   
The
November 2009 edition of the International
Association of Potential, New and Sitting Members of the Board of
Directors (IAMBD)
newsletter
Dear Members,
We will discuss the
changes in risk and compliance management, the amendments of the
Sarbanes Oxley Act and the Basel ii framework, and the insider
trading challenges
Insider trading cases make the news again.
Insider trading is not something new. In 1792, William Duer, the
then Assistant Secretary in the US Department of Treasury, used
his official position to gather insider knowledge to trade, and he
was prosecuted.
Inside
information
in the United States is
"material
nonpublic information".
Inside
information
in the European Union is information of a precise nature which has
not been made public, ralating, directly or indirectly, to one or
more issuers of financial instruments or to one or more financial
instruments and which, if it were made public, would be likely to
have a significant effect on the prices of those financial
instruments or on the price of related derivative financial
instruments
In August 2000, the Securities and Exchange Commission (SEC) adopted
rules regarding insider trading.
Under Rule 10b5-1,
the SEC defines insider trading as any securities transaction made
when the person behind the trade is aware of nonpublic material
information, and is hence violating his or her duty to maintain
confidentiality of such knowledge.
"Insider trading" is a term that most investors have heard and
usually associate with illegal conduct.
But the term actually includes both legal and illegal conduct.
The legal version is
when corporate insiders—officers, directors, and employees—buy and
sell stock in their own companies.
Illegal insider trading refers generally to buying or selling a
security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic
information about the security.
Insider trading violations may also include
"tipping"
such information, securities trading by the person "tipped," and
securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the
SEC are cases against:
Corporate officers, directors, and employees who traded the
corporation's securities after learning of significant,
confidential corporate developments;
Friends, business associates, family members, and other "tippees"
of such officers, directors, and employees, who traded the
securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were
given such information to provide services to the corporation
whose securities they traded;
Government employees who learned of such information because of
their employment by the government; and
Other persons who misappropriated, and took advantage of,
confidential information from their employers.
Because insider trading
undermines investor confidence
in the fairness and integrity of the securities markets, the SEC has treated the
detection and prosecution of insider trading violations as one of
its enforcement priorities.
The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider
trading issues where the courts have disagreed.
Rule 10b5-1
provides that a person trades on the basis of material nonpublic
information if a trader is "aware" of the material nonpublic
information when making the purchase or sale.
The rule also sets forth several affirmative defenses or
exceptions to liability.
The rule permits persons to trade in certain specified
circumstances where it is clear that the information they are
aware of is not a factor in the decision to trade, such as
pursuant to a pre-existing plan, contract, or instruction that was
made in good faith.
Rule 10b5-2
clarifies how the misappropriation theory applies to certain
non-business relationships. This rule provides that a person
receiving confidential information under circumstances specified
in the rule would owe a duty of trust or confidence and thus could
be liable under the misappropriation theory.
Insider Trading, SEC, 2006
According to the Securities and Exchange Comission,
"Insider trading" refers generally to buying or selling a
security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic
information about the security.
Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped" and
securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the
Commission are cases against: corporate officers, directors, and
employees who traded the corporation's securities after learning
of significant, confidential corporate developments; friends,
business associates, family members, and other "tippees" of such
officers, directors, and employees, who traded the securities
after receiving such information; employees of law, banking,
brokerage and printing firms who were given such information in
order to provide services to the corporation whose securities they
traded; government employees who learned of such information
because of their employment by the government; and other persons
who misappropriated, and took advantage of, confidential
information from their employers.
Because insider trading undermines investor confidence in the
fairness and integrity of the securities markets, the Commission
has treated the detection and prosecution of insider trading
violations as one of its enforcement priorities.
How Much May be Paid as a
Bounty?
Insider trading may result in enforcement action by the Commission
or in criminal prosecution by the Department of Justice.
The Exchange Act permits the Commission to bring suit against
insider traders to seek injunctions, which are court orders that
prohibit violations of the law under threat of fines and
imprisonment.
The Commission may also seek other relief against insider traders,
including recovery of any illegal gains (or losses avoided) and
payment of a civil penalty.
The amount of a civil penalty can be
up to three times the profit gained (or loss avoided) as a result
of insider trading.
The Commission is permitted to make bounty awards from the civil
penalties that are actually recovered from violators.
With minor exceptions, any person who provides information leading
to the imposition of a civil penalty may be paid a bounty. However
the total amount of bounties that may be paid from a civil penalty
may not exceed ten percent of that penalty.
How Will the Commission Make
Bounty Determinations?
All Commission determinations regarding bounties including whether
to make a payment, to whom a payment shall be made, and the amount
of a payment (if any), are in the sole discretion of the
Commission.
Any such determination is final and not subject to judicial
review. Nothing in the Commission's rules or in this pamphlet is
intended to limit the Commission's discretion with respect to
bounties.
In making determinations regarding bounty applications the
Commission will be guided by the purposes of the bounty
provisions.
These purposes include the intent of the United States Congress to
encourage persons with information about possible insider trading
to come forward.
The Commission will also consider other factors that it deems
relevant. Examples of other factors that may be relevant are: the
importance of the information provided by an applicant; whether
the information was provided voluntarily; the existence of other
applications in the matter; and the amount of the penalty from
which bounties may be paid.
Normally, the Commission will not make any determination on a
bounty application until a payment of a penalty is both ordered by
a court and recovered. A person who files an application meeting
the requirements of the Commission's rules will be notified of the
Commission's determination on the application.
How and When Do You Apply for a Bounty?
An application must be clearly marked as an "Application for Award
of a Bounty," and must contain the information required by the
Commission's rules. The application must give a detailed statement
of the information that the applicant has about the suspected
insider trading.
Any person who desires to provide information to the Commission
that may result in the payment of a bounty may do so by any means
desired.
The Commission encourages persons having information regarding
insider trading to provide that information in writing, either at
the time they initially provide the information to the Commission
or as soon as possible afterwards.
Providing information in writing reduces the possibility of error,
helps assure that appropriate action will be taken, and minimizes
subsequent burdens and the possibility of factual disputes.
In any event, a written application for a bounty must be filed
within 180 days after the day on which the court orders payment of
the civil penalty.
Can You Apply for a Bounty
Anonymously?
The Commission recognizes that there may be instances when a
bounty applicant wishes to remain temporarily anonymous.
The bounty rules take these instances into account. While the
Commission will only award bounties to applicants who provide
their identity and mailing address, that information may be added
by a later amendment to the application.
The amendment must be filed within 180 days after the entry of the
court order requiring the payment of the penalty upon which the
bounty is based.
An
anonymous applicant
who fails to file such an amendment (and anyone who fails to make
a written application) runs the risk of losing eligibility for a
bounty through lapse of time and ignorance of the fact that a
penalty has been recovered.
Absent compelling cause, the Commission ordinarily does not
disclose the identity of a confidential source.
In some instances however disclosure of that identity will be
legally required, or will be essential for the protection of the
public interest.
For example, a court may order disclosure during litigation, or
the Commission may need to present the testimony of a bounty
claimant to ensure the success of an enforcement action.
Consequently while the Commission and its staff will give serious
consideration to requests to maintain the confidentiality of a
source's identity, no guarantees of confidentiality are possible.
Statutory and Regulatory Provisions
Section 21A(e) of the Exchange Act
There shall be paid from amounts imposed as a penalty under this
section and recovered by the Commission or the Attorney General,
such sums, not to exceed 10 percent of such amounts, as the
Commission deems appropriate to the person or persons who provide
information leading to the imposition of such penalty.
Any determinations under this subsection, including whether, to
whom, or in what amount to make payment, shall be in the sole
discretion of the Commission, except that no such payment shall be
made to any member, officer, or employee of any appropriate
regulatory agency, the Department of Justice, or a self-regulatory
organization.
Any such determination shall be final and not subject to judicial
review.
Subpart C of Part 201 of Title 17 of the Code of Federal
Regulations
Procedures Pertaining to the Payment of Bounties Pursuant to
Subsection 21A(e) of the Securities Exchange Act of 1934
Rule 61 Scope of subpart
Section 21A of the Securities Exchange Act of 1934 authorizes the
courts to impose civil penalties for certain violations of that
Act. Subsection 21A(e) permits the Commission to award bounties to
persons who provide information that leads to the imposition of
such penalties.
