April 13, 2015

The SEC Staff Assesses Itself (In 700 Pages!)

On an ongoing basis, the International Monetary Fund undertakes assessments of the financial regulatory arrangements of countries around the world, which is called the “Financial Sector Assessment Program.” A few weeks ago, the IMF published its FSAP review of the United States, covering banking, insurance and securities. As part of this process, the various regulatory agencies prepare a self-assessment of how they think their agency stacks up against international standards. Here’s the SEC Staff’s self-assessment. It is a remarkable document – 700 pages of the Staff describing its various programs. Principle 16 regarding eliciting disclosure starts on page 244.

Here are other related documents:
Press Release
US: Financial Sector Assessment Program Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision
US: Financial Sector Assessment Program Detailed Assessment of Observance of Insurance Core Principles
US: Financial Sector Assessment Program Detailed Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation

Insider Trading: Second Circuit Declines to Review Newman Insider Trading Decision

A few weeks ago, the US Court of Appeals for the Second Circuit denied Preet Bharara’s request that the court reconsider United States v. Newman. By declining to reconsider Newman, the Second Circuit left in place a sharply narrowed definition of insider trading that limits the government’s ability to prosecute insider trading cases (at least in the Second Circuit). The government must now decide whether to appeal to the Supreme Court and/or rely on Congress to adopt legislation providing a statutory definition of illegal insider trading for the first time. As noted in this DealBook column, this is even more notable given that it’s Judge Rakoff that sided with the SEC.

In addition to this bevy of memos posted in our “Insider Trading” Practice Area, check out this blog by David Smyth about the 2nd Circuit’s Newman case. Here’s an excerpt:

First, the knowledge element could make things very difficult for the SEC and the Justice Department in remote tippee cases. The defendants in Newman, for example, were far removed from the original sources of the information. As the court put it:

“[T]he Government presented absolutely no testimony or any other evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that Newman and Chiasson consciously avoided learning of these facts.”

One of the things that enterprising inside traders might do as a result is to create some distance between the sources of material, nonpublic information and those who ultimately trade on that information. A person or two in between could mean that the actual traders never know the personal benefit, if any, that accrues to the original tipper. Structuring insider trading chains in this way could become part of the general business model. I mean, this is what people do. The court does seem to allow for liability, as it probably must, if defendants “consciously avoid[] learning of these facts.” But one thing about conscious avoidance – it can be pretty hard to prove! Not impossible, but hard.

Also see this blog by David entitled “S.D.N.Y. Vacates Insider Trading Guilty Pleas, Shows How It’s Done.” And this blog by Kevin LaCroix entitled “An Interesting Look at the Characteristics of Insider Traders” is also worth reading…

Leveraged Loans: Looks Like Securities But Not Regulated?

This Bloomberg article entitled “Loans Look Like Securities Yet Escape Oversight From SEC” is worth reading. Here’s an excerpt:

Leveraged loans look and trade like securities — yet the regulator in charge of overseeing securities doesn’t consider them as such. These loans, usually made to companies with high debt and speculative-grade credit ratings, are made for commercial or consumer — not investment — purposes, according to lawyers and bankers who argue they are not securities. At the same time, the $800 billion leveraged-loan market has become an increasingly popular asset class for pension and mutual funds to invest in. About a third of new loans last year were bought by mutual funds, up from 15 percent in 2012, according to Loan Syndications & Trading Association data.

“If they are syndicating this to investors and indicating there is going to be some liquidity in a secondary market, those are the red flags that make it look very much like a security,” said Thomas Lee Hazen, an expert in securities law at the University of North Carolina School of Law. The U.S. Securities and Exchange Commission’s authority in this market is limited to loans that meet the legal definition of a security, which requires a case-by-case review, according to John Nester, an SEC spokesman.

– Broc Romanek