FROM: U.S. DEPARTMENT OF TREASURY
Remarks by Treasury Secretary Jacob J. Lew at Meeting of the Financial Stability Oversight Council (FSOC)
As prepared for delivery
I would like to call the Financial Stability Oversight Council meeting back to order.
I want to start by welcoming Mary Jo White to the Council. I also want to thank Elisse Walter for her hard work over the past several months.
We are meeting to discuss the Council’s annual report. I will talk more about the report in a few moments, but first I would like to take note of why continuing our work on financial reform is absolutely essential.
As we gather together today, the financial system is much more resilient than it was five years ago, and members of this Council have made a great deal of progress in building a safer system, including much progress over the last year.
The Federal Reserve issued a new framework for the consolidated supervision of large financial institutions in December.
The Securities and Exchange Commission and the Commodity Futures Trading Commission continue to fill in the remaining pieces of a new comprehensive oversight framework for derivatives that will reduce risk and increase transparency.
The Consumer Financial Protection Bureau finalized new mortgage rules that provide additional protections for borrowers.
And the FDIC continued to implement the new framework for orderly liquidation authority.
So we have made important strides over the last year, and our financial system is stronger. But, as everyone here knows, much work still remains.
Let me turn now to what is happening today.
In an executive session, we discussed the Council’s continued analysis of nonbank financial companies. It is critically important that the Council take the time to get the analysis right, and we expect to vote on designations of an initial set of nonbank financial companies soon.
The Council’s 2013 annual report released today informs the public about actions the Council has taken over the past year, developments in the financial system during that time, and the challenges ahead.
Our annual report also lays out a number of recommendations to increase the stability of our financial system. I would like to briefly highlight some of the specific areas covered in the report.
A great deal of work remains to attract private capital to our nation’s housing finance system and bolster a housing market showing signs of recovery.
We need to strengthen markets that may be susceptible to destabilizing runs and fire sales.
We need to increase our vigilance to operational risks, whether from cyberattacks or from devastating acts of nature like we saw with Superstorm Sandy.
And we must work with our foreign counterparts to reform the governance and integrity of financial benchmark reference rates like LIBOR and to consider transitions toward alternative benchmarks.
In closing, I want to thank the members of the Council and their staffs for working tirelessly to put together this year’s report and make the financial system more resilient.
And now before we begin with the presentation, I want to give the members of the Council the opportunity to make opening remarks.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Court Finds Brokerage Firm and Two Former Executives Liable for Over $2.74 Million in a Fraudulent Misappropriation Case
The Securities and Exchange Commission announced today that, on April 25, 2013, a federal court in New York found defendants Joshua Constantin and Windham Securities, Inc. jointly and severally liable for over $2.49 million and defendant Brian Solomon liable for over $249,000 in disgorgement, pre-judgment interest, and civil penalties. In addition, the court found relief defendants Constantin Resource Group, Inc. (CRG) and Domestic Applications Corp. (DAC) jointly and severally liable with Constantin and Windham for over $760,000 and $532,000, respectively, of disgorgement and pre-judgment interest.
On July 6, 2011, the SEC filed its complaint. The complaint alleged that Windham, Windham's owner and principal Constantin, and former Windham managing director Solomon fraudulently induced investors to provide more than $1.25 million to Windham for securities investments. The complaint alleged that defendants made false claims to the investors about the intended use of the investors' funds and about Windham's investment expertise and past returns. Instead of purchasing securities for the investors, the defendants misappropriated the investors' funds and then provided false assurances to the investors to cover up their fraud. The SEC's complaint charged Windham, Constantin, and Solomon with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The complaint also named CRG and DAC, entities Constantin owned and/or controlled, as relief defendants. Â
On July 3, 2012, the SEC moved for summary judgment against each of the defendants and relief defendants on all of the SEC's claims. On April 2, 2013, the court issued an opinion granting the SEC's motion in its entirety and finding defendants liable for fraud. Based on the undisputed evidence, the court found that "[t]he litany of misrepresentations that Solomon and Constantin made to their clients is striking;" that Constantin "diverted [investors'] funds to his own purposes;" and that "both Solomon and Constantin provided clients with misleading documents to cover up the fraudulent nature of their investment scheme." The court concluded that permanent injunctions, disgorgement, and civil penalties were warranted against each of the defendants and that the relief defendants would be required to disgorge any assets they received through the defendants' misconduct.
On April 25, 2013, the court issued a supplemental order finding Windham, Constantin, Solomon, CRG, and DAC collectively liable for more than $2.74 million in disgorgement, pre-judgment interest, and civil penalties.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Statement of Chairman Gary Gensler Before the Financial Stability Oversight Council
April 25, 2013
I support the Financial Stability Oversight Council’s (FSOC) annual report and the recommendations. I want thank the FSOC members and their staffs for their work on this year’s important report and capturing the vulnerability to our financial system in its seven themes. I appreciate and wish to compliment their dedication to and coordination on financial reform.
Congress asked us to make recommendations once a year to enhance the integrity, efficiency, competitiveness and stability of U.S. financial markets.
In addition, we are to make recommendations to promote market discipline and maintain investor confidence. In that regard, the report recommends reforms of wholesale funding markets; housing finance; reference rates, such as LIBOR and similar interest rate benchmarks; and heightened risk management and supervisory attention.
Further, the FSOC agencies have made great progress on financial reform since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Working with FSOC agencies, the CFTC has completed most of the Title VII swaps market reforms on transparency, clearing and oversight of swap dealers. The market is increasingly moving to implementation of these common-sense rules of the road.
There are two critical areas, however, in which the CFTC must complete reforms.
First, it is a priority to finish rules to promote pre-trade transparency, including those for swap execution facilities and the block rule for swaps.
Second, it’s a priority that the Commission, working with domestic and international regulators, complete guidance on the cross-border application of swaps market reform.
FROM: U.S. SECURITIES AND EXCHANGE COMISSION
SEC Announces Settlements with Cache Decker and David Decker in SEC V. Zufelt
The United States Securities and Exchange Commission (Commission) announced that on March 6, 2013, Judge Dee Benson entered final judgments against Cache D. Decker and David M. Decker, Jr. The Commission's complaint alleges that Cache and David Decker participated in and aided and abetted Ponzi schemes operated by Anthony C. Zufelt ("Zufelt").
