Securities Regulation and Enforcement

Posted on 12-18-2018

By: David L. Kornblau and Gerald W. Hodgkins

Overview

The enforcement and regulatory priorities of the Securities and Exchange Commission (SEC) have begun to come into focus now that SEC Chairman Jay Clayton has been in office for nearly a year and a half. Courts have also issued decisions that will significantly affect future securities enforcement moving forward. This article discusses the U.S. Supreme Court’s recent decision holding that the SEC’s longstanding process for appointing Administrative Law Judges (ALJs) is unconstitutional; the SEC’s focus on cybersecurity, cryptocurrencies and initial coin offerings, retail investors, whistleblowers, and fiduciary rule reform; waivers of attorney work protection resulting from oral presentations to the SEC staff; and the statute of limitations for SEC enforcement actions.

Constitutionality of the Appointment Process for SEC ALJs

On June 21, 2018, the U.S. Supreme Court held in Lucia v. SEC that SEC ALJs were appointed in violation of the Appointments Clause of the Constitution. 1

Under the Appointments Clause, federal “officers” must be appointed by the President, with the advice and consent of the Senate, while Congress may vest the appointment of “inferior officers . . . in the President alone, in the Courts of Law, or in the Heads of Departments.” 2 Historically, SEC ALJs (like the ALJs of other federal agencies) were formally hired by the federal Office of Personnel Management, with the hiring decision made by the SEC’s Chief ALJ. 3

Resolving a circuit split, the Supreme Court, 7-2, found that ALJs are inferior officers because, in conducting hearings and rendering initial decisions in SEC enforcement actions, they exercise significant authority. Justice Elena Kagan, writing for six members of the Court, also held that the respondent in the case is entitled to a new hearing before a different, properly appointed ALJ or before the SEC itself. The Court did not decide whether the SEC cured the constitutional defect when it “ratified” the prior appointment of its ALJs on November 30,2017.4

To read the full practice note in Lexis Practice Advisor, follow this link.


David L. Kornblau is a partner and the chair of the Securities Enforcement practice group at Covington & Burling LLP, where he represents clients in sensitive and complex investigations, related litigation, and internal investigations. Mr. Kornblau’s clients include investment banks, public companies, stock exchanges, asset management firms, senior executives, portfolio managers, and traders. As a former senior SEC enforcement official and SEC trial lawyer, Mr. Kornblau uses his in-depth knowledge of the agency’s internal workings and personnel to help clients successfully navigate potentially damaging investigations. Gerald W. Hodgkins is a partner at Covington & Burling LLP with a broad regulatory enforcement practice focused on representing financial institutions, public companies, audit firms, and individuals in investigations and enforcement actions brought by the key financial regulators. Mr. Hodgkins has extensive experience in matters pertaining to the SEC and in matters involving broker-dealer and investment adviser regulation, public company accounting, and U.S. anti-corruption law. Assistance provided to the authors by Sharon Kim, Covington & Burling LLP.


For more information on cybersecurity disclosures and recommendations for enhancing cybersecurity-related disclosures, see

> MARKET TRENDS 2017/18: CYBERSECURITY RELATED DISCLOSURES

> Capital Markets & Corporate Governance > Market Trends > Corporate Governance & Continuous Disclosure > Practice Notes

For guidance in finalizing and launching initial coin offerings, see

> MARKET TRENDS 2017/18: BLOCKCHAIN INITIAL COIN OFFERINGS (ICOS) - RISKS, REGULATIONS, AND RICHES

> Capital Markets & Corporate Governance > Market Trends > Equity > Practice Notes

For a discussion on the SEC’s fiduciary rule and Regulation Best Interest, see

> MARKET TRENDS 2017/18: INVESTMENT COMPANIES

> Capital Markets & Corporate Governance > Market Trends > Investment Management > Practice Notes

For a review of the work product doctrine, see

> WORK PRODUCT DOCTRINE

> Corporate Counsel > Ethics for In-House Counsel > Work Product Doctrine > Practice Notes

For details on the SEC’s whistleblower program under the Dodd-Frank Act, see

> DODD-FRANK WHISTLEBLOWER AWARD PROVISIONS

> Capital Markets & Corporate Governance > Corporate Governance and Compliance Requirements for Public Companies > Compliance Controls > Practice Notes

1. Lucia v. SEC, 138 S. Ct. 2044 (2018). 2. U.S. Const. Art. II, § 2, Cl 2. 3.See 5 U.S.C.S. § 1302; 5 C.F.R. § 930.204. 4.See Press Release, Securities and Exchange Commission, SEC Ratifies Appointments of Administrative Law Judges (Nov. 30, 2017), available at https://www.sec.gov/news/press-release/2017-215.