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SEC broadens and extends relief for businesses affected by Covid-19
On March 25, the SEC announced that publicly traded companies have an additional 45 days, subject to certain conditions, to file annual and quarterly reports in an effort to help businesses whose operations may be affected by Covid-19. Disclosure reports due between March 1 and July 1 will be eligible for extensions if companies can justify the need, the SEC stated in the announcement, which supersedes and extends a previously issued order on March 4. To qualify for an extension, “companies must continue to convey through a current report a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed.” In addition, the SEC issued orders (see here and here) that will give certain investment funds and investment advisors more time to meet filing and delivery requirements and more flexibility to avoid in-person meetings. These orders broaden and extend relief that the SEC announced earlier this month (covered by InfoBytes here). The announcement also provides public company disclosure guidance as well as additional information with respect to certain obligations under various securities laws.
FINRA and SEC provide temporary extension of time for submission of fingerprint information
On March 20, the SEC issued an order that provides a temporary exemption until May 30, 2020, from the fingerprinting requirements of Securities Exchange Act Rule 17f-2 for FINRA members and their employees. On March 24, FINRA provided a temporary extension of time for submission of fingerprint information under Rule 1010(d) by notifying the SEC that FINRA’s members and their employees will rely on the SEC’s fingerprinting exemption. A FINRA member seeking to take advantage of this temporary exemption must comply with certain guidance published by FINRA.
SEC guidance provides regulatory flexibility for shareholder meetings
On March 13, the SEC issued guidance to assist public companies, investment companies, shareholders, and other market participants affected by Covid-19 with upcoming annual shareholder meetings. According to the SEC, the guidance is intended to facilitate the ability of companies to hold these meetings and engage with shareholders, including through the use of technology, while complying with federal and state securities laws. Specifically, the guidance provides regulatory flexibility to companies seeking to change the date and location of shareholder meetings, such as allowing affected parties to make these announcements in SEC filings without incurring additional costs.
SEC’s disgorgement authority examined during Supreme Court oral arguments
On March 3, the U.S. Supreme Court heard oral arguments in Liu v. SEC. As previously covered by InfoBytes, the principal question at issue in this case is whether the SEC’s authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. Petitioners—a couple found to have defrauded investors and ordered to disgorge $26.7 million by a California federal court—argued that disgorgement is not a form of “equitable relief” available to the SEC. Respondent SEC contended that Congress enacted several statutes that anticipated the SEC’s use of disgorgement, including the Securities Exchange Act and the Sarbanes-Oxley Act, and that historically, disgorgement has been used as an equitable remedy to deny wrongdoers of their ill-gotten gains.
Counsel for the petitioners made three primary arguments before the Court: (i) the SEC is only authorized to use the powers conferred upon it by Congress and disgorgement is not one of them; (ii) though the statute allows the SEC to seek equitable relief, disgorgement as the SEC has used it is akin to a penalty and “penalties are not equitable relief.”; and (iii) “Congressional silence…does not give an agency any authority to act, much less the authority to punish” in a manner that exceeds its existing statutory authority
Petitioners’ counsel fielded questions from Justices Ginsburg, Alito, and others that probed the limits of the petitioners’ position. The justices asked, among other things, whether disgorgement could ever be ordered by the SEC; whether it could be ordered if the profits are paid out to injured parties; and whether the Court’s holding in Kokesh v SEC, that disgorgement as a penalty should be controlling only when determining the applicable statute of limitations, which was the issue presented in that case. Petitioner’s counsel stated that “the rule should be, if you’re giving the money back to the investors, then [the SEC] can take it and not otherwise, because…then it’s just a punishment.”
