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?’”
Prior to Dodd-Frank, the SEC was not clearly authorized to suspend or bar someone from the entire industry. Now, the SEC can bar an individual from associating with any regulated entity.
Gallagher is not the only SEC commissioner to disagree with application of the industry-wide bar to “pre-enactment” conduct. Last year, then-commissioner Kathleen Casey warned about doing this, noting that although Section 925 is ambiguous enough that such bar enactments over alleged misconduct that occurred before Dodd-Frank is allowable, she questioned whether a federal court would strike down these actions. Also, In re Lawton, SEC Chief Administrative Law Judge Brenda Murray came to the conclusion that Section 925 could not be applied retroactively. In the wake of that ruling, the case has been cited by other ALJs refusing impose the industry-wide bar on “pre-enactment” behavior.
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Remarks at the 44th Annual Rocky Mountain Securities Conference by Commissioner Daniel M. Gallagher, SEC.gov, April 13, 2012
Dodd-Frank, SEC.gov (PDF)
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FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011
Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011
SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record, Stockbroker Fraud Blog, March 15, 2012
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