Any such determination, including whether, to whom, or in what
amount to make payments, is in the sole discretion of the
Commission.
This subpart sets forth procedures regarding applications for the
award of bounties pursuant to subsection 21A(e). Nothing in this
subpart shall be deemed to limit the discretion of the Commission
with respect to determinations under subsection 21A(e) or to
subject any such determination to judicial review.
Rule 62 Application required.
No person shall be eligible for the payment of a bounty under
subsection 21A(e) of the Securities Exchange Act of 1934 unless
such person has filed a written application that meets the
requirements of this subpart and, upon request, provides such
other information as the Commission or its staff deems relevant to
the application.
Rule 63 Time and place of filing.
Each application pursuant to this subpart and each amendment
thereto must be filed within one hundred eighty days after the
entry of the court order requiring the payment of the penalty that
is subject to the application. Such applications and amendments
shall be addressed to: Office of the Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-9303.
Rule 64 Form of application and information required.
Each application pursuant to this subpart shall be identified as
an Application for Award of a Bounty and shall contain a detailed
statement of the information provided by the applicant that the
applicant believes led or may lead to the imposition of a penalty.
Except as provided by Rule 65 of this subpart, each application
shall state the identity and mailing address of, and be signed by,
the applicant.
When the application is not the means by which the applicant
initially provides such information, each application shall
contain: the dates and times upon which, and the means by which,
the information was provided; the identity of the Commission staff
members to whom the information was provided; and, if the
information was provided anonymously, sufficient further
information to confirm that the person filing the application is
the same person who provided the information to the Commission.
Rule 65 Identity and signature.
Applications pursuant to this subpart may omit the identity,
mailing address, and signature of the applicant; provided that
such identity, mailing address and signature are submitted by an
amendment to the application.
Any such amendment must be filed within one hundred eighty days
after the entry of the court order requiring the payment of the
penalty that is subject to the application.
Rule 66 Notice to applicants.
The Commission will notify each person who files an application
that meets the requirements of this subpart, at the address
specified in such application, of the Commission's determination
with respect to such person's application. Nothing in this subpart
shall be deemed to entitle any person to any other notice from the
Commission or its staff.
Rule 67 Applications by legal guardians.
An application pursuant to this subpart may be filed by an
executor, administrator, or other legal representative of a person
who provides information that may be subject to a bounty payment
or by the parent or guardian of such a person if that person is a
minor.
Certified copies of the letters testamentary, letters of
administration, or other similar evidence showing the authority of
the legal representative to file the application must be annexed
to the application.
Rule 68 No promises of payment.
No person is authorized under this subpart to make any offer or
promise, or otherwise to bind the Commission with respect to the
payment of any bounty or the amount thereof.
European Union
Market abuse
The European Parliament and the Council have adopted a directive
on insider dealing and market manipulation.
It is intended to guarantee the integrity of European financial
markets and increase investor confidence. The objective is to
create a level playing field for all economic operators in the
Member States as part of the effort to combat market abuse.
Directive 2003/6/EC of the European Parliament
and of the Council of 28 January 2003 on insider dealing and
market manipulation (market abuse) [See amending acts].
Background
The Lisbon European Council of 24 March 2000 undertook to
integrate European financial markets by 2005 at the latest.
The Stockholm European Council
of 23 and 24 March 2001 considered that an integrated securities
market should be achieved by the end of 2003 by giving priority to
the measures provided for in the Financial Services Action Plan
(FSAP).
In line with the
recommendations in the "Lamfalussy" report, account should be
taken of new market practices and techniques so as to ensure that
the transparency and legal certainty of the securities market are
respected.
Furthermore, the events of 11
September 2001 showed that market abuse may be part of a wider
terrorist strategy of destabilisation, which thus takes on a new
aspect.
That is why the independent
Committee of European Securities Regulators (CESR) adopted a work
programme which includes the preparation of measures to implement
the Directive.
Scope
There are two main categories of market abuse:
insider dealing and market manipulation,
which were previously dealt with by the Insider Dealing Directive
(89/592/EEC), which is no longer in force, and the Investment
Services Directive 93/22/EEC.
Both the Insider Dealing Directive and a separate Directive on
market manipulation served the same objective: to ensure the
integrity of European financial markets and to enhance investor
confidence in those markets.
It was therefore felt that Directive 89/592/EEC should be repealed
and replaced by a common legal framework covering both insider
dealing and market manipulation.
The new instrument is not confined to "regulated markets" but also
takes in other types of market (such as Alternative Trading
Systems (ATS)), as these can be used for insider dealing or market
manipulation in connection with financial instruments negotiated
on regulated markets.
Definition
The definition of what constitutes market abuse is a general one
and is flexible enough to last as long as possible.
Market abuse may arise in
circumstances where investors have been unreasonably
disadvantaged, directly or indirectly, by others who:
have used information which is not publicly available (insider
dealing);
have distorted the price-setting mechanism of financial
instruments;
have disseminated false or misleading information.
This type of conduct can undermine the general principle that all
investors must be placed on an equal footing.
Cooperation
The Directive requires each Member State to designate a single
regulatory and supervisory authority with a common minimum set of
responsibilities. These authorities use convergent methods to
combat market abuse and should be able to assist each other in
taking action against infringements, particularly in cross-border
cases. The administrative cooperation procedure followed could in
particular help to combat terrorist acts.
Basel ii News
Basel ii is becoming much more important. Basel ii
experience is becoming a great advantage.
Why?
Because 20 leaders (G20) say so.
Which other framework is endorsed by 20 presidents and
leaders?
Which country, bank, financial organization can ignore
it?
It is good to read:
Breaking News
PROGRESS REPORT ON THE ECONOMIC
AND FINANCIAL ACTIONS OF THE LONDON, WASHINGTON AND
PITTSBURGH G20 SUMMITS PREPARED BY THE UK CHAIR OF THE
G20 ST ANDREWS, 7 NOVEMBER 2009
1. SUMMIT COMMITMENT
We ask regulators to make use of available flexibility
in capital requirements for trade finance.
PROGRESS AND NEXT STEPS
Eligible countries continue to consider flexibilities,
including through ongoing co-operation in the
Basel Committee on Banking
Supervision (BCBS) and Financial Stability Board (FSB).
The World Trade Organisation chaired Expert
Group on trade finance will also take stock on Basel
II and trade finance ahead of the Pittsburgh Summit.
2. SUMMIT COMMITMENT
Establishment of the remaining supervisory colleges
for significant cross-border firms by June 2009.
PROGRESS AND NEXT STEPS
Supervisory colleges have now been established for
more than thirty large complex financial institutions
identified by the FSF as needing college arrangements.
These colleges will continue to meet on an ongoing
basis.
Over the summer, the FSB, BCBS
and International Association of Insurance Supervisors
(IAIS) carried out a comprehensive stocktaking of
college arrangements and practices in the banking
sector and insurance sector.
The main findings of these surveys were reported to
the G20 at the Pittsburgh Summit. The BCBS is working
to develop a baseline set of principles along with
good practice guidelines to assist the efficient
operation of colleges and sharing of information.
The principles and guidelines
will be completed in the first quarter of 2010.
In October 2009, the IAIS adopted a supervisory
guidance on the use of supervisory colleges.
In June IOSCO launched a Supervisory Cooperation Task
Force, which will develop principles for cooperation
in the supervision and oversight of cross-border
securities market participants.
This Task Force will produce its final report for the
Technical Committee early in 2010.
The FSB will review whether there is any merit in
having a broad set of principles setting out good
practices in the operation of colleges and information
sharing that would apply on a cross-sector basis.
3. SUMMIT COMMITMENT
Prudential regulatory standards should be strengthened
once recovery is assured.
The national implementation of higher level and better
quality capital requirements, counter-cyclical capital
buffers, higher capital requirements for risky
products and off balance sheet activities, as
elements of the Basel II capital
framework, together with strengthened liquidity
risk requirements and forward-looking provisioning,
will reduce incentives for banks to take excessive
risks and create a financial system better prepared to
withstand adverse shocks.
