Securities Law Prof Blog

SEC Obtains Preliminary Relief Against Gen-See Capital

Yet another ponzi scheme:

On January 28, 2009, the United States District Court for the Western District of New York entered an order granting the SEC's motion for preliminary injunction and other relief against defendants, Gen-See Capital Corporation a/k/a Gen Unlimited ("Gen-See") and its owner and president, Richard S. Piccoli. The court's order continues in place the interim relief initially ordered by the court on January 8, 2009, when the court granted the Commission's application for a temporary restraining order, froze the defendants' assets, and prohibited the defendants from destroying, altering or concealing documents. The court's January 28, 2009 order also: (a) preliminarily enjoins the defendants from selling any securities whatsoever; (b) preliminarily enjoins the defendants from violating the securities laws, including, but not limited to, Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rule 10b-5; (c) directs the defendants to provide verified accountings; and (d) permits the Commission to seek expedited discovery regarding the defendants' assets.

The defendants filed no opposition to the Commission's motion and consented to the relief.

The Commission's complaint, filed on January 8, 2009, alleges that the defendants raised millions of dollars from investors by promising steady, "guaranteed" returns, ranging from 7.1% to 8.3% per annum, and no fees or commissions, and, in November 2008 alone, the defendants raised over $500,000 from investors. The complaint further alleges that the defendants relied heavily on advertisements in newsletters published by churches and dioceses; the defendants told investors that their money was invested in "high quality" residential mortgages that the defendants were able to purchase at a discount; and that the defendants did not invest the funds as promised, but instead used new investor funds to make payments to earlier investors. In addition, the complaint alleges that Gen-See's offering and sale of securities to the public was not registered with the Commission.

The litigation is pending.

SEC Sustains NASD Disciplinary Action for Failure to Respond to NASD Requests for Information

The SEC sustained NASD disciplinary action against CMG Institutional Trading, LLC, a former NASD member firm, and Shawn D. Baldwin, the firm's president and chief executive officer. The Commission also sustained NASD's imposition of two-year suspensions on CMG and Baldwin for their misconduct and a $25,000 joint-and-several fine.  The SEC found that CMG and Baldwin failed to respond completely and timely to NASD requests for information regarding the adequacy of CMG's net capital. In sustaining NASD's sanctions, the Commission stressed the importance of member firms' and their associated persons' obligation to provide NASD with information pursuant to a request under Rule 8210, noting that NASD relies on such requests "to obtain information from its members necessary to carry out its investigations and fulfill its regulatory mandate." The Commission found that CMG's and Baldwin's "untimely and incomplete responses" to NASD information requests "put investors at risk because NASD was unable to determine timely if CMG had adequate capital to protect investors from the possibility of the firm's failure." According to the Commission, the sanctions imposed will encourage CMG and Baldwin, "as well as encourage others already in the industry, to respond to NASD information requests completely and in a timely manner."

Merrill Lynch Settles Charges It Failed to Disclose Conflict of Interests in Pension Consulting Business

The SEC charged Merrill Lynch, Pierce, Fenner & Smith, Inc. and two of its former investment adviser representatives with securities laws violations for misleading pension consulting clients about its money manager identification process and failing to disclose conflicts of interest when recommending them to use two of the firm's affiliated services. Merrill Lynch has agreed to settle the SEC's charges and pay a $1 million penalty.

According to the SEC spokesperson,  "There has been tremendous growth in the pension consulting business in recent years. This case is an important reminder to firms and their investment adviser representatives that, whenever they sit across the table from their advisory clients, they need to make sure that all material conflicts of interest are disclosed."

The SEC's order alleged that Merrill Lynch failed to disclose its conflicts of interest when recommending that clients use directed brokerage to pay hard dollar fees, whereby the clients directed their money managers to execute trades through Merrill Lynch. These clients received credit for a portion of the commissions generated by these trades against the hard dollar fee owed for the advisory services provided by Merrill Lynch Consulting Services. Consequently, Merrill Lynch and its investment adviser representatives could and often did receive significantly higher revenue if clients chose to use Merrill Lynch directed brokerage services. The SEC's order finds that Merrill Lynch also failed to disclose a similar conflict of interest in recommending that clients use Merrill Lynch's transition management desk. In addition, the SEC finds that Merrill Lynch made misleading statements to the clients served by its Ponte Vedra South, Fla. office regarding the process used to identify new money managers to present to its clients.

