Securities Law Prof Blog

SEC Approves FINRA Rule Change on Abuses in IPO Allocation Practices

The SEC granted "accelerated approval" of a proposed rule change filed by NASD on Sept. 15, 2003.  New FINRA Rule 5131 (originally proposed as NASD Rule 2712)  prohibits certain abuses in the allocation and distribution of shares in initial publiofferings (“IPOs”), including prohibitions on quid pro quo allocations, spinning, flipping.  It also regulates IPO pricing and trading practices.

SEC Chair Testifies on Dodd-Frank Implementation

SEC Chairman Mary L. Schapiro presented Testimony on Implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act by the U.S. Securities and Exchange Commission, before the United States Senate Committee on Banking, Housing, and Urban Affairs on September 30, 2010.

Former State Street Employees Settle Charges They Misled Investors about Subprime Exposure

The SEC today charged a pair of former employees at Boston-based State Street Bank and Trust Company with misleading investors about their exposure to subprime investments.  The SEC's Division of Enforcement alleges that John P. Flannery and James D. Hopkins marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. Yet despite this exposure to subprime securities, the fund continued to be described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors.

According to the SEC, Hopkins and Flannery played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007. Flannery was a chief investment officer. Hopkins was a product engineer at the time, and later State Street's head of product engineering for North America.

In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley, State Street agreed to pay more than $300 million to investors who lost money during the subprime market meltdown in 2007. State Street distributed those funds to investors in February and March. State Street additionally paid nearly $350 million to investors to settle private lawsuits.

The SEC charged State Street in a related case earlier this year. The firm agreed to settle the charges by repaying fund investors more than $300 million.

Second Circuit Finds Judge Rakoff Exceeded Discretion in Galleon Insider Trading Case

In a setback for the SEC, the Second Circuit, in SEC v. Rajaratnam (Download Secvgalleon2Cir ), reversed Judge Rakoff's discovery order that compelled defendants to disclose to the SEC wiretapped conversations provided to defendants by the federal prosecutor in a related criminal action for use in the civil enforcement action.  The Second Circuit held that, while federal law did not absolutely prohibit the disclosure of the wiretap conversations, the trial court must balance the right of access to the materials against the privacy interests at stake.  The court determined that the district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations.

Both the criminal action and the SEC enforcement action (which are before different judges in the S.D.N.Y.) revolve around the same allegations: that defendants engaged in widespread and repeated insider trading at several hedge funds.  The criminal investigation included court-ordered wiretapping of conversations which were turned over to the defendants as part of criminal discovery.  The federal prosecutor did not share the information with the SEC; the agency instead sought access through discovery in the SEC enforcement action.

The appellate court made clear that where the civil defendant has properly received the materials from the government, the SEC has a presumptive right to discovery of the materials based on the civil discovery principle of equal information.  It went on, however, to state that the right of access does not outweigh any and all privacy interests at issue.  A balancing is required for a district court reasonably to exercise its discretion.  The court found that the SEC's right of access is significant, but the privacy interests in this case were real, since the disclosure order implicated thousands of conversations with hundreds of individuals.  Accordingly, the district court exceeded its discretion because (1) disclosure was ordered prior to any ruling on the legality of the wiretaps, and (2) disclosure was not limited to relevant conversations.

In particular, the appellate court noted that "the more prudent course in the instant case may have been to adjourn the civil trial until after the criminal trial."  In that case, the most relevant wiretapped conversations might have been publicly disclosed at trial, and the SEC would be able to use the materials in the civil proceeding without implicating any privacy concerns.  "Apparently, all the parties agreed to such a request, yet the district court declined to grant it."

Judge Rakoff is known as a take-charge kind of judge -- remember his disapproval of the first proposed settlement in SEC v. Bank of America.  Here the Second Circuit clearly felt he had gone too far and did not take into account the complexities presented by concurrent civil and criminal proceedings.

