by T. GormanPosted on Posted in SECActions

Regulation Best Interest, the long studied and discussed Commission rule that addressed the standards governing broker-dealers when making an investment recommendation was challenged by in a suit filed by seven states and the District of Columbia. State of New York v. SEC, Civil Action No. 1: 19 -cv-0835 (S.D.N.Y. Filed Sept. 9, 2019). The suit claims the SEC’s regulation “increases confusion about the standards of conduct that apply when investors receive recommendations and advice from broker-dealers or investment advisers [and] makes it easier for brokers to market themselves as trusted advisors . . . and contradicts Congress’s express direction.”

Traditionally, broker-dealers have been obligated to render suitable advice. In contrast, advice given by investment advisers is governed by principles of fiduciary duty. The complaint argues that under Dodd-Frank the Commission was given the authority to harmonize the standards of conduct that apply to broker-dealers and investment advisers and draft a standard which would apply to all. Under that standard, when giving personalized investment advice about securities to retail customers, the professional must, according to Dodd-Frank as quoted in the complaint, “”act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.’” By failing to apply its new rule to broker-dealers and investment advisers, and adopt this standard, the SEC acted contrary to Dodd-Frank. The result is to leave retail investors as confused regarding the applicable standards as ever, according to the complaint.

Regulation Best Interest adopted the first part of the standard quoted above regarding best interest, but excluded the language regarding the financial or other interest of the market professional. When adopting the Regulation the Commission also expressly limited the rule to broker-dealers when giving investment advice.

In adopting its Rule the Commission sought to raise the obligations of broker-dealers while crafting a provision suitable to their situation. Regulation Best Interest, the Commission stated, was designed “to draw on key principles underlying fiduciary obligations, including those that apply to investment advisers under the Advisers Act, while providing specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers. The Rule was thus designed to enhance the obligations of the broker-dealer when making a recommendation rather than simply adopt the obligations of an investment adviser. The point was “to help customers better understand and compare the services offered by broker-dealers and investment advisers and make an informed choice of the relationship best suited to their needs and circumstances . . .” Stated differently, the Commission sought to create a situation that would enhance customer knowledge and understanding.

Whether the SEC acted in accord with the dictates of Dodd-Frank and promulgated an aid to retail investors is now a question that will be considered by the court in New York.

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by T. GormanPosted on Posted in SECActions

SEC Chairman Jay Clayton called for greater international cooperation in the enforcement of anti-corruption statutes such as the Foreign Corrupt Practices Act in remarks delivered before the Economic Club of New York on September 9, 2019 (here). The comments followed a review of initiatives taken by the Commission under his tenure to aid the main street investor, a key focus of the agency under Chairman Clayton.

The FCPA, spawned from corruption uncovered in the now infamous Watergate Hearings was written into law through SEC enforcement efforts that began as a lonely crusade for the United States. When the Act was written in the late 1970s, the country was well aware that it was largely going it alone in its effort to stem corruption in international business transactions. Nevertheless, then Enforcement Chief Stanley Sporkin, Senator William Proxmire and others championed the legislation which began with a narrow focus that has expanded over the years.

While enforcement was sporadic in the years immediately following the passage of the legislation, the creation of the OCED in the late 1990s lead to increased recognition of the need for such laws and more enforcement. Today many countries have passed anti-corruption laws similar to the FCPA. Nevertheless, Chairman Clayton is clear correct that the U.S remains the leader when it comes to enforcement efforts.

The Chairman is also correct in stating that increased international efforts are the best enforcement strategy. Illustrating the point through the use of economic game theory, Mr. Clayton posited that when everyone is enforcing FCPA type statutes, the rogue country may have an incentive to change its unethical conduct. On the other hand, when the enforcer is something of a lone wolf, there may be incentives to not implement anti-corruption laws. Indeed, common sense suggests such a result – it may be easier to ignore ethical standards and “cheat” as the Chairman said, than act in accord with anti-corruption laws under such circumstances.

What all of this suggests, as Mr. Clayton stated, is that more enforcement efforts are needed around the globe. That “more,” however, must come from other countries and institutions that are willing to work with the SEC, DOJ, OECD, and countries such as the U.K., Canada that have stepped-up enforcement.

Such efforts can begin with the SEC and DOJ streamlining enforcement with quicker, more focused, inquiries that hold accountable those who violate the FCPA. Those efforts can continue by increasing working arrangements and efforts with international organizations and other countries to ensure the kind of world-wide efforts the Chairman envisioned. A good place to start may be the Congressional budget hearings that will be held next month – the SEC and DOJ will each need additional resources to engage in the kind of efforts that the Chairman envisioned.

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