Justia Securities Law Opinion Summaries

Thrivent Financial for Lutherans and its subsidiary, which sell securities including variable annuities and life insurance contracts, are required as broker-dealers to be members of the Financial Industry Regulatory Authority (FINRA). FINRA’s rules mandate that disputes with customers be arbitrated in FINRA’s forum and prohibit class action waivers in customer agreements, which conflicted with Thrivent’s preferred arbitration process. Thrivent sought to have its own dispute resolution program, culminating in binding arbitration in a non-FINRA forum, applied to all customer disputes involving these products. After FINRA interpreted its rules as prohibiting Thrivent’s program, Thrivent petitioned the Securities and Exchange Commission (SEC) to amend or abrogate the relevant FINRA arbitration rules, arguing they violated the Federal Arbitration Act.After receiving no response for nearly a year, Thrivent sought mandamus relief from the United States Court of Appeals for the District of Columbia Circuit, which was denied. Eventually, the SEC denied the petition for rulemaking in a brief letter that cited resource constraints and agency discretion but did not specifically address Thrivent’s arguments or provide a substantive rationale. Thrivent then petitioned the D.C. Circuit for review of the SEC’s denial.The United States Court of Appeals for the District of Columbia Circuit held that while agency discretion in rulemaking is broad, the SEC’s denial was arbitrary and capricious because it failed to provide a reasoned explanation particular to Thrivent’s petition. The court did not address the underlying merits of Thrivent’s claim or the validity of the FINRA rules. Instead, it granted the petition in part, remanding the matter to the SEC for further consideration and a more reasoned explanation. The court otherwise denied Thrivent’s petition for review. View "Thrivent Financial for Lutherans v. SEC" on Justia Law

The appellant, an experienced foreign currency exchange (FX) trader, claimed he uncovered manipulation in the FX market after noticing a sharp drop in the values of several currencies relative to the Swiss franc in 2011. He believed this was due to collusion among market makers and shared his suspicions with various regulators, including the Commodity Futures Trading Commission (CFTC). His allegations focused on conduct by a retail trading platform, Oanda, and mentioned possible involvement by banks but did not name any specific institutions. Two years later, media reports surfaced about large banks rigging FX benchmark rates, prompting the CFTC to investigate and eventually reach settlements with several banks for manipulating benchmark rates.The CFTC initially investigated the appellant’s allegations against Oanda but found no evidence of wrongdoing and closed the case without action. The CFTC’s later enforcement actions against major banks were initiated after media coverage revealed benchmark-rate manipulation schemes, not because of the appellant’s information. After the settlements were announced, the appellant applied for a whistleblower award, arguing his tips had led to these enforcement actions. The CFTC’s Whistleblower Office and Claims Review Staff recommended denial, finding his tips were not the original source of the information leading to the enforcement actions. The appellant sought reconsideration and, after a delay, petitioned for mandamus relief in the United States Court of Appeals for the District of Columbia Circuit, which was rendered moot when the Commission issued final orders denying his application.The United States Court of Appeals for the District of Columbia Circuit reviewed the CFTC’s denial for arbitrariness or capriciousness. The court found that the appellant’s tips did not lead to or significantly contribute to the enforcement actions against the banks, nor was he the original or derivative source of the information used. The court affirmed the CFTC’s orders denying the whistleblower award. View "Kitchen v. Commodity Futures Trading Commission" on Justia Law