The SEC also charged Michael Callaway and Jeffrey Swanson, who were formerly employed in Merrill Lynch's Ponte Vedra South office.

In a settled enforcement action against Swanson, the SEC finds that he made misleading statements to some of the firm's pension consulting clients regarding the process by which Merrill Lynch assisted them in identifying new managers. As a result, the SEC charged Swanson with aiding and abetting and causing Merrill Lynch's violation of the Investment Advisers Act of 1940. Without admitting or denying the SEC's allegations, Swanson has agreed to a censure, and to cease and desist from committing or causing violations of Section 206(2) of the Advisers Act.

In the contested enforcement action against Callaway, the SEC's Division of Enforcement alleges that Callaway breached his fiduciary duty in making misrepresentations about the manager identification process used by the Ponte Vedra South office and his compensation in connection with transition management services. The Division of Enforcement further alleges that Callaway was a cause of Merrill Lynch's violation of the Advisers Act because he failed to ensure that Merrill Lynch disclosed to clients the conflicts of interest in recommending that clients enter into a directed brokerage relationship with Merrill Lynch and in recommending that they use Merrill Lynch for transition management services. The Division of Enforcement charges that, by this conduct, Callaway willfully aided and abetted and caused Merrill Lynch's violations of Section 206(2) of the Advisers Act.

The SEC charged Merrill Lynch with violations of an anti-fraud provision of the Advisers Act, which does not require a showing of scienter. The SEC also charged Merrill Lynch with failing to maintain certain records and failing to supervise its investment adviser representatives in the Ponte Vedra South office. Without admitting or denying the SEC's allegations, Merrill Lynch has agreed to a censure, to cease and desist from committing or causing violations of Sections 204 and 206(2) of the Advisers Act, and to pay a $1 million penalty.

SEC Issues Final Rules on Interactive Data

The SEC released its final rules on Interactive Data to Improve Financial Reporting.  Here is the summary:

We are adopting rules requiring companies to provide financial statement information in a form that is intended to improve its usefulness to investors. In this format, financial statement information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. The rules will apply to public companies and foreign private issuers that prepare their financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Companies will provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL). The interactive data will be provided as an exhibit to periodic and current reports and registration statements, as well as to transition reports for a change in fiscal year. The new rules are intended not only to make financial information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing. Interactive data has the potential to increase the speed, accuracy and usability of financial disclosure, and eventually reduce costs.

Speculation over Future FINRA CEO

Who will be the next CEO of Finra?  According to Investment News, the leading contenders are Rick Ketchum, CEO, NYSE Regulation, Inc., Annette Nazareth, former SEC Commissioner, and Douglas Shulman, IRS Commissioner.

NASAA Releases Its Legislative Agenda

NASAA outlined its legislative agenda for the 111th Congress aimed at strengthening investor protection, restoring state authority in certain areas, and providing greater transparency and accountability for those in the financial services industry and in government who share responsibility for the prosperity and safety of investors. NASAA framed its legislative proposals in terms of its five Core Principles for Regulatory Reform, released in November 2008:

1. Preserve state/federal collaboration while continuing to streamline the regulatory system where appropriate.

2. Close regulatory gaps by subjecting all financial products and markets to regulation.

3. Strengthen standards of conduct, and use “principles” to complement rules, not replace them.

4. Improve oversight through better risk assessment and interagency communication.

5. Toughen enforcement and shore up private remedies.

UK Appeals Court Upholds SEC Freeze on Assets of UK Citizen

On January 28, 2009, the Supreme Court of Judicature Court of Appeal in the United Kingdom dismissed the appeal of Glenn Manterfield, a citizen of the United Kingdom, of an order by a British court freezing Manterfield's assets. The High Court of Justice in London had previously issued the order freezing assets held in the United Kingdom by Manterfield on May 16, 2008. Manterfield is a defendant in a pending Commission enforcement action filed in April 2007 in the United States in which the Commission obtained emergency relief, including an asset freeze, against Manterfield and others for their roles in an alleged hedge fund fraud. Among other things, the Commission alleged that Manterfield misappropriated millions of dollars from hedge fund investors.

