SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Three More Cases Demonstrating Jurisprudential Reason, Not Politics.”

The following is an excerpt:

Another busy day for the Court, which is no surprise given the short time remaining in the term and the number of opinions that yet have been published. If there is a distinguishing characteristic, it is the continued fracturing of the stereotype that the Justices act for political, not jurisprudential reason, and hence that there are immovable blocs of liberals and conservatives.

Thus it is worthy of note that one of the three cases decided today finds Chief Justice Roberts, along with Justices Breyer, Kagan, and Kavanaugh, joining a Barrett opinion in full. And Justice Thomas filed a dissenting opinion in which Justices Breyer, Sotomayor, and Kagan joined as to its main substantive parts. A great deal of credit should go to the Chief Justice, who clearly has been able to convince a continuing series of majorities to practice constitutional avoidance and insist upon parties’ satisfaction of Article III standing requirements. Last week’s decision on the Affordable Care Act, California v. Texas, is a monument to that laudable administration.

Click here to read the full post and more on SCOTUS Today.

Trading,Securities,Abstract,Background.

Last week, the Securities and Exchange Commission’s Office of Information and Regulatory Affairs released the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which includes the SEC’s rulemaking agenda.

According to the SEC’s press release, notable proposed and final rulemaking areas include:

  • Disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk
    Market structure modernization within equity markets, treasury markets, and other fixed income markets
  • Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market
  • Investment fund rules, including money market funds, private funds, and ESG funds
  • Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including, among other things, securities-based swaps and related rules, incentive-based compensation arrangements, and conflicts of interest in securitizations
  • Enhancing shareholder democracy
  • Special purpose acquisition companies
  • Mandated electronic filings and transfer agents
  • 10b5-1 affirmative defense provisions

One of the first items to be addressed, by October 2021, is proposed rule amendments to address concerns about Rule 10b5-1’s affirmative defense provision. Rule 10b5-1 provides an affirmative defense to corporate insiders and issuers from insider trading law if they adopt a trading plan in good faith and before they become aware of material nonpublic information. The proposed rulemaking on Rule 10b5-1 follows less than a week after SEC Chairman Gary Gensler gave a speech highlighting his concerns about the use of 10b5-1 trading plans. In that speech he also noted that he had asked staff to make recommendations “how we might freshen up Rule 10b5-1.” It is likely that the ideas he raised in his speech, including a mandatory cooling off period before the first transaction, limitations on when 10b5-1 plans can be cancelled, mandatory disclosure of 10b5-1 plans and limits on the number of plans, become part of the rulemaking discussion. Insiders and issuers should pay close attention to the process because it may lead to changes in 10b5-1 plans beyond what is current practice. For example, a four to six month cooling off period is longer than what many consider best practice.    

What is also noteworthy is what was not included in the SEC’s release – rulemaking concerning digital assets – which drew the ire of two commissioners and is somewhat surprising given the growth of digital assets. On June 14, commissioners Hester M. Peirce and Elad L. Roisman issued a statement noting, among other things, the lack of proposed rules regarding digital assets and allowing companies to compensate gig economy workers with equity and also expressed their concern that the SEC was planning to revisit areas that had been the subject of recent rulemaking, such as proxy updates, resource extraction payments, the definition of accredited investor, and whistleblowers.

Although the SEC’s rulemaking agenda may change, this release provides a guide for the SEC’s regulatory initiatives in the near future. And, it will be interesting to see whether the Commissioners Peirce and Roisman and able to garner support to address digital assets.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Reflecting on Bostock.”

The following is an excerpt:

From the number of rainbow flags that I’ve been seeing, it is clear that this is a month of celebration of increasing societal inclusion, notwithstanding the divisions that are challenging the rule of law in America. Indeed, today marks the first anniversary of the Supreme Court’s decision in Bostock v. Clayton County in which, surprising to some, Justice Gorsuch wrote for the majority that an employer that fires an individual merely for being gay or transgender violates Title VII of the Civil Rights Act of 1964 (“Title VII”). Stating the issue plainly, the Court noted:

“Today, we must decide whether an employer can fire someone simply for being homosexual or transgender. The answer is clear. An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.”

