Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

A Member of the Law Professor Blogs Network

Wednesday, July 11, 2012

SEC Votes to Require Market-Wide Consolidated Audit Trail

The SEC voted to require the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail that will significantly enhance regulators’ ability to monitor and analyze trading activity.  The new rule adopted by the Commission requires the exchanges and FINRA to jointly submit a comprehensive plan detailing how they would develop, implement, and maintain a consolidated audit trail that must collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.  According to the SEC's release:

Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Each SRO instead uses its own separate audit trail system to track information relating to orders in its respective markets. Existing audit trail requirements vary significantly among markets, which means that regulators must obtain and merge together large volumes of disparate data from different entities when analyzing market activity.

A consolidated audit trail will increase the data available to regulators investigating illegal activities such as insider trading and market manipulation, and it will significantly improve the ability to reconstruct broad-based market events in an accurate and timely manner. A consolidated audit trail also will significantly increase the ability of regulators to monitor overall market structure and assess how SEC rules are affecting the markets, and will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number of ad hoc requests from regulators presently.

The new rule becomes effective 60 days after its publication in the Federal Register. SROs are required to submit the NMS plan to the Commission within 270 days of the rule’s publication in the Federal Register. Once the Commission approves the NMS plan, the SROs are required to report the required data to the central repository within one year, and members of the SROs are required to report within two years. Certain small broker-dealers will have up to three years to report the data.

FINRA issued the following statement:

The SEC's adoption of a consolidated audit trail through the development of a National Market System (NMS) plan is an important step that will enhance regulators' ability to conduct surveillance of trading activity across multiple markets and perform market reconstruction and analysis.  FINRA looks forward to working with the other SROs to submit an NMS plan that will help close the regulatory data gaps that exist today. FINRA believes that comprehensive intermarket surveillance is essential to ensuring the overall integrity of the U.S. securities markets and maintaining the confidence of investors in those markets.

July 11, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 10, 2012

CFTC Sues Peregrine Financial Group After Owner Attempts Suicide

The latest scandal in the commodities industry involves Peregrine Financial Group and its owner Russell Wasendorf.  The CFTC announced today that it filed a complaint against Peregrine Financial Group Inc. (PFG), a registered futures commission merchant, and its owner, Russell R. Wasendorf, Sr. (Wasendorf).  The Complaint alleges that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission. 

The National Futures Association (NFA) is PFG’s Designated Self-Regulatory Organization and is responsible for monitoring and auditing PFG for compliance with the minimum financial and related reporting requirements. According to the Complaint, in July 2012 during an NFA audit, PFG falsely represented that it held in excess of $220 million of customer funds when in fact it held approximately $5.1 million.

The Commission’s action alleges that from at least February 2010 through the present, PFG and Wasendorf failed to maintain adequate customer funds in segregated accounts as required by the Commodity Exchange Act and CFTC Regulations.  The Complaint further alleges that defendants made false statements in filings required by the Commission regarding funds held in segregation for customers trading on U.S. Exchanges. 

According to the Complaint, Wasendorf attempted to commit suicide yesterday, July 9, 2012.  In the aftermath of that incident, the staff of the NFA received information that Wasendorf may have falsified certain bank records.

The Wall St. Journal reports that the FBI has also opened an investigation.  WSJ, CFTC Sues Peregrine Financial Group

July 10, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles FCPA Charges Against Orthofix Int'l

The SEC charged Texas-based medical device company Orthofix International N.V. with violating the Foreign Corrupt Practices Act (FCPA) when a subsidiary paid routine bribes referred to as “chocolates” to Mexican officials in order to obtain lucrative sales contracts with government hospitals.  Orthofix agreed to pay $5.2 million to settle the SEC's charges.

The SEC alleges that Orthofix’s Mexican subsidiary Promeca S.A. de C.V. bribed officials at Mexico’s government-owned health care and social services institution Instituto Mexicano del Seguro Social (IMSS). The “chocolates” came in the form of cash, laptop computers, televisions, and appliances that were provided directly to Mexican government officials or indirectly through front companies that the officials owned. The bribery scheme lasted for several years and yielded nearly $5 million in illegal profits for the Orthofix subsidiary.

The SEC's proposed settlement is subject to court approval. Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest. The final judgment would permanently enjoined the company from violating the books and records and internal controls provisions of the FCPA. Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period.

Orthofix also disclosed today in an 8-K filing that it has reached an agreement with the U.S. Department of Justice to pay a $2.22 million penalty in a related action.