Without admitting or denying the allegations of the complaint, the Deckers each consented to the entry of a final judgment permanently enjoining them from directly or indirectly violating Sections 5, 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934. Â The final judgment against David Decker orders him to pay disgorgement of $141,000 and prejudgment interest of $39,582. The final judgment also orders David Decker to pay a civil penalty of $25,000. The final judgment against Cache Decker orders him to pay disgorgement of $43,000 and prejudgment interest of $9,395 over three years. The Court did not order Cache Decker to pay a civil penalty based on his sworn statement of financial condition.
The Commission filed a complaint on June 23, 2010, alleging that from approximately June 2005 through June 2006, Zufelt operated a Ponzi scheme through his company Zufelt, Inc. (ZI), and that between July 2006 and December 2006 he ran a second fraudulent scheme through Silver Leaf Investments, Inc. ("SLI"). The Complaint alleges that, in connection with these schemes, the Deckers each made materially false and misleading statements to investors about, among other things, the profitability of ZI and SLI, the ability of ZI and SLI to repay investors, the use of investor funds, and the security of the investments. The Order finds that the Deckers acted as unregistered broker-dealers and sold unregistered ZI and SLI securities.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The United States Securities and Exchange Commission ("Commission") filed a civil action in the United States District Court for the Southern District of Florida against Mark D. Begelman, charging him with insider trading for purchasing Bluegreen Corporation stock in advance of BFC Financial Corporation's announcement that it would acquire Bluegreen.
The Commission’s complaint alleges that as a member of the World President’s Organization ("WPO"), Begelman learned from a fellow WPO member material, non-public information concerning Bluegreen’s and BFC’s negotiations and plans to enter into a business combination. Begelman’s fellow WPO member was a high-ranking executive in both companies. It was the specific written policy of the WPO that matters of a confidential nature were to be kept confidential. The complaint alleges that Begelman placed an order to purchase 25,000 shares of Bluegreen stock on November 3, 2011 in breach of a duty of trust and confidence he owed to the WPO member who was the source of the material, non-public information. On November 14, 2011, BFC announced that the companies had entered into a definitive merger agreement. The day that the acquisition was announced, Bluegreen’s share price rose nearly 46%, and Begelman sold all of his Bluegreen shares. Begelman made $14,949.34 in illegal trading profits.
Without admitting or denying the Commission's allegations, Begelman agreed to settle the case against him. The settlement is pending final approval by the court. Specifically, Begelman consented to the entry of a final judgment permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; requiring him to pay disgorgement of $14,949.34, the amount of his ill-gotten gains, plus prejudgment interest of $377.22, and a civil penalty of $14,949.34; and prohibiting him from serving as an officer and director of a public company for a period of five years.
The Commission thanks FINRA's Office of Fraud Detection and Market Intelligence for its assistance in this matter. The Commission’s investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller under the supervision of Assistant Regional Director Elisha L. Frank. Regional Trial Counsel, Robert K. Levenson will lead the Commission’s district court action.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today announced a non-prosecution agreement (NPA) with Ralph Lauren Corporation in which the company will disgorge more than $700,000 in illicit profits and interest obtained in connection with bribes paid by a subsidiary to government officials in Argentina from 2005 to 2009. The misconduct was uncovered in an internal review undertaken by the company and promptly reported to the SEC.
The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company's prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC's investigation. Ralph Lauren Corporation's cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.
The NPA is the first that the SEC has entered involving FCPA misconduct. NPAs are part of the SEC Enforcement Division's Cooperation Initiative, which rewards cooperation in SEC investigations. In parallel criminal proceedings, the Justice Department entered into an NPA with Ralph Lauren Corporation in which the company will pay an $882,000 penalty.
"When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation," said George S. Canellos, Acting Director of the SEC's Division of Enforcement. "The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC."
Kara Brockmeyer, the SEC's FCPA Unit Chief, added, "This NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered this problem after it put in place an enhanced compliance program and began training its employees. That level of self-policing along with its self-reporting and cooperation led to this resolution."
According to the NPA, Ralph Lauren Corporation's cooperation included:
Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
Voluntarily and expeditiously producing documents.
Providing English language translations of documents to the staff.
Summarizing witness interviews that the company's investigators conducted overseas.
Making overseas witnesses available for staff interviews and bringing witnesses to the U.S.
According to the NPA, the bribes occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The misconduct came to light as a result of the company adopting measures to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina.
As outlined in the NPA, Ralph Lauren Corporation's Argentine subsidiary paid bribes to government and customs officials to improperly secure the importation of Ralph Lauren Corporation's products in Argentina. The purpose of the bribes, paid through its customs broker, was to obtain entry of Ralph Lauren Corporation's products into the country without necessary paperwork, avoid inspection of prohibited products, and avoid inspection by customs officials. The bribe payments and gifts to Argentine officials totaled $593,000 during a four-year period.
Under the NPA, Ralph Lauren Corporation agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.
The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation's remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.
The SEC's investigation was conducted by Kristin A. Snyder and Tracy L. Davis in the San Francisco Regional Office. The SEC appreciates the assistance of the U.S. Department of Justice's Fraud Section, the U.S. Attorney's Office for the Eastern District of New York, and the Federal Bureau of Investigation in this matter.
FROM: COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders North Carolina Residents Timothy Bailey and Michael Hudspeth, and their Company, PMC Strategy, LLC, to Pay over $1.8 Million for Fraud in Foreign Currency Ponzi Scheme
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained federal court orders requiring Defendants Timothy Bailey of Monroe, North Carolina, Michael Hudspeth, formerly of Statesville, North Carolina, and their company, PMC Strategy, LLC (PMC), to pay over $1.8 million for solicitation fraud and misappropriation in connection with an off-exchange foreign currency (forex) Ponzi scheme that solicited at least $669,000 from more than 22 individuals
Judge Graham C. Mullen of the U.S. District Court for the Western District of North Carolina entered an Order of Default Judgment and Permanent Injunction against Defendants PMC and Bailey on October 18, 2012, requiring PMC and Bailey jointly to pay over $429,700 in restitution to defrauded pool participants. The Order also imposes a civil monetary penalty of $560,000 on PMC and $420,000 on Bailey and permanently bans them from trading and registering with the CFTC. The Order finds that PMC and Bailey violated the anti-fraud provisions of the Commodity Exchange Act (CEA) by fraudulently soliciting pool participants to trade forex, misappropriating pool participant funds, issuing false account statements, and refusing to return pool participant funds. PMC claimed to have earned a profit of $160,000 from January through June 2008 as a result of its forex trading, according to the Order. However, these representations were false, as PMC was not formed until June 18, 2008, and engaged in no forex trading until July 2008. Furthermore, PMC and Bailey sent false monthly profit checks to pool participants purporting to represent profits earned, when in fact PMC incurred trading losses in 15 of the 22 months it traded, and was overall net negative from October 2008 onward, according to the Order.
