February 8, 2010
The SEC's mighty cease and desist authority
Since 1990, the Securities and Exchange Commission has possessed the authority to order respondents to cease-and-desist from present or future violations. The power is plenary; Professors Coffee and Sale have noted that the authority entitles the SEC to order the respondent to "cease the violation, disgorge profits, and take affirmative steps to comply with the securities laws."
The question thus becomes, why would the Commission ever seek criminal authority from Congress? Or the duty to register and examine hedge funds and private equity firms? Continually beset by budgetary problems and employee turnover, the SEC enjoys a mighty advantage in being able to demand monies and structural concessions premised upon the assertion that market wrong is about to occur. The statutory cease-and-desist order reaches all persons (i.e., not just registrants), may be based upon the Commission's belief that a violation will occur, and requires less of a showing of proof than the case for an injunction (which must normally establish a likely future violation). Under section 8A(c) of the Securities Act, the SEC even owns the right to issue a temporary order without a hearing in order to prevent "substantial harm to the public interest."
For a recent release describing a Commission cease-and-desist order (upon consent by the respondent and without admitting or denying guilt), see http://www.sec.gov/news/press/2010/2010-21.htm. Among other things, the Order demonstrates the dangers of financial service providers selectively disclosing investment performance information and, specifically, inconsistently marketing funds invested in subprime mortgage-related investments. In the end, the respondent trust company/bank - although legally exempted from the registration requirements of both the Investment Advisers Act and Investment Company Act - was ordered to cease violating securities law anti-fraud provisions Sections 17(a)(2) and (3) of the Securities Act. The Order noted "remedial acts" including the respondent's replacement of senior personnel, review of its internal procedures, and agreement to pay $250 million to compensate investors, thus brightly signaling that any reports of the death of SEC actions in response to the credit crisis are greatly exaggerated.
February 8, 2010 | Permalink