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U.S. Supreme Court Limits SEC’s Disgorgement Power

On June 22, 2020, the U.S. Supreme Court in Liu v. SEC upheld the SEC’s ability to obtain disgorgement under 15 U.S.C. § 78u(d)(5), which authorizes the SEC to seek “equitable relief” in civil proceedings, so long as the disgorgement award “does not exceed a wrongdoer’s net profits and is awarded for victims.”

Justice Sotomayor, writing for the 8-1 majority, discussed three main ways in which courts have occasionally awarded disgorgement that “test the bounds of equity practice:” (1) Ordering the proceeds of fraud to be deposited in Treasury funds instead of disbursing them to victims, (2) imposing joint-and several disgorgement liability, and (3) declining to deduct even legitimate expenses from the receipts of fraud. She noted that the SEC’s disgorgement remedy in such incarnations is in “considerable tension with equity practices and may transform a disgorgement award into an impermissible penalty.”

The Court vacated the trial court’s judgment and remanded the case to the Ninth Circuit for further proceedings consistent with the principles discussed in the opinion.

Justice Thomas, the lone dissenter, argued that disgorgement is not a traditional equitable remedy and is therefore unavailable to the SEC under Section 78u(d)(5).

The opinion can be found here.

By |June 30th, 2020|Securities Law|
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Colorado Appeals Court Holds that Williamson Presumption Applies to General Partnership Interests

A panel of the Colorado Court of Appeals today held that, contrary to a prior panel’s holdings, the Williamson “presumption” that a general partnership interest is not a security applies to the Colorado Securities Act (“CSA”). The Court also held, again contrary to the prior panel’s holdings, that (1) under the second Williamson test, venture-specific experience is not required, and (2) under the third Williamson test, the question is whether the managing partner is essentially irreplaceable; not whether the general partners are able to fill the managing partner role themselves. Lastly, the Court held that the three Williamson tests account for economic realities and a court should consider other economic realities only if they aren’t adequately accounted for under the three Williamson tests. The case is Chan v. HEI Resources, 2020 COA 87.

By |June 4th, 2020|Securities Law|
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SEC Publishes Cybersecurity and Resiliency Observations

The SEC’s Office of Compliance Inspections and Examinations (OCIE) yesterday published its Cybersecurity and Resiliency Observations. Stating that it was “providing these observations to assist market participants in their consideration of how to enhance cybersecurity preparedness and operational resiliency,” OCIE detailed its observations in the following areas:

  • Governance and Risk Management
  • Access Rights and Controls
  • Data Loss Prevention
  • Mobile Security
  • Incident Response and Resiliency
  • Vendor Management
  • Training and Awareness

The document can be found here: https://www.sec.gov/files/OCIE%20Cybersecurity%20and%20Resiliency%20Observations.pdf

By |January 28th, 2020|Securities Law|
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SEC Announces 2020 Examination Priorities

The SEC’s Office of Compliance Inspections and Examinations (OCIE) this week published its 2020 Examination Priorities. They are:

  • Retail Investors, Including Seniors and Those Saving for Retirement – OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.
  • Market Infrastructure – OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.
  • Information Security – OCIE will continue to prioritize cyber and other information security risks across the entire examination program.
  • Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors – OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers (RIAs) will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds.  Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.