This case involves a challenge to the approval by the U.S. Securities and Exchange Commission (“SEC”) of a new options trading exchange, IEX Options, proposed by Investors Exchange LLC (“IEX”). The dispute centers on IEX’s plan to introduce a 350-microsecond “speedbump” delay and a software mechanism called the Options Quote Indicator and Options Risk Parameter (“ORP”), designed to detect and mitigate “latency arbitrage.” Latency arbitrage occurs when high-frequency traders exploit tiny delays in the updating of quotes across exchanges, resulting in significant profits for these traders and increased costs for market makers and investors. IEX’s system aims to limit this practice by slowing the entry of incoming orders and repricing or canceling stale quotes when rapid price changes are detected, a model previously approved for equities trading.After IEX submitted its proposal, the SEC solicited public comment and received input from market makers, institutional investors, and competitors. The SEC approved the proposal, finding that it was consistent with the Securities Exchange Act and did not unfairly discriminate or impose undue burdens on competition. The SEC also determined that quotes subject to IEX’s ORP qualified as “protected” quotations under the Options Order Protection and Locked/Crossed Market Plan. Citadel Securities LLC (“Citadel”), a major market maker and high-frequency trader, petitioned the U.S. Court of Appeals for the Eleventh Circuit for review, arguing that the SEC’s approval was arbitrary and capricious and that the IEX system did not meet legal requirements.The United States Court of Appeals for the Eleventh Circuit reviewed the SEC’s approval under the Administrative Procedure Act’s arbitrary-and-capricious standard. The court held that substantial evidence supported the SEC’s findings about the existence and harm of latency arbitrage in the options market and the effectiveness of IEX’s ORP. The court also concluded that IEX’s quotes were legally “protected,” the SEC’s approval was neither unfairly discriminatory nor unduly burdensome on competition, and denied Citadel’s petition. View "Citadel Securities LLC v. Securities and Exchange Commission" on Justia Law

An individual disclosed information about significant misconduct at a large company to the news media. Following these disclosures, both Congress and staff from the Securities and Exchange Commission (SEC) contacted the individual for interviews and further information, which he provided. The SEC subsequently initiated an enforcement action against the company, relying on the information provided, resulting in substantial monetary sanctions. The individual then applied to the SEC for a whistleblower award under the Securities Exchange Act, which provides monetary awards to those who “voluntarily” provide “original information” leading to successful enforcement actions.The SEC denied the whistleblower award application, finding that the individual’s submission was not “voluntary” because it occurred only after the SEC and other authorities had contacted him. Additionally, the SEC found his submission was untimely and summarily denied his request for exemptions from these requirements. The individual challenged these determinations, arguing that the SEC’s interpretation of “voluntarily” conflicted with the statute's purpose and plain meaning, that his submission was timely, and that the denial of his request for exemptions was insufficiently explained and inconsistent with SEC precedent. He also raised First Amendment concerns, suggesting the SEC’s approach penalized whistleblowers for speaking to the press.The United States Court of Appeals for the District of Columbia Circuit reviewed the SEC’s order. The court held that the SEC’s interpretation of “voluntarily” was reasonable and consistent with statutory text and purpose, and rejected the First Amendment argument, finding it was based on a mistaken premise. However, the court found that the SEC abused its discretion by inadequately explaining its denial of the request for an exemption from the voluntariness requirement. The court thus denied the petition in part, granted it in part, vacated the denial of the exemption request, and remanded to the SEC for further consideration. View "Doe v. SEC" on Justia Law

The Securities and Exchange Commission (SEC) adopted two rules intended to increase transparency in the securities lending and short sale markets. Securities lending involves temporarily transferring securities from a lender to a borrower for a fee, and is closely tied to short selling, where investors sell securities they do not own, hoping to profit from a price decline. The SEC found both markets to be opaque, making regulatory oversight difficult. To address this, the SEC, under authority from the Dodd-Frank Act, promulgated the Securities Lending Rule (requiring prompt reporting of securities loans) and the Short Sale Rule (mandating monthly aggregate reporting of short sale positions by institutional investment managers).The petitioners, associations representing institutional investment managers, challenged both rules before the United States Court of Appeals for the Fifth Circuit. They argued that the rules were arbitrary and capricious, exceeded the SEC’s statutory authority, conflicted with each other, and that the SEC failed to consider their cumulative economic impact. They also raised procedural objections, including inadequate opportunity for public comment and concerns about the extraterritorial application of the Short Sale Rule. The SEC defended its process and statutory authority, maintaining that the rules addressed distinct regulatory gaps and that its economic analysis was sufficient.The United States Court of Appeals for the Fifth Circuit held that the SEC acted within its statutory authority in adopting both rules and provided adequate opportunity for public comment. The court also found that the SEC reasonably explained its choices regarding reporting systems and that the Short Sale Rule did not have impermissible extraterritorial reach. However, the court concluded that the SEC failed to consider and quantify the cumulative economic impact of the two interrelated rules, as required by the Administrative Procedure Act and the Exchange Act. The court granted the petition for review in part and remanded both rules to the SEC for further proceedings on this issue, while denying the remainder of the petition. View "Natl Assoc Priv Fund Mgr v. SEC" on Justia Law