Respondent’s counsel argued that the Court’s ruling in Kokesh was limited to determining the applicability of the statute of limitations. He also urged that “courts should continue to order disgorgement but compute it in accordance with traditional general equitable rules, not in accordance with any SEC-specific formula.” In response to a question from Justice Sotomayor regarding the proper recipient of disgorged funds, respondent’s counsel said that if the defrauded investors can be located, the SEC’s practice it to return disgorgement amounts to them. However, he noted that sometimes, such as in FCPA actions, there are no obvious victims to whom the money could be returned. Justice Kavanaugh asked if it would be proper for the Court to insist that the amounts received from a disgorgement order be returned to defrauded investors if at all possible. Respondent’s counsel conceded this would be within the Court’s authority, but added that the “core purposes of disgorgement are to prevent the wrongdoer from profiting from its own wrong and to deter future violations, and disgorgement can serve those traditional purposes, regardless of where the money ends up.”
On rebuttal, petitioner’s counsel asserted that “the scope of disgorgement has grown over time in part because it is not grounded in statutory text.” He contended that “there is no precedent for using an accounting to compel funds to be paid to the Treasury.” Justice Ginsburg pressed petitioner’s counsel regarding statutes that appear to be predicated on disgorgement being available. Petitioner’s counsel suggested those statutes might show that Congress was aware that courts were ordering disgorgement, but that was “not an authorization, and authorization is what’s needed…to inflict a penalty.” He closed by asking the Court to reverse the case, saying that the petitioners were already responsible to pay their entire gains from the fraud, and “anything more would go beyond the equitable principle that no individual should be permitted to profit from his or her own wrong.”
SEC settles with investment entities over ETF recommendations
On February 27, the SEC announced a settlement with a national bank to resolve allegations that two of its investment entities failed to monitor sales of exchange-traded funds (ETFs) to retail investors. The SEC alleged in its order that the bank’s compliance policies and procedures and supervisory processes were unable to adequately prevent and detect unsuitable recommendations of single-inverse ETFs, which allegedly led to bank investment advisors making recommendations to certain clients who were unaware of the risk of losses when ETFs are held long term. While the bank neither admitted nor denied the SEC’s findings, it agreed to pay a $35 million penalty and distribute funds to affected clients. The bank also agreed to cease and desist from engaging in any future violations of the relevant provisions.
SEC issues $7 million whistleblower award
On February 28, the SEC announced an award of over $7 million to a whistleblower in an enforcement action. According to the SEC’s press release, the whistleblower “provided extensive and sustained assistance, such as identifying witnesses,” which was “critically important to the success of [the] enforcement action.” The formal order also states that the whistleblower helped the SEC “understand complex fact patterns” and that “[t]he whistleblower’s information and assistance helped the SEC staff devise an investigative plan, craft document requests, and ultimately bring an important enforcement action focusing on serious financial abuses.”
The SEC’s press release states that it has awarded 73 individuals a total of approximately $394 million in whistleblower awards since 2012.
Pharmaceutical company settles FCPA-related allegations with SEC
On February 28, an Ohio-based pharmaceutical company agreed to pay over $8.8 million to settle SEC claims that the company violated the books and records and internal accounting controls provisions of the FCPA. According to the SEC, the pharmaceutical company’s former Chinese subsidiary maintained and operated marketing accounts for a European dermocosmetic company, and was the exclusive product distributor for the company in China. The SEC alleged that the dermocosmetic company directed the day-to-day activities of former subsidiary employees who “used the marketing account funds to promote the dermocosmetic company's products” and “directed payments to government-employed healthcare professionals and to employees of state-owned retail companies who had influence over purchasing decisions.” The pharmaceutical company also allegedly received a percentage of profits from sales derived from the improper payments through a profit-sharing agreement.
While the pharmaceutical company “determined that other marketing accounts should be terminated because of their significant FCPA-related compliance risks,” the SEC alleged that the pharmaceutical company “inaccurately assessed the risks of the arrangements with the dermocosmetic company as minimal” and failed to apply its full internal accounting controls to these accounts. The SEC alleged that as a result, the former subsidiary routinely authorized and made payments from the marketing accounts without being able “to provide reasonable assurance that the transactions were executed in accordance with management’s general or specific authorization, and failed accurately to record on its books and records payments made from the accounts.”
