Month: December 2016

The Supreme Court Weighs in Insider Trading

If you were expecting a tidal wave of changes from the Supreme Court, you will be disappointed. On Tuesday, the Court delivered its opinion in Salman v. U.S. Prosecutors can see a glimmer of upside because they do not have to prove that something valuable changed hands in order to prove the crime of insider trading.

Supreme Court

Newman was a setback because the U.S. Court of Appeals for the 2nd Circuit, that the insider must “also receive something of a ‘pecuniary or similarly valuable nature’ to prove illegal insider trading.

In a 1983 case, Dirks v. SEC, the Supreme Court had ruled that  someone who receives confidential information from an insider and then uses the information to trade can be held liable under insider trading laws when the insider violates his duty to shareholders by disclosing the information. But that depends on whether the insider receives “a direct or indirect personal benefit from the disclosure.” In Dirks, the Court said that jurors could infer a “personal benefit” when the insider either (1) receives something of value in exchange for the tip or (2) “makes a gift of confidential information to a trading relative or friend.”

Newman was under the first option. The prosecutors did not prove that the information was passed between friends or relatives and did not prove that there was an exchange of value. The Salman case is under the second option when the material non-public information was passed between friends and relatives.

The Court’s reasoning is simply that “giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” You are not likely to give a gift to a stranger so there needs to be some other value. You are likely to give a gift to a friend or relative.

I think the Court used the Salman case to state that Dirks is still the standard for insider trading and Newman did not change it. The opinion was forcefully narrow and limited itself to insiders passing material non-public information to friends and relatives.

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Compliance Bricks and Mortar for December 2

These are some of the compliance related stories that recently caught my attention.

Trump Risk Factors Begin to Appear in SEC Documents by Steve Quinlivan in Dodd-Frank.com

Risk factors related to uncertainties resulting from possible policies that may be implemented by President-elect Trump have begun to appear in SEC filings:

TPI Composites, Inc. Form 10-Q:

The results of the 2016 United States presidential and congressional elections may create regulatory uncertainty for the wind energy sector and may materially harm our business, financial condition and results of operations.

[More…]

Dodd-Frank critic Paul Atkins in frame for top SEC post by Kara Scannell in Financial Times

The Securities and Exchange Commission may come to resemble its pre-crisis self under Donald Trump, if the legacy, testimony and votes of the man advising the president-elect on financial regulation are any guide to the policies investors and Wall Street can expect. Paul Atkins is a vocal critic of the Dodd Frank post-crisis regulations, believes in fewer rules for private investment funds and small businesses and opposes corporate penalties because, he says, they are ultimately paid by shareholders.  [More…]

Donald Trump and the Indiana Carrier factory, explained by Matthew Yglesias in Vox

Americans still don’t know exactly what Trump and Pence offered or threatened. And the larger implications of the move are hotly disputed. Is this a first step toward Trump governing as a true champion of production workers? An alarming slide into crony capitalism? Or something worse? Most likely it’s something much more boring — a relatively minor piece of presidential public relations in which an important politician uses his Twitter feed to highlight a relatively small development that nonetheless reflects well on him. [More…]

Evaluating the U.S. Performance Against Money Laundering by Samuel Rubenfeld in WSJ’s Risk and Compliance Journal

Ashsish Kumar is a policy analyst for the Financial Action Task Force, an international standard-setting body that provides the roadmap for countries on anti-money laundering and counter-terrorist financing. The body on Thursday released its latest evaluation report on the U.S., and Mr. Kumar discussed its findings. The conversation was lightly edited for clarity. [More…]

An Efficient Investment-Risk Model of Compliance by Robert Bird and Stephen Park in the CLS Blue Sky Blog

The EIR model provides an analytical framework for addressing the effectiveness of different approaches to business regulation. It equips regulators with a dynamic understanding of how compliance functions respond to different kinds of regulatory mandates. We categorize regulatory rules as three basic archetypes of regulation. Direct Regulation consists of traditional command-and-control rules promulgated and enforced by government agencies through sanctions and penalties. Collaborative Regulation consists of hybrid public-private approaches to regulation that use non-coercive measures and often incorporate private standards. Market Contingent Regulation seeks to influence firm behavior by providing incentives or signals to regulated firms, such as market-leveraging taxes, fees, and permits and mandatory disclosure requirements. [More…]

Bold and Unrelenting SEC Enforcement

We are in a time of transition at the Securities and Exchange Commission. There are two vacancies on the Commission and Chair Mary Jo White has announced her departure. Although there are changes coming to the highest level of the SEC, the vast majority of the SEC personnel are staying in place and continuing their efforts to protect investors.

mary-jo-white

Chair White gave a speech to the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business about the SEC’s enforcement program.

During Chair White’s confirmation hearings, she pledged to would pursue a “bold and unrelenting” enforcement agenda as SEC Chair. That was combined with a change in the way enforcement approached cases.

Investigate to Litigate – The SEC staff is coached to conduct all investigations with litigation in mind. During investigations, staff will focus on acquiring admissible and persuasive evidence

Use of Data Analytics to Uncover and Investigate Misconduct – These efforts have resulted in at least nine insider trading cases originating solely from leads generated by these types of tools, many others in the pipeline, and dozens of other cases being expanded using these tools to identify additional unlawful trading

Using Whistleblowers to Detect Misconduct – The SEC recently surpassed the $100 million mark for awards to whistleblowers, and tips in fiscal year 2016 surpassed 4,200, rising over 40 percent from 2012, the first fiscal year the program was in place.

Focusing on Individuals – Holding individuals liable for wrongdoing is a core pillar of any strong enforcement program.

The SEC’s Admissions Policy – In a first for a civil financial regulator, we announced in June 2013 that the SEC would begin to require admissions as a condition for settlement in certain types of cases, including cases with harm to large numbers of investors or significant risk of harm to the market, where the settling party engaged in egregious conduct or obstructed Commission investigations, or where admissions would significantly enhance the deterrent message of the action.

Impact of SEC Enforcement Activity – We have also, however, increasingly brought cases – including those involving negligent actions – that harm investors in other important ways that can be remedied through changes in industry practices in response to our actions, thus benefiting huge segments of investors beyond those harmed in a specific case.

In this last area, Chair White highlights the effect of enforcement on private equity.

“Over the past three years, we have brought 11 actions against private equity advisers for undisclosed fees and expenses, impermissible shifting and misallocation of expenses, and failure to adequately disclose conflicts of interests to clients. Our strong sense from exams and industry discussions is that, through the Commission’s focus on these problematic practices, we have helped to transform the level of transparency of fees, expenses, and conflicts of interest, and have prompted very meaningful change for the benefit of investors.”

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