Subsequently, on April 3, 2013, Judge Mullen granted Summary Judgment against Defendant Hudspeth finding him liable for the same violations of the CEA as Bailey and PMC, and making Hudspeth jointly and severally liable with Bailey and PMC for the $429,700 restitution award previously ordered by the Court. The Order also imposes a $420,000 civil monetary penalty against Hudspeth and permanently bans him from the commodities industry.
The CFTC Division of Enforcement staff members responsible for this case are Eugenia Vroustouris, Michael Loconte, Daniel Jordan, Rick Glaser, and Richard B. Wagner.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former "Teach Me to Trade" Saleswoman and Infomercial Personality Linda (Knudsen) Woolf Agrees to Settle Securities Fraud Charges and Pay a $225,000 Penalty
The Securities and Exchange Commission announced that on April 16, 2013 the United States District Court for the Eastern District of Virginia entered settled final judgments against Linda (Knudsen) Woolf and Hands On Capital, Inc. Securities and Exchange Commission v. Linda Woolf, Hands On Capital, Inc., et al, Civil Action No. 1:08cv235 (E.D.Va. filed March 11, 2008). The final judgments resolve the Commission’s case against Woolf and Hands On Capital.
Woolf sold securities trading products and services such as classes, mentoring, and software called "Teach Me to Trade" to investors who wanted to learn how to trade securities. The Commission’s complaint alleges that Woolf told investors at Teach Me to Trade workshops that she had purchased mentoring, classes and software to learn to trade and had quickly turned profits by trading securities using Teach Me to Trade methods. The Commission alleges that Woolf’s tales of making money by trading were untrue; she was not a successful securities trader. Woolf sold the products and services pursuant to an independent contractor agreement between Hands On Capital and Teach Me to Trade
Under the terms of the settlement, Woolf (who filed for bankruptcy while this action was pending) agreed to pay a civil penalty of $225,000. Without admitting or denying the Commission’s allegations, Woolf and Hands On Capital also consented to the entry of final judgments permanently enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934. Additionally, the final judgments will permanently enjoin Woolf and Hands On Capital from receiving compensation for participating in the development, presentation, promotion, marketing, or sale of any classes, workshops, or seminars (and from receiving compensation for any sales of connected products or services) given to actual or prospective securities investors concerning securities trading.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former Investment Bank Analyst and His College Friend Plead Guilty to Insider Trading Scheme
The Securities and Exchange Commission announced that on April 16, 2013, Jauyo "Jason" Lee, 29, of New York, and Victor Chen, 29, of Sunnyvale, Calif., both pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud for their roles in an insider trading scheme.
The criminal charges filed by the U.S. Attorney for the Northern District of California arose out of the same facts that were the subject of a civil action that the SEC filed against Lee and Chen on September 27, 2012. The SEC’s complaint alleged that Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive, nonpublic information about two upcoming deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped Chen, his longtime college friend with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.
According to the SEC’s complaint, Lee was first privy to information about Leerink’s client Syneron Medical Ltd., which was negotiating an acquisition of Candela Corporation in 2009. He later learned that Leerink’s client Somanetics Corporation was in the process of being acquired by Covidien plc. in 2010. As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly and exchanged dozens of phone calls and text messages. Some of the calls took place from Lee’s office telephone at Leerink. Lee had a duty to preserve the confidentiality of the information that he received in the course of his employment at Leerink.
The SEC alleged that in the days leading up to the public announcements of each of these deals, Chen made sizeable purchases of stock and call options in Candela and Somanetics and made unusual trades in the securities of each of these acquisition targets. Chen had never previously bought securities in these companies, yet he suddenly spent a significant portion of his available cash to buy the Candela and Somanetics securities. Chen proceeded to sell most of his Candela and Somanetics holdings once public announcements were made about the transactions. Because Chen made some of his trades in his sister Jennifer Chen’s account, the SEC’s complaint also names her as a relief defendant for the purposes of recovering the illegal profits in her account.
As a result of their conduct, the SEC’s complaint charged Lee and Chen with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC, whose case is still pending, is seeking disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctions against Lee and Chen.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Parker Drilling Company with Violating the Foreign Corrupt Practices Act
The Securities and Exchange Commission today charged Parker Drilling Company, a worldwide drilling services and project management firm, with violating the Foreign Corrupt Practices Act (FCPA) by authorizing improper payments to a third-party intermediary retained to assist the company in resolving customs disputes.
The SEC's complaint, filed in federal district court in Alexandria, Virginia, alleges that in 2004 Parker Drilling authorized payments to a Nigerian agent totaling $1.25 million. The company did so despite former senior executives knowing that the agent intended to use the funds to "entertain" Nigerian officials involved in resolving Parker Drilling's ongoing customs problems. Following the Nigerian agent's work, the company received an unexplained $3,050,000 reduction of a previously assessed customs fine, and the company was permitted to nationalize and sell its Nigerian rigs.
To settle the SEC's charges, Parker Drilling will pay disgorgement of $3,050,000 plus pre-judgment interest of $1,040,818. Parker Drilling consented to the entry of a final judgment permanently enjoining it from violating Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. The proposed settlement is subject to court approval.
In the parallel criminal proceedings, the Department of Justice entered into a Deferred Prosecution Agreement with Parker Drilling in which the company will pay an $11,760,000 penalty.
The SEC acknowledges the assistance of the Department of Justice's Fraud Section, the Federal Bureau of Investigation, and the United Kingdom's Crown Prosecution Service and Metropolitan Police Service.
