Compliance Bricks and Mortar for June 6

These are some of the compliance-related stories that recently caught my attention.

The key to hedge-fund riches: your retirement dollars by Timothy Spangler in The Guardian

First, there is the misconception that “there are no restrictions on what they can invest in.” This is true. They can invest the same way Sir Richard Branson or your Aunt Edna can invest, if they had the money and the expertise. They are not given a special pass to avoid all of modern Wall Street regulation that applies to ever trader out there. But, since retail investors are excluded, hedge funds don’t have to submit to any of the “bubble wrap” restrictions that the SEC puts on mutual funds and other products meant for retail investors.

SEC, Bitcoin and Unregistered Offerings by Thomas O. Gorman in SEC Actions

Bitcoin has been a much discussed item recently. The virtual currency is a digital representation of value that is traded and can serve as a medium of exchange. There are websites that use it. At one time there was a stock exchange called the Global Bitcoin Stock Exchange which apparently listed shares valued in the medium but is now out of business. And, there are trading platforms that use bitcoin such as the MPEx based in Romania.

Now the Commission has brought an administrative proceeding involving two offerings of unregistered securities valued in bitcoin.

The SEC’s (New) Admissions Policy: Questions and Consequences by Nancy Adams in Securities Litigation & Compliance Matters

Nearly a year has passed since the SEC announced that it would require admissions of wrongdoing as a condition of settling SEC charges in certain cases. Perhaps it can no longer be called a “new” policy. But lawyers are still wrestling with questions about the policy and its consequences – both intended and unintended. How broadly does the new policy apply? How and when should the question of its application be addressed in a case?

FATCA: What it is, and why it may apply to your business by Stephanie Quiñones in The Securities Edge

The Foreign Account Tax Compliance Act (“FATCA”) is a US law designed to counter offshore tax avoidance by US persons. Controversial because of its wide-ranging breadth and application to non-US financial institutions, in the most general sense, FATCA imposes a 30% withholding tax on payments of US source income made to foreign financial institutions (“FFIs”) unless they enter into an agreement with the US Internal Revenue Service (“IRS”) and disclose information about their US account holders.

Massachusetts, Illinois surveying RIAs about cybersecurity by Minda Smiley in Investment News

“Many of the RIAs are smaller and we want to get their input to see what exactly they feel they have and what they might need,” said William Galvin, secretary of the Commonwealth of Massachusetts. “We want to see what kind of protections are in place and if additional protections are needed, we want to prescribe what they should be.”

Do You Want Your Lawyer To Be Horatius Or Atticus Finch? by Keith Paul Bishop in California Corporate & Securities Law

Lawyers should be treated differently from accountants because their roles and professional obligations are fundamentally different. Simply put, lawyers are not gatekeepers. To foist the role of gatekeeper on private attorneys undermines the critical role that lawyers play in our polity as advocates for their clients and checks on the government. The former Soviet Union had lawyers, but they all worked for the government. By labeling lawyers as gatekeepers and threatening enforcement, the government is in effect saying “you work for us”.

Judge Rakoff Reversed by Second Circuit on SEC-Citi case, Still Sort of Wins by David Smyth in Cady Bar the Door

And yet, it turns out Judge Rakoff was wrong the whole time.  By essentially insisting on admissions to the facts alleged in the SEC’s complaint, Rakoff exceeded his authority as a district judge.  According to the Second Circuit today, here is what a court evaluating a proposed SEC consent decree for fairness and reasonableness should assess: (1) the basic legality of the decree, (2) whether the terms of the decree, including its enforcement mechanism, are clear; (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind.  Of course, a district court may need to make additional inquiry to ensure the decree is fair and reasonable.  Indeed, it shouldn’t be a “rubber stamp.”  But the primary focus should be on ensuring the decree is procedurally proper and take care not to infringe on the SEC’s discretionary authority to settle on a particular set of terms.