Dodd-Frank Wall Street Reform and Consumer Protection Act

SEC Chairman Says Commission Shouldn’t Impose Industry-Wide Bars On Offenders that Committed Misconduct Before Dodd-Frank Statute’s Enactment

Published on: April 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Speaking at the Rocky Mountain Securities Conference in Colorado a few days ago, Securities and Exchange Commission Chairman Daniel Gallagher said that the imposition of an industry-wide bar, which is authorized under Section 925 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, shouldn’t be applied to misconduct that happened before the financial reform statute was enacted. He talked about how many of the cases that have been brought to the agency for consideration under Section 925 involve “pre-enactment” conduct.

Gallagher said this raised the question of “basic fairness.” He believes that imposing an industry bar on conduct that took place before the legislation was passed is unfair. He said that choosing not to apply the Dodd-Frank provision to “pre-enactment” conduct would show that the SEC is here to not just prevent bad behavior and protect investors and markets, but also to “afford procedural fairness” so that any SEC enforcement action that a party is subject to is “legitimate.” He noted that while there are many defendants that undoubtedly deserve to have the SEC enforce actions against them, there should be limits, such as not subjecting them to sanctions that didn’t exist at the time that their conduct occurred. During his speech, Gallagher was clear to note that the views he is expressing are his alone and not the SEC’s.

Commenting on Gallagher’s statements, Institutional Investment Fraud Attorney William Shepherd said, “When assessing past behavior in the securities markets and whether certain sanctions against wrongdoers is or is not appropriate, does Wall Street really want to rely on this standard: ‘we face a question of basic fairness?’”

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC

Published on: October 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services subcommittee Chairman Scott Garrett (R-N.J.) is encouraging the Securities and Exchange Commission to refrain from rulemaking for establishing a uniform fiduciary standard that would apply to both broker-dealers and investment advisers unless the federal agency can come up with adequate evidence to support this action. Garrett made his views known at a Subcommittee on Capital Markets and Government Sponsored Enterprises oversight hearing. Committee Chairman Spencer Bachus (R-Ala.) and Rep. Ed Royce (R-Calif.) also echoed these same sentiments.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “Washington is again bowing to Wall Street pressure to exempt them from liability for their wrongful acts. It is incredible that, considering the unmitigated investment fraud perpetrated on the American public in the last decade, Congress would even consider thwarting the very investors who elected them from receiving the justice they deserve!”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, the SEC has the authority to start up the rulemaking for this uniform fiduciary standard but is under no obligation. Earlier this year, the SEC put out a report recommending that it take up this rulemaking.

While Garrett questioned whether “hard factual data” existed demonstrating that a suitability standard is not enough to protect investors, others noted that it is a fiduciary standard and not a suitability standard that addresses cost, which impacts investors’ long-term performance. The majority of those that testified at the hearing also supported a uniform fiduciary standard that would apply to both investment advisers and broker-dealers. Consumer Federation of America director of investor protection Barbara Roper said that investors lose money when the person giving them investment advice must only meet a suitability standard and not a fiduciary one.

Meantime, while financial industry representatives have expressed support for a uniform fiduciary standard for investment advisers and broker-dealers, they don’t believe that it could be properly executed under the 1940 Investment Advisers Act.

Securities Industry and Financial Markets Association senior managing director and general counsel Ira Hammerman has said that the Act is unable to work with the business models for broker-dealer, while Financial Services Institute government affairs director and general counselor David Bellaire said that imposing a 1940 Act fiduciary duty on broker-dealers would decrease investor choice and decrease services, which would all significantly affect the market.

Currently, broker-dealers have to abide by a suitability standard, which is more lenient than the fiduciary duty standard for investment advisers. SEC Chairman Mary Schapiro has told staff that they need to recommend a proposal before the year is over.

Also up for discussion was the draft that Senator Bachus released last month mandating that there be at least one self-regulatory organization tasked with overseeing investment advisers. The Financial Industry Regulatory Authority is a top candidate for the role and has expressed interest in taking on this new responsibility. However, not everyone is a supporter of FINRA becoming SRO.

More Blog Posts:
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Two Years of Wall Street Executives’ Pay To Be Seized For Role Played in a Financial Firm’s Collapse, Says FDIC

Published on: July 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Federal regulators have approved a plan that would make Wall Street executives forfeit two years’ pay if it was discovered that he/she played a part in a major financial firm’s collapse. Executives who are considered “negligent” and “substantially responsible” are subject to this rule, which clarifies that “negligence,” rather than “gross negligence,” is the standard.

Banks had complained that an earlier version of the rule, which said that any executive who had made strategic decisions could be found responsible for a financial firm’s failure. They were worried that key executives would quit upon initial signs of trouble rather than risk their pay.

