On May 8th, the SEC’s Division of Enforcement issued a statement describing the factors it considers when determining whether a contested enforcement action should be brought as an administrative proceeding before the Commission’s administrative law judges or as a civil action in the federal courts. View the statement here.
The statement, discretely tucked to the side of the Division’s homepage, was issued three days after SEC Chair Mary Jo White told Senators she was considering the issuance of guidelines that would describe the forum selection process. See e.g., Reuters.
The Enforcement Division’s statement makes clear that the approach it describes is non-exhaustive, fact driven, and subject to Commissioner review. Among other things, the Division considers:
- Who is being sued. If multiple defendants from different jurisdictions are being sued jointly, personal jurisdiction and venue considerations may make it easier to bring the matter in an administrative court.
- What relief is sought. Associational bars and suspensions can only be imposed in an administrative proceeding. Judicial economy may therefore direct that an action be brought in an administrative proceeding rather than first commencing a district court action and later instituting an administrative proceeding.
- Where the Division is authorized to initiate the action. Proceedings for control person liability, for example, can only be brought administratively while a suit seeking emergency relief can only be pursued in a district court.
Interestingly, the Division openly states that if the action involves novel or unsettled legal issues it may bring the action in-house in order to take advantage of the Commission’s expertise. “[O]btaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law,” the Enforcement Division notes.
Whether you look at proxy season through the lens of the corporate boardroom or from the shareholder perspective, there’s a lot to keep on top of. That’s especially true in a climate where activists and shareholder advocacy groups are becoming increasingly influential, and old ways of doing things are being reexamined.
Lexis® Securities Mosaic® has everything you need related to proxy access and the proxy process all in one place: recent disclosure, rulemaking and administrative guidance, and news and commentary. Click the thumbnail image to see a PDF with more detail.
Last week, Second Circuit Judge Pierre N. Leval, writing for a three-judge panel, resolved at least some of the questions concerning the preclusive reach of the Securities Litigation Uniform Standards Act (“SLUSA”). SLUSA was adopted in order to close what some perceived to be a loophole in the federal securities laws. It precludes state‐law‐based class actions brought on behalf of at least 50 persons and that allege conduct referencing the anti‐falsity provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934. Although the basic premise of SLUSA is clear, its outer limits are not, and the Second Circuit, in In re Kingate Management Limited Litigation, addressed those limits.
In that case, investors in two British Virgin Island mutual funds filed a class action suit against the officers, directors, and managers of the funds, as well as the funds’ auditors, a consultant, and the funds’ administrator, for alleged breaches of contract and fiduciary duty, negligence, and fraud. The funds were feeder funds for Bernard L. Madoff Investment Securities LLC. They lost the vast majority of their assets when the Madoff Ponzi scheme was exposed. According to the complaint, defendants undertook obligations to evaluate and monitor Madoff and to audit the funds’ financial statements. Defendants, however, failed to do so and thereby caused the investors’ losses.
The district court concluded that because some of plaintiffs’ allegations involved material misstatements in connection with the purchase or sale of a covered security, the complaint should be dismissed in its entirety. But the Second Circuit disagreed noting that when applying SLUSA, a court must first inquire whether an allegation is of conduct by the defendant, or by a third party. Only claims stemming from the falsity-based conduct of the defendant is subject to SLUSA preclusion.
For example, if plaintiffs of a stockbroker hired an accountant to audit their accounts and the accountant did so negligently, failing to uncover the stockbroker’s fraud in handling the accounts, plaintiffs’ negligence based lawsuit would fall outside of SLUSA’s reach. The accountant isn’t alleged to have engaged in fraud and the federal securities laws are not involved.
SLUSA also requires courts to inquire whether the allegation is necessary to or extraneous to liability under the state law claims. If the allegation is extraneous to the complaint’s theory of liability, it cannot be the basis for SLUSA preclusion.
In announcing this standard, the Court noted two caveats and a limitation. First, plaintiffs cannot evade SLUSA by camouflaging their allegations. If the success of a class action claim depends on a showing that the defendant committed false conduct conforming to SLUSA’s specifications, the claim will be subject to SLUSA, even if the plaintiff is asserting liability under a state law theory.
Second, SLUSA may apply even if no private right of action exists for the underlying violation of the Securities Act or the Securities Exchange Act.