Business Groups Challenge SEC Proxy Access Rule

As expected, the U.S. Chamber of Commerce and the Business Roundtable yesterday filed a complaint (Download ChamberProxyAccessComplaint) in the D.C. Circuit, challenging the SEC's recent adoption of the Proxy Access Rule.  Petitioners ask the Court to hold the rule unlawful under the Investment Company Act, the Securities Exchange Act, and the Administrative Procedure Act.  The petitioners state they have asked the SEC to stay the rule, scheduled to go into effect on November 15, 2010, and if the SEC does not grant the stay, then it will file a motion for stay with the Court.

Petitioners' principal argument is that the SEC failed to adequately assess the rule's impact on "efficiency, competition, and capital formation," an argument that has found a receptive ear at the D.C. Circuit in recent years.  The Court has previously struck down several SEC rules for these same inadequacies.  In particular, the petitioners argue that the SEC did not give sufficient weight to the costs on corporations of election contests and to the motives and intensity of shareholders pursuing special interests, such as unions.  The petitioners also assert the rule violates the First Amendment and is a taking of corporate property because it forces companies to fund and carry election-related speech that is opposed by the board of directors.

ABB Ltd. Settles FCPA Charges Involving Mexico and Iraq Business

The SEC announced today that it filed a settled civil action against ABB Ltd ("ABB") in the United States District Court for the District of Columbia, charging the company with violations of the Foreign Corrupt Practices Act. ABB is a Swiss corporation that provides power and automation products and services worldwide. The SEC alleges that ABB, through its subsidiaries, paid bribes to government officials in Mexico to obtain business with government owned power companies, and paid kickbacks to the former regime in Iraq to obtain contracts under the United Nations Oil for Food Program. As alleged in the complaint, ABB's subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.

ABB agreed to settle the SEC's action without admitting or denying the allegations.  It will pay $22,804,262 in disgorgement and prejudgment interest and a $16,510,000 civil penalty.  In related criminal proceedings, ABB has reached a settlement with the United States Department of Justice in which ABB has agreed to pay a criminal fine of $30,420,000.

NASAA Announces Assistance for Investment Advisers Switching from Federal to State Regulation

NASAA today launched an online resource to help investment adviser firms prepare to switch from federal to state regulation.  The new NASAA IA Switch Resource Center provides a series of resources to keep firms  informed of the upcoming registration switch, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under the new law, investment advisers with assets under management of less than $100 million will be required to register with and be examined by state securities regulators. The previous threshold had been $25 million. The new law takes effect on July 21, 2011.

The IA Switch Resource Center includes background information, answers to frequently asked questions and a directory of state contacts. Users of the site also are able to send their questions to NASAA. These questions, in turn, will be used to update the site’s FAQ.

 

FINRA Plans to Allow All Investors to Select Arbitration Panels with All Public Arbitrators

FINRA announced today that it will file a rule proposal next month that would allow all investors filing arbitration claims the option of having an all-public panel.  The rule proposal, which will be filed for approval with the Securities and Exchange Commission (SEC), would expand to all investor claims a two-year-old FINRA pilot program that gives investors filing an arbitration claim against certain firms the option of choosing an all-public panel.  According to Richard Ketchum, FINRA CEO, "Giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process."   

If approved by the SEC, the rule would give investors the option of choosing an arbitration panel that has two public arbitrators and one non-public arbitrator, as is now the case, or choosing to have their case heard by an all-public panel. The proposed rule would apply to all investor disputes against any firm and any individual broker. It would not apply to arbitration disputes involving only industry parties.

The current pilot program involves 14 firms that agreed voluntarily to a set number of investor cases that did not involve individual brokers.  Since the pilot program began in October 2008, slightly more than 60 percent of investors eligible to participate have opted in, resulting in almost 560 cases to date. Investors opting into the pilot, given the power to eliminate all non-public arbitrators, still chose to have one non-public arbitrator on their panel about 50 percent of the time. The pilot program was originally set to conclude after two years. However, the participating firms agreed recently to extend the pilot program for an additional year while the rule making process goes forward.