FROM: U.S. DEPARTMENT OF JUSTICE
April 17, 2013
Federal Court in Florida Orders Michael Alcocer and His Panama-based Company, InovaTrade, Inc., to Pay More than $38 Million in Foreign Currency Fraud Action
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order requiring Defendants Michael Alcocer (a U.S. citizen) and his company, InovaTrade, Inc., formerly of Miami and Orlando, Florida and later Panama City, Panama, to pay, jointly and severally, restitution of over $9.6 million and a civil monetary penalty of more than $28.8 million. The Order also imposes permanent trading and registration bans against Alcocer and InovaTrade and permanently prohibits them from further violations of federal commodities law, as charged. Neither Defendant has ever been registered with the CFTC.
The Default Judgment and Permanent Injunction Order was entered on April 5, 2013, by Judge Joan A. Lenard of the U.S. District Court for the Southern District of Florida, and stems from a CFTC Complaint filed on September 21, 2012, that charged Alcocer and InovaTrade with solicitation fraud, providing customers with false statements, and misappropriation in connection with an off-exchange foreign currency (forex) trading scheme.
The Order finds that Alcocer and InovaTrade orchestrated a fraudulent scheme that, between November 2008 and September 2011, induced more than 400 customers to deposit more than $10.6 million with InovaTrade, a purported Retail Foreign Exchange Dealer (RFED), to trade forex. Using its website, as well as certain third-party introducing brokers, InovaTrade fraudulently solicited customers, both within and outside the United States, to open retail forex trading accounts — some of which InovaTrade managed and some of which it did not, the Order finds. The Order also finds that Defendants sent InovaTrade customers false statements of trading activity and misappropriated more than $9.6 million of customer funds.
As part of a nationwide forex sweep, the CFTC filed a prior lawsuit against InovaTrade in January 2011, in the U.S. District Court for the Western District of Missouri for its failure to register as an RFED. In July 2011, the U.S. District Court for the Western District of Missouri issued a permanent injunction enjoining InovaTrade from continuing to operate as an RFED with U.S. customers. The April 5, 2013, Order further finds that InovaTrade falsely represented to its customers that the InovaTrade sued by the CFTC in January 2011 was a different entity. In addition, that same Order finds that beginning in or around August 2011, InovaTrade refused to honor any customer withdrawal requests, and in October 2011, Defendants closed InovaTrade’s operations.
The CFTC appreciates the assistance of the Panama Superintendencia del Mercado de Valores (SMV).
CFTC Division of Enforcement staff responsible for this case are Margaret Aisenbrey, Jenny Chapin, Stephen Turley, Mary Lutz, Charles Marvine, Rick Glaser, and Richard Wagner.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Outmanned and Outgunned: Fighting on Behalf of Investors Despite Efforts to Weaken Investor Protections
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
North American Securities Administrators Association, Annual NASAA/SEC 19(d) Conference
Washington, D.C.
April 16, 2013
Good morning. Thank you for inviting me to deliver the opening remarks of today’s North American Securities Administrators Association ("NASAA") and the U.S. Securities and Exchange Commission’s ("SEC") 19(d) Conference. Before I begin, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.
This Annual Conference is an important opportunity for representatives of NASAA and the SEC to come together to discuss how best to accomplish our common goal of protecting investors. These annual conferences provide an opportunity to increase collaboration, communication, and cooperation for the benefit of investors, and to promote fair and orderly markets. I have been honored to have served as the SEC’s liaison to NASAA for the past four years. I know and appreciate NASAA’s mission of protecting main street investors and the critical role that state securities regulators play in the enforcement of the securities laws. You are often the first to receive complaints from investors and identify the latest scams devised to steal from investors.
I want to take this opportunity to highlight some of the recent achievements of NASAA’s members. According to the latest statistics, as of October 2012:
1
State securities regulators conducted 6,121 investigations;
The states reported filing more than 2,600 administrative, civil, and criminal enforcement actions involving nearly 3,700 respondents and defendants;
The states reported criminal actions that resulted in 1,662 years of incarceration, which is a 47% increase over the previous year;
The states imposed more than $2.2 billion in investor restitution orders and levied fines or penalties and collected costs in excess of $290 million; and
A total of nearly 2,800 licenses were withdrawn due to state action, and 774 licenses were denied, revoked, suspended, or conditioned.
These statistics are impressive – particularly given the lack of resources faced by many state securities regulators.
2 Just as the SEC has struggled without adequate resources, state regulators have had to deal with the challenges of doing more with less.
And, as NASAA knows well, in meeting our challenges, we also need to be a voice for pro-investor legislation and rulemaking. Today, I want to focus my remarks on (1) certain efforts that I believe have weakened investor protection; and (2) legislative and rulemaking initiatives that I believe are critical to strengthening investor protection. In particular, I would like to highlight the importance of:
Listening to the voices of investors and regulators – with a particular focus on the recent SEC proposal to allow heretofore private offerings to be mass-marketed;
Moving forward to implement rulemaking that would disqualify felons and other bad actors from Rule 506 offerings;
Strengthening private remedies for victims of fraud; and
Prohibiting or limiting pre-dispute mandatory arbitration.
Efforts to Weaken Investor Protection
As many of you know, the Jumpstart Our Business Startups Act (the "JOBS Act") requires the SEC to amend Rule 506
3 to eliminate a ban on the general advertising of private securities offerings.4 Companies using the Rule 506 exemption can raise an unlimited amount of money without registering the offering with the SEC, as long as they meet certain standards.5 Rule 506 has allowed many legitimate companies to raise money and prosper. At the same time, however, the Rule 506 exemption has resulted in significant fraudulent activities. Reports from state and federal securities regulators have shown that Rule 506 offerings are frequently the subject of enforcement investigations and actions.6 In fact, just in 2011, state regulators and the SEC, collectively, filed more than 324 enforcement actions related specifically to Rule 506 offerings.7
The removal of the ban on "general solicitation" has resulted in widespread fear that offerings mass-marketed under Rule 506 will expose investors to even greater risk of fraud and abuse.
8 Yet, to my profound disappointment, when the removal of the ban was proposed by the Commission, a majority of the SEC’s Commissioners proactively excluded from discussion many of the practical and cost-effective suggestions made by investors and other regulators, including comments from NASAA, that could serve to reduce the anticipated harm to investors.
The Commission received comments, both before and after the proposal, urging that we consider various amendments, alternatives, and recommendations to better align the mass-marketing provisions with investor protection.