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Unanimity on Criminal Cases as We Wait for More Divisive Matters.”

The following is an excerpt:

Not surprisingly, as the Court’s term moves nearer to its end, we still are awaiting decisions in several controversial areas that are likely to produce divided results. Meanwhile, unanimity prevails, though the cases in which it is reflected are unlikely to foreshadow the results in other matters, except to the extent that I think all of them will devolve from literal, textual approaches on both the left and the right.

This morning’s two decisions were easy ones for the Court, and they follow the text-governing pattern that I have discussed over the last few weeks.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “The Justices Show Again That They Are Not Politicians in Robes.”

The following is an excerpt:

A short note about the Supreme Court’s decision today in Borden v. United States, in which it considered whether a felon-in-possession gun charge qualified as a “violent felony” under the Armed Career Criminal Act (“Act”), 18 U. S. C. §924, which provides enhanced penalties for criminals convicted of certain firearms offenses who have at least “three previous convictions . . . for a violent felony or a serious drug offense.” The case centered around the Act’s definition of a “violent felony” as a “crime punishable by imprisonment for a term exceeding one year” that either “has as an element the use, attempted use, or threatened use of physical force against the person of another” (the elements clause) or “involves conduct that presents a serious potential risk of physical injury to another.” The Court concluded that a crime of mere recklessness did not contain the mens rea that would fall within the statute’s “elements clause.” This holding is certainly of interest to accused career felons whose latest misconduct is reckless but not violent, and to those who represent them. But that is not why I write about it.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “The Court Takes a Literal Approach to Statutory Interpretation Again – This Time, to Immigration Laws.”

The following is an excerpt:

This term’s potential blockbusters still are unresolved, but this morning’s unanimous decision in Sanchez v. Mayorkus is worthy of at least a passing note. In an opinion written by Justice Kagan, the Court held that an individual who entered the United States unlawfully and was later granted Temporary Protective Status (TPS) by the government is not entitled to Lawful Permanent Resident (LPR) status by virtue of the TPS designation. This is yet another case where Justice Kagan has become a leading Court liberal voice for the application of textual principles long espoused by more conservative Justices. This is not to say that there are not cases where various judges examine text, yet reach differing conclusions. It is to say, though, that, increasingly, there are opinions authored or joined by Justices from the liberal wing of the Court that don’t lead with policy or interpretive pronouncements but, instead, with a literalist approach to statutory text.

Click here to read the full post and more on SCOTUS Today.

Pennsylvania-state-flag-shutterstock_549468718

Our colleagues Janene Marasciullo and Daniel J. Green of Epstein Becker Green have a new post on Trade Secrets & Employee Mobility that will be of interest to our readers: “The Pennsylvania Supreme Court Nixes a No-Poach Agreement Between Business Partners as Overbroad.”

The following is an excerpt:

As reported here and here, in December 2019 and January 2020, the United States Department of Justice brought its first criminal charges against employers who entered into “naked” wage fixing agreements and no-poach (e.g., non-solicitation and/or non-hire) agreements with competitors. According to DOJ’s 2016 Antitrust Guidance for HR Professionals, such agreements are “naked,” and, therefore, illegal per se, because they are “separate from or not reasonably related to a larger legitimate collaboration between competitors.” Although DOJ recognized that such agreements may not be illegal per se when made in furtherance of legitimate joint ventures or business, it provided scant guidance on what it would deem to be a legitimate joint venture or collaboration. The Pennsylvania Supreme Court recently addressed the issue in Pittsburgh Logistics Systems v. Beemac Trucking, 2021 WL 1676399, at *1 (Pa. Apr. 29, 2021).  Relying in part on DOJ’s Guidance, the Court found that the no-poach agreement was unenforceable because it was overbroad and contrary to public policy.

Click here to read the full post and more on Trade Secrets & Employee Mobility.

Compliance,Concept

Over the past 15 years, chief compliance officers (“CCOs”) for financial services firms have come under increased scrutiny as the Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) have brought more frequent enforcement actions seeking to hold CCOs personally liable. CCOs understandably have been concerned about this trend and financial service firms have focused on the chilling effect that the enforcement actions may have on the vital role CCOs play in their organizations and the quality of the COO applicant pool.