This rule proposal is not unexpected, although many thought that FINRA would wait until completion and further evaluation of the cases in the pilot program.

Recent Developments in insider Trading Law

The law of insider trading under Rule 10b-5 is a law professor’s dream; it’s so much fun to come up with clever hypotheticals.  For a doctrine that can result in loss of reputation and even criminal penalties, however, it is not a model of clarity and, indeed, presents difficult questions in application.   The Supreme Court in U.S. v. Chiarella told us that a fiduciary relationship, or at least a relationship of trust and confidence, is required for “classic” insider liability, and, in U.S. v. O’Hagan,  told us that “deception” is required to establish liability under the misappropriation theory.  Meanwhile, the distinctions between the classic  and misappropriation theories have become increasingly blurred; the SEC frequently alleges both theories in its complaints.   While a legislative solution might seem the preferred method to clean up the law, Congress has not taken up the challenge, and the SEC has not advocated for Congressional action.  Two recent decisions illustrate the difficulties.

In SEC v. Cuban (5th Cir. Sept. 21, 2010), the Fifth Circuit reversed the district court’s dismissal of the SEC’s action and held that the SEC had stated a claim.  Cuban was a minority shareholder in Mamma.com when the company’s CEO called to ask if he would be interested in purchasing additional shares in a forthcoming PIPES offering.  According to the SEC, the CEO began the conversation by telling Cuban he had confidential information for him, and Cuban agreed to keep the information confidential.  Cuban became upset when the CEO told him about the PIPES offering and at the end of the conversation, Cuban told the CEO, “Well, now I’m screwed.  I can’t sell.”  Cuban asked for , and subsequently received, further information about the terms of the PIPES offering.  Shortly thereafter, Cuban sold his holdings in Mamma.com.  In dismissing the complaint, the district court acknowledged that Cuban’s “I’m screwed” statement appeared to express his belief that it would be illegal to sell his shares, but the statement could not be understood as a promise not to sell.  Accordingly, the complaint alleged at best that the CEO intended to obtain an agreement to keep the information confidential and not an agreement to refrain from selling. 

The Fifth Circuit agreed with the district court that the “I’m screwed” statement, read in isolation,  did not express an agreement not to sell, but,  emphasizing that it was reading the complaint in the light most favorable to the SEC, found that the additional allegations that Cuban obtained confidential information about the PIPES offering provide “more than a plausible basis” to find that the understanding between the CEO and Cuban was more than a confidentiality agreement.  “It is at least plausible that each of the parties understood, if only implicitly, that Mamma.com would only provide the terms and conditions of the offering to Cuban for the purpose of evaluating whether he would participate in the offering, and that Cuban could not use the information for his own personal belief.”   Had the SEC not alleged that Cuban asked for and received confidential information about the PIPES offering, the Fifth Circuit suggests it would have upheld the district court’s distinction between an agreement to keep information confidential and an agreement not to trade.  Finally, the court expressly states it is taking no position on the merits of the SEC’s allegations, “given the paucity of jurisprudence on the question of what constitutes a relationship of ‘trust and confidence’ and the inherently fact-bound nature of determining whether such a duty exists.”  In short, the Fifth Circuit’s reversal is not a robust showing of support for the SEC’s position.

A federal district in S.D.N.Y. recently granted summary judgment for defendants in  SEC v. Obus (S.D.N.Y. Sept. 20, 2010).  Strickland, an employee of GE Capital, was a member of the team that had discussions with SunSource about a financing in connection with an acquisition of the company by a third party.  Strickland had at least one conversation about SunSource with a college friend, Black, an employee at  Wynnefield Capital, which was a SunSource shareholder.   Black, in turn, spoke with his boss, Obus, about SunSource.  Shortly after that conversation, Obus spoke with SunSource’s CEO , saying that “a little birdie in Connecticut” told him that SunSource was going to be sold.  Thereafter, Wynnefield’s trader received an unsolicited offer to purchase SunSource shares;  after consulting with Obus, the trader purchased the SunSource shares.  All this took place before any public announcement of the SunSource acquisition.