9 Yet, in a departure from the Commission’s standard practice of allowing proposals to include a fulsome discussion of reasonable alternatives, the proposing release did not request comment on any of those recommendations and, contrary to the Commission staff’s own guidance for economic analysis, the proposing release did not consider whether including any of the recommendations would be a reasonable alternative to the approach in the proposed rule.10 In addition, some may argue that under the Administrative Procedures Act this failure may prevent the Commission from even considering any of those suggestions unless there is a re-proposal.11 In all my time at the Commission, I’ve never seen a more aggressive effort to exclude pro-investor initiatives.
Because of the decision to ignore the recommendations by investors and other regulators, I consider the Commission’s proposal to be fatally flawed. I was left with no choice but to vote "no" on the proposal. In my view, the only viable alternative is for it to be re-proposed so that we can provide for a fulsome discussion of how best to allow general solicitation under Rule 506 while, at the same time, considering the needs of investors. To me, it is clear that Congress did not expect the SEC to ignore investor protection issues. Instead of enacting a self-implementing provision to allow general solicitations, Congress gave the SEC the obligation to determine how best to do so. A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues. To say that I was disappointed in the Commission’s action would be an understatement.
Disqualifying Felons and Other Bad Actors from Rule 506 Offerings
I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called "bad actors" from utilizing Rule 506 (the "Bad Actor Rule").
12 It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify "bad actors" from 506 offerings,13 and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:
[t]he Commission should work swiftly to impose the "bad actor" disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.
14
The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.
Strengthening Private Remedies for Victims of Fraud
In light of the SEC’s actions to shut out investors’ voices, and in unduly delaying the adoption of investor-friendly rulemaking, it is now more important than ever that defrauded investors have the ability to seek redress against those who participate in defrauding them. Unfortunately, a series of Supreme Court cases has restricted aiding and abetting liability in private actions.
15 I agree with NASAA’s request that Congress amend the Securities Exchange Act of 1934 ("Exchange Act") to allow for a private civil action against a person that provides substantial assistance in violation of the Exchange Act.16 In 2009, former Senator Arlen Specter introduced legislation that would have amended the Exchange Act so that any person who "knowingly or recklessly provides substantial assistance to another person would be subject to liability in a private action to the same extent as the person to whom such assistance is provided."17 I join with NASAA in calling on Congress to reintroduce this legislation.
Congress has long recognized the importance of private actions under the federal securities laws. In the Private Securities Litigation Reform Act of 1995, or PSLRA, Congress reaffirmed that "[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs."
18
Private actions give fraud victims the ability to recover their losses. It is unrealistic to expect that state regulators or the SEC will have the resources to police all securities frauds or go after every fraudster. Investors should have the ability to protect themselves.
19
Pre-Dispute Mandatory Arbitration Weakens Investor Protection
Investors also should have the unencumbered right to seek redress in all available forums. This is why I want to spend a few moments discussing pre-dispute mandatory arbitration provisions. Currently, almost all customer agreements with brokerage firms include an arbitration clause requiring customers to arbitrate their claims in an arbitration forum
20 – and they’re now popping-up in the investment advisory industry.21 By adding such provisions, brokerage and advisory firms are essentially requiring their clients to give up their legal rights before the client even knows about the nature of a dispute, and before the client has had the opportunity to consider whether giving up those rights would be in their interest. The inclusion of such provisions in brokerage and advisory contracts diminishes investor protection.
Today, I do not intend to discuss the merits of whether arbitration is a better or worse system than going through the federal and state court systems, except to note that the relative merits and benefits of the arbitration processes are still the subject of debates in the industry.
22 Arbitration may be a viable option after a dispute arises and both parties knowingly agree to go into arbitration. However, my main concern with pre-dispute mandatory arbitration is the denial of investor choice; investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers.
A client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit.
23 A client’s right to bring private actions under the Exchange Act is meaningful, and the client should not be required to waive – prematurely – their legal rights, including their rights to bring an action in federal or state court. Let me give you some statistics. In fiscal year 2012, the SEC brought 147 investment adviser-related cases.24 This is roughly 20% of all enforcement cases, and accounted for the largest category of enforcement cases during that fiscal year.25 Of these enforcement cases, approximately 88 out of 147 cases, or 60%, involved allegations of fraud under the Exchange Act.26
Similarly, in fiscal year 2012, the SEC brought 134 broker-dealer cases.
27 This is about 18% of all enforcement cases, and accounted for the second largest category of enforcement cases during that fiscal year.28 Out of these 134 broker-dealer enforcement cases, roughly 95 cases, or 71%, involved allegations of fraud under the Exchange Act.29
In many of these cases, clients may be able to pursue claims against their advisers and brokers for fraud. However, if the clients had signed a pre-dispute mandatory arbitration agreement at the inception of the relationship, the clients’ ability to pursue claims through the judicial process is extinguished. My point is simply this: by providing investors with the ability to choose the forum in which to bring their legal claims and protect their legal rights, we enhance investor protection and add more teeth to our federal securities laws.
The concerns about mandatory pre-dispute arbitration are not new. For example, in April 2007, U.S. Representative Barney Frank, then the Chairman of the House Committee on Financial Services, sent a letter to the SEC Chairman to share his concerns that mandatory arbitration imposed limits on investor rights and required investors to "risk losing their rights under federal securities laws in order to invest in our public markets."30 It is, therefore, not surprising that during the legislative process that resulted in the passage of the Dodd-Frank Act,31 members of Congress voiced their concerns about mandatory pre-dispute arbitration and noted the concerns that they were "unfair to the investors."32
In passing the Dodd-Frank Act, Congress recognized the need to protect investors from abusive practices in the financial services industry.
33 As many of you know, Section 921(a) of the Dodd-Frank Act authorizes the Commission to prohibit or restrict mandatory pre-dispute arbitration provision in customer agreements, if such rules are in the public interest and protect investors.34 The authority covers broker-dealers and investment advisers.35 I believe the Commission needs to be proactive in this important area. We need to support investor choice.
Conclusion
Before I end my remarks, I want to highlight an additional pro-investor initiative that is long overdue. As this group knows well, the Dodd-Frank Act reinforced the Commission’s need to be more focused on investor advocacy issues by mandating that the SEC establish an Office of the Investor Advocate.
36 Yet, as of today, almost three years after Dodd-Frank became law, the Commission still has not created the Office of the Investor Advocate. I hope this is one of the first matters addressed by the new SEC Chairman.