Leaders have committed to developing by end-2010
internationally agreed rules to improve both the
quantity and quality of bank capital and to discourage
excessive leverage.
These rules will be phased in as financial conditions
improve and economic recovery is assured, with the aim
of implementation by end-2012.
PROGRESS AND NEXT STEPS
In Pittsburgh Leaders welcomed the key measures agreed
on 7 September 2009 by the Group of Central Bank
Governors and Heads of Supervision, the oversight body
of the BCBS, to
strengthen the supervision and regulation of the
banking sector.
These include:
• Raise the quality, consistency and transparency of
the Tier 1 capital base.
• Introduce a leverage ratio as a supplementary
measure to the Basel II risk-based framework with a
view to migrating to a Pillar 1 treatment based on
appropriate review and calibration.
• Introduce a minimum global standard for funding
liquidity that includes a stressed liquidity coverage
ratio requirement, underpinned by a longer-term
structural liquidity ratio.
• Introduce a framework for countercyclical capital
buffers above the minimum requirement.
The Committee also agreed to assess the need for a
capital surcharge to mitigate the risk of systemic
banks.
The BCBS will issue concrete
proposals on these measures by the end of this year.
At its October meeting, the BCBS
agreed the framework and timeline for undertaking a
quantitative impact study and the calibration of the
overall capital level by end 2010.
The impact assessment will look at the cumulative
effect of all the reforms and how they interact.
Appropriate implementation standards will be developed
to ensure a phase-in of these new measures that does
not impede the recovery of the real economy.
Government injections will be grandfathered.
4. SUMMIT COMMITMENT
The FSB, BCBS and Committee on the Global Financial
System (CGFS), working with accounting standard
setters should take forward implementation of the
recommendations published to mitigate procyclicality,
by the end of 2009, including a requirement for banks
to build buffers of resources in good times that they
can draw down when conditions deteriorate.
PROGRESS AND NEXT STEPS
The Group of Central Bank Governors and Heads of
Supervision, the oversight body of the BCBS, reached
agreement on 7 September 2009 to introduce a framework
for countercyclical capital buffers above the minimum
requirement.
In October, the BCBS agreed to develop concrete
proposals to reduce the pro-cyclicality of Basel II
and introduce a counter-cyclical buffer mechanism.
There will be four elements to
this:
• dampening the cyclicality of the minimum capital
requirement;
• promoting more forward looking provisions;
• conserving capital to build capital buffers at
individual banks and the banking sector that can be
used in stress;
• achieving the broader macroprudential goal of
containing excess credit growth and protecting the
banking sector from system-wide risk.
Proposals for the first three elements will be
developed by the end of this year and on the fourth by
the middle of next year.
A comprehensive package to address procyclicality will
be finalised by the end of next year.
The BCBS is actively engaged with accounting standard
setters to promote more forward-looking provisions
based on expected losses.
5. SUMMIT COMMITMENT
Risk-based capital requirements should be supplemented
with a simple, transparent, non-risk based measure
which is internationally comparable, properly takes
into account off-balance sheet exposures, and can help
contain the build-up of leverage in the banking
system.
We support the introduction of a
leverage ratio as a supplementary measure to the Basel
II risk-based framework with a view to migrating to a
Pillar 1 treatment based on appropriate review and
calibration.
To ensure comparability, the details of the leverage
ratio will be harmonised internationally, fully
adjusting for differences in accounting.
PROGRESS AND NEXT STEPS
The Group of Central Bank Governors and Heads of
Supervision, the oversight body of the BCBS, reached
agreement in September to introduce a leverage ratio
as a supplementary measure to the Basel II risk-based
framework with a view to migrating to a Pillar 1
treatment based on appropriate review and calibration.
To ensure comparability, the details of the leverage
ratio will be harmonised internationally, fully
adjusting for differences in accounting.
A key issue will be the appropriate level and how it
interacts with the risk based ratio.
6.
SUMMIT COMMITMENT
All major G-20 financial centres commit to have
adopted the Basel II capital framework by 2011.
PROGRESS AND NEXT STEPS
G20 countries have either implemented or are taking
steps to implement Basel II into national regulatory
frameworks.
7. SUMMIT COMMITMENT
BCBS to review guidelines for processes for
measurement of risk concentrations in 2009 to ensure
they are timely and comprehensive.
PROGRESS AND NEXT STEPS
The BCBS has strengthened guidance for use in the
Pillar 2 supervisory review process of the Basel II
framework to address key lessons of the crisis,
covering governance, the management of risk
concentrations, stress testing, valuation practices
and exposures to off-balance sheet activities.
8. SUMMIT COMMITMENT
Regulators should develop enhanced guidance to
strengthen banks’ risk management practices, in line
with international best practices, and should
encourage financial firms to re-examine their internal
controls and implement strengthened policies for sound
risk management.
PROGRESS AND NEXT STEPS
The BCBS has strengthened guidance for use in the
Pillar 2 supervisory review process of the Basel II
framework to address key lessons of the crisis,
covering governance, the management of risk
concentrations, stress testing, valuation practices
and exposures to off-balance sheet activities.
National authorities have also
strengthened their guidelines for risk management
practices following the shift to Basel II.
The Senior Supervisors Group (SSG) issued in October
2009 a report setting out the results of a self
assessment exercise by twenty large financial
institutions to benchmark their own risk management
practices against official and industry
recommendations issued since the outbreak of the
crisis.
The report also reviewed in-depth the funding and
liquidity issues central to the recent crisis and the
areas of risk management practices warranting
improvement across the financial services industry.
9. SUMMIT COMMITMENT
The Basel Committee should study the need for and help
develop firms’ stress testing models, as
appropriate.
PROGRESS AND NEXT STEPS
The BCBS has strengthened guidance for use in the
Pillar 2 supervisory review process of the Basel II
framework to address key lessons of the crisis,
covering governance, the management of risk
concentrations, stress testing, valuation practices
and exposures to off-balance sheet activities.
The BCBS issued in May 2009 Principles for Sound
Stress Testing Practices and Supervision.
10. SUMMIT COMMITMENT
Supervisors should require that institutions which
have hedge funds as their counterparties have
effective risk management, including mechanisms to
monitor the funds’ leverage and set limits for single
counterparty exposures.
PROGRESS AND NEXT STEPS
The BCBS is reviewing the treatment of counterparty
credit risk under all three pillars of Basel II.
Concrete proposals will be presented at the December
2009 BCBS meeting.
11. SUMMIT COMMITMENT
BCBS should integrate FSB principles on pay and
compensation into their risk management guidance by
autumn 2009.
PROGRESS AND NEXT STEPS
The BCBS incorporated the Principles in Pillar 2 of
Basel II in July 2009, with an expectation that banks
and supervisors begin implementing the new Pillar 2
guidance immediately.
The Group of Central Bank Governors and Heads of
Supervision, the oversight body of the BCBS, endorsed
in September 2009 the following principle to guide
supervisors: compensation should be aligned with
prudent risk taking and long-term, sustainable
performance, building on the FSB sound compensation
principles.
Sarbanes Oxley News
The
Garrett-Adler amendment to the Sarbanes Oxley Act
Dear
Members,
Prepare
for the Garrett-Adler amendment to the Sarbanes Oxley Act.
The House Financial Services (HFS) Committee has voted to amend
the Sarbanes-Oxley Act to
permanently
exempt small public companies
(companies valued at less than $75 million) from the provisions of
Sarbanes-Oxley
Section 404b.
The Garrett-Adler amendment,
offered by Rep. Scott Garrett (R-NJ) and Rep. John Adler (D-NJ),
was approved in the HFS Committee as part of
the Investor Protection Act (IPA).
The Garrett-Adler amendment (that is incorporated in the Investor
Protection Act of 2009) exempts all small
issuers from 404(b) and requires the SEC to study how the
cost-of-compliance burden for companies with market caps between
$75 million and $250 million can be reduced.
More than 50%
of all publicly traded companies have market capitalizations below
$75 million.
Let's remember Section 404b of the Sarbanes Oxley Act
SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL
CONTROLS.