The SEC pursued both classic insider and misappropriation theories against Strickland, Black and Obus and also named Wynnefield entities as relief defendants.  The district, however, dismissed all the counts. 

As to the classic insider theory, the court rejected the argument that GE Capital, or its employee Strickland, became a temporary insider of SunSource when it held discussions with it about providing financing, for two reasons:  (1) GE Capital did not sign a confidentiality agreement, and (2) the potential debtor-creditor relationship did not establish a relationship of trust and confidence.

As to the misappropriation theory, the court found insufficient evidence that Strickland breached a duty owed to his employer, GE Capital, despite the fact that GE Capital had reprimanded Strickland for violating its policies that preclude an employee from engaging in any tipping or trading on inside information.  The court finds that Strickland’s conduct was not “deceitful,” noting GE Capital found only that Strickland made a “mistake.”   It expressly rejected the SEC’s argument that “deception” could be established by the “breach, tip and trade” alone and did not require any additional deceptive conduct.  The court also did not view Obus’s telling the SunShine CEO that he had information about a sale as the actions of someone acting deceptively.

These cases nicely illustrate the SEC’s difficulties in pleading and proving insider-trading cases under both the classic and misappropriation theories and perhaps reflect a judicial disinclination to extend these doctrines beyond the most obvious forms of insider trading.  It might be time for the SEC to reconsider its longstanding disinclination to establish more certain guidelines in this very difficult area.

SEC Issues Guidance on Auditing, Attestation and Professional Standards Related to Broker-Dealers

The SEC published interpretive guidance to clarify the application of certain Commission rules, regulations, releases, and staff bulletins in light of the authority granted to the Public Company Accounting Oversight Board in the Dodd-Frank Wall Street Reform and Consumer Protection Act to establish auditing, attestation, and related professional practice standards governing the preparation and issuance of audit reports to be included in broker and dealer filings with the Commission. 

Section 982 of Dodd-Frank amended the Sarbanes-Oxley Act of 20022 to authorize PCAOB, among other things, to establish, subject to approval by the Commission, auditing and related attestation, quality control, ethics, and independence standards to be used by registered public accounting firms with respect to the preparation and issuance of audit reports to be included in broker and dealer filings with the Commission pursuant to Rule 17a-53 under the Exchange Act of 19344 (“Exchange Act”). The amendments directly impact certain Commission rules, regulations, releases, and staff bulletins related to brokers and dealers and certain provisions in the federal securities laws for brokers and dealers, which refer to Generally Accepted Auditing Standards (“GAAS”) and to specific standards under GAAS (including related professional practice standards). There may be confusion on the part of brokers, dealers, auditors, and investors with regard to the professional standards auditors should follow for reports filed and furnished by brokers and dealers pursuant to the federal securities laws and the rules of the Commission.  The Commission is considering a rulemaking project to update the audit and related attestation requirements under the federal securities laws for brokers and dealers, particularly in light of the Dodd-Frank Act. In addition, the PCAOB has not yet revised its rules, which currently refer only to issuers, to require registered public accounting firms to comply with PCAOB standards for audits of non-issuer brokers and dealers.

As a result, the Commission is providing transitional guidance with respect to its existing rules regarding non-issuer brokers and dealers. Specifically, references in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific standards under GAAS, as they relate to non-issuer brokers or dealers, should continue to be understood to mean auditing standards generally accepted in the United States of America, plus any applicable rules of the Commission. The Commission intends, however, to revisit this interpretation in connection with its rulemaking project referenced above.

