SEC Speaks 2017

Commission staff highlight key developments and successes in the SEC enforcement program.

As they do every year, senior officials from the US Securities and Exchange Commission (SEC or the Commission), including current and former commissioners, recently gathered at the SEC Speaks conference held in Washington, DC to highlight the Commission's accomplishments in fiscal year 2016 and announce its priorities for 2017. Officials from the SEC's Division of Enforcement (Division or Enforcement Division) offered guidance to securities law practitioners as to best advocacy practices in defending enforcement actions, repeatedly emphasized the benefits of extraordinary cooperation with the enforcement staff in investigations and litigation, and discussed recent court decisions and issues pending before the federal courts, all of which will have a significant impact on the SEC's enforcement program. In addition, in their prepared remarks, Acting SEC Chair Michael Piwowar and Commissioner Kara Stein—the sole members of the Commission at the moment—focused on investor protection, including the importance of empowering investors through transparency and disclosure of information, while Acting Chair Piwowar also questioned whether assessing civil monetary penalties on corporations in enforcement actions unduly harms investors instead of protecting the marketplace.

Straight from the Source: Practical Tips for Advocacy Before the Commission

Joseph Brenner, chief counsel of the Division, expressed surprise at defense counsels' lack of focus on the decisions and opinions of the Commission when advocating before the SEC Staff (Staff) and in Wells submissions. Mr. Brenner emphasized that, from the Division's perspective, the Commission's view on legal issues is the view that the Staff will apply unless it is discussing a litigated matter in the federal district courts. In particular, Mr. Brenner highlighted several recent Commission opinions addressing negligence-based claims and what evidence the Commission deems necessary to prove such a violation, as well as potential defenses to such claims.1

Mr. Brenner noted that in order to prove a negligence-based claim, the Division must prove that the alleged wrongdoer failed to exercise reasonable care.2 Mr. Brenner stated that, when considering the reasonableness of the alleged misconduct, the Commission applies a higher threshold to individuals (or entities) that have a heightened legal duty, such as an investment adviser who owes a fiduciary duty to clients. He cited as an example Robare Group Ltd., which involved an alleged conflict of interest that the investment adviser did not disclose in its Form ADV. The Commission found that while the adviser did not intend to defraud clients by its failure to disclose the conflict, it was negligent for failing "to use the 'degree of care that a reasonably careful person would use under like circumstances.'"3 Mr. Brenner suggested, however, that if the respondent had not been an adviser with both a fiduciary duty and a duty to disclose, the Commission's reasonableness analysis might have reached a different conclusion.

Finally, Mr. Brenner discussed the use of a "reliance on the advice of counsel" defense to counter negligence-based claims, again referencing the Commission's opinion in Robare. In the initial decision underlying the Commission's opinion, the administrative law judge (ALJ) found that the Division had failed to prove that the Robare Group (the respondents) had acted with scienter, recklessness, or even negligence, and placed great weight on evidence that respondents had reasonably relied in good faith on guidance from two compliance firms in preparing the firm's Form ADV disclosure.4 In its opinion, the Commission found that the respondents' reliance on others did not negate a finding of negligence. Mr. Brenner noted that the Commission's Robare opinion suggests that a reliance on counsel defense, which has generally developed in the context of scienter-based claims,5 may be a defense to negligence-based claims in some instances. However, the opinion found that the Robare respondents could not reasonably rely on advice that a potential conflict of interest did not need to be disclosed because they knew they were required to disclose potential conflicts of interest.6

Insider Trading, Limitations on Relief, and Constitutional Battles: Litigation Developments in 2017

Members of the Enforcement Division's Trial Unit and Office of General Counsel discussed several important federal criminal and civil cases impacting the Commission's enforcement program, including (i) Salman v. United States, which resolved the differing decisions by the Second and Ninth Circuits' courts of appeals on what the government must prove in order to show that a tipper in an insider trading case received a "personal benefit" in exchange for a tip;7 (ii) the current split between the Tenth8 and Eleventh9 Circuits' courts of appeals regarding the application of the five-year statute of limitations under 28 U.S.C. § 2462 to SEC claims for disgorgement in enforcement actions, and the Supreme Court's grant of certiorari to resolve it;10 and (iii) the ongoing litigation challenging whether the SEC's appointments of its ALJs violate the Appointments Clause of the Constitution because they are "inferior officers" who were not appointed by the president.11

Panelist and former SEC Chair David S. Ruder stated that the potential ramifications of a Supreme Court decision stating that ALJs are inferior officers are "severe," explaining that such a holding would not only affect ALJs within the SEC but all ALJs throughout the federal government. He also questioned whether ALJ decisions would be retroactively overturned. Solicitor Michael A. Conley responded that if it were ultimately decided that ALJs are inferior officers, such issues would have to be addressed by the Commission and the Department of Justice "down the road."

Cooperate to Mitigate: Cooperation Yields Array of Benefits for Defendants

Bridget Fitzpatrick, acting...