On February 29, 2008, the Commission filed a limited notice application with the High Court of Justice, Queen's Bench Division seeking an emergency order freezing approximately $1 million in assets held by Manterfield in the United Kingdom. The Commission filed the application after learning that a separate freeze order previously obtained by British authorities against Manterfield's assets might be lifted. After a hearing on the Commission's application on February 29, 2008, the High Court of Justice issued an order freezing the assets until March 6, 2008. Manterfield consented to continue the freeze until the court held an evidentiary hearing to determine whether the freeze should be extended. An evidentiary hearing was held in the High Court of Justice on April 30, 2008 and May 1, 2008. On May 16, 2008, the High Court of Justice issued an order continuing the freeze of Manterfield's assets until the resolution of the Commission's pending enforcement action in the United States. Manterfield appealed the order to the Supreme Court of Judicature Court of Appeal. On November 26, 2008, the Court of Appeal held a hearing and, on January 28, 2009, the three-judge panel unanimously dismissed Manterfield's appeal.

The Commission filed its U.S. enforcement action on April 12, 2007 in the U.S. District Court in Massachusetts against Manterfield, Evan Andersen, of Boston, Massachusetts, and Lydia Capital, LLC, a registered investment adviser based in Boston, Massachusetts. On April 12, 2007, the U.S. District Court issued a temporary restraining order that, among other things, froze the three defendants' assets. On May 3, 2007, following a hearing before the Court on May 2, 2007, the Court issued a consented-to preliminary injunction and ordered a continuation of an asset freeze of the defendants' assets. Andersen has settled the Commission's action against him, and the action is still pending against Manterfield and Lydia.

The Commission's Amended Complaint alleges that, between June 2006 and April 2007, Manterfield and Andersen, acting through Lydia, engaged in a scheme to defraud more than 60 investors, who invested approximately $34 million in Lydia Capital Alternative Investment Fund LP, a hedge fund managed by Lydia. The Amended Complaint alleges that defendants told investors that they intended to use the Fund's assets to acquire a portfolio of life insurance polices in the life settlement market. According to the Amended Complaint, Manterfield, Andersen, and Lydia made a series of material misrepresentations and omissions, including: (1) materially overstating, and in some instances completely fabricating the Fund's performance; (2) inventing business partners, offices, and investors in an attempt to legitimatize the firm and concealing the truth as to why key vendors and banks ceased relationships with the defendants; (3) lying about Manterfield's significant criminal history, and failing to disclose a February 2007 criminal asset freeze against Manterfield in England; (4) lying about how the Fund planned to address certain material risks and failing to disclose others; and (5) misstating the nature of the Fund's assets and its investment process. In addition, the Amended Complaint alleges that Manterfield and Andersen misappropriated millions of dollars of investors' funds by withdrawing investor monies to which they were not entitled.

SEC Suspends under Rule 102(e) Attorney Suspended under State Law for Non-Payment of Dues

A cautionary tale:

On January 27, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions against Arthur P. Hipwell. The Order finds that Hipwell has been suspended from the practice of law by the Kentucky Supreme Court and lacks the requisite qualifications to appear and practice before the Commission as an attorney.  Specifically, the SEC alleged that Hipwell was suspended from the practice of law in 1985 by the Kentucky Supreme Court for non-payment of bar association dues.  During most of the time since then, however, Hipwell held himself out as an attorney by representing that he was Senior Vice President and General Counsel of Humana, Inc., including signing SEC filings to that effect.

Based on the above, the Order forthwith suspends Hipwell and denies him the privilege of appearing or practicing before the Commission for a period of one year from the date of the Order. Hipwell consented to the issuance of the Order without admitting or denying any of the findings in the Order. In the Matter of Arthur P. Hipwell

SEC Alleges Nashville Financial Planner Told Customers They Invested in TARP Program

On January 28, 2009, the SEC filed a complaint seeking emergency relief ("Complaint") in the United States District Court for the Middle District of Tennessee against Gordon B. Grigg ("Grigg") and ProTrust Management, Inc., d/b/a ProTrust Management Group, LLC d/b/a ProTrust Management Group, Inc. d/b/a ProTrust Management Group, Inc. LLC d/b/a ProTrust Corporation (collectively "ProTrust"). The Complaint alleges that ProTrust, a Tennessee corporation with offices in Nashville, is engaged in on-going securities fraud and that Grigg is a purported financial planner and an investment adviser who controls ProTrust.