In entering into the administrative order, the SEC considered the pharmaceutical company’s self-disclosure, cooperation, and remedial efforts. Without admitting or denying wrongdoing, the pharmaceutical company consented to a cease and desist order, and agreed to pay a $2.5 million civil money penalty and approximately $6.3 million in disgorgement and pre-judgment interest.
Agencies seek comments on covered funds under Volcker Rule
On February 28, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking (NPR) to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. (Previous InfoBytes coverage of the Volcker Rule here). According to the press release, the proposed amendments “would modify and clarify the regulations concerning covered funds and would address certain related issues, including qualifying foreign excluded funds.” Among other things, the amendments to the regulations would (i) “permit the activities of qualifying foreign excluded funds”; (ii) “revise the exclusions from the definition of covered fund for foreign public funds, loan securitizations, and small business investment companies”; (iii) create exclusions from “covered fund credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles”; (iv) allow certain transactions that would otherwise be prohibited under the so-called “Super 23A” restrictions; (v) redefine “ownership interest”; and (vi) exclude certain investments from “a banking entity’s calculation of its ownership interest in the covered fund.” Comments in response to the NPR must be submitted by April 1.
Court overturns foreign bribery conviction of former transportation and energy industry executive
On February 26, the U.S. District Court for the District of Connecticut acquitted a British national and former executive of a French multinational transportation and energy company who had been convicted by a jury of FCPA violations, citing the government’s failure to prove at trial that the defendant was an “agent” of a domestic concern. The court left intact the jury’s money laundering verdicts against the defendant.
At trial in November 2019, the jury found the defendant guilty of one count of conspiracy to violate the FCPA, and six counts of substantive FCPA violations, as well as several money laundering counts, for his alleged involvement in a scheme by the company’s U.S. subsidiary, a power generation equipment manufacturer, to bribe Indonesian officials to obtain a power plant construction contract. The defendant filed a Rule 29(a) motion for a judgment of acquittal on all of the counts, arguing as to the FCPA counts that the government “failed to prove that he was an agent of [the subsidiary], the relevant domestic concern,” as required pursuant to the U.S. Court of Appeals for the Second Circuit’s earlier decision in the matter (covered by InfoBytes here). The trial court agreed, ruling that the evidence adduced at trial did not established that the subsidiary exercised “control over [the defendant’s] actions sufficient to demonstrate agency.” The court also granted the defendant’s in-the-alternative request for a new trial on the FCPA counts, in the event that court’s acquittal is later disturbed on appeal.
DOJ, SEC settle with national bank for $3 billion over sales-compensation practices
On February 21, the DOJ and SEC announced that one of the nation’s largest banks agreed to a settlement including a $3 billion monetary penalty to resolve investigations regarding their incentive compensation sales program. (See the DOJ’s Statement of Facts here). As previously covered by InfoBytes, the OCC also recently issued charges against five of the bank’s former executives, and announced settlements with the former CEO and operating committee members for allegedly failing to adequately ensure that the bank’s sales incentive compensation plans operated according to policy.
The SEC alleged in its Cease and Desist order that the bank violated the antifraud provisions of the Securities Exchange Act of 1934. The SEC’s press release states that in addition to agreeing to cease and desist from committing any future violations of the antifraud provisions, the bank agreed to a civil penalty of $500 million, which the SEC will return to harmed investors.
The bank also settled the DOJ’s civil claims under the Financial Institutions Reform, Recovery and Enforcement Act. According to the settlement, the bank accepted responsibility, cooperated in the resulting investigations, and has taken “extensive remedial measures.” In addition, the DOJ’s press release states that it entered into a three-year deferred prosecution agreement with the bank regarding the bank’s sales incentive compensation practices.