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Morgan Lewis: Congress to Beef Up SEC Enforcement

Patrick D. Conner and E. Andrew Southerling at the Morgan Lewis law firm have published a memorandum discussing ways in which the financial regulatory reform bills that, until the deal struck at 5:00 this morning, were being reconciled in Congress are poised to arm the SEC with enhanced enforcement powers.  In particular, the memo discusses potential changes to the way the SEC may be granted expanded powers over market oversight, including collateral bars for securities laws violators, regulation of municipal securities, and increase whistleblower incentives and protections.  The memo deftly summarizes these potential changes, separating them by whether they appear in both the Senate and the House bills, or the House bill alone.  It should be noted that the revised bills must be revoted by each chamber, and the final language of the compromise bill agreed upon early this morning will not be available immediately. We will have to wait to see which of these provisions survive in the ultimate legislation.  


The Senate and House Bills: Enhanced SEC Enforcement and Market Oversight

Collateral Bars for Securities Laws Violators.  This provision would expand the SEC's ability to bar violators of the securities laws from all financial industry activities, not just the area in which the violation occurred.
Securities Whistleblower Incentives and Protections.  The legislation would expand the bounty programs which currently allow the SEC to provide financial rewards for blowing the whistle on violations of the securities laws.
Enhanced Oversight and Regulation of Municipal Securities.  This provision would allow the SEC more power to regulate the municipal advisors who provide advice to a municipal securities issuers, if not municipal securities directly, and expand the role of the Municipal Securities Rulemaking Board (MSRBA), and establish an Office of Municipal Securities within the SEC to administer the SEC's rules and coordinate with the MSRBA.  It also would impose fiduciary duties on municipal financial advisors and issuers.

The House Bill: Key Provisions Not Included in the Senate Bill

Aiding and Abetting Liability.  The House bill would expand the SEC's authority to prosecute those who aid and abet primary violators of the federal securities laws under the Securities Act of 1933 and the Investment Company Act of 1940. Currently, the SEC may only bring aiding and abetting enforcement actions for violations of the 1934 Act and the Investment Advisers Act of 1940.
Civil Penalties in Cease-and-Desist Proceedings.  This provision would give the SEC the authority to pursue civil penalties in cease-and-desist proceedings against any person found to have violated the securities laws, including officers and directors, and accountants.
Nationwide Service of Subpoenas.  This change would greatly expand the power of the SEC to serve subpoenas anywhere in the U.S. in cases filed in federal courts. 
"Speedy Trial Act" for Commencement of SEC Enforcement Actions.  This provision would impose time limits on the the SEC's ability to bring enforcement actions.  Under the legislative provision, the SEC' staff would be required to file an enforcement action within 180 days after notifying that it intends to recommend that an enforcement action be instituted, or must inform the Enforcement Division's Director that the staff does not intend to file an action.
Access to Grand Jury Materials.  Currently, the DOJ is generally not allowed to share grand jury testimony and materials with the SEC, except in rare circumstances.  In order to assist the SEC and DOG in parallel investigations, the House bill would permit federal courts to grant the SEC access to certain grand jury materials. 

Each of these new powers is discussed in more detail in the Morgan Lewis memorandum located at: