Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement...

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CONFIDENTIAL © Copyright Baker Botts 2017. All Rights Reserved. Securities Enforcement Forum 2017 October 26, 2017 Ten Questions Key to the Current Regulatory Climate

Transcript of Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement...

Page 1: Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement Philosophy • Limited record: – confirmation testimony – speech to the Economic

CONFIDENTIAL©CopyrightBakerBotts2017.AllRightsReserved.

SecuritiesEnforcementForum2017October26,2017

TenQuestionsKeytotheCurrentRegulatoryClimate

Page 2: Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement Philosophy • Limited record: – confirmation testimony – speech to the Economic

BAKERBOTTS

CurrentStateofFinancialRegulation

• SECpenaltiesdown66%yearoveryear• FINRAenforcementnumbersalsodecliningfromrecord2016• SECandFINRAleadershipfocusingonretailinvestorprotection

– Ponzischemes,boilerrooms,pennystocks,affinityfraud,salespracticeabuse

• Theseareaswillremaintheprioritiesuntilovertakenbyeventsorpoliticalchange• Expectadeclineinnon-scienter andsupervision-basedactions• RegulatorsandCongressalignedinthefocusonfraudandintentionalmisconduct• Stateattorneygeneralsremainactiveandunpredictable• Classactionsonarecordpace,drivenbyqualitativematerialitytheories• Customerarbitrationclaimsatrecordlowlevels

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ParticularChallengesFacingFINRA

• Migrationofassetstoadvisoryaccounts/fiduciarydutyrule/lackofjurisdictionoveradvisoryaccounts

• Riseofindexinvestingandfintech• Declineintaxabletradingvolumes• FailuretowinCATprocessor/viabilityofRSA business• Declineinbroker-dealers

– 80percentormoreofregisteredrepresentativesworkfor20largestfirms– NumberofB/D's stillexceedshistoricallevels

• Absenceofpoliticalsupportforlargerrole• Unpredictablecashflowstreams• FINRA360Reviewdesignedtoidentifyrisksandopportunities

– combinationofduplicativeenforcementandexaminationfunctions– rightsizeorganizationtoitsrevenuestream

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Page 4: Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement Philosophy • Limited record: – confirmation testimony – speech to the Economic

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SECChairClayton'sEnforcementPhilosophy

• Limitedrecord:– confirmationtestimony– speechtotheEconomicClubofNewYork,July12,2017– limitednumberofenforcementactions

• Strongfocusonretailinvestorprotection"Mr.&Mrs.401(k)"• Vigorouspursuitofthosewho"lie,cheatandsteal"• Skepticalofsystemsandsupervisioncases• Compliancecostsversusbenefitstoinvestors

– AML,controlarchitecturefailures

• Individualaccountabilityprovidesthegreatestdeterrence• Penaltiestiedtoshareholderbenefit,shareholderloss,existenceofa"real"victim,

andlevelofintent

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Question1:Isitsafertooperateingrayareas?

• No• NeithertheSECnortheDepartmentofJusticehasmuchofanappetiteforpursing

negligence-basedcaseswherethereisnobenefittoshareholdersoridentifiablevictims,butthereiseveryindicationthatintentionalviolationsofcriminalandcivilstatutesgoverningbusinessconductwillbevigorouslypursued.

• Companywouldbefoolishtocourtdisasterbycuttingbackonsystemsorcomplianceortakingmoreaggressivepositionsonitsfinancialreportinginhopesthatregulatorswillnotpursuetheconduct.

• NoindicationthatwillfulblindnesswillbetoleratedinsuchhighpenaltyareasastheForeignCorruptPracticesAct,theSecuritiesActof1933andtheSecuritiesandExchangeActof1934,insidertrading,ormailandwirefraud.

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Question2:Doindividualshavealowerriskofprosecution?

• No• TheHolyGrailofcorporateenforcementactionsremainstheprosecutionof

responsibleindividuals.• OneofthefirststatementsofferedbyChairClaytonduringhisconfirmationwas

thatnothingprovidesdeterrencelikethevigorousprosecutionofindividuals.• TheDepartmentofJusticeproceduresareexplicitinrequiringprosecutorsto

justifythefailuretonameindividualcorporateemployeesiftheyproposesettlingacorporateprosecutionwithanactionsolelyagainstthecorporation.

• PerAGSessions“theDepartmentofJusticewillcontinuetoemphasizetheimportanceofholdingindividualsaccountableforcorporatemisconduct.Itisnotmerelycompanies,butspecificindividuals,whobreakthelaw.”

• FINRAalsofocusedonnamingindividuals,particularlyinhighriskareas

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BAKERBOTTS

Question3:Haswhistleblowerriskdeclined?

• No• Noindicationthatwhistlebloweractivityisdrivenbyenforcementpolicies• VastmajorityofthewhistleblowercomplaintsreceivedbytheSECarefiledby

lawyersonbehalfofclientsseekingbountypayments• Whistleblowercomplaintshavealsobecomeakeystrategicleverinemployment

disputes,ofteninanefforttogaintheprotectionofanti-retaliationprovisions• Othermotivatingfactorsaretheabsenceofinternalreportingmechanisms,

distrustofthecorporateculture,andagenuinefeelingthattheemployeehasbeenaggrieved

• SECexpandingthepoolofeligiblewhistleblowerstoincludestateandlocalgovernmentpersonnelinnon-enforcementpositionsandthoseparticipatinginthewrongdoing

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Question4:Canweexpectlowerfinesandpenalties?

