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

15
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...

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.