From approximately 2007 to the present, according to the Complaint, Grigg and ProTrust defrauded at least 27 clients out of approximately $6.5 million by claiming to have invested the money in non-existent securities. Specifically, the Complaint alleges that the defendants have: (1) obtained control over client funds and falsely claimed to have invested such funds in fictitious securities that were described as "Private Placements;" (2) created false and fraudulent account statements reflecting the clients' ownership of non-existent securities; (3) falsely claimed that the defendants had the ability to invest client funds in government-guaranteed commercial paper and bank debt as part of the U.S. government's Troubled Asset Relief Program ("TARP"), and that they did invest client funds in the TARP program; and (4) falsely claimed to have partnerships and other business relationships with several of the nation's top investment firms.

Cuomo Issues Subpoenas to Thain on Merrill Lynch Bonuses

STATEMENT FROM ATTORNEY GENERAL ANDREW CUOMO REGARDING NEW DEVELOPMENTS IN INVESTIGATION OF MERRILL LYNCH BONUSES AND BANK OF AMERICA:

"Today, as part of our ongoing inquiry into executive compensation issues at institutions who have received TARP funds, my Office issued subpoenas seeking the testimony of former Merrill Lynch CEO John Thain, as well as the testimony of Bank of America Chief Administrative Officer J. Steele Alphin.  These subpoenas are part of an ongoing inquiry into billions of dollars in bonuses paid by Merrill Lynch late last year just days before Merrill was taken over by Bank of America.  The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation.   

With that in mind, I am also pleased to announce that our ongoing inquiry into executive compensation practices at TARP funded institutions, including this matter, will be conducted cooperatively and in coordination with the TARP Special Inspector General Neil Barofsky.  Our offices have already begun working together and I look forward to a continuing and productive working relationship with the Special Inspector General.  Our cooperative efforts set a perfect example for how federal and state authorities should be working together on behalf of taxpayers. "

FINRA's Interim CEO Testifies on Madoff

Stephen Luparello, Finra's Interim CEO, also testified at the Senate hearing on the Madoff scandal.  In his remarks, he emphasized that Finra only regulated Madoff's broker-dealer firm and has no regulatory authority over investment advisors.  He also stated they received no tips or complaints about fraud.  Some excerpts from his testimony:

It certainly appears that Madoff knew well the seams in that system that separated functional lines of regulation, and perhaps that knowledge assisted him in avoiding detection and defrauding so many unsuspecting individuals and institutions. By all accounts, it appears that Mr. Madoff engaged in deceptive and manipulative conduct for an extended period of time during which he defrauded the customers who invested with him and misled those who had the responsibility to regulate him.

Even so, Mr. Madoff's alleged fraud highlights how our current fragmented regulatory system can allow bad actors to engage in misconduct outside the view and reach of some regulators. It is undeniable that, in this instance, the system failed to protect investors. ...

In its regulatory filings and FINRA examinations, the Madoff broker-dealer has consistently held itself out as a wholesale market-making firm; that means it was a firm that was in the business of executing, as a market maker, order flow that other broker-dealers directed to it for execution and otherwise trading securities for the risk of its own proprietary accounts. These relationships with other broker-dealers are treated under regulatory rules as counter-party rather than customer relationships. The Madoff broker-dealer consistently reported that 90 percent of its revenue was generated by market making and 10 percent by proprietary trading. The broker-dealer consistently represented to FINRA that it had no retail or institutional customer accounts, a position that would be consistent with the business model of a wholesale market-maker.