• Yes,unlessthereiscompellingevidenceoffraud• SECreturningtotheStatementoftheSecuritiesandExchangeCommission

ConcerningFinancialPenalties,SECRelease2006-4(January4,2006)• Keydriversare(1)thepresenceorabsenceofadirectbenefittothecorporation

asaresultoftheviolation;(2)thedegreetowhichthepenaltywillrecompenseorfurtherharminjuredshareholders;(3)theneedtodetertheparticulartypeofoffense;(4)whethercomplicitywaswidespreadthroughoutthecorporation;(5)thelevelofintentoftheperpetrators;(6)thedegreeofdifficultyindetectingtheparticulartypeofoffense;(7)thepresenceofremedialsteps;and(8)theextentofcooperationwithlawenforcement.

• Appliedliterally,drasticreductionofpenaltiesincomplexsystemsandsupervisioncasesasbydefinitiontheconductinthesemattersdoesnotinvolveintentionalwrongdoing,complicity,orabenefittoshareholders,andthevastmajorityofsystemsfailuresareremediatedbythecorporation.

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Question5:Willthebenefitsofself-reportingbecomemoreapparent?

• Yes• SECappearstobelookingforwaystovisiblyrewardcompanieswhoself-report

misconduct.• Recentenforcementactionssuggestthatfineswillbelowerforthosecompanies

whoself-reportandprovidemeaningfulcooperation.• FINRA,stressingrestitutionoverpenaltiesandrewardingthefirmswhofindand

fixtheirownproblems.• FINRAhasbeenamongthemostaggressiveinrewardingself-reportingdespite

thefactthatFinraRule4530requiresfirmstoself-reportmaterialissues• Evenifyoudonotfindtheissue,promptremedialactionwillbecreditedbythe

regulators

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Question6:WhatwillbetheeffectofKokesh v.U.S.ontheSECEnforcementProgram?

• LimitedpracticaleffectonfinancialremediesinSECactions• Footnote3oftheOpinioninvitesachallengetotheuseofthedisgorgement

remedyasapenaltyunauthorizedbystatute• SECcanalwaysaddwhattheywouldhavegottenasdisgorgementtothepenalty

amount.• Willincreasetheuseoftollingagreements• WillpressureSECtocompletecasesinfiveyears

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Page 11: Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement Philosophy • Limited record: – confirmation testimony – speech to the Economic

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Question7:Istheremoreflexibilityindiscipliningsenioremployees?

• Probablynot• Individualdisciplineisoneofthemostcompellingwaysinwhichacorporation

communicatestoregulatorsthatit“getsit”.• Alsoconsistentwitheffectiveremediation• Marketexpectsthatthecorporationwilltakemeaningfulstepstomovebeyond

theissue

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Question8:WillSECandFINRAinvestigationsbecomelessexhaustiveandexpensive?

• No,ifcaseturnsonintentandindividualliability• Toughestchallengeforinvestigatorsincomplexcasesisprovingintentand

identifyingculpableindividuals• Diffusionofresponsibilitiesrequiresmoretestimonyandemailreview• Settlementoffraudchargeswithoutanindividualdefendantwillbemorerare• Companiesshouldcarefulreviewextentofindemnificationobligationsand

insurancecoverage• Notargetingoflegalandcompliancepersonnel,particularlyinsupervisioncases

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Page 13: Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement Philosophy • Limited record: – confirmation testimony – speech to the Economic

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Question9:WhatistheeffectofFinra's combinationofenforcementfunctions?

• "Speedcamera"tradereportinganddataentrycasesshoulddecline• MorethoroughvettingofMarketRegulationcasesshouldleadtomorelogical

outcomes• RoleofRSA clientsinenforcementmattersmaydecline• Opensthedoorforabroadrangeofworkstreamimprovements• AccretivewithotherchangeslikelytocomeoutofFINRA360• Expectsignificantturnoveroflongstandingstaff• ClosercoordinationwithSECtoavoidregulatoryduplication

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Question10:Havethestandardschangedforwhentolaunchaninternalinvestigation?

• Yes.• Redflags,hotlinereports,andallegedviolationsofcorporatepoliciesandcodes

ofconductmustberesolvedintheordinarycoursepursuanttoestablishedWSPs.• Thereismoreleewayincraftinganincrementalandrisk-basedresponseto

allegations.• Theuseofinternalmechanisms,suchasin-houselawyers,internalauditors,and

corporatecompliancepersonnelintheinitialstagesisquitereasonablewheretheallegationsdonotimplicateamaterialbusinesslineorseniorcorporateofficers.

• Documentationofthereview,thepreservationofrelevantevidence,theuseofpersonnelwhoseconductisnotatissue,andstrongreportinglinesarekey,asisthewillingnesstochangetheinvestigativeplaniftheevidencesuggestsbroaderissuesoramoresignificantreputationalrisk.

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