The provision is part of a Federal Deposit Insurance Corporation rule, which is supposed to help retain stability within the economy by unwinding beleaguered firms in a manner that is less disruptive than major bankruptcies and taxpayer-financed bailouts. The rule lets the government take over a failing financial company, break it apart, and sell it off.

The liquidation authority is a significant part of the Dodd-Frank financial oversight law. It also designates the order that creditors will be paid whenever a government liquidates a large financial firm. For example, FDIC or the receiver that carried part of the expense of taking over a firm, administrative costs, and employees that are owed money for benefits are among those that would top the list. General creditors fall lower down in order of priority.

It is not enough that a Wall Street executive pay the government or other entities for any misconduct that caused a financial firm to fail. There are also the investors who sustained financial losses as a result of his/her negligence. Here is where our securities fraud attorneys step in. We are committed to helping institutional investors recoup their money.

Related Web Resources:

Federal Deposit Insurance Corporation

More Blog Posts:

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO

Published on: April 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Congressional Budget Office, between 2010 and 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act will lower the federal deficit by $3.2 billion as it takes in more money than what will go toward enforcement and implementation. CBO Director Douglas Elmendorf released the cost projection at a recent House Financial Services Oversight and Investigations Subcommittee hearing on the reform law.

Although Dodd-Frank will require $10.2 billion in direct spending over the next decade, it will take in $13.4 billion, said Elmendorf. He said that revenues would come mainly from fees assessed on different financial institutions and participants as new rules determine how financial firms can do business and what it will cost them.

The Government Accountability Office has said it could cost over $1 billion to implement Dodd-Frank, a bill that nearly all House Republicans were against. CBO said that even though Dodd-Frank calls for $37.8 billion in spending, savings that the law creates will lower that amount by $27.6 billion, which equals the $10.2 billion projection for final spending. Also, federal deposit insurance changes will lower costs by $16.3 billion and lower TARP authority by $11 billion.

CBO also noted that to create new agencies, including the Financial Stability Oversight Council, Office of Financial Research, Consumer Financial Protection Bureau, and Office of National Research, the government will spend $6.3 billion. It will also spend $100 million to change the current oversight structure, as well as $1.5 billion for subsidies to assist homeowners in foreclosure. A liquidation program for insolvent financial entities is expected to cost $20.3 billion.

Throughout the US, our securities fraud attorneys represent clients that have sustained financial losses because of broker and investment advisor misconduct.

CBO Says Dodd-Frank Act Will Reduce U.S. Deficit by $3.2 Billion, Bloomberg, March 30, 2011

Congressional Budget Office

More Blog Posts:
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans

Published on: March 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Randy Neugebauer (R-Texas), who is the Financial Services Oversight Subcommittee chairman, and Rep. Spencer Bachus (R-Ala.), the House Financial Services Committee chairman, have sent a letter to US Securities and Exchange Commission Chairman Mary Schapiro asking her about Boston Consulting Group Inc.’s recent report on the recent report on SEC reform. Even though BCG is an independent consultant, the two GOP members are questioning the report’s impartiality.

In their letter, they asked Schapiro to disclose what (if any) editorial input the SEC provided on the content of the BCG report. They also want to see any earlier drafts that BCG may have sent the SEC Chairman. Neugebauer and Bachus said that given the regulatory failures from the 2008 economic collapse, it was important that BCG was allowed compete independence to do its job and that the report did not undergo any editorial deletions, review, or insertions by the SEC.

Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967 had directed the SEC to retain the services of an independent consultant to analyze the agency’s structure and operation, as well as suggest reforms. BCG issued its report on March 10. Among its recommendations: for the SEC:

• Hire staff with “high-priority” skills
• Invest in key technology systems,
• Improve oversight over SROs (self-regulatory organizations)
• If Congress determines that the SEC cannot fulfill expectations by further optimizing its resources, the lawmaking body should “relax” funding constraints

BCG has said that it stands by the report’s “integrity and independence.” Meantime, Schapiro has said that the report confirms her own worries that the SEC lacks the resources to do all that it is expected to accomplish.

Our institutional investment fraud lawyers have successfully represented clients throughout the US.

Related Web Resources:
Integrity of report on SEC questioned, Washington Post, March 18, 2011

Statement From Chairman Schapiro on Independent Consultant Report of SEC Organization and Operations, SEC, March 10, 2011

Read the BCG Report (PDF)

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SEC Proposes New Rule to Verify Swap Transactions

Published on: January 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Under Rule 15Fi-1, the Securities and Exchange Commission’s proposed rule under the 1934 Securities Exchange Act, certain security-based swap participants and security-based swap dealers would provide counterparties with an electronic “trade acknowledgement” to acknowledge and verify specific security-based swap transactions. The SEC’s proposal comes under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s mandate that the commission set up standards for the documentation and confirmation of SBS transactions.