(a) RULES REQUIRED.—
The Commission shall prescribe
rules requiring each annual report required by section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)) to contain an internal control report, which shall—
(1) state the responsibility of management for establishing and
maintaining an adequate internal control structure and procedures
for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal
year of the issuer, of the effectiveness of the internal control
structure and procedures of the issuer for financial
reporting.
404(b)
INTERNAL CONTROL EVALUATION AND REPORTING.—
With respect to the internal control
assessment required by subsection (a), each registered public
accounting firm that prepares or issues the audit report for the
issuer shall attest to, and report on, the assessment made by the
management of the issuer.
An attestation
made under this subsection shall be made in accordance with
standards for attestation engagements issued or adopted by the
Board. Any such attestation shall not be the subject of a separate
engagement.
Is it a good
decision?
I do not think so. It is a fact that smaller
public companies have less controls in place and face more risks,
as there are as many people in the smaller companies committing
fraud as those in major organizations.
I am
also surprised with the humor or the ignorance - they do not
protect investors of small public companies any more, with an
amendment incorporated in the "Investor Protection Act"!!!
I have made a decision: I will never invest in smaller public
companies again, as there is no independent reasonable assurance
that their financial statements are reflecting the financial
conditions of these companies.
Audiatur et
altera pars (hear the other side)
Garrett
Statement on Committee Passage of Sarbanes Oxley Amendment
Rep. Scott Garrett’s (R-NJ) Sarbanes-Oxley amendment to the
Investor Protection Act of 2009, cosponsored by Rep. John Adler
(D-NJ), was approved by the Financial Services Committee today by
a roll call vote of 37-32.
This amendment would exempt small businesses from the burdensome
reporting requirements contained within Section 404(b) of the
Sarbanes-Oxley (SOX) Act of 2002 .
The amendment language mirrors legislation
Garrett introduced earlier this year, the “Small Business SOX
Compliance Relief Act.”
“Although the stated intent of
Sarbanes-Oxley was to provide investor confidence in our markets
through greater accountability and disclosure, the Act has had the
unintended effect of creating undue—and often unbearable—burdens
on small businesses,” Garrett said.
“There is a place for Federal oversight, but the weighty cost of
compliance under Section 404 is slowly strangling small
businesses. It is diverting valuable resources away from other
legitimate business needs; creating massive and tedious
documentation requirements; and discouraging the public listing of
both international and domestic companies on U.S. markets.
Honest
companies are being punished and the U.S. economy will suffer as a
result. Especially now, as our country struggles to emerge
from a recession, the last thing American small businesses need is
another barrier to economic stabilization.
I would like to thank my
colleague from New Jersey for working with me on this bipartisan
amendment that will free small businesses from onerous regulations
and allow them to return their focus and their resources to
creating jobs for unemployed Americans and innovating for our
economy.”
The Securities and Exchange Commission (SEC) has
repeatedly extended the deadline for
non-accelerated filers to begin providing audited
assessments of their internal controls over financial reporting,
an acknowledgement of continued concern about compliance costs.
Although reforms were made in 2007 to relax the guidelines for
smaller companies, businesses of all sizes still report excessive
compliance costs, as noted in an SEC report from September 2009 .
In
summarizing survey responses from businesses regarding the
benefits of Section 404 compliance, the SEC wrote, “[A] majority
felt that the costs of compliance outweighed the benefits. This
was especially true among smaller companies.”
The extra requirements of Section 404 increase costs to small
companies significantly.
Section 404 adds external
consulting costs, including legal fees, and substantially
increases the audit and attestation fees for these companies.
Research by NASDAQ shows that the burden of compliance, on a
percentage of revenue basis, is 11 times greater for small
companies . This creates an unfair
competitive advantage for larger companies.
The Investor
Protection Act of 2009
TITLE IX—ADDITIONAL IMPROVEMENTS TO
FINANCIAL MARKETS REGULATION
SEC. 901. SHORT TITLE.
This title may be cited as the “Investor Protection Act of 2009.”
Subtitle
A—Disclosure
SEC. 911. INVESTOR ADVISORY COMMITTEE
ESTABLISHED.
The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by adding at the end the
following new section:
“SEC. 38. INVESTOR ADVISORY COMMITTEE.
“(a) ESTABLISHMENT AND PURPOSE.—
There is established an
Investor Advisory Committee to advise
and consult with the Commission on—
“(1) regulatory priorities and issues regarding new products,
trading strategies, fee structures and the effectiveness of
disclosures;
“(2) initiatives to protect investor interest; and
“(3) initiatives to promote investor confidence in the integrity
of the market place.
“(b) MEMBERSHIP.—
“(1) APPOINTMENT.—
The Chairman of the Commission
shall appoint the members of the Investor Advisory Committee,
which members shall—
“(A) represent the interests of individual investors;
“(B) represent the interests of institutional investors; and
“(C) use a wide range of investment and approaches.
“(2) MEMBERS NOT COMMISSION EMPLOYEES.—
Members shall not be deemed
employees or agents of the Commission solely because of membership
on the Investor Advisory Commission.
“(c) MEETINGS.—The Investor Advisory Committee
shall meet from time to time at the call of
the Commission, but, at a minimum, shall meet at least twice in
each year.
“(d) COMPENSATION AND TRAVEL EXPENSES.—
Members of the Investor
Advisory Committee who are not full-time employees of the United
States shall—
“(1) be entitled to receive compensation at a rate fixed by the
Commission while attending meetings of the Investor Advisory
Committee, including travel time; and
“(2) be allowed travel expenses, including transportation and
subsistence, while away from their homes or regular places of
business.
“(e) COMMITTEE FINDINGS.—
Nothing
in this section requires the Commission to accept, agree, or act
upon the findings or recommendations of the Investor Advisory
Committee.
“(f) AUTHORIZATION OF APPROPRIATIONS.—
There is authorized to be
appropriated to the Commission such sums as are necessary to cover
the costs of the Investor Advisory Committee.”.
SEC. 912. CLARIFICATION OF THE COMMISSION’S
AUTHORITY TO ENGAGE IN CONSUMER TESTING.
(a) AMENDMENT TO SECURITIES ACT OF 1933.—
Section 19 of the Securities
Act of 1933 (15 U.S.C. 77s) is amended by adding at the end the
following new subsection:
“(e) For the purposes of evaluating its rules and programs and for
considering, proposing, adopting, or engaging in rules or
programs, the Commission is authorized to gather information,
communicate with investors or other members of the public, and
engage in such temporary or experimental programs as it in its
discretion determines is in the public interest or for the
protection of investors. The Commission may delegate to its staff
some or all of the authority conferred by this subsection.”.
(b) AMENDMENT TO SECURITIES EXCHANGE ACT OF
1934.—
Section 23 of the Securities
Exchange Act of 1934 (15 U.S.C. 78w) is amended by adding the
following new subsection (b) after subsection (a) and
redesignating subsections (b), (c), and (d) as subsections (c),
(d), and (e):
“(c) GATHERING INFORMATION.—
For the purposes of evaluating
its rules and programs and for considering proposing, adopting, or
engaging in rules or programs, the
Commission is authorized to gather information, communicate with
investors or other members of the public, and engage in such
temporary or experimental programs as it in its discretion
determines is in the public interest or for the protection of
investors. The Commission may delegate to its staff some or
all of the authority conferred by this subsection.”.
(d) AMENDMENT TO INVESTMENT COMPANY ACT OF
1940.—
Section 38 of the Investment
Company Act of 1940 (15 U.S.C. 80a-38) is amended by adding at the
end the following new subsection:
“(e) GATHERING INFORMATION.—
For the purposes of evaluating
its rules and programs and for considering proposing, adopting, or
engaging in rules or programs, the
Commission is authorized to gather information, communicate with
investors or other members of the public, and engage in such
temporary or experimental programs as it in its discretion
determines is in the public interest or for the protection of
investors. The Commission may delegate to its staff some or
all of the authority conferred by this subsection.”.
(f) AMENDMENT TO THE INVESTMENT ADVISERS ACT
OF 1940.—
Section 211 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-11) is amended by adding at
the end the following new subsection:
“(g) For the purposes of evaluating its rules and programs and for
considering proposing, adopting, or engaging in rules or programs,
the Commission is authorized to gather information, communicate
with investors or other members of the public, and engage in such
temporary or experimental programs as it in its discretion
determines is in the public interest or for the protection of
investors. The Commission may delegate to its staff some or all of
the authority conferred by this subsection.”.
