Calling the Dodd-Frank Act arguably the most significant financial legislation in modern history, SEC Commissioner Kathleen Casey essentially asked Congress to extend some of the Act's rulemaking deadlines. In remarks at the PLI SEC Speaks seminar, she said that the legislation ushers in a breathtaking amount of changes that will result in a tectonic shift in the legal, regulatory and policy landscape affecting markets and the economy in a relatively short period of time. These changes touch every aspect of the financial markets, from consumer credit to proprietary trading at financial firms, from OTC derivatives markets to securitization markets, and from private fund registration and regulation to corporate governance at public companies. There is a concern that the SEC is not able to fully consider the rules it is adopting, and that short public comment periods imposed in an effort to comply with Dodd-Frank deadlines may undermine their very function of supporting and strengthening the confidence in the rules.As part of this, the cost-benefit analysis is also severely limited and potentially undermined. In turn, this may make the rules more susceptible to challenge on APA grounds, opined the Commissioner. For these reasons, she urged Congress to consider these risks arising from the implementation of the law and, where appropriate, give regulators additional time to scale its regulatory mandates. Moreover, the same concerns counsel the SEC to focus at this point on only those Dodd-Frank rulemakings that are expressly required by the statute. Where the agency has been granted discretionary rulemaking authority, she noted. the SEC should be judicious in using this authority under circumstances that are not ideal for considered and thorough rulemaking. In addition, the breadth of Dodd-Frank makes it increasingly important that policy makers stay mindful of the costs and effects that these regulations will have on the markets. The likely impact of Dodd-Frank will be enormous, and the costs not fully calcuable at this time. Given prior experience with Sarbanes-Oxley,the actual costs will prove substantially more significant than legislators and regulators have predicted. Given the unpredictability of these potential costs and effects, both direct and indirect, regulators should proceed very carefully and thoughtfully, and Congress should monitor the law's implementation closely. There is also the issue of retroactivity. Congress has periodically granted the Commission new authorities concerning the charges it may bring and the remedies it may seek or impose. Each time Congress does this, it raises a question as to whether the new authorities may be applied to conduct that pre-dated the enactment of the statute. In some instances, the answer may be obvious; however, in many instances, the issue of retroactivity can pose difficult legal and policy questions for the Commission. The Supreme Court has opined on retroactivity on a number of occasions. Its leading case in this area is Landgraf v. USI Film Products, where the Court discussed the history and significance of the well-established legal presumption against interpreting statutes to have retroactive effect. The Court recognized that the general principle of anti-retroactivity is "deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic." Retroactive statutes raise particular concerns, said the Commissioner, since they can sweep away settled expectations suddenly and without individualized consideration. The Landgraf Court went on to lay out an analytic framework for retroactivity cases. First, courts must look to the text of the statute to determine if Congress clearly expressed an intent to apply the provision retroactively; if so, then the inquiry is over. If not, then courts should ask whether the statute, if applied to pre-enactment conduct, "would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed." Put another way, she noted, courts should ask "whether the new provision attaches new legal consequences to events completed before its enactment." In conducting this analysis, it would be appropriate for courts to rely on "familiar considerations of fair notice, reasonable reliance, and settled expectations" to guide the inquiry. Dodd-Frank gave the Commission all sorts of new authority, including in the Enforcement area, and the courts have yet to determine which provisions may be applied retroactively and which may not. Here are a few examples of such provisions: Section 925 allowed the Commission to impose collateral suspensions and bars across all of the securities professions regulated by the Commission. This section also granted the Commission brand new authority to suspend or bar persons from associating with a municipal advisor or a nationally recognized statistical rating organization (NRSRO). Section 926 disqualified offerings made by certain "bad actors" from relying on Regulation D as an exemption from registration. Sections 929M, 929N, and 929O amended the Commission's authority to bring actions for aiding-and-abetting violations by stating that "knowing or reckless" conduct would suffice to support such liability. Section 929P granted the Commission authority to impose civil money penalties in all cease-and-desist (C&D) proceedings. Section 929U imposed deadlines applying to investigation and examinations conducted by Commission staff. The Enforcement Division has already procured settlements that include Dodd-Frank collateral bars, including the two new bars for which the Commission had no authority prior to Dodd-Frank: the municipal advisor and NRSRO bars. The misconduct pre-dated the enactment of Dodd-Frank, raising the specter of retroactivity. By imposing the two new Dodd-Frank bars in this settled case, the Commission implied that it has the authority to impose these bars for pre-Act conduct. The more interesting question, however, said the Commissioner, is not how the Commission views its authority, but rather how the federal courts will. Under the Landgraf framework, look first to whether Congress included a clear statement of retroactive intent in the text of the statute. Unfortunately, Section 925 says absolutely nothing in that regard. The next step in the Landgraf analysis asks whether the statute, if applied to pre-enactment conduct, "would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed" or "whether the new provision attaches new legal consequences to events completed before its enactment." In doing so, one is guided by "familiar considerations of fair notice, reasonable reliance, and settled expectations." Take the hypothetical case of a broker who, prior to Dodd-Frank, confesses to having violated the securities laws. Before Dodd-Frank, the Commission could have imposed a broker-dealer bar on him based on, among other things, his association with a broker or dealer at the time of the misconduct. If that broker were later to associate with, or seek to associate with, an investment adviser, the Commission could have sought to bar him from the investment adviser profession as well. The same would have been true for the municipal securities dealer and transfer agent professions. Thus, in the Commissioner's view, a person who violated the securities laws prior to Dodd-Frank should have understood that he could be suspended or barred from associating with a broker, dealer, investment adviser, municipal securities dealer, or transfer agent if and when he became associated with, or sought to be associated with, such an entity. One could therefore argue that imposing collateral broker, dealer, investment adviser, municipal securities dealer, or transfer agent bars under Dodd-Frank – based on pre-Dodd-Frank conduct – would not attach new legal consequences to pre-enactment conduct, but rather would merely accelerate the imposition of such consequences.
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