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SEC announces 2020 OCIE exam priorities
On January 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced the release of its 2020 Examination Priorities. The annual release of exam priorities provides transparency into the risk-based examination process and lists areas that pose current and potential risks to investors. OCIE’s 2020 examination priorities include:
- Retail investors, including seniors and those saving for retirement. OCIE places particular emphasis on disclosures and recommendations provided to investors.
- Information security. In addition to cybersecurity, top areas of focus include: risk management, vendor management, online and mobile account access controls, data loss prevention, appropriate training, and incident response.
- Fintech and innovation, digital assets and electronic investment advice. OCIE notes that the rapid pace of technology development, as well as new uses of alternative data, presents new risks and will focus attention on the effectiveness of compliance programs.
- Investment advisers, investment companies, broker-dealers, and municipal advisers. Risk-based exams will continue for each of these types of entities, with an emphasis on new registered investment advisers (RIA) and RIAs that have not been examined. Other themes in exams of these entities include board oversight, trading practices, advice to investors, RIA activities, disclosures of conflicts of interest, and fiduciary obligations.
- Anti-money laundering. Importance will be placed on beneficial ownership, customer identification and due diligence, and policies and procedures to identify suspicious activity.
- Market infrastructure. Particular attention will be directed to clearing agencies, national securities exchanges and alternative trading systems, and transfer agents.
- FINRA and MSRB. OCIE exams will emphasize regulatory programs, exams of broker-dealers and municipal advisers, as well as policies, procedures and controls.
Representatives urge financial regulators to strengthen cyber infrastructures
On January 7, Representatives Emanuel Cleaver II (D-MO) and Gregory Meeks D-NY) sent a letter to nine federal financial regulators urging them to strengthen their financial infrastructures against possible cyber-attacks in the wake of recent threats against the U.S. from Iran and its allies following the killing of Iranian official Qasem Soleimani. The letter also requests that the regulators coordinate with law enforcement and regulated entities to increase information sharing surrounding cyber threats, and “communicate a strategy to further mitigate existing cyber vulnerabilities within [the U.S.] financial infrastructure by March.” The letter was sent to the Federal Reserve Board, Treasury Department, SEC, FDIC, CFPB, Federal Housing Finance Agency, Commodity Futures Trading Commission, National Credit Union Administration, and the OCC.
As previously covered by InfoBytes, NYDFS separately issued an Industry Letter on January 4 warning regulated entities about the “heightened risk” of cyber-attacks by hackers affiliated with the Iranian government. The letter provides recommendations for ensuring quick responses to any suspected cyber incidents, and reminds entities they must inform NYDFS “as promptly as possible but in no event later than 72 hours’ after a material cybersecurity event.”
SEC settles FCPA charges stemming from Malaysian development fund scheme
On December 16, the SEC announced a resolution with a former executive at a U.S. financial institution to settle allegations that he violated the anti-bribery, internal controls, and books and records provisions of the FCPA by using a third party intermediary to bribe government officials in Malaysia and Abu Dhabi. According to the administrative order, the bribes enabled the financial institution to obtain business from a Malaysian investment development fund, including underwriting several bond deals for which the financial institution allegedly earned roughly $600 million. The SEC further found that the former executive personally received more than $43 million in payments for his alleged role in facilitating the bribery scheme.
The former executive consented to the order without admitting or denying the factual basis, and consented to being permanently barred from the securities industry. He also agreed to pay disgorgement of $43.7 million, which will be offset and “deemed satisfied” by a forfeiture order in a previously instituted parallel DOJ criminal action where he pleaded guilty to FCPA and money laundering conspiracies. (Previous InfoBytes coverage here.)
FTC asks Supreme Court to delay review of $1.3 billion judgment
On December 13, the FTC filed a brief in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. The question presented to the Court asks whether the FTC is empowered by Section 13(b) of the FTC Act to demand equitable monetary relief in civil enforcement actions. The petitioners, who include a Kansas-based operation and its owner, filed the petition for a writ of certiorari in October, appealing a December 2018 decision by the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme. Among other things, the 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. The 9th Circuit also rejected the petitioners’ request to revisit those precedents in light of the Court’s 2017 holding in Kokesh v. SEC—which limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462 (previously covered by InfoBytes here)—concluding that the district court did not abuse its discretion in calculating the award. Additionally, the 9th Circuit referenced the Court’s statement in Kokesh that noted “[n]othing in [its] opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”
In response to the petition, the FTC asked the Court to delay reviewing the appeal, stating that the Court should hold the petition pending the disposition in a matter that was recently granted cert “to decide whether district courts may award disgorgement to the [SEC] under analogous provisions of the securities laws.” The FTC acknowledged that while the “relevant statutory schemes are not identical, and the FTC’s and the SEC’s authority to seek monetary relief will not necessarily rise and fall together,” the questions presented in both cases overlap.
Broker to pay nearly $4 million to settle ADR mishandling claims
On December 9, the SEC announced a settlement with a broker to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s order, the broker improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker neither admitted nor denied the SEC’s allegations, but agreed to pay more than $2.2 million in disgorgement, roughly $468,000 in prejudgment interest, and a $1.25 million penalty. The SEC’s order acknowledged the broker’s cooperation in the investigation and that the broker had entered into tolling agreements.
10th Circuit affirms $5 million disgorgement in Kokesh
On December 6, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s revised disgorgement order in SEC v. Kokesh. As previously covered by InfoBytes, in 2017, the U.S. Supreme Court handed down a unanimous ruling in Kokesh and rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty. The Court’s decision limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462. Following the Court’s ruling, in 2018, the 10th Circuit, on remand, directed the district court to enter an order for a lower disgorgement amount of $5 million (from nearly $35 million), holding that only a portion of the SEC’s claims were not time-barred by 28 U.S.C. § 2462. At the district court, the SEC also argued that prejudgment interest of more than $2.6 million should apply to the disgorgement penalty, as well as nearly $2.3 million in civil penalties, and the district court awarded such amounts, rejecting Kokesh’s argument that “the district court should reject any relief other than an order of disgorgement.” Kokesh again appealed, arguing, among other things, that “§ 2462 is jurisdictional and precludes this action in its entirety,” and that the permanent injunction and civil penalties were invalid.
On appeal, the 10th Circuit refused to address Kokesh’s jurisdictional argument, stating that, among other things, the appellate court had previously found that “each act of misappropriation should be considered separately” and that not all of the SEC’s claims were time-barred. The appellate court further concluded that because it had previously found that some alleged misappropriations happened within the five-year limit, the $5 million disgorgement calculation that the SEC requested was warranted. Moreover, the appellate court noted that Kokesh failed to show any reason that its 2018 decision was “clearly erroneous,” and during remand, “rather than. . .contesting timeliness or the SEC’s calculations, Kokesh conceded the district court should enter the disgorgement order and instead focused on the SEC’s new request for prejudgment interest.” Additionally, the appellate court refused to consider Kokesh’s challenges to the permanent injunction and the civil penalty ordered because they were first raised in Kokesh’s reply brief.
Swedish telecommunications company resolves FCPA allegations with DOJ, SEC
On December 6, the DOJ announced that it entered into a deferred prosecution agreement with a Swedish-based telecommunications company, in which the company agreed to pay more than $1 billion in criminal and civil penalties related to alleged violations of the FCPA’s anti-bribery, books and records, and internal control provisions. The company’s Egyptian subsidiary also pleaded guilty in New York federal court to a one-count criminal information that charged it with conspiracy to violate the FCPA’s anti-bribery provisions. The SEC simultaneously announced a resolution with the company. Under the terms of the agreements, the company agreed to pay a criminal fine of more than $520 million to the DOJ, and will cooperate with any ongoing investigations, enhance its compliance program, and be subject to an independent compliance monitor for three years. An additional $540 million in disgorgement and interest will be paid to the SEC. The announcements cited improper payments and accounting practices regarding five countries and various third party agents. The company received partial cooperation credit and a 15 percent criminal fine reduction for (i) “conducting a thorough internal investigation” and “making regular factual presentations to the [D]epartment”; (ii) voluntarily making foreign witnesses available to prosecutors; and (iii) “producing extensive documentation and disclosing some conduct of which the [D]epartment was previously unaware.” Additionally, the DOJ recognized the company’s measures to improve its anti-bribery compliance processes.
