Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement...
Transcript of Ten Questions Key to the Current Regulatory Climate · BAKER BOTTS SEC Chair Clayton's Enforcement...
CONFIDENTIAL©CopyrightBakerBotts2017.AllRightsReserved.
SecuritiesEnforcementForum2017October26,2017
TenQuestionsKeytotheCurrentRegulatoryClimate
BAKERBOTTS
CurrentStateofFinancialRegulation
• SECpenaltiesdown66%yearoveryear• FINRAenforcementnumbersalsodecliningfromrecord2016• SECandFINRAleadershipfocusingonretailinvestorprotection
– Ponzischemes,boilerrooms,pennystocks,affinityfraud,salespracticeabuse
• Theseareaswillremaintheprioritiesuntilovertakenbyeventsorpoliticalchange• Expectadeclineinnon-scienter andsupervision-basedactions• RegulatorsandCongressalignedinthefocusonfraudandintentionalmisconduct• Stateattorneygeneralsremainactiveandunpredictable• Classactionsonarecordpace,drivenbyqualitativematerialitytheories• Customerarbitrationclaimsatrecordlowlevels
2
BAKERBOTTS
ParticularChallengesFacingFINRA
• Migrationofassetstoadvisoryaccounts/fiduciarydutyrule/lackofjurisdictionoveradvisoryaccounts
• Riseofindexinvestingandfintech• Declineintaxabletradingvolumes• FailuretowinCATprocessor/viabilityofRSA business• Declineinbroker-dealers
– 80percentormoreofregisteredrepresentativesworkfor20largestfirms– NumberofB/D's stillexceedshistoricallevels
• Absenceofpoliticalsupportforlargerrole• Unpredictablecashflowstreams• FINRA360Reviewdesignedtoidentifyrisksandopportunities
– combinationofduplicativeenforcementandexaminationfunctions– rightsizeorganizationtoitsrevenuestream
3
BAKERBOTTS
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
4
BAKERBOTTS
Question1:Isitsafertooperateingrayareas?
• No• NeithertheSECnortheDepartmentofJusticehasmuchofanappetiteforpursing
negligence-basedcaseswherethereisnobenefittoshareholdersoridentifiablevictims,butthereiseveryindicationthatintentionalviolationsofcriminalandcivilstatutesgoverningbusinessconductwillbevigorouslypursued.
• Companywouldbefoolishtocourtdisasterbycuttingbackonsystemsorcomplianceortakingmoreaggressivepositionsonitsfinancialreportinginhopesthatregulatorswillnotpursuetheconduct.
• NoindicationthatwillfulblindnesswillbetoleratedinsuchhighpenaltyareasastheForeignCorruptPracticesAct,theSecuritiesActof1933andtheSecuritiesandExchangeActof1934,insidertrading,ormailandwirefraud.
5
BAKERBOTTS
Question2:Doindividualshavealowerriskofprosecution?
• No• TheHolyGrailofcorporateenforcementactionsremainstheprosecutionof
responsibleindividuals.• OneofthefirststatementsofferedbyChairClaytonduringhisconfirmationwas
thatnothingprovidesdeterrencelikethevigorousprosecutionofindividuals.• TheDepartmentofJusticeproceduresareexplicitinrequiringprosecutorsto
justifythefailuretonameindividualcorporateemployeesiftheyproposesettlingacorporateprosecutionwithanactionsolelyagainstthecorporation.
• PerAGSessions“theDepartmentofJusticewillcontinuetoemphasizetheimportanceofholdingindividualsaccountableforcorporatemisconduct.Itisnotmerelycompanies,butspecificindividuals,whobreakthelaw.”
• FINRAalsofocusedonnamingindividuals,particularlyinhighriskareas
6
BAKERBOTTS
Question3:Haswhistleblowerriskdeclined?
• No• Noindicationthatwhistlebloweractivityisdrivenbyenforcementpolicies• VastmajorityofthewhistleblowercomplaintsreceivedbytheSECarefiledby
lawyersonbehalfofclientsseekingbountypayments• Whistleblowercomplaintshavealsobecomeakeystrategicleverinemployment
disputes,ofteninanefforttogaintheprotectionofanti-retaliationprovisions• Othermotivatingfactorsaretheabsenceofinternalreportingmechanisms,
distrustofthecorporateculture,andagenuinefeelingthattheemployeehasbeenaggrieved
• SECexpandingthepoolofeligiblewhistleblowerstoincludestateandlocalgovernmentpersonnelinnon-enforcementpositionsandthoseparticipatinginthewrongdoing
7
BAKERBOTTS
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.