Per the proposal, an SBC entity would have to fulfill the following requirements:
• Depending on how the transaction is executed, give trade acknowledgement within 15 minutes, 30 minutes, or 24 hours of execution.

• Electronic processing of security-based transactions for SBS entities that have the capability.

• Written policies and procedures designed to get verification of the terms delineated in the trade acknowledgement.

The proposed rule would specify which SBC entity has to provide trade acknowledgement, let an SBS entity fulfill the requirements of the rule through the processing of the transaction through a registered clearing house, identify which details must be contained in the trade acknowledgement, and for SBS Entities that are also brokers, give limited exemption from the requirements of Rule 10b-10 under the Exchange Act.

Other recent SBS-related rules that the SEC has proposed under the Dodd-Frank Act deal with the mandatory clearing of security-based swap, the defining of security-based swap terms, security-based swap reporting and repositories, security-based swap fraud, and security-based swap conflicts.

Related Web Resources:
SEC Proposes Rule for the Timely Acknowledgment and Verification of Security-Based Swap Transactions, SEC.gov, January 14, 2011

Proposed Rule, SEC (PDF)

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions

Published on: January 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Comments to the Securities and Exchange Commission’s proposal to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower protections have drawn mixed reactions. While some commenters think that employees of publicly traded companies should have to report alleged wrongdoing to internal compliance programs before they can be eligible to a monetary award, others believes that this requirement would make whistleblowers less willing to come forward. Still others have said that whistleblowers shouldn’t be allowed to hire lawyers on a contingency basis. Commenters also were in disagreement over the proposed rule’s overall impact.

Per new Section 21F of the Securities Exchange Act of 1934, a whistleblower program has been established that requires the SEC to monetarily award eligible whistleblowers that voluntarily give the agency original information about a federal securities laws violation if the tip results in successful enforcement of an administration or judicial action that leads to sanctions of over $1 million. The SEC proposed rule has the agency’s Whistleblower Office administering the program, prohibits whistleblowers that engaged in wrongdoing from being eligible for the financial award, and includes anti-retaliatory provisions protecting whistleblowers.

One theme touched upon in many of the comment letters is the desire for the SEC to make the final rule more “user friendly,” which is a term found in the statute. Critics believe that the SEC’s proposal doesn’t meet that standard. Still others expressed concern about what the SEC would consider “original” information presented by a whistleblower. Also, while some commenters wanted firms’ internal compliance programs to have the opportunity to initiate its own meaningful investigation first before the whistleblower gives the SEC a similar submission, the National Whistleblowers Center submitted a comment letter arguing that employees shouldn’t have to report alleged wrongdoing internally first to qualify for the SEC whistleblower program.

SEC Commissioner Luis Aguilar Encourages Agency Not to Refrain From Exercising Enforcement Powers from Dodd-Frank to Protect Investors

Published on: October 25, 2010 | by Shepherd Smith Edwards & Kantas, LLP

SEC Commissioner says the Securities and Exchange Commission should go back to employing a “muscular approach” and use its new enforcement powers bestowed under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform legislation gives the SEC more authority and enforcement tools in the areas of extraterritorial reach, subpoenas, aiding and abetting liability, and whistleblowing. The SEC also now has oversight over hedge and private equity funds and over-the-counter derivatives.

Aguilar spoke on October 15 at the University of California at Berkeley’s Center for Law, Business and the Economy. He says that his views are his own.

Aguilar says that Americans must feel as if the SEC will use whatever tools and powers at its disposal to protect investors from. He notes that action, not rhetoric, is now required. Aguilar cites areas that the SEC has been slow to deal with in terms of enforcement action. For example, there is the area of clawbacks. Aguilar noted that even though the 2002 Sarbanes-Oxley Act lets the commission bring an enforcement action against CFO’s and CEO’s to recover incentive pay and bonuses related to a financial restatement because of misconduct, the SEC waited five years to exercise this authority when it brought action against ex- CSK Auto Corp. (CAO) CEO Maynard Jenkins. Aguilar says that if the law had been enforced earlier, less investors might have been harmed.

The SEC commissioner wants the SEC to “resist” the trend toward an entrenched two-tier market where different investors are overseen and protected differently. He says that recent SEC cases involving pension funds and auction-rate securities are clear indicators that institutional investors also need protections.

Our securities fraud law firm works with institutional investors throughout the US. We have helped many clients recoup their financial losses.

Related Web Resources:
Speech by SEC Commissioner: An Insider’s View of the SEC: Principles to Guide Reform, SEC.gov, October 15, 2010

SEC Commissioner Luis Aguilar

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)