The results of a recent survey reported in March 2013 show that, by an overwhelming margin, 84% of Americans want the federal government to play an active role in protecting investors.
37 As my remarks have shown, the Commission’s leadership can do more to respond to the needs of investors.
The recognition that the Commission’s leadership can do a better job in addressing the needs of investors, however, does not in any way distract from the hard work and the commitment of the SEC staff to fulfill the SEC’s mission of protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. They are among the finest individuals I’ve had the privilege of working with every day.
In closing, I want to commend the SEC staff and NASAA members for all your efforts in enforcing the federal and state securities laws and for working to preserve the integrity of our financial markets. I think that the partnership between NASAA and the SEC has been, and can continue to be, a powerful force to protect investors.
As the SEC’s NASAA liaison, I am also aware of the benefits of cooperation between the SEC and NASAA. For example, during the past two years, approximately 2,400 investment advisers made a smooth transition to state regulation as a result of the Dodd-Frank Act,
38 which expanded state authority over mid-sized investment advisers to those with up to $100 million in assets.39 This is a testament to the cooperation by the staffs of the SEC and state securities regulators.
I know that the Commission can count on NASAA’s support to work together on behalf of investors. I am honored to be working with you to protect investors. Though we may be outmanned and outgunned as state and federal securities regulators, I know that the people in this room have the resolve and commitment to fight on behalf of investors every single day.
Thank you for the opportunity to speak with you today.
1 See, NASAA Enforcement Report (Oct. 2012), available at http://www.nasaa.org/wp-content/uploads/2011/08/2012-Enforcement-Report-on-2011-Data1.pdf.
2 See, e.g., U.S. Gov’t Accountability Office, GAO-13-110, National Strategy Needed To Effectively Combat Elder Financial Exploitation, p. 20 (Nov. 15, 2012) ("For example, in one California county officials reported that due to budget cuts, they had lost many positions that involved educating the public about elder financial exploitation."), available at http://www.gao.gov/assets/660/650074.pdf; Russell Grantham, Investment Fraud; Georgia braces for fraud workload, The Atlanta Journal-Constitution (May 8, 2011, at 1D) ("[Georgia] last year folded its securities division into two other departments to cut costs. And it has cut its securities supervision budget by half since 2008, to roughly $1 million."); John Wasik, Why are states taking over SEC’s duties?, Ventura County Star(Oct. 5, 2003, at D03) ("Congress needs to restore powers and share funding and resources with the states so that they can continue to supervise financial services in an era of massive state budget cuts."); Thomas S. Mulligan, Markets; State Securities Staff Could Face Cutbacks; Plan By Department of Corporations Would Cut Unit Combating Fraud Against Small Investors, Los Angeles Times (May 9, 2003, at Business, Part 3, Business Desk, p. 1) (Due to state budget-cutting in California, "[t]he Department of Corporations’ 13 investigators would lose their jobs; they include veterans who worked on such high-profile cases as the 1989 collapse of Charles H. Keating Jr.’s Lincoln Savings & Loan. The department's investigators typically work on lower-profile frauds, such as pyramid schemes, phony limited partnerships and other scams whose victims tend to be elderly.").
3 Rule 506 is one of three exemptive rules for limited offerings under Regulation D. Rule 506 is by far the most widely used Regulation D exemption, accounting for an estimated 90% to 95% of all Regulation D offerings and the overwhelming majority of capital raised in transactions under Regulation D. Staff of the SEC’s Division of Risk, Strategy, and Financial Innovation estimate that, for 2009, 2010, and 2011, approximately $581 billion, $902 billion, and $909 billion, respectively, was raised in transactions claiming the Rule 506 exemption, in each case representing more than 99% of funds raised under Regulation D for the period. See, Vlad Ivanov and Scott Baugess, Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption (Feb. 2012), available at http://www.sec.gov/info/smallbus/acsec/acsec103111_analysis-reg-d-offering.pdf. Rule 506 permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors, so long as there was no general solicitation, and appropriate resale limitations were imposed.
4 Section 201(a)(1) of the JOBS Act directs the Commission to amend Rule 506 of Regulation D under the Securities Act of 1933 to provide that the prohibition against general solicitation or general advertising shall not apply to offerings under Rule 506 provided that all purchasers of the securities are accredited investors
5 17 CFR 230.506. If an investor is an accredited investor then under the "certain standards" of Rule 506 there is no limit on the number of purchasers, no requirement that individuals receive any information, and no conditions or restrictions relating to the status of the issuer. In fact, the only requirement other than the prohibition on general solicitation is that the issuers take reasonable care to assure that purchasers are not underwriters. Rule 506 provides a requirement to file a Form D within 15 days after the first sale; however, this requirement is not a condition to the exemption.
6 Supra, Note 1.
7 See, SEC File No. S-7-07-12, comment letter from NASAA (Oct. 3, 2012) (The year 2011 are the latest statistics available), available at http://www.sec.gov/comments/s7-07-12/s70712-92.pdf; Year-by-Year SEC Enforcement Statistics (The SEC brought 89 and 124 enforcement actions related to securities offering fraud in 2011 and 2012, respectively), available at http://www.sec.gov/news/newsroom/images/enfstats.pdf; and Recommendations of the Investors Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing Investor Protection, Capital Formation and Market Integrity (In 2011, state regulators brought 200 enforcement actions related to 506 offerings, 250 actions were brought in 2010, and 175 actions in 2009), available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-general-solicitation-advertising-recommendations.pdf.
In fact, several state securities regulators have published statistics that highlight investor harm as a result of certain Rule 506 offerings.
In Virginia, regulators took enforcement actions in 24 offerings in 2010 and 2011, which resulted in $12 million in losses to Virginia investors. See, comment letter from the State Corporation Commission, Division of Securities and Retail Franchising of the Commonwealth of Virginia (Oct. 4, 2012), available at http://www.sec.gov/comments/s7-07-12/s70712-102.pdf.
In Montana, investors have lost more than $100 million in fraudulent Rule 506 offerings in the last four years. See, comment letter from the Commissioner of Securities and Insurance, State of Montana (Oct. 4, 2012), available at http://www.sec.gov/comments/s7-07-12/s70712-116.pdf.
In South Carolina, fraudulent Rule 506 offerings are the number one complaint received by the attorney general’s office, and those complaints have more than doubled in the last two years. See, comment letter by the Securities Commissioner of the State of South Carolina (Oct. 5, 2012), available at http://www.sec.gov/comments/s7-07-12/s70712-151.pdf.
8 See, comment letter from Fund Democracy, Consumer Federation of America, Americans for Financial Reform, AFSCME, AFL-CIO, International Brotherhood of Teamsters, U.S. PIRG, Public Citizen, Consumer Action, SAFER (The Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform), Consumer Assistance Council, Inc., Florida Consumer Action Network, Consumer Federation of the Southeast, Dēmos, Chicago Consumer Coalition, Consumers for Auto Reliability and Safety, CA REINVESTment Coalition, Center for California Homeowner Association Law, Cumberland Countians for Peace & Justice and Network for Environmental & Economic Responsibility, Virginia Citizens Consumer Council, Lynn E. Turner (Former SEC Chief Accountant), James D. Cox (Brainerd Currie Professor of Law, Duke Law School), Joseph V. Carcello (Ernst & Young Professor, Director of Research – Corporate Governance Center, University of Tennessee), J. Robert Brown, Jr. (Chauncey Wilson Memorial Research Professor of Law, Director, Corporate and Commercial Law Program, University of Denver Sturm College of Law), Jane B. Adams (Former SEC Acting Chief Accountant), Gaylen Hansen (Audit Prtner, EKS&H) and Bevis Longstreth (Former SEC Commissioner) (Aug. 15, 2012), available at http://www.sec.gov/comments/jobs-title-ii/jobstitleii-59.pdf.
9 For example, several commenters recommended that the Commission condition the availability of the proposed exemption on the filing of Form D, in advance of any general solicitation, and suggested modestly amending Form D to require some additional information. See, SEC Release No. 33-9354 (the "Proposing Release"), note 28, available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf. Other commenters suggested that the Commission’s proposal address the content and manner of advertising and solicitations used in offerings conducted under the proposed exemption. See, the Proposing Release, note 31.
10 See, Staff Current Guidance on Economic Analysis in SEC Rulemakings, (March 16, 2012), available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf
11 The Commission approved the proposal by a vote of 4 to 1. Commissioner Luis Aguilar dissented from the Commission’s action stating, "I cannot support today’s proposal, because it presents a framework that is not balanced and that fails to address the acknowledged increased vulnerability of investors. In fact, there is no consideration of any of the commenters’ proposals that would have decreased investor vulnerability." Commissioner Luis A. Aguilar, Statement at SEC Open Meeting (Aug. 29, 2012), available at https://www.sec.gov/news/speech/2012/spch082912laa.htm.
12 Dodd-Frank Act, § 926, 124 Stat. 1376, 1851 (Jul, 21, 2010) (to be codified at 15 U.S.C. 77d note). (Section 926 of the Dodd-Frank Act requires the Commission to adopt rules to disqualify certain securities offerings from the safe harbor provided by Rule 506 for exemption from registration under Section 4(a)(2) (formerly Section 4(2)) of the Securities Act of 1933.)
13 See, Securities and Exchange Commission Release No. 33-9211, Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings (May 25, 2011), available at http://www.sec.gov/rules/proposed/2011/33-9211.pdf.
14 See, Investor Advocates Press SEC to Finish Bad Actor Rule, Thomson Reuters, Sarah N. Lynch (Dec. 6, 2012), available at http://newsandinsight.thomsonreuters.com/Legal/News/2012/12_-_December/Investor_advocates_press_SEC_to_finish__bad_actor__rule/.
15 See, e.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (clarified that Section 10(b) of the Exchange Act and Rule 10b-5 do not create an implied private cause of action for aiding and abetting liability); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (reaffirmed Central Bank); Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (same).
16 See, NASAA Legislative Agenda for the 113th Congress (Mar. 5, 2013), available at http://www.nasaa.org/wp-content/uploads/2011/08/NASAA-Legislative-Agenda-113th-Congress_FINAL1.pdf.
17 The legislation would have amended Section 20 of the Exchange Act. See, S. 1551 (111th): Liability for Aiding and Abetting Securities Violations of 2009 (Jun. 30, 2009), available at http://www.govtrack.us/congress/bills/111/s1551. See also, H.R. 5042 (111th): Liability for Aiding and Abetting Securities Violations of 2010 (Apr. 15, 2010), available at http://www.govtrack.us/congress/bills/111/hr5042/text.
18 Securities Litigation Reform Act, Conference Report, H.R. 104-369, 104th Cong., 1st Sess. (Nov. 28, 1995), p. 31, available at http://www.gpo.gov/fdsys/pkg/CRPT-104hrpt369/pdf/CRPT-104hrpt369.pdf.
19 Although the SEC recovered $140 million for investors defrauded by Enron, investors recovered more than $7 billion in private suits. See, Thomas C. Pearson, Enron’s Banks Escape Liability (2010), available at http://www.bus.lsu.edu/accounting/faculty/lcrumbley/jfia/Articles/FullText/2010v2n1a5.pdf.
20 According to the U.S. Supreme Court, customers who sign pre-dispute arbitration agreements with their brokers may be compelled to arbitrate claims arising under the Exchange Act, and these agreements are binding with respect to investors’ claims under the Securities Act of 1933 and state laws. See, Shearson/American Express, Inc. v. McMahon, 482 U.S. 222 (1987); Rodriquez de Quijas v. Shearson/American Express, 490 U.S. 477 (1989); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985). "The standard arbitration agreement covers all disputes arising under federal law, state law, and [Self-Regulatory Organization] rules." See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. 80 n. 378 (Jan. 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf. Most arbitrations in the securities industry are conducted through the Financial Industry Regulatory Authority (or "FINRA"), which is the largest dispute resolution forum in the securities industry. See, FINRA, Arbitration and Mediation, available at http://www.finra.org/ArbitrationAndMediation/.
21 See, e.g., Massachusetts Securities Division, Report on Massachusetts Investment Advisers’ Use of Mandatory Pre-Dispute Arbitration Clauses in Investment Advisory Contracts, p. 2 (Feb. 11, 2013), available at http://www.sec.state.ma.us/sct/sctarbitration/Report%20on%20MA%20IAs'%20Use%20of%20MPDACs.pdf. ("The Division has received 370 returned surveys as of February 11, 2013, representing 52.11% of all state-registered investment advisers located in Massachusetts. Of those 370 responses, 87.3% (323) of investment advisers indicated that they use standardized written contracts pertaining to their investment advisory services … Of the 323 investment advisory firms that indicated they had written contracts, nearly half confirmed that those contracts contained a mandatory pre-dispute arbitration clause.")
