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News August 3, 2015 Issue

Two Commissioners Call on SEC to Remove Certain Retroactive Collateral Bars

SEC commissioners Daniel Gallagher and Michael Piwowar on July 22 called on the Commission to remove "all impermissibly retroactive" collateral bars that have been placed on advisers and other financial entities since the adoption of the Dodd-Frank Act.

While both commissioners have criticized the use of retroactive collateral bans in the past, this latest call comes in the wake of the unanimous decision by the U.S. Court of Appeals for the District of Columbia to reverse the SECís use of such bans in its case against Koch Asset Management. "We are pleased with the Courtís holding, which vindicates our vocal†opposition to such bars since joining the Commission," Gallagher and Piwowar said in a joint statement.

"Not only have we dissented from every vote to†impose such bars since joining the Commission, but we have also publicly criticized the majorityís legal analysis with respect to the imposition of such bars. Ö The Commission should promptly take appropriate†action to address all impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frank," they said.

The appellate courtís Koch Asset Management July 14 ruling was the latest development in the SECís prosecution of the adviser for allegedly manipulating the closing price of certain stocks held in client portfolios on the last trading days of certain months. While the appeals court upheld most of the SECís overall ruling, it reversed its use of a retroactive collateral ban on the adviserís†association with municipal advisers and ratings organizations, as the alleged manipulation violations occurred before such bars were allowed under the Dodd-Frank Act. "Although we agree with the Commissionís order in large part, one of the SECís sanctions is impermissibly retroactive and requires us to grant the petition in part and vacate the order in part," the appeals court said.

What it means

"The Commissionís retroactive application of collateral bars provided for in the Dodd-Frank Act has been a subject of disagreement among individual Commissioners ever since the statute was enacted," said Mayer Brown partner Matthew Rossi. "The D.C. Circuit decision in this case may go a long way in resolving those disagreements. However, it remains to be seen whether the Commission will rescind the collateral bars that it has already retroactively applied to respondents in previous administrative proceedings. This would require the Commission to reopen a significant number of old cases."

"This was a close question, and I would have expected the Commissionís lawyers to have taken the position that they did, but the appeals court ruled against them," said Stroock partner and former SEC Division of Investment Management deputy director Robert Plaze. "If previous bars had been imposed as part of a settlement agreement, I wouldnít expect them to be reopened" in light of another recent court decision, this one in an insider trading case, that did not upset a settled enforcement agreement.

Past calls

Piwowar spoke on the issue in remarks before a Los Angeles County Bar Association seminar in November 2013. While noting that some take the position that a collateral bar may be applied without being considered retroactive because it constitutes a "prospective remedy," he said he disagreed because the municipal advisor and [rating organization] bars were not authorized prior to the passage of Dodd-Frank. "These bars are†impermissibly retroactive unless any part of the violative conduct occurred after the passage of Dodd-Frank," he said. "I see this simply as an issue of fairness."

Gallagher previously addressed the issue when he dissented in part from a 2012 Commission reversal of a 2011 administrative law judge decision. "Collaterally imposing the two new Dodd-Frank bars, the municipal advisor and [ratings organization] bars, on the respondent attached new legal consequences to, and increased respondentís liability for, conduct that occurred entirely before the enactment of the Dodd-Frank Act," he wrote. "In imposing those bars here, the Commission has given impermissible retroactive effect to Section 925 of the Dodd-Frank Act," which, he said, violated the presumption against retroactivity "recognized and venerated" by a former U.S. Supreme Court decision and later decisions based on that high court decision.