SEC. 913. ESTABLISHMENT OF A FIDUCIARY DUTY
FOR BROKERS, DEALERS, AND INVESTMENT ADVISERS, AND HARMONIZATION
OF THE REGULATION OF BROKERS, DEALERS, AND INVESTMENT ADVISERS.
(a) AMENDMENT TO SECURITIES EXCHANGE ACT OF
1934.—
Section 15 of the Securities
Exchange Act of 1934 (15 U.S.C. 78o) is amended by adding at the
end the following new subsections:
“(k) STANDARDS OF CONDUCT.—
Notwithstanding any other
provision of this Act or the Investment Advisers Act of 1940, the
Commission may promulgate rules to provide, in substance, that the
standards of conduct for all brokers, dealers, and investment
advisers, in providing investment advice about securities to
retail customers or clients (and such other customers or clients
as the Commission may by rule provide), shall be to act solely in
the interest of the customer or client without regard to the
financial or other interest of the broker, dealer or investment
adviser providing the advice.
“(l) OTHER MATTERS.—
The Commission shall—
“(1) take steps to facilitate the provision
of simple and clear disclosures to investors regarding the terms
of their relationships with investment professionals; and
“(2) examine and, where appropriate, promulgate rules prohibiting
sales practices, conflicts of interest, and compensation schemes
for financial intermediaries (including brokers, dealers, and
investment advisers) that it deems contrary to the public interest
and the interests of investors.”.
(b) AMENDMENT TO INVESTMENT ADVISERS ACT OF
1940.—
Section 211 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-11) is amended by adding at
the end the following new subsections:
“(f) STANDARDS OF CONDUCT.—
Notwithstanding any other
provision of this Act or the Securities Exchange Act of 1934, the
Securities and Exchange Commission may promulgate rules to
provide, in substance, that the standards of conduct for all
brokers, dealers, and investment advisers, in providing investment
advice about securities to retail customers or clients (and such
other customers or clients as the Commission may by rule provide),
shall be to act solely in the interest of the customer or client
without regard to the financial or other interest of the broker,
dealer, or investment adviser providing the advice.
“(g) OTHER MATTERS.—
The Commission shall—
“(1) take steps to facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with investment professionals, including
consultation with other financial regulators on best practices for
consumer disclosures, as appropriate; and
“(2) examine and, where appropriate, promulgate rules prohibiting
sales practices, conflicts of interest, and compensation schemes
for financial intermediaries (including brokers, dealers, and
investment advisers) that it deems contrary to the public interest
and the interests of investors.”.
SEC. 914. CLARIFICATION OF COMMISSION
AUTHORITY TO REQUIRE INVESTOR DISCLOSURES BEFORE PURCHASE OF
INVESTMENT COMPANY SHARES.
Section 24 of the Investment Company Act of 1940 (15 U.S.C.
80a-24) is amended by adding at the end the following new
subsection:
“(h) TIMING OF DISCLOSURE.—
Notwithstanding any other provision of this Act or the Securities
Act of 1933, the Commission is authorized to promulgate rules
designating documents or information that must precede a sale to a
purchaser of securities issued by a registered investment
company.”.
Subtitle B—Enforcement and Remedies
SEC. 921. AUTHORITY TO RESTRICT MANDATORY
PRE-DISPUTE ARBITRATION.
(a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.—
Section 15 of the Securities
Exchange Act of 1934 (15 U.S.C. 78o) is amended by adding at the
end the following new subsection:
“(m) AUTHORITY TO RESTRICT MANDATORY
PRE-DISPUTE ARBITRATION.—
The Commission, by rule, may
prohibit, or impose conditions or limitations on the use of,
agreements that require customers or clients of any broker,
dealer, or municipal securities dealer to arbitrate any future
dispute between them arising under the federal securities laws or
the rules of a self-regulatory organization if it finds that such
prohibition, imposition of conditions, or limitations are in the
public interest and for the protection of investors.”.
(b) AMENDMENT TO INVESTMENT ADVISERS ACT OF
1940.—
Section 205 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-5) is amended by adding at the
end the following new subsection:
“(f) AUTHORITY TO RESTRICT MANDATORY
PRE-DISPUTE ARBITRATION.—
The Commission, by rule, may
prohibit, or impose conditions or limitations on the use of,
agreements that require customers or clients of any investment
adviser to arbitrate any future dispute between them arising under
the federal securities laws or the rules of a self-regulatory
organization if it finds that such prohibition, imposition of
conditions, or limitations are in the public interest and for the
protection of investors.”.
SEC. 922 WHISTLEBLOWER PROTECTION.
The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by adding after section 21E the
following new section:
“SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION.
“(a) IN GENERAL.—
In any judicial or
administrative action brought by the Commission under the
securities laws that results in monetary sanctions exceeding
$1,000,000, the Commission, under regulations prescribed by the
Commission and subject to subsection (b), may pay an award or
awards not exceeding an amount equal to 30 percent, in total, of
the monetary sanctions imposed in the action or related actions to
one or more whistleblowers who voluntarily provided original
information to the Commission that led to the successful
enforcement of the action. Any amount payable under the preceding
sentence shall be paid from the fund described in subsection (f).
“(b) DETERMINATION OF AMOUNT OF AWARD;
DENIAL OF AWARD.—
“(1) DETERMINATION OF AMOUNT OF AWARD.—
The determination of the
amount of an award, within the limit specified in subsection (a),
shall be in the sole discretion of the Commission. The Commission
may take into account the significance of the whistleblower’s
information to the success of the judicial or administrative
action described in subsection (a), the degree of assistance
provided by the whistleblower and any legal representative of the
whistleblower in such action, the Commission’s programmatic
interest in deterring violations of the securities laws by making
awards to whistleblowers who provide information that leads to the
successful enforcement of such laws, and such additional factors
as the Commission may establish by rules or regulations.
“(2) DENIAL OF AWARD.—No award under
subsection (a) shall be made—
“(A) to any individual who is, or was at the time he or she
acquired the original information submitted to the Commission, a
member, officer, or employee of any appropriate regulatory agency,
the Department of Justice, or a self-regulatory organization;
“(B) to any individual who is convicted of a criminal violation
related to the judicial or administrative action for which the
individual otherwise could receive an award under this section; or
“(C) to any individual who fails to submit information to the
Commission in such form as the Commission may, by rule, require.
“(c) REPRESENTATION.—
“(1) PERMITTED REPRESENTATION.—
Any whistleblower who makes a
claim for an award under subsection (a) may be represented by
counsel.
“(2) REQUIRED REPRESENTATION.—
Any whistleblower who makes a
claim for an award under subsection (a) must be represented by
counsel if the whistleblower submits the information upon which
the claim is based anonymously. Prior to the payment of an award,
a whistleblower must disclose his or her identity and provide such
other information as the Commission may require.
“(d) NO CONTRACT NECESSARY.—
No contract with the
Commission is necessary for any whistleblower to receive an award
under subsection (a), unless the Commission, by rule or
regulation, so requires.
“(e) APPEALS.—
Any determinations under this
section, including whether, to whom, or in what amounts to make
awards, shall be in the sole discretion of the Commission, and any
such determinations shall be final and not subject to judicial
review.
“(f) INVESTOR PROTECTION FUND.—
“(1) FUND ESTABLISHED.—
There is established in the
Treasury of the United States a fund to be known as the
“Securities and Exchange Commission Investor Protection Fund”
(referred to in this section as the “Fund”).
“(2) USE OF FUND.—
The Fund shall be available to
the Commission, without further appropriation or fiscal year
limitation, for the following purposes:
“(A) paying awards to whistleblowers as provided in subsection
(a); and.
“(B) funding investor education initiatives designed to help
investors protect themselves against securities fraud or other
violations of the securities laws, or the rules and regulations
thereunder.