22 See, e.g., Jill I. Gross & Barbara Black, When Perceptions Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration, 2008 J. Disp. Resol. 349, 400 (2008) ("We then present our findings, including our primary conclusions that (1) investors have a far more negative perception of securities arbitration than all other participants, (2) investors have a strong negative perception of the bias of arbitrators, and (3) investors lack knowledge of the securities arbitration process… Simply put, even if the system meets objective standards of fairness, a mandatory system that is not perceived as doing so cannot maintain the confidence of its users and, in the long run, may not be sustainable. As a result, customers' negative perceptions are changing the realities of the current system of securities arbitration and require a re-thinking by policy-makers."); Jennifer J. Johnson & Edward Brunet, Arbitration of Shareholder Claims: Why Change is Not Always a Measure of Progress, Lewis & Clark Law School Legal Studies Research Paper No. 2008-11, p. 5 ("We find numerous problems with arbitration of shareholder claims and conclude that arbitration is not an attractive alternative to litigation), available at http://SSRN.com/abstract=1112826; Comment letter from Richard M. Layne to the SEC (Aug. 25, 2010) (providing reasons why arbitrations may be unfair and favors the brokerage industry), available at http://www.sec.gov/comments/df-title-ix/pre-dispute-arbitration/predisputearbitration-9.pdf; Comment letter from Melinda Steuer to the SEC (Aug. 18, 2010) (same), available at http://www.sec.gov/comments/df-title-ix/pre-dispute-arbitration/predisputearbitration-5.htm.
23 For advisory clients, this is an indispensable right, especially in light of the U.S. Supreme Court case stating that advisory clients generally do not have a private right of action for monetary relief against their investment adviser under the Investment Advisers Act of 1940 ("Advisers Act"). See, Transamerica Mortgage Advisors, Inc. et al. v. Lewis, 444 U.S. 11, 24 (1979). Advisory clients may have limited private rights of action to void an investment adviser’s contract and obtain restitution of the fees paid to the adviser. See, Section 215 of the Advisers Act; id. at 24, n. 14. An advisory client, however, may file private claims for fraud against an investment adviser under the Exchange Act. See, e.g., Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1970); Laird v. Integrated Resources, Inc., 897 F.2d 826 (5th Cir. 1990); Carl v. Galuska, 785 F. Supp. 1283 (N.D.Ill. 1992); and Levine v. Futransky, 636 F. Supp. 899 (N.D.Ill. 1986).
24 U.S. Securities and Exchange Commission, Fiscal Year 2012 Agency Financial Report, Management’s Discussion and Analysis, p. 16 (FY 2012), available at http://www.sec.gov/about/secpar/secafr2012.pdf#2012review.
25 Id.; U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, p. 3 (Fiscal 2012), available at http://www.sec.gov/about/secstats2012.pdf.
26 U.S. Securities and Exchange Commission, Select SEC and Market Data 2012, pp. 3, 11-14 (Fiscal 2012), available at http://www.sec.gov/about/secstats2012.pdf.
27 Id., at 3.
28 Id.
29 Id.
30 Letter from Rep. Barney Frank, Chairman of the House Committee on Financial Services, to SEC Chairman Christopher Cox, dated April 25, 2007 (showing great concerns that "the Commission and its staff may begin permitting public companies to impose mandatory arbitration requirements on their shareholders through the registration process."), available at http://democrats.financialservices.house.gov/press110/press2042507.shtml. Similarly, in May 2007, Senators Patrick Leahy and Russell Feingold sent a letter to the SEC Chairman to share their concerns about mandatory arbitration clauses, stating, "[t]he SEC’s mission is, first and foremost, to protect investors, and simply relying on investors’ ability to exercise informed choice when no choice is actually offered is clearly insufficient." Letter from Sen. Patrick Leahy, Chairman of the Senate Committee on the Judiciary, and Sen. Russell D. Feingold, to SEC Chairman Christopher Cox (May 4, 2007), available at http://www.judiciary.senate.gov/resources/documents/upload/05-04-07-Leahy-Feingold-to-Cox.pdf.
31 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), Pub. L. No. 111-203, 124 Stat. 1376 (2010), available at http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
32 Report of the Senate Committee on Banking, Housing, and Urban Affairs on S. 3217, S.Rep. No. 111-176, at 110 ("There have been concerns over the past several years that mandatory pre-dispute arbitration is unfair to the investors."), available at http://www.banking.senate.gov/public/_files/Comittee_Report_S_Rept_111_176.pdf.
33 See, supra Note 33.
34 See, Section 921(b) of the Dodd-Frank Act, which added Section 205(f) of the Advisers Act, provides that "The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’
Similarly, Section 921(a) of the Dodd-Frank Act, which added Section 15(o) of the Exchange Act, provides that "The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors."
The Dodd-Frank Act also required the Commission to conduct a study to evaluate, among other things, the legal and regulatory standards of care and any shortcomings in the standards in the protection of investment advisory clients. See, Section 913 of Title IX of the Dodd-Frank Act. The staff completed this study more than two years ago. See, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, p. i (Jan. 2011), available at
http://www.sec.gov/news/studies/2011/913studyfinal.pdf. That study covered pre-dispute mandatory arbitration agreements in many respects, but the staff did not offer any recommendations. See, id., at pp. 43-46, 80-83, 133-135.
35 See, Dodd-Frank Act, § 921.
36 See, Dodd-Frank Act, § 915.
37 See, The Financial Planning Coalition Survey (Mar. 8, 2013), available at http://www.financialplanningcoalition.com/docs/assets/59D91618-0B2F-4937-04E99C3E324A05E9/FinancialPlanningCoalitionMarch2013SurveyOmnibusToplineResults.pdf.
38 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Pub. L. 111-203, § 410 (2010).
39 See, Dodd-Frank Act, § 410, and Give States Oversight and Examination Authority Over RIAs Managing $1 Billion Or Less To Solve The RIA Regulatory Authority Mess" (Feb. 26, 2013) (quoting NASAA Spokesman Bob Webster).
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