Although SEC Commissioners and Staff members, as well as various FINRA executives, have attempted to ease the concerns and offer guidance on when they will pursue an action against a CCO personally for conduct relating to their compliance-related duties (COO Conduct Charges), there is no formal framework that lays out the factors for regulators to consider in determining whether to charge CCOs.

In a recently released report, the New York City Bar Compliance Committee (the “Committee”) attempted to fill that void with a “proposal of non-binding factors for the SEC to consider in creating a Framework under which to evaluate whether to bring . . . CCO Conduct Charges under the federal securities laws.”

The Committee recommended one general affirmative factor that should be considered in all CCO Conduct Charges and specific affirmative factors relevant to three types of claims brought against CCOs: 1) the CCO exhibited a “wholesale failure” to carry out responsibilities; 2) the CCO obstructed the investigation; and 3) the CCO participated directly in the fraud. The Committee also recommended certain mitigating factors that should be considered in the decision to bring charges.

Affirmative: General Factor

The Committee recommended that in all cases, the SEC “should carefully consider whether [charging the CCO] helps the SEC fulfill its ultimate regulatory goals.” One of those primary goals is deterrence and the Committee argues that CCO Conduct Charges do not meaningfully deter CCO’s from improper conduct. Instead, it may actually increase future securities law violations because it may lead to the departure from the profession by qualified individuals or result in their withdrawal from deep involvement in their organizations due to the fear of future prosecution. Thus, the Committee recommended fewer enforcement proceedings and resolving the conduct underlying many CCO Conduct Charges through a deficiency letter or other nonpublic methods. At bottom, the Committee recommended that the SEC should have a “slightly higher standard for charging CCOs than against a registrant or a businessperson.”

Affirmative: Wholesale Failure Factors

The Committee noted that the compliance community was most concerned about cases brought against CCOs for “wholesale failures in carrying out responsibilities that were clearly assigned to them” or failing “meaningfully to implement compliance programs, policies and procedures for which he or she has direct responsibility.” Accordingly, the Committee recommended that regulators should exercise judicious discretion in such cases and conclude that the following factors were present prior to charging a CCO in such cases:

  • Did the CCO not make a good faith effort to fulfill his or her responsibilities?
  • Did the wholesale failure relate to a fundamental or central aspect of a well-run compliance program of the registrant?
  • Did the wholesale failure persist over time and/or did the CCO have multiple opportunities to cure the lapse?
  • Did the wholesale failure relate to a discrete, specified obligation under the securities laws or the compliance program at the registrant?
  • Did the SEC issue rules or guidance on point to the substantive area of compliance to which the wholesale failure relates?
  • Did an aggravating factor add to the seriousness of the CCO’s conduct?

The proposed guidance is grounded in the SEC’s prior statements that “good faith judgments of CCOs made after reasonable inquiry and analysis should not be second guessed,” and the reality that CCOs must frequently make decisions in real time with limited guidance. Given the number of issues that CCOs handle, the Committee recommended that CCO liability only apply to certain types of incidents and when aggravating factors were also present. Specifically, the Committee recommended that CCO liability apply to claims related to core aspects of compliance such as fulfillment of a fiduciary duty, failing to disclose fees and expenses or conflicts of interest, or other cases involving monetary impact to investors or clients. The Committee also provided examples of aggravating factors, including that the CCO already had a discussion with the SEC about the issue and failed to change course, or that the “CCO exhibited indicia of intentional conduct, a disregard for the SEC’s regulatory mission, or extreme disregard for the CCO’s responsibilities.”

Affirmative: Obstruction Factors

The SEC may bring claims against a COO if they obstruct the SEC in an examination or investigation. Prior to bringing such an action, the Committee recommended that the SEC seek to establish one of more of the following as a means to evaluate any kind of obstruction:

  • Were the acts of obstruction or false statements repeated?
  • Was the obstruction denied when confronted, or did the CCO not immediately reverse course and cooperate?
  • Did the obstruction relate to a necessary or highly relevant part of the examination or investigation?
  • Did evidence show other indicia of intent to deceive or disregarding for cooperation with the SEC’s regulatory mission?