*   *   *

During the last 20 years, FINRA (or its predecessor, NASD) conducted regular exams of Madoff's broker-dealer operations at least every other year. Madoff's broker-dealer was on a two-year examination cycle because it engaged in market making and was self-clearing. Based on this business mo
In the course of FINRA's broker-dealer exams, we found no evidence of the fraud that Bernard Madoff carried out through its investment advisory business. While there have been some reports that victims of the fraud received statements from the Madoff broker-dealer, our examinations did not reveal the existence of customer relationships that the broker-dealer would have had in providing execution or custody of advisory assets, and they did not reveal that the Madoff broker-dealer in fact held client assets other than in a small number of inactive employee accounts. Also, FINRA did not receive customer complaints that might have alerted us to the existence of the alleged accounts.

*           *         *

The absence of FINRA-type oversight of the investment adviser industry leaves their customers without an important layer of protection inherent in a vigorous examination and enforcement program and the imposition of specific rules and requirements. It simply makes no sense to deprive investment adviser customers of the same level of oversight that broker-dealer customers receive.

Aguilar on the Future of the SEC

SEC Commissioner Luis A. Aguilar spoke at the Investment Company Institute’s Board of Governor’s Winter Meeting on Jan. 26.  In his remarks, he addressed the need for independent funding for the agency and the need to close loopholes in regulation, including hedge funds advisors, derivatives, and municipal securities disclosure.  He also recommended an SEC study on the growth of institutional ownership and the creation of a federal advisory committee to make recommendations to improve retail investor participation in SEC business.

SEC Enforcement and OCIE Directors Testify on Madoff

Both Linda Chatman Thomsen, SEC Director of Enforcement, and Lori Richards, Director of OCIE, testified today before the United States Senate Committee on Banking, Housing and Urban Affairs about the Madoff scandal.  In her written statement, Ms. Thomsen does not provide much, if any, new information on past SEC investigations into Madoff and why the SEC did not uncover the Madoff ponzi scheme earlier, particularly since they were given, in former Chair Cox's words, "credible and specific" allegations about the fraud at least as early as 1999.  Instead, her written statement discusses the SEC and criminal complaints that were filed in December 2008 and other possible remedies by other regulators and private parties.  She then goes into a long general description of how enforcement handles the "hundreds and thousands" of tips it receives each year and the usual rhetoric about scarce resources, dedicated staff, etc.   

Lori Richards acknowledged the obvious -- that examinations of the Madoff broker-dealer firm did not find the alleged fraud committed by Mr. Madoff -- and stated that the staff did not examine his advisory operations, which first became registered in late 2006. She then went on to describe the risk-based program for selecting firms for examination and the "expansive steps" being taken to identify possible improvements to the system.  Specifically, with respect to Madoff:

The SEC staff did not examine the Madoff investment adviser. The firm registered as an investment adviser in September 2006. As noted above, about 10% of registered investment advisers are examined routinely, every three years.

The Madoff broker-dealer operation was subject to routine examination oversight by the firm's SRO, and was also subject to several limited-scope examinations by the SEC staff for compliance with, among other things, trading rules that require the best execution of customer orders, display of limit orders, and possible front-running, most recently in 2004 and 2005. These examinations were focused on the firm's broker-dealer activities. (As noted above, the firm's advisory business became registered in 2006 and was not examined.) For the reasons I noted, I must not discuss these examinations in any greater detail.

In fairness to both Thomsen and Richards, this is an ongoing investigation, so it was probably a waste of everyone's time to bring them before Congress just to meet the legislators' apparent need to express their outrage over the SEC's failures.

Schapiro is new SEC Chair

Mary Schapiro was sworn in today as the SEC Chair.  She has a tough job ahead of her, and I wish her the best.

SEC Staff Releases Revised Interpretations on Rule 13e-3

The SEC's Division of Corporation Finance posted on the SEC website Compliance and Disclosure Interpretations (“C&DIs”) that comprise the Division’s interpretations of Exchange Act Rule 13e-3 as it applies to “going private” transactions and related Schedule 13E-3. These C&DIs replace the Rule 13e-3 and Schedule 13E-3 interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations, the July 2001 Interim Supplement to the Manual of Publicly Available Telephone Interpretations and the November 2000 Current Issues and Rulemaking Projects Outline. Some of these C&DIs were originally published in the sources noted above and have been revised in some cases.

