SEC Commissioner Objects to Retroactive Application of Dodd-Frank Bars

Commissioner Gallagher recently filed this opinion dissenting in part with respect to In the Matter of John W. Lawton. The matter arose out of the alleged misconduct of respondent John W. Lawton, who purportedly committed multiple violations of the antifraud provisions of the securities laws. The respondent’s alleged misconduct resulted in the imposition of a permanent injunction against him in July 2009, as well as a criminal conviction. All of the respondent’s alleged misconduct occurred before the July 21, 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In December 2010, after passage of the Dodd-Frank Act, the SEC instituted follow-on administrative proceedings against the respondent under the Investment Advisers Act of 1940, relying solely on the permanent injunction as the jurisdictional predicate. In April 2011, the law judge issued an initial decision by summary disposition, barring the respondent from associating with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. The law judge declined to impose municipal advisor or NRSRO bars against the respondent, holding that to impose those bars – based entirely on pre-Dodd-Frank misconduct – would have given impermissible retroactive effect to the collateral bar provisions of the Dodd-Frank Act.

Before Dodd-Frank, the SEC did not impose collateral bars following the decision of the United States Court of Appeals for the District of Columbia in Teicher v. SEC. Section 925 of the Dodd-Frank Act, however, amended the federal securities laws to provide the Commission with express authority to impose collateral bars. Section 925 also created the new municipal advisor and NRSRO bars.

The law judge was presented with the question of whether the Commission has the authority to impose collateral broker, dealer, municipal securities dealer, and transfer agent bars retrospectively without giving impermissible retroactive effect to Section 925 of the Dodd-Frank Act, and concluded that it does. The law judge also was presented with another important question, which arises from the Dodd-Frank Act’s creation, from whole cloth, of two entirely new bars, namely, the municipal advisor and NRSRO bars.

Before the Dodd-Frank Act, those bars did not exist, and the SEC did not have statutory authority to suspend or bar someone from association with a municipal advisor or NRSRO. Thus, before the passage of the Dodd-Frank Act, no person committing a securities law violation could reasonably have been on notice that the SEC had the authority to bar persons from working in the municipal advisor or NRSRO branches of the securities industry. According to Commissioner Gallagher, this gives rise to the central question in this case: even if the SEC does have the authority to impose certain bars collaterally and retrospectively, would the retrospective imposition of the two new Dodd-Frank bars – based entirely on pre-Dodd-Frank conduct – give impermissible retroactive effect to Section 925 of the Dodd-Frank Act? Commissioner Gallagher agreed with the law judge that it would and therefore dissented from the imposition of those two bars against the respondent.

Topics:  Dodd-Frank, Fraud, Investment Advisers Act of 1940, NRSRO, SEC

Published In: Administrative Agency Updates, Civil Procedure Updates, Civil Remedies Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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