The recently passed Securities Act of 2008 strives to enhance the effectiveness of the U.S. Securities and Exchange Commission.
The U.S. House of Representatives passed the Securities Act of 2008 on September 11, 2008. The purpose of the Act is “to enhance the effectiveness of the Securities and Exchange Commission’s enforcement, corporate finance, trading and markets, investment management, and examination programs . . .” Some of the more significant components of the Act are summarized below.
Civil Money Penalties
The Act would provide the U.S. Securities and Exchange Commission (SEC) with the authority to impose civil money penalties in cease-and-desist proceedings before an SEC administrative law judge, against any person or company, whether registered or unregistered, alleged to have violated the Act.
Currently, the SEC may only impose civil money penalties in administrative proceedings against securities industry firms and professionals. The SEC currently may only obtain civil money penalties in federal district court against other defendants (such as public companies, officers and directors, accountants and others). Section 8A also sets out a method by which a respondent subject to the penalty provisions may offer evidence on his or her ability to pay such fines and the impact of such fines on his or her ability to continue in business.
The Act contains three tiers of the penalties:
- First Tier: a maximum penalty of $6,500 for each act or omission committed by any natural person, and a $65,000 cap for each act or omission committed by any other person, that constitutes a violation of the Securities Act or any rule or regulation thereunder
- Second Tier: a maximum penalty of $65,000 for natural persons and $325,000 for all other persons for each act or omission that involves fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement
- Third Tier: a maximum penalty of $130,000 for a natural person or $650,000 for all other persons if the act or omission involves fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and such act or omission directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons, or resulted in substantial pecuniary gain to the person who committed the act
The Act would allow the entry of collateral bar orders, or orders that bar associated persons who violate the federal securities laws in one capacity (e.g., as an associated person of a broker or dealer) from being associated with other securities businesses in a different capacity (e.g., as an associated person of an investment adviser). Currently, the law does not permit, for example, the SEC to bar someone whose misconduct occurred while associated with a broker-dealer from associating with an investment adviser (or vice versa).
Nationwide Service of Subpoenas
The Act provides for nationwide service of subpoenas in the United States. Subpoenas issued under the auspices of the federal court in which the SEC has filed an action to compel attendance of witnesses or production of documents may be served in any other district. The Act provides that “Such subpoenas may be served and enforced without application to the court or a showing of cause,” notwithstanding the applicable provisions of the Federal Rules of Civil Procedure. While the meaning of this language is not entirely clear, it appears to indicate that the Act will allow the SEC to issue subpoenas for depositions or the production of documents throughout the United States, requiring appearance or production to the district in which the subpoena is issued. In addition, it appears that the Act allows the SEC to compel people to travel to testify (for trial or depositions) anywhere in the United States.
Sharing Privileged Information with Other Authorities
The Act provides that the SEC shall not be deemed to have waived any privilege by sharing information with another agency of the U.S. government, any foreign securities authority, any foreign law enforcement authority, or any state securities or law enforcement authority. The SEC would not be compelled to disclose privileged information obtained from another securities authority if the authority represents to the SEC that it has made a good faith determination that the information is in fact privileged. No federal agency or state securities or law enforcement authority would be deemed to have waived any applicable privilege by sharing information with the SEC. Nothing in the provision would provide the SEC with a right to refuse disclosure of information to Congress or to refuse to comply with an order of a federal court in an action commenced by the United States or the SEC.
Expanded Authority Over Various Individuals
The Act would grant the SEC and other regulatory agencies powers to: (i) remove from office and censure all members of the Municipal Securities Rulemaking Board; (ii) institute disciplinary proceedings against persons associated with or seeking to become associated with, registered or unregistered government securities brokers and dealers; (iii) conduct investigations into alleged violations committed by individuals who were formerly associated with members of national securities exchanges and national securities associations, as well as former participants of registered clearing agencies; (iv) remove from office or censure persons who either are or were officers of self-regulatory organizations; and (v) bring an action in district court against persons who are, or at the time of the alleged misconduct were, serving or acting, with respect to any investment company, as an officer, director, member of any advisory board, investment adviser, depositor, or as principal underwriter if the investment company was an open-end company, unit investment trust or face-amount certificate company.
Scope of Exemption from State Securities Registration
The Act would allow the NYSE, AMEX or Nasdaq to establish tiers on which stocks can be listed and traded, even if those stocks would not otherwise qualify as covered securities exempt from state registration requirements.
The Act would clarify that states can require that notice filings for exempt securities contain all of the information required by Form D including the appendix to Form D (even though the appendix is not required for filings with the SEC on Form D).
Unlawful Margin Lending
The Act would avoid a potentially problematic reading of Section 7(c)(1)(A). Currently, the section may be interpreted to provide that so long as a broker-dealer extended, maintained or arranged for credit to a customer and the credit was collateralized by securities, then the broker-dealer would not have to abide by the margin rules and regulations of the Federal Reserve Board of Governors. The amendment will eliminate any potential confusion regarding the interpretation of this rule.
Advisers Act Section 205
The Act would clarify that Section 205 of the Advisers Act, dealing with contractual provisions between clients and advisers, does not apply to state registered advisers. This amendment will clarify that certain hedge fund and private equity advisers, who may be subject to state (but not SEC) registration, may charge performance fees that would not be permitted for most SEC registrants.
Amendments to the Securities Investor Protection Act of 1970 (SIPA)
The Act would amend SIPA to add securities futures and options on securities futures to the list of covered claims a customer can make against a broker-dealer that the Securities Investor Protection Corporation will cover, so long as these positions are carried in a securities account pursuant to a portfolio margining program approved by the SEC. The Act would allow SIPC coverage but would not address the conflicting regulatory requirements of the SEC and the CFTC that prevent securities futures and options on securities futures from being carried in a securities account.