2010 Mid-Year in Review: SEC and SRO Selected Enforcement Cases and Developments Regarding Broker-Dealers

August 2010

This Outline highlights selected U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) and Financial Industry Regulatory Authority (“FINRA”) enforcement actions and developments regarding broker-dealers during the first half of 2010.


The SEC appeared to begin FY 2010 (that commenced on October 1, 2009) with the momentum that it had generated in FY 2009 by instituting a number of actions early in the fiscal year. In fact, one study concluded that in the first half of FY 2010, the SEC significantly increased the number of defendants with whom it settled with over the prior year. Anecdotally, however, the volume of cases brought by the SEC appears to have tapered off as the year progressed, perhaps due to the enforcement staff’s continued attention to its major reorganization and the Commission’s focus on the qualitative, rather than solely quantitative, nature of its cases. In terms of penalties this year, the Commission resolved several matters with substantial fines, including settlements with State Street Bank, Bank of America and Goldman Sachs.

The personnel changes that the SEC began in 2009 continued in the first six months of this year. In early 2010, the Commission announced the leaders of its five new specialized enforcement units. Since then, a number of enforcement-related personnel moves have been made, including new senior personnel and promotions in the Atlanta Regional Office, New York Regional Office, and the Home Office.

In January 2010, the SEC announced a series of new measures created to encourage both individuals and companies to cooperate in its investigations. First, the Commission issued a policy statement setting forth formal guidelines to evaluate and potentially reward cooperation by individuals. Second, the SEC authorized the use of a number of new “cooperation tools” designed to establish incentives for individuals and companies to cooperate with the Division of Enforcement. These new mechanisms include cooperation agreements, deferred prosecution agreements, and nonprosecution agreements. These changes are expected to significantly alter the SEC’s enforcement program.

In the first half of 2010, the SEC brought actions against broker-dealers and their employees in several areas, including insider trading, the marketing and sales of collateralized debt obligations, short sales, and supervision. Additional actions of note occurred in the municipal securities and net asset valuation arenas. The Commission also is actively engaged in an intensive review of the May 6, 2010 “flash crash.”

These developments and cases are described in more detail at pages 4 through 37 of this Outline.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). This landmark legislation contains a number of measures that significantly expand the enforcement authority of the SEC and strengthen its oversight and regulatory authority over the securities markets.

Specifically, the Dodd-Frank Act extends the SEC’s enforcement authority in the aiding and abetting and control person liability areas. The legislation also extends the statute of limitations for securities laws violations and expands the application of the antifraud provisions and the jurisdiction of federal courts in actions brought by the SEC in certain cases. With the new legislation in place, the SEC has several enhanced remedies, including the ability to impose collateral bars and the authority to impose civil penalties in cease-and-desist proceedings against any person found to have violated the securities laws. The incentives and protections afforded to securities whistleblowers have been significantly enhanced by, among other changes, permitting the SEC to pay whistleblowers who voluntarily provide original information between 10% and 30% of monetary sanctions exceeding $1 million in cases involving any violation of the securities laws.

Finally, the Dodd-Frank Act contains additional procedural enhancements for SEC enforcement actions, including granting the Commission nationwide subpoena power in connection with civil actions filed in federal courts and requiring the agency to file an enforcement action within 180 days of the Wells notice in certain cases or to notify the affected party of the staff’s intent not to file an action.

The Dodd-Frank Act is described in more detail at pages 38 through 45 of this Outline.


FINRA also experienced senior personnel changes this year, with the departure of the heads of the Member Regulation Sales Practice area and the Department of Enforcement.

Although FINRA has not yet released official statistics for 2010, the number of cases with significant fines appears to have dropped sharply in the first half of 2010 when compared to the first six months of 2009. However, as the Outline went to press, FINRA announced several significant new actions with substantial fines.

As to process, senior Enforcement staff members have indicated that FINRA will continue to use the on-site enforcement investigation technique that it utilized in 2008 and 2009 in connection with certain auction rate securities investigations more frequently in fraud and other high-profile investigations.

FINRA has identified at least 13 priorities in its enforcement program, including Regulation D offerings, fixed income trading and sales, reverse convertibles, and municipal securities transactions.

In June 2010, FINRA completed the previously announced agreement under which it assumed responsibility for performing the market surveillance and enforcement functions previously conducted by NYSE Regulation. Under the agreement, FINRA took over the regulatory functions for the New York Stock Exchange, NYSE Arca, and NYSE Amex.

In the first half of 2010, FINRA brought enforcement actions on various topics, including auction rate securities, the protection of customer confidential information, day trading, mutual fund operations, Regulation SHO, supervision, and unregistered offerings.

These developments and cases are described in more detail at pages 46 through 77 of this Outline.

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