Over the last several years, the Securities and Exchange Commission (the “SEC”) and the Commodities Futures Trading Commission (“CFTC”) have been laser-focused on the use of so called “off-channel communications” in the financial services industry. On the theory that employees’ use of personal devices to communicate about business matters violates the “books and records” rules as these communications are not saved in company systems, regulators have conducted intrusive and extensive investigations requiring employees to turn over their personal devices for review. SEC Chairperson Gary Gensler recently stated that “bookkeeping sweeps are ongoing,” having resulted in well over $1 billion in fines so far. While the first round of investigations focused on the large banks, this “sweep” has since spread to hedge funds, credit rating agencies, online banking platforms, and now, to regional banks.
Securities Exchange Commission (SEC)
SEC Showcases Lesser-Known Legal Theory in Crypto Lending Suit
The Securities Exchange Commission (“SEC” or “Commission”) has taken action against Genesis Global Capital, LLC (“Genesis”) and Gemini Trust Company, LLC (“Gemini”) (collectively, “Defendants”) in a recently-filed complaint alleging that the crypto companies violated federal securities laws by engaging in the unregistered offer and sale of securities in the form of their “Gemini Earn Agreements.” In doing so, the Commission not only relied upon the mainstay Howey Test for determining whether an agreement is a security, but also summoned Howey’s lesser-known cousin, the Reves Test, notably leading with the latter in its complaint.…
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SEC Adopts Amendments Regarding Insider Trading Plans and Related Disclosures
On December 14, 2022, the Securities and Exchange Commission (the “SEC”) adopted amendments to modernize Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and add new disclosure requirements to enhance investor protections against insider trading. Rule 10b5-1, which was adopted in 2000, provides a safe harbor for corporate insiders such as officers and directors to buy or sell company stock without violating insider trading regulations under Section 10(b) of the Exchange Act, and Rule 10b-5, if trades are made pursuant to pre-determined trading plans, also known as Rule 10b5-1 plans, entered into at a time when such parties are not privy to any material nonpublic information.…
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NYAG’s Warning to Crypto Businesses Muddies Regulatory Waters; Compliance Requirements Remain Elusive
New York’s chief law enforcement agency recently squandered an opportunity to bring much needed guidance to the digital assets space. On October 18, 2021, the Office of New York Attorney General, Letitia James (“NYAG”), issued a press release warning New York businesses that offer interest-bearing accounts to customers depositing virtual currency without having registered under New York General Business Law § 352, et seq. (the “Martin Act”) are breaking the law.
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A September to Remember: Coinbase Avoids SEC Clash by Dropping Crypto Lend Product
Last week, Coinbase Global Inc. (“Coinbase”) headed off confrontation with the Securities and Exchange Commission (“SEC”) by announcing it was shelving a much ballyhooed digital asset lending product, Lend. The announcement came two weeks after Coinbase revealed that it had received a Wells notice from the SEC warning the company of its plans to sue over Coinbase’s planned October Lend launch.
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Second Circuit Upholds Enforceability of SEC Tolling Agreements
In Securities & Exchange Comm’n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission (“SEC”) civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading. The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933. On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. § 2462 despite the parties having entered into tolling agreements. Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm’n, 140 S. Ct. 1936 (2020). After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that § 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties’ tolling agreements. The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries. The court also rejected defendant’s arguments alleging improper civil penalty and disgorgement calculations.
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SEC Proposal to Exempt Finders from Registration Generates Split Reaction
A Securities and Exchange Commission (“SEC”) plan to create a registration exemption for certain finders has generated a mixed response. The nearly 90 comments received by the SEC by the November 12, 2020 close of the comment period reflect a clear divide along predictable lines. Broker-dealers, issuers, and some practitioners lauded the proposal for bringing regulatory clarity to what has long been a cloudy issue while regulatory groups and investor advocates criticized the plan for allowing unregistered finders to conduct brokerage activities without sufficient investor protection mechanisms.
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OCIE Director Instructs Advisers to Empower Chief Compliance Officers
On November 19, 2020, Peter Driscoll, director of the Office of Compliance Inspection and Examination (“OCIE”) of the Securities and Exchange Commission (“SEC”), gave a speech urging advisory firms to empower their Chief Compliance Officers (“CCOs”). The speech, made at the SEC’s annual compliance outreach conference, accompanied OCIE’s Risk Alert, issued the same day, identifying notable deficiencies and weaknesses regarding Registered Investment Advisors (“RIAs”) CCOs and compliance departments. Driscoll’s speech complemented the Risk Alert by outlining the fundamental requirements for CCOs: “empowered, senior and with authority.” …
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Ninth Circuit Reverses SEC Disgorgement Award and Remands in First Decision Post-Liu
For the first time outside of the originating case itself, a federal appeals court was called upon to apply the principles governing disgorgement in SEC enforcement actions established by the United States Supreme Court’s high-profile decision in Liu v. Securities & Exchange Comm’n, No. 18-1501, 2020 WL 3405845 (U.S. June 22, 2020) (see our prior blog article here). In Securities & Exchange Comm’n v. Yang, No. 19-55289, 2020 WL 4530630 (9th Cir. Aug. 6, 2020), the United States Court of Appeals for the Ninth Circuit reviewed a district court order, issued eighteen months before the Supreme Court spoke in Liu, awarding the SEC disgorgement. In an unpublished memorandum decision, the Court of Appeals reversed the disgorgement awards and remanded the case to the district court to explicitly determine whether the awards comported with the requirements for such relief under Liu. The Yang decision drew attention because it served as an example of how the high court’s decision is impacting appellate review of disgorgement awards. If Yang is any indication, courts of appeal will be remanding cases to district courts with instruction to reach specific findings regarding compliance with Liu’s disgorgement requirements.
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D.C. Circuit Rejects SEC’s Program Testing Exchange Fees and Rebates
On June 16, 2020, the U.S. Court of Appeals for the District of Columbia Circuit held that the Securities and Exchange Commission (“SEC”) lacks the authority to administer a two-year pilot program designed to review the fees and rebate structure used by U.S. stock exchanges. As discussed in our previous article, major U.S. exchanges, such as New York Stock Exchange, CBOE, Global Markets, and Nasdaq sought review to challenge the pilot program. In New York Stock Exchange LLC v. SEC, No. 19-1042 (D.C. Cir. Jun. 16, 2020), the Court sided with the exchanges, holding that the SEC exceeded its authority by creating a program whose thrust was merely to test whether the current pricing structure was problematic.
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Supreme Court Limits SEC’s Authority to Disgorge Ill-Gotten Gains in Civil Suits
On Monday, the Supreme Court placed significant limits on the Securities and Exchange Commission’s (“SEC”) ability to seek disgorgement, a powerful tool that often was used more like a penalty than an equitable remedy. The Supreme Court held the SEC may only seek disgorgement of ill-gotten gains that do not exceed a wrongdoer’s net profits and are awarded for victims under 15 U.S.C. §78u(d)(5)’s provision of equitable relief. This opinion reaffirms the SEC’s power to seek disgorgement of ill-gotten gains through civil actions as equitable relief, eliminating any doubt created by its prior opinion in Kokesh v. SEC. However, the Supreme Court left a few key questions for lower courts to decide, such as what may be considered legitimate expenses and deducted from a disgorgement award, and whether the Government can retain the funds disgorged by the defendants. The resolution of these issues may provide additional relief to future defendants in SEC enforcement cases.
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