“(2) DEPOSITS AND CREDITS.—
There shall be deposited into
or credited to the Fund—
“(A) any monetary sanction collected by the Commission in any
judicial or administrative action brought by the Commission under
the securities laws that is not added to a disgorgement fund
pursuant to Section 308 of the Sarbanes-Oxley Act of 2002 or other
fund or otherwise distributed to victims of a violation of the
securities laws, or the rules and regulations thereunder,
underlying such action, unless the balance of the Fund at the time
the monetary sanction is collected exceeds $100,000,000;
“(B) any monetary sanction added to a disgorgement fund pursuant
to Section 308 of the Sarbanes-Oxley Act of 2002 or other fund
that is not distributed to the victims for whom the disgorgement
fund was established, unless the balance of the Fund at the time
the determination is made not to distribute the monetary sanction
to such victims exceeds $100,000,000; and
“(C) all income from investments made under paragraph (3).
“(3)INVESTMENTS.—
“(A) AMOUNTS IN FUND MAY BE INVESTED.—
The Commission may request the
Secretary of the Treasury to invest the portion of the Fund that
is not, in the Commission’s judgment, required to meet the current
needs of the Fund.
“(B) ELIGIBLE INVESTMENTS.—
Investments shall be made by
the Secretary of the Treasury in obligations of the United States
or obligations that are guaranteed as to principal and interest by
the United States, with maturities suitable to the needs of the
Fund as determined by the Commission.
“(C) INTEREST AND PROCEEDS CREDITED.—
The interest on, and the
proceeds from the sale or redemption of, any obligations held in
the Fund shall be credited to, and form a part of, the Fund.
“(4) REPORTS TO CONGRESS.—
Not later than October 30 of
each year, the Commission shall transmit to the Committee on
Banking, Housing, and Urban Affairs of the Senate, and the
Committee on Financial Services of the House of Representatives a
report on—
“(A) the Commission’s whistleblower award program under this
section, including a description of the number of awards granted
and the types of cases in which awards were granted during the
preceding fiscal year;
“(B) investor education initiatives described in paragraph (1)(B)
that were funded by the Fund during the preceding fiscal year;
“(C) the balance of the Fund at the beginning of the preceding
fiscal year;
“(D) the amounts deposited into or credited to the Fund during the
preceding fiscal year;
“(E) the amount of earnings on investments of amounts in the Fund
during the preceding fiscal year;
“(F) the amount paid from the Fund during the preceding fiscal
year to whistleblowers pursuant to subsection (a);
“(G) the amount paid from the Fund during the preceding fiscal
year for investor education initiatives described in paragraph
(1)(B);
“(H) the balance of the Fund at the end of the preceding fiscal
year; and
“(I) a complete set of audited financial statements, including a
balance sheet, income statement, and cash flow analysis.
“(g) PROTECTION OF WHISTLEBLOWERS.—
“(1) PROHIBITION AGAINST RETALIATION.—
“(A) IN GENERAL.—
Any employee, contractor, or
agent shall be entitled to all relief necessary to make that
employee, contractor, or agent whole, if that employee,
contractor, or agent is discharged, demoted, suspended,
threatened, harassed, or in any other manner discriminated against
in the terms and conditions of employment because of any lawful
act done by the employee, contractor, or agent or associated
others in providing information to the Commission in accordance
with subsection (a), or in assisting in any investigation or
judicial or administrative action of the Commission based upon or
related to such information.
‘‘(B) RELIEF.—
Relief under subparagraph (A)
shall include reinstatement with the same seniority status that
the employee, contractor, or agent would have had, but for the
discrimination, 2 times the amount of back pay, with interest; and
compensation for any special damages sustained as a result of the
discrimination, including litigation costs, expert witness fees,
and reasonable attorneys’ fees. An action under this subsection
may be brought in the appropriate district court of the United
States for the relief provided in this subsection.
“(C) PROCEDURE.—
“(i) SUBPOENAS.—
A subpoena requiring the
attendance of a witness at a trial or hearing conducted under this
section may be served at any place in the United States.
“(ii) STATUTE OF LIMITATIONS.—
An action under this
subsection may not be brought more than 6 years after the date on
which the violation reported in section (a) is committed, or more
than 3 years after the date when facts material to the right of
action are known or reasonably should have been known by the
whistleblower, but in no event after 10 years after the date on
which the violation is committed.
“(2) CONFIDENTIALITY.—
“(A) IN GENERAL.—
Except as provided in
subparagraph (B), all information provided to the Commission by a
whistleblower shall be confidential and privileged as an
evidentiary matter (and shall not be subject to civil discovery or
other legal process) in any proceeding in any Federal or State
court or administrative agency, and shall be exempt from
disclosure, in the hands of an agency or establishment of the
Federal Government, under the Freedom of Information Act (5 U.S.C.
552), or otherwise, unless and until required to be disclosed to a
defendant or respondent in connection with a public proceeding
instituted by the Commission or any entity described in
subparagraph (B). For purposes of section 552 of title 5, United
States Code, this paragraph shall be considered a statute
described in subsection (b)(3)(B) of such section 552. Nothing
herein is intended to limit the Attorney General’s ability to
present such evidence to a grand jury or to share such evidence
with potential witnesses or defendants in the course of an ongoing
criminal investigation.
“(B) AVAILABILITY TO GOVERNMENT AGENCIES.—
Without the loss of its status
as confidential and privileged in the hands of the Commission, all
information referred to in subparagraph (A) may, in the discretion
of the Commission, when determined by the Commission to be
necessary to accomplish the purposes of this Act and protect
investors, be made available to—
“(i) the Attorney General of the United States;
“(ii) an appropriate regulatory authority;
“(iii) a self-regulatory organization;
“(iv) State attorneys general in connection with any criminal
investigation; and
“(v) any appropriate State regulatory authority,
each of which shall maintain such information as confidential and
privileged, in accordance with the requirements in subparagraph
(A).
“(3) RIGHTS RETAINED.—
Nothing in this section shall
be deemed to diminish the rights, privileges, or remedies of any
whistleblower under any Federal or State law, or under any
collective bargaining agreement.
“(h) RULEMAKING AUTHORITY.—
The Commission shall have the
authority to issue such rules and regulations as may be necessary
or appropriate to implement the provisions of this section
consistent with the purposes of this section.
“(i) DEFINITIONS.—
For purposes of this section,
the following terms have the following meanings:
“(1) ORIGINAL INFORMATION.—
The term ‘original
information’ means information that—
“(A) is based on the direct and independent knowledge or analysis
of a whistleblower;
“(B) is not known to the Commission from any other source; and
“(C) is not based on allegations in a judicial or administrative
hearing, in a governmental report, hearing, audit, or
investigation, or from the news media, unless the whistleblower is
the initial source of the information that resulted in the
judicial or administrative hearing, governmental report, hearing,
audit, or investigation, or the news media’s report on the
allegations.
“(2) MONETARY SANCTIONS.—
The term ‘monetary sanctions,’
when used with respect to any judicial or administrative action,
means any monies, including but not limited to penalties,
disgorgement, and interest, ordered to be paid, and any monies
deposited into a disgorgement fund pursuant to Section 308(b) of
the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of
such action or any settlement of such action.
“(3) RELATED ACTION.—
The term ‘related action,’
when used with respect to any judicial or administrative action
brought by the Commission under the securities laws, means any
judicial or administrative action brought by an entity described
in subsection (g)(2)(B) that is based upon the same original
information provided by a whistleblower pursuant to subsection (a)
that led to the successful enforcement of the Commission action.
“(4) WHISTLEBLOWER.—The term ‘whistleblower’
means an individual, or two or more individuals acting jointly,
who submit information to the Commission as provided in this
section.”.
SEC. 923. CONFORMING AMENDMENTS FOR
WHISTLEBLOWER PROTECTION.
(a) IN GENERAL.—
Each of the following
provisions is amended by inserting “and section 21F of the
Securities Exchange Act of 1934” after “the Sarbanes-Oxley Act of
2002”:
(1) Section 20(d)(3)(A) of the Securities Act of 1933 (15 U.S.C.
77t(d)(3)(A)).
(2) Section 42(e)(3)(A) of the Investment Company Act of 1940 (15
U.S.C. 80a–41(e)(3)(A)).
