As SEC Enforcement savors its settlement in Goldman and
continues to retool into a new and more aggressive program, Congress is giving
it new tools. The Dodd-Frank Wall Street Reform and Consumer Protection Act has
a number of provisions which enhance the authority of SEC Enforcement. These
Enhancement to the anti-fraud provisions: Under the
new legislation, Exchange Act Section 9, relating to market manipulation, and
Section 10(1), concerning short sales, are being extended to cover all except
government securities, rather than just those registered on a national
securities exchange. In addition, Section 9(b), regarding options, is being
extended to cover non-exchange transactions in options while Section 9(c) will
now apply to all brokers and dealers, not just members of a national securities
exchange. Section 15(c)(1)(A) will now cover exchange transactions, not just
those in the over-the-counter market.
Extraterritorial jurisdiction: The Act precludes the
application of the Supreme Court's recent decision in Morrison, discussed here, to
actions brought by the SEC or the United States. Rather, it specifies that the
antifraud provisions extend in SEC and government actions to any conduct within
the U.S. that constitutes "significant steps in furtherance of the violation,"
even where the securities transaction is not in the U.S. and involves only foreign
investors. The extension also covers any conduct outside the U.S. that has a
foreseeable, substantial effect in the United States. The SEC is required to
prepare a study on the impact of applying these extensions to private damage
Aiding and abetting: The Act makes it clear that
recklessness is sufficient to prove aiding and abetting. It also gives the SEC
explicit authority to bring enforcement actions based on this theory under the
Securities Act, the Investment Company Act and the Investment Advisers Act. The
Act did not include a provision extending aiding and abetting liability to
private civil actions. The GAO, however, is required to study the impact of
extending such authority to private damage actions.
Formerly associated persons: The Act makes it clear
that the SEC can bring an action against a person formerly associated with a
Control person liability, Exchange Act: Under the
Act, the SEC may impose joint several liability on control persons.
Service of subpoenas: Parties to SEC enforcement
actions in federal district court will be able to serve subpoenas nationwide.
Collateral bars: The SEC will be able to impose
collateral bars prohibiting offenders from associating with a range of
Commission regulated entities.
Penalties: The SEC will now have authority to seek
civil penalties in all of its cease and desist proceedings.
While the SEC's enforcement authority is being enhanced, the
Act also sets deadlines to speed the process. The Commission SEC will now have
180 days after giving a written Wells notice to institute an enforcement
action. Likewise, the agency will be required to inform the subject of an
examination in writing within 180 days from the date the exam is completed if
there are no findings or the staff intends to request corrective action. Both
time limits can be extended for complex matters.
For more cutting edge commentary on developing securities
issues, visit SEC Actions, a blog by Thomas