Judge Says She'll Approve SEC-Citigroup Settlement

The federal district judge who initially expressed concerns about the proposed SEC-Citigroup $75 million settlement said today that she would approve it after the parties agreed to additional changes in the bank's disclosure policies.  The SEC sued Citigroup alleging inadequate disclosures about its $40 billion portfolio in subprime mortgage assets in 2007.  While Judge Huvelle said that $75 million "is not going to deter anyone," she said she would defer to the agency.  WSJ, Judge Signals Approval of Citi-SEC Settlement

Volcker Critiques the Financial Crisis

Scrapping his prepared remarks, Paul Volcker shared his opinions on the financial crisis, banks, regulators and money market funds, at a luncheon talk before the Chicago Federal Reserve.  Well worth reading.  WSJ, Volcker Spares No One in Broad Critique

Senate Banking Committee Schedules Hearing on Dodd-Frank Implementation

The Senate Banking Committee will hold a hearing on Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act on September 30, 2010.  Witnesses include Neal S. Wolin, Deputy Secretary, U.S. Department of the Treasury; Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System; Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Mary Schapiro, Chairman, U.S. Securities and Exchange Commission; Gary Gensler, Chairman, Commodity Futures Trading Commission; and John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency.

Geithner Calls First Meeting of Financial Stability Oversight Counsel for Oct. 1

Treasury Secretary Tim Geithner, in his capacity as chairperson of the Financial Stability Oversight Council, announced that the Council will hold its first meeting on October 1, 2010.

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Financial Stability Oversight Council, to provide comprehensive oversight over the stability of our nation's financial system. It is charged with identifying threats to the financial stability of the United States; promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties that the government will shield them from losses in the event of failure; and responding to emerging risks to the stability of the United States financial system.

The members of the Financial Stability Oversight Council that are expected to attend the October 1 meeting include:

· Tim Geithner, Treasury Secretary (Chairperson of the Financial Stability Oversight Council)

· Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System

· John Walsh, Acting Comptroller of the Currency

· Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission

· Sheila Bair, Chairman of the Federal Deposit Insurance Corporation

· Gary Gensler, Chairman of the Commodity Futures Trading Commission

· Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency

· Debbie Matz, Chairman of the National Credit Union Administration

· John M. Huff, Director, Missouri Department of Insurance, Financial Institutions, and Professional Registration (non-voting member)

· William S. Haraf, Commissioner, California Department of Financial Institutions (non-voting member)

· David S. Massey, Deputy Securities Administrator, North Carolina Department of the Secretary of State, Securities Division (non-voting member

Hedge Fund Adviser Settles SEC Reg M Charges

The SEC today charged Dallas-based hedge fund adviser Carlson Capital, L.P. with improperly participating in four public stock offerings after selling short those same stocks.  Carlson agreed to pay more than $2.6 million to settle the SEC's charges.

The SEC's Rule 105 of Regulation M helps prevent short selling that can reduce proceeds received by companies and shareholders by artificially depressing the market price shortly before the company prices its public offering. Rule 105 ensures that offering prices are set by natural forces of supply and demand rather than manipulative activity by prohibiting the short sale of an equity security during a restricted period — generally five business days before a public offering — and the purchase of that same security through the offering. The rule applies regardless of the trader's intent in selling short the stock.

According to the SEC's order, Carlson violated Rule 105 on four occasions and had policies and procedures that were insufficient to prevent the firm from participating in the relevant offerings. For one of those occasions, the SEC found a Rule 105 violation even though the portfolio manager who sold short the stock and the portfolio manager who bought the offering shares were different.  In its order, the SEC found that the "separate accounts" exception to Rule 105 did not apply to Carlson's participation in that offering. If certain conditions are met, this exception allows the purchase of an offered security in an account that is "separate" from the account through which the same security was sold short. The Commission found that the combined activities of Carlson's portfolio managers violated Rule 105 and did not qualify for the separate accounts exception because the firm's portfolio managers:

• Could access each others' trading positions and trade reports, and could consult with each other about companies of interest.
• Reported to a single chief investment officer who supervised the firm's portfolios and had authority over the firm's positions.
• Were not prohibited from coordinating with each other with respect to trading.