(3) Section 209(e)(3)(A) of the Investment Advisers Act of 1940
(15 U.S.C. 80b–9(e)(3)(A)). 15
(b) SECURITIES EXCHANGE ACT.—
The Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.) is amended—
(1) in section 21(d)(3)(C)(i) (15 U.S.C. 78u(d)(3)(C)(i)), by
inserting “and section 21F of this title” after “the
Sarbanes-Oxley Act of 2002”;
(2) in section 21A(d)(1) (15 U.S.C. 78u-1(d)(1)), by
(A) striking “(subject to subsection (e))”; and
(B) inserting “and section 21F of this title” after “the
Sarbanes-Oxley Act of 2002”; and
(C) by striking section 21A(e) (15 U.S.C. 78u-1(e)) and
renumbering sections 21A(f) and (g) (15 U.S.C. 78u-1(f) and (g))
as sections 21A(e) and (f).
SEC. 924. IMPLEMENTATION AND TRANSITION
PROVISIONS FOR WHISTLEBLOWER PROTECTIONS.
(a) IMPLEMENTING RULES.—
The Securities and Exchange
Commission shall issue final regulations implementing the
provisions of section 21F of the Securities Exchange Act of 1934,
as added by this subtitle, no later than 270 days after the date
of enactment of this Act.
(b) ORIGINAL INFORMATION.—
Information submitted to the
Commission by a whistleblower in accordance with regulations
implementing the provisions of section 21F of the Securities
Exchange Act of 1934, as added by this subtitle, shall not lose
its status as original information, as defined in section
21F(i)(1) of the Securities Exchange Act of 1934, as added by this
subtitle, solely because the whistleblower submitted such
information prior to the effective date of such regulations,
provided such information was submitted after the date of
enactment of this subtitle, or related to insider trading
violations for which a bounty could have been paid at the time
such information was submitted.
(c) AWARDS.—
A whistleblower may receive an
award pursuant to section 21F of the Securities Exchange Act of
1934, as added by this subtitle, regardless of whether any
violation of a provision of the securities laws, or a rule or
regulation thereunder, underlying the judicial or administrative
action upon which the award is based occurred prior to the date of
enactment of this subtitle.
SEC.
925. COLLATERAL BARS.
(a) SECTION 15 OF THE SECURITIES EXCHANGE
ACT OF 1934.—
Section 15(b)(6)(A) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(b)(6)(A)) is
amended by striking “12 months, or bar such person from being
associated with a broker or dealer, ” and inserting “12 months, or
bar any such person from being associated with a broker, dealer,
investment adviser, municipal securities dealer, transfer agent,
or nationally recognized statistical rating organization, ”.
(b) SECTION 15B OF THE SECURITIES EXCHANGE
ACT OF 1934.—
Section 15B(c)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-4(c)(4)) is amended
by striking “twelve months or bar any such person from being
associated with a municipal securities dealer, ” and inserting
“twelve months or bar any such person from being associated with a
broker, dealer, investment adviser, municipal securities dealer,
transfer agent, or nationally recognized statistical rating
organization,”.
(c) SECTION 17A OF THE SECURITIES EXCHANGE
ACT OF 1934.—
Section 17A(c)(4)(C) of the
Securities Exchange Act of 1934 (15 U.S.C. 78q-1(c)(4)(C)) is
amended by striking “twelve months or bar any such person from
being associated with the transfer agent, ” and inserting “twelve
months or bar any such person from being associated with any
transfer agent, broker, dealer, investment adviser, municipal
securities dealer, or nationally recognized statistical rating
organization,”.
(d) SECTION 203 OF THE INVESTMENT ADVISERS
ACT OF 1940.—
Section 203(f) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f)) is amended by
striking “twelve months or bar any such person from being
associated with an investment adviser, ” and inserting “twelve
months or bar any such person from being associated with an
investment adviser, broker, dealer, municipal securities dealer,
transfer agent, or nationally recognized statistical rating
organization,”.
SEC. 926. AIDING AND ABETTING AUTHORITY
UNDER THE SECURITIES ACT AND THE INVESTMENT COMPANY ACT.
(a) UNDER THE SECURITIES ACT OF 1933.—Section 15 of the Securities
Act of 1933 (15 U.S.C. 77o) is amended to read as follows:
“SEC. 15. LIABILITY OF CONTROLLING PERSONS AND PERSONS WHO AID AND
ABET VIOLATIONS.
“(a) CONTROLLING PERSONS.—
Every person who, by or
through stock ownership, agency, or otherwise, or who, pursuant to
or in connection with an agreement or understanding with one or
more other persons by or through stock ownership, agency, or
otherwise, controls any person liable under section 11, or 12,
shall also be liable jointly and severally with and to the same
extent as such controlled person to any person to which such
controlled person is liable, unless the controlling person had no
knowledge of or reasonable ground to believe in the existence of
the facts by reason of which the liability of the controlled
person is alleged to exist.
“(b) PROSECUTION OF PERSONS WHO AID AND ABET
VIOLATIONS.—
For purposes of any action
brought by the Commission under subparagraph (b) or (d) of section
20, any person that knowingly or recklessly provides substantial
assistance to another person in violation of a provision of this
Act, or of any rule or regulation issued under this Act, shall be
deemed to be in violation of such provision to the same extent as
the person to whom such assistance is provided.”.
(b) UNDER THE INVESTMENT COMPANY ACT OF
1940.—
Section 48 of the Investment
Company Act of 1940 (15 U.S.C. 80a-48) is amended to read as
follows:
“SEC. 48. LIABILITY OF CONTROLLING PERSONS
AND PERSONS WHO AID AND ABET VIOLATIONS; PREVENTING COMPLIANCE
WITH ACT.
“(a) CONTROLLING PERSONS.—
It shall be unlawful for any
person, directly or indirectly, to cause to be done any act or
thing through or by means of any other person which it would be
unlawful for such person to do under the provisions of this Act or
any rule, regulation, or order thereunder.
“(b) PROSECUTION OF PERSONS WHO AID AND ABET
VIOLATIONS.—
For purposes of any action
brought by the Commission under subsection (d) or (e) of section
42, any person that knowingly or recklessly provides substantial
assistance to another person in violation of a provision of this
Act, or of any rule or regulation issued under this Act, shall be
deemed to be in violation of such provision to the same extent as
the person to whom such assistance is provided.
“(c) PREVENTING COMPLIANCE WITH ACT.—
It shall be unlawful for any
person without just cause to hinder, delay, or obstruct the
making, filing, or keeping of any information, document, report,
record, or account required to be made, filed, or kept under any
provision of this Act or any rule, regulation, or order thereunder.”.
SEC. 927. AUTHORITY TO IMPOSE PENALTIES FOR
AIDING AND ABETTING VIOLATIONS OF THE INVESTMENT ADVISERS ACT.
Section 209 of the Investment Advisers Act of 1940 (15 U.S.C.
80b-9) is amended by inserting at the end the following new
subsection:
“(f) AIDING AND ABETTING.—
For purposes of any action
brought by the Commission under subsection (e), any person that
knowingly or recklessly has aided, abetted, counseled, commanded,
induced, or procured a violation of any provision of this Act, or
of any rule, regulation, or order hereunder, shall be deemed to be
in violation of such provision, rule, regulation, or order to the
same extent as the person that committed such violation
Breaking News: Important Changes in the Basel ii
framework in the European Union
The amendment of the Capital Requirements Directive
Accompanying document to the
Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL
amending Capital Requirements Directive on trading
book, securitization issues and remuneration policies
IMPACT ASSESSMENT
Summary of problems and objectives
A. Capital Requirements for
Trading Book
- Not all material credit risks in
trading books are
appropriately reflected in current capital
requirements
- Capital requirements of institutions as determined
by using VAR models are
not robust enough to
absorb potential trading book losses
- Swings in capital position, linked to trading losses
and volatility of capital requirements for trading
activities, risk exacerbating pro-cyclicality of bank
lending and investment with possible negative
implications for the real economy
- Regulatory arbitrage
possibilities possibly lead to undercapitalization
B. Capital Requirements for
Re-securitizations
- Capital required for re-securitizations does
not adequately reflect their
higher risk compared to "normal"
securitisations
- Swing in capital position, driven by losses from
resecuritizations, exacerbated pro-cyclicality of bank
lending with possible negative implications for the
real economy
C. Disclosure of
Securitization Risks
-Lack of transparency of banks' exposure to
securitizations contributed to the loss of market
confidence, which had a negative impact on the
liquidity of inter-bank markets, particularly
affecting banks who relied on wholesale funding
D. Remuneration Schemes
-Excessive short-term risk
taking impaired soundness of institutions,
disrupted financial stability and exacerbated
procyclicality in the financial system
Capital requirements rules stipulate the minimum
amounts of own financial resources that banks must
have in order to cover the risks to which they are
exposed.
