Dodd-Frank: New Authority for SEC Enforcement

Dodd-Frank: New Authority for SEC Enforcement

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 include:

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 suits.

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 registered entity.

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 Gorman.