Cybersecurity at the forefront. On September 20, 2017, Chairman Clayton released a statement on cybersecurity, which revealed that, in August 2017, the Chairman had learned that “an incident” of cyber breach in the SEC’s online EDGAR filing system “may have provided the basis for illicit gain through trading.” The hack has brought renewed and vigorous focus from the Commission on issues of cybersecurity. Just five days after announcing the SEC’s hacking, the agency announced a series of enforcement-related initiatives designed to combat cyber-based threats, including the creation of a dedicated Cyber Unit and a Retail Strategy Task Force.
Continued focus on accounting fraud. Both before and after Chairman Clayton’s confirmation, in 2017, the SEC maintained a focus on rooting out and punishing instances of accounting fraud—a trend that is likely to continue as Chairman Clayton pushes his agenda item of protecting “Main Street” investors.
Impending changes to Dodd-Frank In June 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which would repeal significant portions of Dodd-Frank. As passed by the House, the CHOICE Act would curtail the SEC’s ability to seek penalties through administrative proceedings and prevent courts from deferring to the SEC’s statutory or regulatory interpretations through so-called “Chevron deference.” In November 2017, a bipartisan group of senators published a narrower proposal focused on rolling back banking regulations included in Dodd- Frank. As relevant to the securities laws, the proposal would exempt banks with fewer than $10 billion in assets from the Volcker Rule’s proprietary trading ban. In early December 2017, the Senate Banking Committee approved the proposal (now known as the “Economic Growth, Regulatory Relief and Consumer Protection Act”) for consideration by the full Senate. Directors should be aware that at least some change, and potentially drastic change, in the area of securities regulation could arrive in the coming months.
Further developments in insider trading. In August 2017, the 2nd Circuit, in a 2-1 panel opinion, affirmed a criminal insider trading conviction in U.S. v. Martoma, No. 14-3599 (2d Cir. Aug. 23, 2017), which held that the Supreme Court’s 2016 decision in Salman v. United States, 137 S. Ct. 420 (2016), abrogated the requirement for a “meaningfully close personal relationship” between tipper and tippee previously articulated by the Second Circuit in United States v. Newman, 773 F.3d 438 (2014). The opinion did not disturb Newman’s other key holding–which is consistent with language in the Salman opinion–that, at least in a criminal case, the government must prove that the tippee knew that the tipper breached a duty and received a personal benefit in order to be liable for insider trading. From a risk-avoidance perspective, compliance professionals across all sectors should take a conservative view and should counsel against trading in a scenario that involves the possession of material non-public information, at least without extremely careful analysis of questions of duties, motivations and personal benefit.
View the full report here.