Affirmative: Active Participation in Fraud

The Committee recommended that if there is a CCO Conduct Charge related to alleged fraudulent conduct that the SEC demonstrate that the “CCO’s conduct ‘added value’ in some way to the fraud committed by the firm or the other individuals charged.” The SEC may demonstrate such conduct with evidence indicating that the “CCO’s conduct aided the primary violators in avoiding detection, increased harm to investors or otherwise exacerbated the fraud.” The Committee was clear that if the fraud is not connected to the CCO’s compliance duties then the SEC should not consider any additional factors in bringing charges against the CCO.

Mitigating Factors

The Committee also suggested specific mitigating factors that the SEC should consider in its charging decision, including:

  • Did structural or resource challenges hinder the CCO’s performance?
  • Did the CCO at issue voluntarily disclose and actively cooperate?
  • Were policies and procedures proposed, enacted or implemented in good faith?

The Committee’s suggested mitigation factors reflect a concern that the CCO or compliance function may not be provided adequate resources or have the necessary authority to make decisions that could have prevented the alleged misconduct and, thus, it would be unfair to hold CCO’s liable, particularly where they were prevented from fully doing their job.

***

Much of the Committee’s proposed framework has been suggested by Commissioners and Staff in speeches, at conferences or in other communications. Hopefully, the Committee’s report will lead to further dialogue between the securities industry and the SEC to develop official guidance regarding situations where the SEC will pursue claims against a CCO. We note that the Committee’s report only applies to the SEC and does not address oversight of CCOs by other regulatory agencies such as FINRA, the Office of the Comptroller of the Currency, Commodity Futures Trading Commission, or National Futures Association. Many CCOs work for entities that are regulated by multiple regulators, and they may seek to have a broader dialogue with all of their regulators to formalize guidance on when CCOs may have personal liability.

Cod,Liver,Oil,Omega,3,Gel,Capsules,Isolated,On,Wooden

Do plaintiffs’ attorneys smell blood in the water? A raft of class-action suits recently initiated against dietary supplement manufacturers, alleging deceptive practices in the sale of fish oil products, suggests that they might.

These suits, filed in California federal courts (a favorite jurisdiction for the plaintiffs’ bar), are nearly identical in that they allege that the manufacturers’ fish oil products do not actually contain fish oil. To date, plaintiffs’ class action lawyers have already targeted well-known dietary supplement products, such as Dr. Tobias Omega 3 Fish Oil Triple Strength (by Mimi’s Rock) and GNC-brand Triple Strength Fish Oil (by International Vitamin and Nutra Manufacturing). More litigation may be forthcoming.

The allegations focuses on the process used to create fish oil supplements—transesterification. Transesterification is a chemical process used to obtain fatty acid ethyl esters from fish oil achieved by introducing an alcohol catalyst to the fatty triglycerides.

The lawsuits claim that the transesterification process intrinsically leaves the finished supplement products without any of the Omega-3 fatty acids DHA or EPA. The plaintiffs also allege that the resulting Omega-3 molecules in the finished post-transesterification product are different than the Omega-3 molecules naturally found in fish oil.

Thus, according to the lawsuits, “Once trans-esterified, fish oil is irrevocably transformed, such that it is no longer fish oil and therefore cannot be so named or labeled.” As a result, plaintiffs claim that these products mislead the public with false and deceptive labeling that is in violation of federal and state laws.

The lawsuits are still in their early stages, so their ultimate success remains to be seen. But the potential impact is substantial. Fish oil supplements constitute a large consumer market. Indeed, the lawsuits put that figure at almost $2 billion per year worldwide with an expectation of nearing $3 billion per year by the end of the decade.

Given the sheer size of the market, a lot of dietary supplement manufacturers potentially face copycat suits. And, were the plaintiffs to succeed on their theory that “once trans-esterified, fish oil is irrevocably transformed, such that it is no longer fish oil,” then dietary supplement manufacturers may also have to worry about the Federal Trade Commission pursuing civil liability or even an aggressive Department of Justice considering criminal charges.

Supplement companies can take action to mitigate potential risks from litigation. A manufacturer should always review and ensure adequate and solid substantiation for any and all claims (express or implied) about products.