July 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's July 11 Open Meeting Will Take Up Proposed Rule 613

The SEC's next Open Meeting will be held on July 11, 2012.  The subject matter of the Open Meeting will be:

The Commission will consider whether to adopt Rule 613 under Section 11A of the Securities Exchange Act, to require national securities exchanges and national securities associations to submit a national market system (“NMS”) plan to develop, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

 

July 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Rules and Interpretations for Key Terms for Regulating Derivatives

Last week the SEC unanimously approved rules and interpretations for key definitions of certain derivative products.  They further define the terms “swap” and “security-based swap” and whether a particular instrument is a “swap” regulated by the Commodity Futures Trading Commission (CFTC) or a “security-based swap” regulated by the SEC. The SEC action also addresses “mixed swaps,” which are regulated by both agencies, and “security-based swap agreements,” which are regulated by the CFTC but over which the SEC has antifraud and other authority.

The rules and interpretations were written jointly with the CFTC implement provisions of the 2010 Dodd-Frank Act that establish a comprehensive framework for regulating over-the-counter derivatives.  Once both agencies adopt the final rules, they will become effective 60 days after the date of publication in the Federal Register. The compliance date of such rules for purposes of certain interim exemptions under the federal securities laws will be 180 days after the date of publication in the Federal Register. The final rule text and a fact sheet will be available after both agencies adopt the final rules.

July 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, July 8, 2012

Dombalagian on Investment Recommendations

Investment Recommendations and the Essence of Duty, by Onnig H. Dombalagian, Tulane Law School, was recently posted on SSRN. Here is the abstract:

I recommend that federal bank, commodity, and securities regulators jointly modify the manner in which financial intermediaries market investment transactions in order to provide investors with quantitative information that facilitates comparison across products and understanding of risk. On its face, the Dodd-Frank Act does little to address the balkanization of business conduct standards but continues Congress’s policy of classifying the obligations of financial services providers by regulatory category (e.g., “securities,” “derivatives,” “banking,” “consumer finance”). To the extent that opponents of harmonization dwell on the talismanic significance of words such as “fiduciary,” “suitability,” and “duty of care,” I propose a safe harbor that distills the essence of a fiduciary’s obligations to permit consistent application across all financial services products.

July 8, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Burch on Governing Securities Class Actions

Governing Securities Class Actions, by Elizabeth Chamblee Burch, University of Georgia Law School, was recently posted on SSRN.  Here is the abstract:

This short essay, written for a symposium on The Principles and Politics of Aggregate Litigation: CAFA, PSLRA, and Beyond, decouples due process from a proceduralist’s intuition and explains why it matters in securities class actions. It begins by exploring several analytical models that shed light on the representative relationship in class actions, including a public law analogy to the administrative state, a private law analogy to corporate law, and another, more modern public law analogy to political governance. After finding that the political-governance model best addresses both sources of inadequate representation in securities class actions — rifts between class members and class counsel, and between class members and their lead plaintiff — this Essay argues that incorporating qualified class members into securities class action governance will improve due process and legitimacy in securities litigation just as it does in the political sphere

July 8, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Dombalagian on Proprietary Trading

Proprietary Trading: Of Scourges, Scapegoats, and Scofflaws, by Onnig H. Dombalagian, Tulane Law School, was recently posted on SSRN.  Here is the abstract:

The Volcker Rule was designed to strike a compromise between reestablishing the firewall between investment and commercial banking activities under the Glass-Steagall Act and retaining the synergistic benefits of bundling such services championed by the Gramm-Leach-Bliley Act. This paper will approach the topic from the perspective of regulators who must grapple with the Rule’s implementation. On the one hand, the financial community can be expected squarely to resist any aggressive implementation of the Rule; on the other, failure to adopt a set of rules and an associated supervisory program would almost surely result in regulators taking significant heat if the Rule does not at least have some impact on the configuration of Wall Street’s activities. Moreover, such efforts must be implemented in a manner that complements other initiatives mandated by Dodd-Frank.

The regulators have staked out a three-pronged approach in their proposed rulemaking: (i) formalizing the classification of trading activities, (ii) adopting quantitative measures, and (iii) mandating a system of internal controls that provides a roadmap for regulatory compliance, supervision, and enforcement. This paper considers the arguments made for and against the Rule’s restrictions on proprietary trading, analyzes the public debate over the proposed implementation of the Rule, and offers some remarks on how regulators might advance the Rule’s moral imperative.

July 8, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)