Bridging the Week by Gary DeWaal: November 16 - 20 and 23, 2015 (Personal Accountability; Dark Pools; Proprietary Trader Registration; CCO Liability Redux; WORM)

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Published Date: November 22, 2015

Two senior federal law enforcement regulators indicated that seeking personal accountability will be emphasized in upcoming criminal and civil actions involving alleged corporate wrongdoing. Meanwhile, the Securities and Exchange Commission issued proposed new rules aimed to enhance transparency and its oversight of alternative trading systems, including so-called “dark pools,” that include stocks listed on national securities exchanges, while the Commodity Futures Trading Commission readies for release tomorrow proposed new rules dealing with automated trading systems, and possibly the registration of certain proprietary traders who directly access exchanges through ATSs. Moreover, it appears similar SEC rules for proprietary traders may be forthcoming too – as well as rules on disruptive trading. As a result, the following matters are covered in this week’s edition of Bridging the Week:

(There will be no Bridging the Week on November 30, 2015 because of the upcoming Thanksgiving weekend holiday.)

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Deputy US Attorney General and SEC Enforcement Head Warn Corporate Individual Wrongdoers to Beware

Deputy US Attorney General Sally Quillian Yates provided further insight into the Department of Justice’s new emphasis on personal liability in connection with corporate criminal and civil law violations, at the same time that the Office of the United States Attorneys rolled out revisions to its written guidelines to its staff regarding the prosecution of corporate criminal and civil cases.

In a speech before the American Banking Association and American Bar Association Money Laundering Enforcement Conference on November 16, Ms. Quillian Yates noted that the US Attorneys’ revised guidelines “now emphasize the primacy in any corporate case of holding individual wrongdoers accountable and list a variety of steps that prosecutors are expected to take to maximize the opportunity to achieve that goal.”

Among other things, if a corporation desires credit for cooperation, “it must provide all non-privileged information about individual wrongdoing” (emphasis added). Whereas, previously, corporations may have received at least some credit for cooperation even where they did not disclose all information regarding individuals, “providing complete information about individuals’ involvement in wrongdoing is a threshold hurdle that must be crossed before we’ll consider any cooperation credit,” said Ms. Quillian Yates.

In connection with notes and memos covered by attorney-client privilege, Ms. Quillian Yates indicated that prosecutors will continue not to request such documents. However, Ms. Quillian Yates indicated that “to earn cooperation credit, the corporation [needs] to produce all relevant facts – including the facts learned through those interviews – unless identical information has already been provided.”

The revised written guidelines are included in the US Attorneys’ Manual. According to the Manual,

[p]rosecution of a corporation is not a substitute for the prosecution of criminally culpable individuals within or without the corporation… Provable individual culpability should be pursued, particularly if it relates to high-level corporate officers, even in the face of an offer of a corporate guilty plea or some other disposition of the charges against the corporation…

Separately, Andrew Ceresney, Director of the Division of Enforcement of the Securities and Exchange Commission, said that holding individuals liable is a priority of the SEC in cases against corporations where there are violations of the Foreign Corrupt Practices Act. In a speech before the American Conference Institutes FCPA Conference on November 17, 2015, Mr. Ceresney said that, although FCPA cases “often present formidable challenges to establish individual liability … [h]olding individuals liable for their wrongdoing is critical to effective deterrence.”

(Click here for background on the Department of Justice’s new policy in the article, “US Justice Department to Emphasize Naming Individuals in Corporate Misconduct Civil and Criminal Actions” in the September 13, 2015 edition of Bridging the Week.)

Court to House Subcommittee and Staff Member: Comply With SEC Investigative Subpoenas – No Exemptions for You!

A federal district court in New York rejected arguments from the Committee on Ways and Means of the US House of Representatives and Brian Sutter, the former staff director of the Committee’s Health Subcommittee, that they did not have to comply with investigative subpoenas of the Securities and Exchange Commission for documents and testimony.

The SEC had served subpoenas on respondents in connection with an investigation related to the possible leak of non-public information regarding unexpected Medicare payment rates determined by the US Department of Health and Human Services announced on April 1, 2013. Just prior to the time of HHS’ official announcement, a research firm advised 200 clients of expectations that appeared to presage this unexpected outcome. According to the court, the SEC claimed it possessed information and emails that Mr. Sutter may have been the source of information used by the research firm as the basis for its advice. However, the respondents claimed they were excused from compliance with the SEC’s subpoenas because of principles of “sovereign immunity” and the Speech or Debate Clause of the US Constitution, among other reasons.

Respondents said they could not be compelled to comply with the SEC’s investigative subpoenas under the doctrine of sovereign immunity because the federal government and its agencies cannot be sued unless they voluntarily consent.

The court rejected this argument, saying this doctrine has traditionally barred only private suits against the federal government and not suits by one branch of government against another. In any case, said the court, Congress waived any sovereign immunity defense against the SEC in an insider trading investigation when it enacted into law in 2012 a provision stating that members of Congress and Congressional employees are not exempt from securities laws’ insider trading prohibitions.

The court also rejected respondents’ claim that the SEC’s investigative subpoena was prohibited under the US Constitution’s Speech or Debate clause. This clause states that “for any Speech or Debate in either House, [Senators or Representatives] ... shall not be questioned in any other Place.”

The court acknowledged that the Speech or Debate clause was implicated by the SEC’s subpoena. However, the court said the clause only precluded inquiry that fell within the “sphere of legitimate legislative activity” and a large portion of the SEC’s subpoena addressed matters outside such activity, including personal communications. Accordingly, the court ordered respondents to comply with the SEC subpoenas but endeavored to somewhat limit their scope.


