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News October 26, 2015 Issue

SEC Will No Longer Seek Certain Retroactive Collateral Bars

The SEC this month decided not to challenge a unanimous July 14 ruling of the U.S. District Court of Appeals for the District of Columbia that found the agency erred in imposing certain retroactive collateral bars against an adviser, Koch Asset Management. Those retroactive collateral bans would have prevented the adviser from associating with municipal advisers or nationally recognized statistical rating organizations.

At issue was whether the SEC was overstepping its†authority by retroactively banning advisers from†associating with entities that the agency did not have the authority to ban prior to passage of the Dodd-Frank Act. It was only with passage of Dodd-Frank that the SEC gained the authority to ban advisers from association with municipal advisers or nationally recognized SROs.

Since the alleged conduct in the Koch Asset Management case pre-dated the enactment of Dodd-Frank, the†appellate court held that applying the ban in such a case would be "impermissibly retroactive."

"The Commission has determined not to seek further review of that decision," the SEC said in its statement.

Further, the agency offered to consider vacating collateral bars already enacted against entities in regard to association with municipal advisers or nationally recognized SROs, and provided a link to a form to make that request. The key factor in successfully having such a ban vacated is that the conduct in such cases must have occurred before July 22, 2010, Dodd-Frankís effective date, the SEC said. The process is available only to bans against associating with municipal advisers or nationally recognized SROs.

"What else were they going to do?" asked Stroock partner and former SEC Division of Investment Management deputy director Robert Plaze, in regard to steps the Commission could have taken following the D.C. appeals courtís unanimous verdict. "Iím sure they concluded that the Supreme Court would not have been likely to take the case," he said, and, in any event, the issue of retroactive collateral bars is "small potatoes" compared to larger issues the SEC is now facing, including the definition of insider trading (ACA Insight, 10/12/15) and its use of administrative proceedings over federal courts (ACA Insight, 9/28/15). "This is an issue that will go away with the passage of time."

The agencyís decision not to challenge the appellate court no doubt was welcomed by SEC commissioner Michael Piwowar and former commissioner Daniel Gallagher. The two had issued a joint statement following the appellate ruling, calling on the Commission to "promptly take appropriate action to address all†impermissibly retroactive collateral bars that have been misapplied since the enactment of Dodd-Frank."

"The Commissionís apparent willingness to consider vacating bars that were impermissibly applied retroactively is clearly a positive development," said Mayer Brown partner Matthew Rossi.