The limitation on the Second Circuit’s standard concerns how the plaintiff drafts the complaint. SLUSA will apply even if the complaint does not allege a “covered security,” that is, a security listed on a national exchange or issued by a registered investment company. Where a state law class‐action claim charges the defendant with liability based on conduct violative of the anti‐falsity provisions of the Securities Act or the Securities Exchange Act, SLUSA may apply.
We’ve just released the latest enhancement to our already fabulous SEC Comment Letters page: the ability to filter by the name of the SEC examiner assigned to the case.
Since correspondence between filers and the SEC first became electronically available in 2004, over 800 individual examiners – typically attorneys and accountants who work for various A/D offices of the Securities and Exchange Commission – have had a hand in the meticulous process of auditing public company disclosure, making recommendations, responding to companies’ questions, and reviewing changes. Some examiners have handled thousands of letters over the years. (Larry Spirgel, Assistant Director of the Division of Corporation Finance, currently leads the pack with 7,781 letters and counting.) Most have handled at least hundreds. So it is possible, using the new SEC Examiner filter, to profile individual examiners’ tendencies when it comes to interpreting disclosure obligations.
To learn more about our SEC Comment Letters page, visit our Video Tutorials page.
Like a good horror movie, the specter of SEC administrative bars haunts anyone subject to an enforcement action. It was therefore fitting that the SEC’s Division of Corporation Finance should issue a policy statement on waivers — on Friday the 13th. The quietly issued policy statement specifically addresses the waiver of the automatic disqualification provisions under Regulation A and Rules 505 and 506 of Regulation D. View the Policy Statement here.
The disqualification provisions of Rules 262, 505, and 506 under the Securities Act make the exemptions from registration under Regulation A and Rule 505 of Regulation D unavailable for an offering if an issuer, its affiliates, or certain persons is subject to certain administrative orders, industry bars, injunctions, or specified criminal convictions.
The Commission may waive a disqualification upon a showing of good cause that it is not necessary under the circumstances that the exemptions be denied. The Commission has delegated authority to grant these waivers to the Director of the Division of Corporation Finance, although the Commission retains authority to consider waiver requests and review actions taken pursuant to the delegated authority.
When considering an application for a waiver, the Division will consider the nature of the violation or conviction and whether it involved the offer and sale of securities. In addition, the Division will consider whether the conduct involved a criminal conviction or scienter based violation. Where there is a criminal conviction or a scienter based violation involving the offer and sale of securities, the burden on the party seeking the waiver will be significantly greater.
The Division emphasized that the provisions from which the waiver applicant is disqualified are safe harbors that facilitate private or limited offerings of securities and investors in such offerings do not receive the benefits of the registration requirements of the Securities Act. Therefore, the focus of the Division’s waiver analysis will be on how the identified misconduct bears on the applicant’s fitness to participate in these exempt offerings.
The Division also will consider the following factors, none of which is dispositive.
- Who was responsible for the misconduct and his or her relationship with the waiver applicant. The Division will also consider whether the misconduct reflects more broadly on the entity as a whole. Removal or termination of those responsible for the misconduct will generally be viewed favorably.
- The duration of the misconduct. An isolated event will be treated more favorably than that which occurred over an extended period.
- Remedial measures. The Division will consider what remedial measures the waiver applicant has taken, when those remedial measures began, and whether those measures are likely to prevent a recurrence of the misconduct and mitigate the possibility of future violations.
- The impact if the waiver is denied. The Division will consider the severity of the impact on the issuer or third parties, such as investors, clients or customers, if the waiver request is denied. Applicants should submit information concerning whether or how often they have used the relevant exemption in the past, or how they plan to use the exemption in the future, and explain why a waiver is needed.
Parties seeking a waiver must submit a waiver request that includes appropriate justification, addressing the factors outlined above, describing why a waiver should be granted.
Lexis® Securities Mosaic® is available once again after scheduled maintenance this weekend. Please note that the official URL of our website has also changed to lexissecuritiesmosaic.com. However, other URLs you may have used (securitiesmosaic.com, knowledgemosaic.com) are being automatically redirected and should work fine as well.
We appreciate your patience while the work was being done. Among other benefits, the system upgrade will put us in a better position to make enhancements to the product going forward!
Important notice: Lexis® Securities Mosaic® will temporarily be unavailable this weekend, while we make upgrades to improve our service to you. Our upgrade will begin on Friday, March 20th at 8:00pm EDT / 5:00pm PDT through mid-day Sunday, March 22nd. We apologize in advance for any inconvenience and appreciate your patience. Thank you.