Compliance Weeds and My View: As previously pointed out in prior versions of Bridging the Week, Securities and Exchange Commission rules require investment advisers to adopt and implement written policies and procedures “reasonably designed” to ensure the adviser’s compliance with applicable law. The chief compliance officer solely is responsible to “administer” policies that are adopted by the adviser (click here to access Rule 206(4)-7 under the Investment Advisers Act). (Click here for details regarding the SEC’s requirements in the article, “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally” in the June 21, 2015 edition of Bridging the Week.) At Sands Brothers Asset Management, however, the compliance manual tasked the CCO with ensuring the firm’s compliance with the custody rule – thus placing a higher obligation on the CCO than required by rule, and transferring the legal responsibility of the adviser to Mr. Kelly. CCOs should be mindful of any language in their firms’ compliance manual that places any obligation on them to ensure compliance with any applicable law. CCOs can help firms comply with applicable law, but they cannot guarantee compliance as they typically have no supervisory authority. Here the SEC acknowledged that Christopher Kelly, SBAM’s CCO, reminded personnel of relevant deadlines, but by not doing more, he was held accountable for SBAM’s failures. At a minimum, said the SEC, Mr. Kelly should have notified “…staff of the Commission of any difficulties the Adviser was encountering in meeting the custody rule deadlines.” Once again, this seems an outcome that unfairly punishes a compliance officer for actions of an adviser and its senior officer he or she can influence but not control!

Compliance Weeds: Both the Securities and Exchange Commission and the Commodity Futures Trading Commission have strict rules regarding the electronic storage of mandatory records, including retention periods. These rules – which generally apply to all SEC brokers, dealers and exchange members, and all CFTC registrants – specify the format in which such documents must be kept (WORM format); back-up requirements; written operational procedures and control requirements; how information in such documents may have to be produced; and how compliance with SEC and CFTC requirements must be back-stopped through use of mandatory technical consultants. Certain required records must always be retained in native format even if also maintained electronically. Registrants periodically should double-check to ensure there are no gaps in their document retention process prompted by new, amended or discontinued businesses or processes. (Click here for access to the relevant CFTC rule – Rule 1.31 – and here for the relevant SEC rule – Rule 17a-4.)

Culture and Ethics: As I wrote back in May 2015, “It can only be hoped that [recent] settlements of alleged acts of Forex manipulation provide the last revelations of major inappropriate conduct by financial service industry companies and their employees. Unfortunately, this may not be the case, as there appear to be continuing investigations into electronic trading of Forex and Forex-related products as well as the price-setting process for gold, silver, platinum and palladium. Hopefully, though, financial service firms have minimized the likelihood of future incidents of such illicit behavior by not only implementing better internal controls to prevent and detect such potential issues earlier, but by enhancing overall compliance cultures. This can be encouraged through enacting compensation schemes that better reward and penalize good and bad behavior (not only by line employees, but by their direct and indirect supervisors as well), and by repeatedly educating employees not only about their legal requirements, but also about their ethical obligations too. (Keep in mind the ‘grandma test:’ don’t engage in conduct you would not be proud for your grandmother to read about in her morning tabloid.) It’s not just about avoiding the line between black and white, but about staying out of the zone surrounding such lines altogether. For sure, implementation of better internal controls is critical to prevent and detect potential violations. However, such controls cannot solely be reliant on quantitative analysis and metrics. Such controls must include the intuitive analysis of trained and seasoned professionals who can piece together different metrics and detect issues through application of the ‘smell test’ as well as through application of complex formulas!” This was good advice in May 2015, it is good advice in November 2015 – and it will be good advice in the future too and regularly worth repeating!

And more briefly:

For more information, see:

Bank Settles NYS Charges Related to FX Trading System That Allegedly Rejected Some Client Orders Where Bank Could Not Profit:

Broker-Dealer Fined $2.6 Million by FINRA for Failure to Retain Key Records in WORM Format:

CCO Fined and Suspended by SEC for Recidivist Violation by Investment Adviser; Sanctions Against IA and Principals Too:

Christopher Kelly:
Sands Brothers, Martin Sands, Steven Sands:

CFTC Extends Certain Inter-Affiliate Swaps Transaction No-Action Relief and Suspends Index Investment Data Report:

No Action Relief:
Suspension of Index Investment Data Report:

Court to House Subcommittee and Staff Member: Comply With SEC Investigative Subpoenas – No Exemptions for You!:

Deputy US Attorney General and SEC Enforcement Head Warn Corporate Individual Wrongdoers to Beware:

See also:
Andrew Ceresney Speech:
US Attorneys Manual – Principles of Federal Prosecution of Business Organizations:

Enhanced Transparency Is Objective of Proposed SEC Rules for Alternative Trading Systems:

ESMA Determines Not to Permit Use of Non-Collateralized Bank Guarantees to Support Cleared Energy Derivatives After March 15, 2016:

FCA to Study Competition in the Asset Management Industry:

Former Sentinel CEO Formally Banned From the Futures Industry:

One More Time: Treasury Official Warns of Need for Cybersecurity Preparedness:

SEC Chair Tells Congressional Committee Disruptive Trading Rule and Proposals Mandating Third-Party Compliance Reviews of Investment Advisers Coming Soon; CFTC Reg AT Proposal Coming Sooner:


Staff Issues Report on CFTC De Minimis Exception for Swap Dealer Registration But Makes No Recommendations:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of November 21, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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