This post continues our summary of the testimony of Jay Clayton, President Trump’s pick to head the SEC, at his recent nomination hearing before the Senate. Clayton commented on several important issues confronting the SEC.
For those eager to learn what direction the SEC will take during the Trump administration, some clues surfaced during the recent nomination hearing of Jay Clayton, President Trump’s pick to head the SEC. Clayton commented on several important issues confronting the SEC.
Apparently lost in the news of the impending departure of SEC Chair Mary Jo White is her recent suggestion to expand liability of corporate executives. In a speech on November 18, 2016, Chair White suggested a potential change in federal securities law that would hold executives accountable even if they are not involved in the misconduct and did not know about it. Given recent signals from the new administration in Washington, we believe this potential expansion of liability is unlikely to occur.
In June 2013, SEC Chair Mary Jo White announced a new SEC policy requiring admissions as part of settlements in certain types of cases. The criteria for admission cases, as stated by Chair White and an SEC staff memo, included the following factors:
- A large number of investors have been harmed or the conduct was otherwise egregious
- The conduct posed a significant risk to the market
- Admissions would aid investors in deciding whether to deal with a particular party in the future
- Disclosing the facts would send an important message to the market
- Intentional misconduct
- Obstruction of an investigation
In practice, the SEC has rarely required defendants to make admissions in settlements.
Last week, at the Securities Enforcement Forum in Washington, DC, senior staff of the SEC’s Division of Enforcement shed light on risks that asset managers and fund boards should be aware of. Their comments followed a record enforcement year resulting in more than $4 billion in disgorgement and penalties. Fueled in part by data collection technology, the SEC brought 868 enforcement actions the past fiscal year. Approximately 20% involved investment advisers or investment companies, the highest percentage in history, including one that found a private equity adviser to be acting as an unregistered broker/dealer, and others that involved alleged insufficient disclosure around accelerated monitoring fees.
In a recent enforcement proceeding, In the Matter of Equity Trust Company, the SEC sought to impose a standard of care to an IRA custodian that the administrative law judge (“ALJ”) found to be “essentially made up of whole cloth.” The ALJ dismissed the case due to this weakness, among other reasons. The SEC’s loss illustrates the limits of liability for the acts of others.