SEC Staff Compliance & Disclosure Interpretations -- Securities Act

SEC Division of Corporation Finance posted on the SEC website its Compliance and Disclosure Interpretations (“C&DIs”) that comprise the Division’s interpretations of the rules adopted under the Securities Act. Some of these C&DIs were first published in prior Division publications and have been revised in some cases.

Former Enron Inhouse Counsel Settle SEC Charges

On January 20, 2009, the U.S. District Court in Houston entered final judgments in the SEC's civil action against Jordan H. Mintz, a former Enron Vice President and General Counsel of Enron's Global Finance group, and Rex R. Rogers, Enron's former Vice President and Associate General Counsel. The SEC had earlier charged Mintz and Rogers with participating in a fraudulent scheme not to disclose Enron's related-party transactions with partnerships controlled by its Chief Financial Officer, Andrew Fastow, and compensation Fastow had received through those transactions. As part of the alleged scheme, Rogers further failed to disclose Enron's related-party transactions involving insider stock sales by its Chairman, Kenneth Lay.

In settlement of this action, Mintz and Rogers neither admitted nor denied the allegations of the Commission's complaint. Among other things, the complaint alleged the following: In 1999, Enron sold an interest in a troubled power project in Cuiaba, Brazil to a related party called LJM1, a partnership controlled by Fastow, to deconsolidate the project and recognize related earnings. Under accounting rules, deconsolidation and earnings recognition were inappropriate because Enron did not transfer the risks and rewards of ownership in light of a secret side agreement promising that LJM1 would not lose money on Cuiaba. Satisfying the side agreement, Mintz helped Enron repurchase Cuiaba from LJM1 in 2001. Mintz then delayed signing and closing of the Cuiaba buyback in an effort to avoid reporting related-party transactions in Enron's 2000 Proxy Statement and 2001 Second Quarter Form 10-Q. Moreover, Mintz and Rogers failed to disclose in Enron's 2000 Proxy Statement millions of dollars Fastow received through related-party transactions between LJM and Enron. Rogers further failed to disclose in Enron's 2000 Proxy Statement at least $16 million in insider stock sales by Chairman Kenneth Lay to repay his Enron line of credit during 2000, and aided and abetted Lay's failure to disclose in SEC Form 4 filings an additional $70 million in insider stock sales by Lay during 2001.

Mintz and Rogers also consented to the entry of an Administrative Order, pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice, suspending each attorney from appearing or practicing before the Commission for a period of two years.

Schapiro's Responses to Some Questions by Senator Levin

Senator Carl Levin has posted on his website Mary Schapiro's responses to a list of questions the Senator submitted to her about her vision for the SEC.  Here are some excerpts:

Current SEC Chair Christopher Cox has indicated that he thinks the SEC should allow U.S. publicly traded companies to use international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB) instead of U.S. generally accepted accounting principles (GAAP) in their financial statements.
a. Do you believe the Sarbanes-Oxley Act allows the SEC to delegate the development of U.S. accounting standards to the IASB? If confirmed, would you try to advance such a proposal?
b. Section 404 of the Sarbanes-Oxley Act requiring auditors to review a company’s internal controls has still not be applied to publicly traded small businesses. If confirmed, would you allow Section 404 to take effect for small businesses without additional delay?
Response: When it comes to international accounting standards, it’s critical that these standards are converged in a way that does not kick off a race to the bottom. American investors deserve and expect high standards of financial reporting, transparency, and disclosure -- along with a standard-setter that is free from political interference and that has the resources to be a strong watchdog. At this time, it is not apparent that the IASB meets those criteria, and I am not prepared to delegate standard-setting or oversight responsibility to the IASB.
Regarding, SOX 404, accurate, robust, and easy-to-understand financial reporting -- and the internal controls that guarantee it -- are critically important to investors and to the efficient functioning of our markets. Right now, we have a system where some issuers are complying with 404 and others are still exempt from it. It’s time that we bring uniformity to the system so that investors know what to expect from companies, while being sensitive to the needs of small businesses. I look forward to working with the small business community in making sure they have the tools they need to comply with 404.

