top five priorities:

1. Firm Culture. FINRA's been pushing "culture of compliance" for years, but in 2016 will take it to the next level: "FINRA will formalize our assessment of firm culture while continuing our focus on conflicts of interest and ethics." In looking at a firm's culture, FINRA will focus on "Five Factors" to assess whether:

• policy or control breaches are tolerated;
• control functions are valued within the organization;
• managers are ...

As 2015 ended, FINRA fined Barclays Capital $13.75 million for mutual-fund switching and breakpoint supervisory failures that might have been avoided if that part of Barclay's WSPs had been properly calibrated and/or part of their annual compliance testing. The lapses stemmed in part from an inaccurate definition of switching in Barclay's WSPs and those undetected problems mounted over the years. A five-year look back review uncovered over 6100 unsuitable switches with customer harm of about $8.63 million; a similar six-month look back revealed 1,723 unsuitable mutual-fund ...

On Christmas Eve's eve, the SEC approved, without change, the MSRB's proposed conduct rule for municipal advisors. Broadly, the Rule imposes:

• Fiduciary duty (care and loyalty) to municipal entity clients but only a duty of care to obligated persons;
• Written engagement-letter and conflict-disclosure regime;
• Suitability and KYC requirements;
• A list of prohibited practices, including a wide-ranging (but not absolute) ban on principal transactions with municipal entity clients.

New Rule G-42 has been in the works since January, 2014 and the MSRB filed two amendments with the SEC ...

FINRA's Dispute Resolution Task Force issued its Final Report in mid-December. The Report reflects the group's consideration of wide-ranging issues affecting the nation's principle dispute-resolution forum for broker-dealers, their associated persons and customers. The Task Force made 51 recommendations for changes to FINRA Arbitrations, including: Improve Arbitrator Quality by:

• Increasing compensation;
• Improving recruitment for depth and diversity;
• Improving selection to provide a pool of 30 in all-public arbitrator cases; achieve earlier and better conflict ...

On December 16, the Municipal Securities Rulemaking Board ("MSRB") filed with the SEC a proposed rule that would extend to municipal advisers the MSRB's existing rule prohibiting "pay-to-play" practices and restricting campaign contributions in the municipal securities and advisory business. The proposed amendments extend Rule G-37 to municipal advisers and third-party solicitors:

• Imposing a two-year ban on business with municipal entities after any contribution to an issuer official who can influence municipal-advisory business, subject to $250 de minimis

The Supreme Court Monday re-affirmed the enforceability of class-waivers in arbitration agreements. The five-justice majority felt the need to rebuke the California courts for trying to end-run Federal preemption through a latent "States-rights" nullification approach. Two of the three dissenters saw the case as a consumerist crusade against big business. But the biggest take away for businesses using arbitration clauses just might lie hidden within the opinion. DirectTV's Conditional Class-Waiver. DirectTV's consumer contracts contained a conditional class waiver ...

The Tennessee Supreme Court released a December 14 decision reviewing personal jurisdiction over non-resident defendants. First Community Bank, NA v. First Tennessee Bank, NA, No. 2012-01422-SC-R110CV (Tenn. Dec. 14, 2015). The case involved a Virginia bank's securities claims against a host of defendants, among them a couple Tennessee-resident firms and three non-resident Ratings Agencies having rated various collateralized-debt-obligation securities - some of which had Tennessee securities as a small portion of their underlying portfolio assets. The trial and ...

Last week, VW blamed its "culture" for allowing "individual misconduct" that lead to the emissions-testing-evasion scandal engulfing the company. It reminded me of a couple of corporate-compliance mantras and of DOJ's recent Yates Memo: To deter individual misconduct, you need a "Culture of Compliance" set by "Tone from the Top." Volkswagen's mea culpa bears that out: VW admitted it had neither and blamed both. See "VW Says 'Culture' Flaw Led to Crisis," Wall St. J. at B1 (Dec. 11, 2015) For years - decades, in fact - the United States Department of Justice and securities ...