The Securities and Exchange Commission (SEC) initiated a civil enforcement action against several individuals, alleging they orchestrated profitable “pump-and-dump” schemes to artificially inflate stock prices and then sell shares at a profit, harming investors. The SEC ultimately obtained final judgments and recovered over $11 million in sanctions. Under the Dodd-Frank Act, the SEC is required to pay whistleblower awards to individuals who voluntarily provide original information leading to successful enforcement actions. After posting a Notice of Covered Action, five claimants submitted applications for whistleblower awards related to this enforcement action.The SEC’s Claims Review Staff awarded 30 percent of the monetary sanctions to Daniel Fisher, a former executive at a company central to the investigation, finding that Fisher provided new, helpful information that substantially advanced the investigation. The staff denied the other applications, including those from Lee Michael Pederson, John Amster, and Robert Heath, concluding that their information was either duplicative, based on publicly available sources, or not used by enforcement staff. Pederson and Fisher were found not to have acted jointly as whistleblowers, and Amster and Heath’s information was not relied upon in the investigation. The SEC affirmed these determinations in its final order.The United States Court of Appeals for the Eighth Circuit reviewed the SEC’s final order, applying a deferential standard to the agency’s factual findings and reviewing legal conclusions de novo. The court held that substantial evidence supported the SEC’s determinations: Pederson and Fisher did not act jointly, Pederson’s individual tips were not original or helpful, and Amster and Heath’s information did not lead to the enforcement action. The court also rejected Pederson’s due process and procedural arguments and denied his motion to compel. The petitions for review were denied, and the SEC’s order was affirmed. View "Pederson v. U.S. Securities Exch. Comm." on Justia Law

Shareholders of Fannie Mae and Freddie Mac, acting derivatively on behalf of these entities, challenged the federal government’s actions following the 2008 financial crisis. After the housing market collapse, Congress passed the Housing and Economic Recovery Act of 2008 (HERA), creating the Federal Housing Finance Agency (FHFA) and authorizing it to act as conservator for the Enterprises. The FHFA placed both entities into conservatorship, and the U.S. Treasury entered into agreements to provide financial support in exchange for senior preferred stock and other rights. In 2012, a “net worth sweep” was implemented, redirecting nearly all profits from the Enterprises to the Treasury, effectively eliminating dividends for other shareholders. The plaintiffs, as preferred shareholders, alleged that this arrangement constituted an unconstitutional taking under the Fifth Amendment.The United States Court of Federal Claims previously reviewed the case and granted the government’s motion to dismiss. The Claims Court relied on the Federal Circuit’s prior decision in Fairholme Funds, Inc. v. United States, which held that, under HERA, the Enterprises lost any cognizable property interest necessary to support a takings claim because the FHFA, as conservator, had broad authority over the Enterprises’ assets. The Claims Court found the plaintiffs’ claims indistinguishable from those in Fairholme and dismissed them accordingly.On appeal, the United States Court of Appeals for the Federal Circuit reviewed the dismissal de novo. The court affirmed the Claims Court’s decision, holding that claim preclusion barred the plaintiffs’ derivative takings claims because the issues had already been litigated in Fairholme. The court rejected arguments that the prior representation was inadequate or that the Supreme Court’s subsequent decision in Tyler v. Hennepin County fundamentally changed takings law. The Federal Circuit concluded that Fairholme remained binding precedent and affirmed the dismissal. View "FISHER v. US " on Justia Law