8
BAKERBOTTS
Question5:Willthebenefitsofself-reportingbecomemoreapparent?
• Yes• SECappearstobelookingforwaystovisiblyrewardcompanieswhoself-report
misconduct.• Recentenforcementactionssuggestthatfineswillbelowerforthosecompanies
whoself-reportandprovidemeaningfulcooperation.• FINRA,stressingrestitutionoverpenaltiesandrewardingthefirmswhofindand
fixtheirownproblems.• FINRAhasbeenamongthemostaggressiveinrewardingself-reportingdespite
thefactthatFinraRule4530requiresfirmstoself-reportmaterialissues• Evenifyoudonotfindtheissue,promptremedialactionwillbecreditedbythe
regulators
9
BAKERBOTTS
Question6:WhatwillbetheeffectofKokesh v.U.S.ontheSECEnforcementProgram?
• LimitedpracticaleffectonfinancialremediesinSECactions• Footnote3oftheOpinioninvitesachallengetotheuseofthedisgorgement
remedyasapenaltyunauthorizedbystatute• SECcanalwaysaddwhattheywouldhavegottenasdisgorgementtothepenalty
amount.• Willincreasetheuseoftollingagreements• WillpressureSECtocompletecasesinfiveyears
10
BAKERBOTTS
Question7:Istheremoreflexibilityindiscipliningsenioremployees?
• Probablynot• Individualdisciplineisoneofthemostcompellingwaysinwhichacorporation
communicatestoregulatorsthatit“getsit”.• Alsoconsistentwitheffectiveremediation• Marketexpectsthatthecorporationwilltakemeaningfulstepstomovebeyond
theissue
11
BAKERBOTTS
Question8:WillSECandFINRAinvestigationsbecomelessexhaustiveandexpensive?
• No,ifcaseturnsonintentandindividualliability• Toughestchallengeforinvestigatorsincomplexcasesisprovingintentand
identifyingculpableindividuals• Diffusionofresponsibilitiesrequiresmoretestimonyandemailreview• Settlementoffraudchargeswithoutanindividualdefendantwillbemorerare• Companiesshouldcarefulreviewextentofindemnificationobligationsand
insurancecoverage• Notargetingoflegalandcompliancepersonnel,particularlyinsupervisioncases
12
BAKERBOTTS
Question9:WhatistheeffectofFinra's combinationofenforcementfunctions?
• "Speedcamera"tradereportinganddataentrycasesshoulddecline• MorethoroughvettingofMarketRegulationcasesshouldleadtomorelogical
outcomes• RoleofRSA clientsinenforcementmattersmaydecline• Opensthedoorforabroadrangeofworkstreamimprovements• AccretivewithotherchangeslikelytocomeoutofFINRA360• Expectsignificantturnoveroflongstandingstaff• ClosercoordinationwithSECtoavoidregulatoryduplication
13
BAKERBOTTS
Question10:Havethestandardschangedforwhentolaunchaninternalinvestigation?
• Yes.• Redflags,hotlinereports,andallegedviolationsofcorporatepoliciesandcodes
ofconductmustberesolvedintheordinarycoursepursuanttoestablishedWSPs.• Thereismoreleewayincraftinganincrementalandrisk-basedresponseto
allegations.• Theuseofinternalmechanisms,suchasin-houselawyers,internalauditors,and
corporatecompliancepersonnelintheinitialstagesisquitereasonablewheretheallegationsdonotimplicateamaterialbusinesslineorseniorcorporateofficers.
• Documentationofthereview,thepreservationofrelevantevidence,theuseofpersonnelwhoseconductisnotatissue,andstrongreportinglinesarekey,asisthewillingnesstochangetheinvestigativeplaniftheevidencesuggestsbroaderissuesoramoresignificantreputationalrisk.
14
AUSTIN
BEIJING
BRUSSELS
DALLAS
DUBAI
HONGKONG
HOUSTON
LONDON
MOSCOW
NEWYORK
PALOALTO
RIYADH
SANFRANCISCO
WASHINGTON
bakerbotts.com
©BakerBottsL.L.P.,2017.Unauthorizeduseand/orduplicationofthismaterialwithoutexpressandwrittenpermissionfromBakerBottsL.L.P.isstrictlyprohibited.Excerptsandlinksmaybeused,providedthatfullandclearcreditisgivenwithappropriateandspecificdirectiontotheoriginalcontent.