*         *             *

Chairman Cox has indicated that he thinks the PCAOB should stop inspecting auditing firms in other countries and instead delegate its inspection authority to foreign oversight bodies where those firms are located. Do you believe the Sarbanes-Oxley Act allows the SEC to make this delegation? If confirmed, would you try to advance such a proposal?
Response: No, I do not; and no, I will not.

*          *           *

Former SEC Chair William Donaldson proposed establishing a mechanism to allow certain shareholders of publicly traded corporations to nominate a candidate to the board of directors. If confirmed, would you support a rule to allow shareholder nominations of some board members?
Response: Yes. A central tenet of our market system is that shareholders are the owners of the company in which they hold shares, and they should have a way to hold their representatives – members of the board of directors -- accountable for their actions.  Access to the proxy has been debated for many years, and I believe it is time for a thoughtful approach to proxy access for significant, long term shareholders.

*           *           *
What is your view of the compensation paid to executives and market traders at financial institutions? If confirmed, would you support a rule to allow shareholders to express an advisory opinion on executive compensation?
Response: Yes. Like you and millions of Americans, executive compensation has been a concern of mine for some time now, and I believe that it’s an appropriate measure to give shareholders an advisory vote on these matters.

Davidoff on Regulatory Reform

Filling Gaps and Black Holes: Restructuring the Financial Regulatory Apparatus for the Next Crisis (Written Testimony for the Senate Homeland Security and Governmental Affairs Committee Hearing on the Adequacy of the U.S. Financial Regulatory System), by Steven M. Davidoff, University of Connecticut School of Law; Ohio State University - Michael E. Moritz College of Law, was recently posted on SSRN.  Here is the abstract:

The current financial regulatory system is fractured and archaic. In my testimony I recommend that Congress consolidate the present system into three regulators: a financial markets regulator, bank capital regulator and systemic risk regulator. To the extent full financial integration is not politically achievable, Congress should create regulatory champions in each of these three areas who can dominate the remaining other regulators and grow and absorb them or their responsibilities over time.

Any regulatory reform must also encompass the entirety of the financial system. It cannot leave gaps, black holes (i.e., deliberately unregulated areas) or financial institutions without potential oversight. To do otherwise would allow for regulatory arbitrage. In particular, any systemic risk regulator should have potential oversight over the entire financial market and all financial institutions, including insurance companies, should be subject to financial regulatory oversight. Here, I emphasize that when I speak of providing "oversight" responsibility over the entire financial system, it does not necessarily equate with heightened substantive regulation, but the potential for regulation if a regulator exercising its prudent authority deems it appropriate.

Congress should additionally build flexible regulators and a sustainable financial architecture but should leave the details of specific rules to be filled in by the selected regulator. Otherwise, Congress risks erecting rules that are either not adaptable to future changes or are not fully informed by later research on the financial crisis and our capital markets. In particular, Congress should require cost-benefit analysis for any rule-making by these new agencies.

Erickson on Corporate Misconduct & Shareholder Litigation

Corporate Misconduct and the Perfect Storm of Shareholder Litigation, by Jessica Erickson, University of Richmond School of Law, was recently posted on SSRN.  Here is the abstract:

When it comes to combating corporate misconduct, is more litigation necessarily better? The conventional wisdom is that we should deploy every weapon in the law's arsenal to combat corporate misconduct. This wisdom, however, reflects legal scholarship that is confined to analyzing securities class actions and derivative suits in isolation, with little inquiry into the interplay between them. By failing to take a broader view of shareholder litigation, legal scholars have missed an opportunity to provide courts with the conceptual tools necessary to meet the complex challenges of complex corporate litigation. In courtrooms and boardrooms across the country, a debate is raging over whether courts should permit shareholders to file parallel securities class actions and derivative suits arising out of the same allegations of corporate wrongdoing-a debate that has gone almost entirely unnoticed in the legal academy. The time has come for legal theory to catch up with legal practice. We must re-conceptualize the tools we use to combat corporate misconduct, recognizing that securities class actions and derivative suits can work together to achieve the diverse goals of shareholder litigation. We should then bring these new conceptual insights to bear on the current legal debate over how courts should handle parallel securities class actions and derivative suits. Now is the perfect time to calm the perfect storm of shareholder litigation.