The aim is to ensure the financial soundness of these
institutions and, in particular, to ensure that they
can weather difficult periods and that their
depositors are protected.
This is aimed at ensuring financial stability and
maintaining confidence in financial institutions.
In the EU, the current bank
capital framework is represented by the Capital
Requirements Directive (CRD) comprising Directives
2006/48/EC and 2006/49/EC and reflecting the
proposals of the Basel Committee for the Basel II
Framework (Basel II) and Trading Book Review.
It covers both credit
institutions and investment firms.
With the adoption of the CRD, capital requirements
became more comprehensive.
In particular, they were expanded to cover
'operational' risk (e.g. the risk of systems breaking
down).
Also, the rules were made more
risk-sensitive, with a possibility for
institutions to adopt approaches to determining
regulatory capital that are appropriate to their
situation and to the sophistication of their risk
management.
For instance, the Internal Ratings Based (IRB)
approach enabled institutions to determine capital
requirements for credit risk of their corporate
portfolios, by using their own ‘risk inputs’ such as
probability of default and loss given default.
The calculation of these risk inputs was made subject
to a strict set of operational requirements to ensure
that they are robust and reliable.
The CRD also enhanced the role
of the ‘consolidating supervisor’ by assigning
it responsibilities and powers in coordinating the
supervision of cross-border groups and laid out a
three-pillar structure representing additional marked
differences from a predecessor legislation.
Shortcomings of VAR Models
Drivers:
VAR models based on short periods of historical data
which may not capture relevant market stress episodes
VAR models' assumption of independent returns does not
hold at times of market stress when correlations
between risk factors increase
Problems:
Capital requirements as determined by using VAR models
are not robust enough to absorb potential trading book
losses and contribute to sub-optimal level of risk
management.
Swings in capital position, linked to trading losses
and volatility of capital requirements for the trading
book, risk exacerbating procyclicality of bank lending
and investment with negative implications for the real
economy.
Starting with the second half of 2007, several banks
reported trading losses many times exceeding their VAR
estimates.
While the VAR estimates had soared due to historically
high volatility, they still grossly underestimated
market risks.
As a result, banks experienced a large number of 'backtesting
exceptions', i.e., instances when the actual loss
exceeded estimated VAR for a given day. Statistically,
this number should not be higher
than three per year for VAR calculated assuming
a 99% confidence level.
An analysis by Standard and Poor's, however, shows
that a number of backtesting exceptions recorded by
several large
European and US banks in 2007 reached
multiples of this number.
The large number of VAR exceptions casts doubt on the
robustness of VAR models in stress conditions.
To recall, banks may calculate capital requirements on
the basis of these VAR models. Even though capital
requirements, when derived this way, also incorporate
a safety margin, backtesting exceptions constitute
events when actual losses in the trading book may have
exceeded the actual capital required for the trading
book.
Importantly, institutions' own estimates of economic
capital for market risk indicate that current
regulatory capital requirements for market risk are
insufficient. For example, Deutsche Bank in its annual
report estimated economic capital required for its
traded market risk at €5.5 billion at the end of 2008.
Meanwhile, its regulatory market risk charge was
around €1.9 billion, i.e., 65%
less than bank's own economic capital estimate.
VAR models are based on historical data on risk
factors, regulatory requirements setting a look-back
period of one year.
They therefore provide limited insight into risks that
do not show within the model's 'time window'. In
particular, if the time window does not encompass
periods of illiquidity that leads to increases in
asset price volatility, VAR will fail to produce a
relevant measure of risk on some positions.
Not only will the short look-back period render the
VAR based regulatory capital less sound in the sense
that actual losses may exceed the regulatory capital
requirement. An additional problem caused by the
short look-back period is
that capital requirements become volatile.
For instance,
VAR
measure of Deutsche Bank increased from €76.9 million
at the end of 2006 to €131.4 million at the end of
2008,
i.e., by more than 70% - an increase that is still
likely to understate the actual volatility of the VAR
measure assuming a constant portfolio composition, as
one can safely assume that the bank have tried to
reduce its exposures over the stressed period in
question.
This volatility of capital requirements implies that
banks can take a lot of risk during good times but are
curtailed in their risk taking ability during more
difficult times, as regulatory capital requirements
rise at the time when the level of available capital
is eaten up by losses from operations yet raising
additional capital in the markets becomes more
expensive, if not impossible.
While such risk reassessment can be viewed as rational
from the individual firms perspective, it considerably
reduces liquidity in already stressed capital markets
and in a wider sense also introduces volatility into
banks' ability and willingness to lend to the real
economy thus exacerbating the underlying cyclical
trends.
Most VAR models use correlations among risk factors
that are not stressed.
Under stress conditions like the ones experienced
during the 2007-2008 episode, however, correlations
change and the benefits of risk diversification as
assessed by VAR in the preceding more benign
environment turn out to have been overestimated.
To illustrate, a bank trading in both equity and bond
risks will in good times benefit from risk
diversification as shares and bonds
will often not experience losses at the same time.
When market conditions deteriorate, extreme movements
can however occur in all risk categories
simultaneously.
Moreover, in times of stress,
bad days tend to cluster.
Proposed amendments to the Capital Requirements
Directives
The purpose of the Capital Requirements Directives
(2006/48/EC and 2006/49/EC) is to ensure the financial
soundness of banks and investment firms. Together they
stipulate how much of their own financial resources
banks and investment firms must have in order to cover
their risks and protect their depositors. This legal
framework needs to be regularly updated and refined to
respond to the needs of the financial system as a
whole.
The main
changes proposed are as follows:
Capital requirements for re-securitisations
Re-securitisations are complex financial products that
have played a role in the development of the financial
crisis. In certain circumstances,
banks that hold them can be
exposed to considerable losses. The proposal
will impose higher capital requirements for re-securitisations,
to make sure that banks take proper account of the
risks of investing in such complex financial products.
Disclosure of securitisation exposures
Proper disclosure of the level of risks to which banks
are exposed is necessary for market confidence. The
new rules will tighten up disclosure requirements to
increase the market confidence that is necessary to
encourage banks to start lending to each other again.
Capital requirements for the trading book
The trading book consists of all the financial
instruments that a bank holds with the intention of
re-selling them in the short term, or in order to
hedge other instruments in the trading book. The
proposal will change the way that banks assess the
risks connected with their trading books to ensure
that they fully reflect the potential losses from
adverse market movements in the kind of stressed
conditions that have been experienced recently.
Remuneration policies and practices within banks
The proposal will tackle perverse pay incentives by
requiring banks and investment firms to have sound
remuneration policies that do not encourage or reward
excessive risk-taking. Banking supervisors will be
given the power to sanction banks with remuneration
policies that do not comply with the new requirements.
Dear
Potential, New or Sitting Members of the Board of
Director,
You
have the duty to prudently represent the interests of the
shareholders.
You have to understand the needs and desires
of employees, customers and regulators.
You have to do your
best to understand the risks in your organization, and to exercise
oversight.
Year after year, you have to do more, and you
have more responsibilities.
Our Mission: To help you make
informed business decisions in good faith.
Our International
Association provides networking, training, certification, alerts and
updates you can use.
Best Regards,
George
Lekatis
President of the International Association of Potential,
New and Sitting Members of the Board of Directors (IAMBD)
General
Manager, Compliance LLC
1200 G Street NW Suite 800, Washington DC
20005, USA
Tel: (202) 449-9750
Email: lekatis@members-of-the-board-association.com
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www.members-of-the-board-association.com
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