The SEC further found that the portfolio manager who sold short the particular stock during the restricted period received information — before the short sales were made — that indicated the other portfolio manager intended to buy offering shares.

Without admitting or denying the SEC's findings, Carlson agreed to pay a total of $2,653,234, which includes $2,256,386 in disgorgement of improper gains or avoided losses, a $260,000 penalty, and pre-judgment interest of $136,848. Carlson also consented to an order that imposes a censure and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 105. During the SEC's investigation, the adviser took remedial measures including implementation of an automated system that helps review the firm's prior short sales before it participates in offerings.

Beyond Borders: Extraterritoriality in American Law Symposium

On November 12, 2010, Southwestern Law School in Los Angeles, California is hosting a symposium titled Beyond Borders: Extraterritoriality in American Law. This one-day symposium will bring together leading legal figures from throughout the country to analyze critical issues related to transnational litigation and extraterritorial regulation.  Do U.S. law stop at the border?  If not, when do they – or when should they – govern the conduct of people abroad?  From the controversial extraterritorial application of U.S. domestic law, to the contentious uses of universal jurisdiction in the human rights context, to debates over the extent to which the U.S. Constitution applies outside U.S. territory, a flurry of recent scholarship has involved disputes over the geographic reach of domestic law. 

The symposium will bring together leading scholars to discuss the history, doctrine, and current issues related to extraterritoriality.  The proceedings will be published in the Southwestern Law Review and distributed widely.  The following professors are participating in the symposium (listed alphabetically):

• Jeffery Atik, Professor of Law, Loyola Law School, Los Angeles
• Hannah Buxbaum, Professor of Law, Indiana Univ. Maurer School of Law
• Lea Brilmayer, Professor of Law, Yale Law School
• William Dodge, Professor of Law, University of California, Hastings College of the Law
• Stephen Gardbaum, Professor of Law, UCLA School of Law
• Andrew Guzman, Professor of Law, University of California, Berkeley School of Law
• Max Huffman, Associate Professor of Law, Indiana Univ. School of Law
• Chimene Keitner, Associate Professor of Law, University of California, Hastings College of the Law
• John Knox, Professor of Law, Wake Forest Univ. School of Law
• Caleb Mason, Professor of Law, Southwestern Law School
• Daniel Margolies, Professor of History, Virginia Wesleyan College
• Jeff Meyer, Professor of Law, Quinnipiac Univ. School of Law
• Trevor Morrison, Professor of Law, Columbia Law School
• Austen Parrish, Professor of Law, Southwestern Law School
• Tonya Putnam, Assistant Professor of Political Science, Columbia University
• Kal Raustiala, Professor of Law, UCLA School of Law
• Bartholomew Sparrow, Professor of Government, University of Texas at Austin
• Peter Spiro, Professor of Law, Temple Univ. Beasley School of Law
• Christopher Whytock, Acting Professor of Law, University of California, Irvine School of Law

Kanjorski Says SIPC Ignored Spirit of Law in Paying Madoff Victims' Claims

The House Financial Services Subcommittee on Capital Markets held a hearing today on Assessing the Limitations of the Securities Investor Protection Act.  Witnesses included:

 Mr. Joseph Borg, Director, Alabama Securities Commission
The Honorable Orlan Johnson, Chairman of the Board, Securities Investor Protection Corporation
Mr. John Coffee, Adolf A. Berle Professor of Law, Columbia Law School
Mr. Ira Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets Association
Mr. Steven Caruso, Partner, Maddox, Hargett, & Caruso

Here is some excerpts from Rep. Kanjorski's opening statement:

The victims of [Madoff's fraud] believe that SIPC has fallen short in meeting its responsibilities, and they want more change. I do, too.