House passes bill to let SEC go back 14 years on disgorgement
On November 18, the U.S. House passed the Investor Protection and Capital Markets Fairness Act (H.R. 4344) by a vote of 314-95. The bill, which was received in the Senate, would overturn the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC, which limits the SEC’s disgorgement power and subjects the agency to the five-year statute of limitations applicable to penalties and fines. (Previously covered by InfoBytes here.) As discussed in a recent Buckley article, in Kokesh’s wake, H.R. 4344 would amend the Securities Exchange Act of 1934 by specifically authorizing the SEC to seek disgorgement and restitution, putting to rest the threshold question of whether the SEC has the authority to seek disgorgement. Notably, on November 1, the Court granted certiorari in Liu v. SEC to answer this very question. If signed into the law, H.R. 4344 would allow the SEC 14 years to pursue disgorgement in federal court under the statute of limitations.
SEC monetary sanctions in whistleblower program top $2 million for 2019
On November 15, the SEC announced it issued its fiscal year 2019 whistleblower program annual report to Congress, which states that since the program’s inception, the SEC has ordered over $2 billion in total monetary sanctions in enforcement actions that resulted from information brought by meritorious whistleblowers. As for FY 2019, the SEC received over 5,200 whistleblower tips, with over 300 tips relating to cryptocurrencies, and awarded approximately $60 million in whistleblower awards to eight individuals. Since the program’s inception, the SEC has awarded approximately $387 million to 67 whistleblowers. The report acknowledges that FY 2019 was an “unusual year” due to the lapse in appropriations, referring to the government shutdown from the end of December 2018 through most of January 2019, and includes a summary of the six actions leading to the eight awards of FY 2019. The report notes that the agency anticipates final rules to be adopted in FY 2020 related to the July 2018 proposed amendments to the whistleblower program (covered by InfoBytes here). The proposed amendments, among other things, address the Supreme Court ruling in Digital Realty Trust, Inc. v. Somers (covered in a Buckley Special Alert) and authorize the SEC to adjust an award’s percentage as appropriate to advance the goals of rewarding and incentivizing whistleblowers.
On the same day, the SEC announced a collective award of over $260,000 to three whistleblowers who submitted a joint tip “alerting the agency to a well-concealed fraud targeting retail investors,” which led to a successful enforcement action. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. With this new action, the SEC has now awarded approximately $387 million to 70 whistleblowers.
2nd Circuit denies three petitioners seeking whistleblower awards for SEC settlement
On November 8, the U.S. Court of Appeals for the Second Circuit denied petitions from three whistleblowers seeking awards following a $55 million settlement between the SEC and a global financial institution, which the SEC previously denied. According to the opinion, multiple individuals disclosed information to the SEC during an investigation into the financial institution’s financial statements. In 2015, the SEC reached a settlement with the institution, and nine whistleblower claimants filed applications to receive awards based on the information they provided. The SEC granted the applications for two claimants and denied the rest. The three individuals involved in this action were denied the awards because the SEC concluded that the individuals “did not provide ‘original information that led to a successful enforcement action,’” as required by the Securities and Exchange Act’s whistleblower provisions. Specifically, for the two named individuals, the SEC determined that it had already received the information they provided through an individual known as “Claimant 2,” who had previously submitted an expert report prepared by the two individuals to the SEC. The appellate court agreed with the determination made by the SEC, concluding that “their [] submission did not significantly contribute to the success of the [] action; Claimant 2ʹs submissions did.” The appellate court noted that the individual’s expert report did not qualify for Rule 21F‐4’s “original source exception,” which was designed to treat information submitted to another federal agency as though it had been submitted to the SEC directly.
As for the third, unnamed individual, the appellate court also denied the petition, concluding that the unnamed individual’s interpretation of the whistleblower program would “disincentivise whistleblowers from curating their submissions.” Specifically, the SEC asserted that the unnamed individual “‘appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws’” and “‘brought with him to the meeting a wet brown paper bag containing what he claimed to be evidence.’” The SEC further noted that the documents were “jumbled and disorganized” and ultimately used similar information brought by a subsequent whistleblower. The appellate court noted that “[a] whistleblower might still be rewarded for being the first to bring incriminating information to the SECʹs attention, but only if that information is contained in a credible, and ultimately useful submission.”