The SEC granted two petitions for review last week that tee-up significant issues for full Commission consideration late next Spring. The Commission will consider the application of the Second Circuit's Newman decision restricting the "gifting theory" of insider trading and also will take up the constitutionality of the agency's administrative enforcement forum. Insider-Trading After Newman. ALJ Patil dismissed insider-trading charges against trader Joseph Ruggieri last fall, finding that his tipper hadn't provided the inside information in return for any personal ...

There's a developing circuit split over whistleblower standing for retaliation claims. A decision this week extended that split to U.S. district courts within Tennessee, too. In Verble v. Morgan Stanley Smith Barney, LLC, No. 3:15-CV-74-TAV-CCS (Dec. 8, 2015 USDC EDTN), the Eastern District of Tennessee joined with the Fifth Circuit view that Dodd-Frank whistleblowers must report to the SEC to have standing. An earlier decision from the Middle District of Tennessee had sided with the Second Circuit's view, deferring to the broader language of the SEC regulations that would ...

Speaking to a November 16 Money Laundering conference jointly sponsored by the American Banking and Bar Associations, Deputy AG Sally Yates unveiled revisions to the Department of Justice's U.S. Attorneys' Manual ("USAM"). The revisions implement the new focus on individual wrongdoing in the corporate criminal context first announced September 9 in the "Yates Memo." The revisions principally involve (1) the Filip Factors, (2) extend the Yates Memo to civil investigations, and (3) address coordination in parallel proceedings.

1. Filip Factor Revisions.

Atlanta federal Judge Leigh Martin May enjoined the SEC from proceeding in yet another administrative enforcement action Tuesday. Ironridge Global IV, Ltd. v. SEC, No. 1:15-CV-2512 (USDC NDGA Nov. 17, 2015). SEC ALJ Grimes had refused to dismiss or stay the administrative proceeding and that hearing was scheduled to commence December 7. The SEC charged Ironridge last June under the '34 Act for allegedly operating as an unregistered broker-dealer by its provision of "Liability for Equity" transactions with 28 microcap issuers. The OIP is here. As before, the Court held it had ...

Last Thursday, November 12, the MSRB published its Compliance Advisory for Municipal Advisors ("MA's"). The new MA regulatory regime was imposed by Dodd-Frank and implemented by the MSRB and SEC over the past several years. The Advisory highlights some of fundamental regulatory requirements for MA's and identifies some potential compliance risks, including, for example:

• Failing to register;
• Failing to ensure MA associated persons are Series 50 qualified (still in pilot);
• Failing to implement an MA-specific compliance program under Rule G-44;
• Failing to distinguish ...

Laurie Bebo, CEO of Assisted Living Concepts, initially got some sympathetic words from the U.S. District Judge who felt constrained to turn away her constitutional challenge to the SEC's administrative forum:

The Court finds that Bebo's claims are compelling and meritorious, but whether that view is correct cannot be resolved here. This is so because Bebo's claims are subject to the exclusive remedial scheme set forth in the Securities Exchange Act. Bebo must litigate her claims before the SEC and then, if necessary, on appeal to the Court of Appeals for the Seventh Circuit.

SEC Commissioners Piwowar and Gallagher dissented from a recent Commission Opinion sanctioning an investment adviser's use of misleading historical data purporting to validate an asset-allocation model. Agreeing there was a violation, Piwowar and Gallagher nevertheless dissented, criticizing "rulemaking by opinion:"

Instead, the majority opinion creates from whole cloth specific requirements for advertisements that include the word "backtest." Despite the lack of any statutory or regulatory definition of what constitutes a "backtest," the majority opinion ...

The battle over the constitutionality of the SEC's administrative forum now moves to the U.S. Eleventh Circuit. The appellate court issued an order Wednesday, denying the SEC's bid to upset the trial court's preliminary injunction and allow the administrative trial to go forward. Moreover, the Court consolidated two cases on the issue for expedited merits disposition, including oral argument (if held). See Gray Financial Group, Inc. v. US Securities and Exchange Comm'n, No. 15-13738-F (11^th Cir. Oct. 7, 2015); Hill v. Securities and Exchange Comm'n, No. 15-12831 (11^th Cir.). In ...