We have many questions to explore today. For example, although SIPA’s protections do
not currently extend to the customers of investment advisers, we must explore the issue of
expanding SIPA’s coverage as investment advisers may also commit fraud.

In any serious efforts to reform SIPA, we must also consider what responsibility SIPC
has to honor the broker statements that customers receive. SIPC has denied the claims of
customers based on the seemingly legitimate paperwork provided to them by their brokers, yet
SIPC expects customers to use those very same statements to report unauthorized trading in their
accounts. This inconsistency is unacceptable, and we must work to resolve it.

Investor trust, for which SIPA was designed to preserve, has been seriously eroded by
SIPC’s narrow interpretations of its statutory mandate. While SIPC’s actions may follow the
letter of the law, many would argue that SIPC has ignored the spirit of the law. We therefore
must consider the best way to change the tone at SIPC and refocus this body on maintaining
confidence in the financial system and promoting investor protection. To the extent possible, we
ought to also explore how SIPC could learn from the success of the Federal Deposit Insurance
Corporation in maintaining the public’s trust.

Senate Focuses on SEC's Performance

The Senate unanimously passed S.3171 that would repeal a FOIA exemption for records obtained by the SEC during its surveillance, risk assessment, regulatory or other duties.  A companion bill has been referred to the House Oversight and Financial Services Committee.  The exemption was contained in Dodd-Frank 9291, but has been criticized for its breadth.  SEC Chair warns that the legislation could weaken the effectiveness of the examinations process.

Meanwhile, the SEC was the subject of substantial criticism yesterday by Senators on the Banking Committee at a hearing on the SEC Inspector General's Report on the SEC's handling of the Stanford matter.  Criticisms involved not only the agency's failure to uncover the alleged Stanford ponzi scheme sooner, but also more generally the failure of enforcement to hold individuals and firms accountable for the financial crisis.  The SEC Inspector General also testified that the timing of the SEC's enforcement action against Goldman Sachs last spring was suspicious, as it coincided with the Inspector General's critical report on Stanford.  WSJ, SEC Blasted on Goldman.

GAO Recommends Actions to Improve SEC Regulation of Rating Agencies

The GAO released a report on Action Needed to Improve Rating Agency Registration Program and Performance-Related Disclosures.  According to the summary:

In 2006, Congress passed the Credit Rating Agency Reform Act (Act), which intended to improve credit ratings by fostering accountability, transparency, and competition. The Act established Securities and Exchange Commission (SEC) oversight over Nationally Recognized Statistical Rating Organizations (NRSRO), which are credit rating agencies that are registered with SEC. The Act requires GAO to review the implementation of the Act. This report (1) discusses the Act’s implementation; (2) evaluates NRSROs’ performance-related disclosures; (3) evaluates removing NRSRO references from certain SEC rules; (4) evaluates the impact of the Act on competition; and (5) provides a framework for evaluating alternative models for compensating NRSROs. To address the mandate, GAO reviewed SEC rules, examination guidance, completed examinations, and staff memoranda; analyzed required NRSRO disclosures and market share data; and interviewed SEC and NRSRO officials and market participants.

The Report's recommendations include:

SEC should identify the additional time frames and authorities it needs to review NRSRO applications, develop a plan to help ensure the NRSRO examination program is sufficiently staffed, improve NRSROs’ performance-related disclosure requirements, and develop a plan to approach the removal of NRSRO references from its rules. SEC generally agreed with these recommendations.

Senate Committee Holds Hearing on SEC and Stanford

The Senate Banking Committee held a hearing today on Oversight of the SEC Inspector General’s Report on the ‘Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme’ and Improving SEC Performance.  Witnesses included H. David Kotz, Esq., Inspector General, U.S. Securities and Exchange Commission; Robert Khuzami, Esq., Director, Division of Enforcement, U.S. Securities and Exchange Commission.; and Rose Romero, the Regional Director of the SEC's Forth Worth office.  Their prepared statements and a webcast are available at the Committee's website.