April 27, 2017

Financial Choice Act 2.0: Likely DOA in the Senate, But Just the Opening Salvo

As Liz blogged yesterday, the latest iteration of the Financial Choice Act has attracted substantial criticism from the CII.  If you’re also not a fan of the legislation, then this Bloomberg interview should cheer you up – the conventional wisdom says that it’s likely deader than disco in the Senate.  That’s not a surprise, since it’s merely the opening salvo in what promises to be an extended debate over efforts to reform financial regulation.

For the short term, this Arnold & Porter Kaye Scholer memo says that reform legislation is probably going nowhere fast:

It is likely that Republicans will try to push the bill through the Committee and onto the House floor in the coming weeks.

Not yet clear is how this effort will be coordinated—if at all—with the Trump Administration, as the Treasury Department is in the process of completing a study on financial regulatory reform, expected to be issued in early June, pursuant to an executive order signed by President Trump in February. Furthermore, while we anticipate that the House of Representatives will pass some version of the FCA in 2017, prospects in the Senate are much less clear. The Senate is more likely to pursue regulatory reform legislation that is more limited in scope than the FCA. Also, the Senate being the Senate, such action probably will not be seen until 2018.

Check out this blog from Cydney Posner for a detailed summary of Financial Choice Act 2.0.

“SEC Penalties Act” Would Raise Financial Stakes for Securities Violations

Meanwhile, back in the Senate, bipartisan legislation was introduced late last month that would substantially increase the statutory limits on civil monetary penalties, directly link the size of penalties to investor harm – and raise the financial stakes for repeat securities law violators.

According to a press release issued by the bill’s sponsors, the “Stronger Enforcement of Civil Penalties Act of 2017” – or “SEC Penalties Act” – would make a number of changes to the SEC’s current authority to levy civil penalties:

Under existing law, the SEC is constrained to penalizing violators in some cases to a maximum of $181,071 per offense and institutions to $905,353. In other cases, the SEC may calculate penalties to equal the gross amount of ill-gotten gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.

This bill strives to make potential and current offenders think twice before engaging in misconduct by increasing the maximum civil monetary penalties permitted by statute, directly linking the size of the maximum penalties to the amount of losses suffered by victims of a violation, and substantially raising the financial stakes for repeat offenders of our nation’s securities laws.

Specifically, the SEC Penalties Act increases the per-violation cap applicable to the most serious securities laws violations to $1 million per violation for individuals, and $10 million per violation for entities. It would also triple the penalty cap for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years. The agency would be able to assess these types of penalties in-house – and not just in federal court.

The Financial Choice Act includes an increase in the SEC’s penalty authority too, so this might be an effort that turns out to have legs – although as this article notes, it’s Congress’s third try at this.

Whistleblowers: Securities Analysts Get Into the Game

This Reuters article tells the tale of a couple of enterprising securities analysts who smelled something fishy about a public company’s numbers, blew the whistle, and now stand to receive some serious coin from the SEC.  While analysts are far from the disgruntled employee stereotype, the article notes that outsiders have played a big role in the whistleblower program:

The program, established in 2011 under the Dodd-Frank financial reform law, aimed to bolster the SEC’s enforcement program by encouraging insiders to report potential fraud. However, since its inception through Sept. 30, 2016, just over a third of the more than $111 million awarded to whistleblowers went to outsiders such as analysts or short-sellers, according to the SEC.

“Sometimes outsiders have a particular expertise and they are able to independently piece things together that might not be as obvious to those close to the matter,” said Jane Norberg, the head of the SEC’s Office of the Whistleblower.

I bet it won’t be long before somebody starts a whistleblowing hedge fund.

John Jenkins