A group of individuals and organizations challenged a longstanding policy of the Securities and Exchange Commission (SEC), codified as Rule 202.5(e), which requires defendants in civil enforcement actions to agree not to publicly deny the allegations against them as a condition of settlement. This “no-deny” provision has been in place since 1972 and is incorporated into settlement agreements, with the SEC’s remedy for a breach being the ability to ask the court to reopen the case. The petitioners argued that this rule violates the First Amendment and was improperly adopted under the Administrative Procedure Act (APA).Previously, the New Civil Liberties Alliance (NCLA) petitioned the SEC to amend Rule 202.5(e) to remove the no-deny requirement, citing constitutional concerns. The SEC denied the petition, explaining that defendants can voluntarily waive constitutional rights in settlements and that the rule preserves the agency’s ability to litigate if a defendant later denies the allegations. After the denial, the petitioners sought review in the United States Court of Appeals for the Ninth Circuit, asserting both First Amendment and APA violations.The United States Court of Appeals for the Ninth Circuit reviewed the SEC’s denial. Applying the Supreme Court’s framework from Town of Newton v. Rumery, the court held that voluntary waivers of constitutional rights, including First Amendment rights, are generally permissible if knowing and voluntary. The court concluded that Rule 202.5(e) is not facially invalid under the First Amendment, as it is a limited restriction tied to the settlement context and does not preclude all speech. The court also found that the SEC had statutory authority for the rule, was not required to use notice-and-comment rulemaking, and provided a rational explanation for its decision. The petition for review was denied, but the court left open the possibility of future as-applied challenges. View "POWELL V. UNITED STATES SECURITIES AND EXCHANGE COMMISSION" on Justia Law

The case involves a challenge to the U.S. Securities and Exchange Commission's (SEC) 2023 Funding Order, which amended the funding structure for the Consolidated Audit Trail (CAT). The CAT was established to create a single electronic system for gathering and maintaining data on stock trades. Initially, the SEC estimated the cost of building and operating the CAT to be significantly lower than the actual costs incurred. The 2023 Funding Order allowed self-regulatory organizations (SROs) to pass all CAT costs to their broker-dealer members, a shift from the original plan that required both SROs and broker-dealers to share the costs.The American Securities Association and Citadel Securities, LLC challenged the 2023 Funding Order, arguing that it was arbitrary and capricious. They contended that the SEC failed to justify the decision to allow SROs to pass all CAT costs to broker-dealers and did not update its economic analysis to reflect the actual costs of the CAT, which had significantly increased since the original estimates.The United States Court of Appeals for the Eleventh Circuit reviewed the case. The court found that the SEC's 2023 Funding Order was internally inconsistent and represented an unexplained policy change from previous rules that required both SROs and broker-dealers to share CAT costs. The court also determined that the SEC failed to consider the effects of allowing SROs to pass all CAT costs to broker-dealers, creating a potential free-rider problem. Additionally, the court held that the SEC's reliance on outdated economic analysis was unreasonable given the significant increase in CAT costs.The Eleventh Circuit vacated the 2023 Funding Order, stayed its decision for sixty days to allow the SEC to address the issues, and remanded the matter to the SEC for further proceedings consistent with the court's opinion. View "American Securities Association v. Securities and Exchange Commission" on Justia Law

Institutional Shareholder Services, Inc. (ISS), a proxy advisory firm, challenged the Securities and Exchange Commission’s (SEC) interpretation of the term “solicit” under section 14(a) of the Exchange Act of 1934. The SEC had begun regulating proxy advisory firms by treating their voting recommendations as “solicitations” of proxy votes. ISS argued that its recommendations did not constitute “solicitation” under the Act.The United States District Court for the District of Columbia agreed with ISS and granted summary judgment in its favor. The court found that the SEC’s interpretation of “solicit” was overly broad and not supported by the statutory text. The National Association of Manufacturers (NAM), an intervenor supporting the SEC’s position, appealed the decision.The United States Court of Appeals for the District of Columbia Circuit reviewed the case. The court affirmed the district court’s decision, holding that the ordinary meaning of “solicit” does not include providing proxy voting recommendations upon request. The court concluded that “solicit” refers to actively seeking to obtain proxy authority or votes, not merely influencing them through advice. The SEC’s definition, which included proxy advisory firms’ recommendations as solicitations, was found to be contrary to the statutory text of section 14(a) of the Exchange Act. View "Institutional Shareholder Services, Inc. v. SEC" on Justia Law