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  • FinCEN director discusses approach to virtual currency and emerging technology

    Financial Crimes

    On August 9, FinCEN Director Kenneth A. Blanco delivered remarks at the 2018 Chicago-Kent Block (Legal) Tech Conference to discuss, among other things, the agency’s approach to virtual currency and its efforts to protect financial institutions from being exploited for illicit financing purposes as new financial technologies evolve and are adopted. Blanco commented that while innovation provides customers with greater access to financial services, it can also create opportunities for criminals or serve as a vehicle for fraud. Blanco discussed several areas of focus, such as (i) the regulation of virtual currency and initial coin offerings (ICOs), along with coordinated policy development and regulatory approaches done in conjunction with the SEC and CFTC; (ii) examination and supervision efforts designed to “proactively mitigate potential illicit finance risks associated with virtual currency”; (iii) anti-money laundering/countering the financing of terrorism (AML/CFT) regulatory compliance expectations for companies involved in ICOs or virtual currency transmissions; (iv) enforcement actions taken against companies that fail to implement effective programs; (v) the rise and importance of virtual currency suspicious activity report filings which help the agency identify and investigate illicit activity; and (vi) the development of an information sharing virtual currency-focused FinCEN Exchange program. Blanco emphasized that “individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the requirements” of the Bank Secrecy Act.

    Financial Crimes FinCEN Bank Secrecy Act Virtual Currency Anti-Money Laundering Combating the Financing of Terrorism SARs SEC CFTC Fintech Initial Coin Offerings

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  • FINRA seeks comments on fintech innovation in broker-dealer industry

    Fintech

    On July 30, the Financial Industry Regulatory Authority (FINRA) issued a Special Notice seeking comment on how it can support fintech innovation consistent with its mission of investor protection and market integrity. According to FINRA, the comment request builds on its Innovation Outreach Initiative, which launched last year to assist FINRA in understanding fintech innovations and how those innovations affect the securities industry (previously covered by InfoBytes here). The Special Notice seeks general comments on FINRA’s rules or processes that could be “modified to better support fintech innovation without adversely affecting investor protection or market integrity,” and comments pointing to specific areas of fintech innovation that may need a greater focus by the organization. In addition to those comments, the notice also raises three specific topics for comment that have previously been flagged as potential areas of engagement through the Innovation Outreach Initiative: (i) data aggregation services; (ii) supervision as it relates to artificial intelligence; and (iii) the development of a taxonomy-based machine-readable rulebook. Comments are due by October 12.

    Fintech FINRA Federal Issues SEC Securities

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  • Global investment bank subsidiaries to settle SEC allegations of mishandled American Depositary Receipts

    Securities

    On July 20, the SEC announced it had reached a settlement with two U.S.-based subsidiaries of a global investment bank to settle allegations that the subsidiaries mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. According to the SEC’s separately issued orders, the bank’s depository bank subsidiary and the broker-dealer subsidiary allowed pre-released ADRs to be “used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.” The SEC explained in its press release that ADRs can only be “pre-released” without the deposit of foreign shares, provided the brokers receiving the ADRs have an agreement with a depository bank and the broker or the broker's customer owns an amount of the underlying shares that corresponds to the number of shares the ADR represents. However, the SEC alleged that the depository bank subsidiary improperly provided thousands of ADRs where neither the broker nor its customers possessed the required shares, and that the broker-dealer subsidiary’s policies, procedures and supervision failed to prevent and detect violations tied to the borrowing and lending of pre-released ADRs. While the two subsidiaries neither admitted nor denied the SEC’s allegations, the depository bank has agreed to pay more than $51 million in disgorgement and prejudgment interest, along with a $22.2 million civil money penalty. The broker-dealer subsidiary has agreed to pay approximately $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 civil money penalty.

    Securities SEC Settlement

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  • Court dismisses SEC allegations against executives of hedge fund management firm as time-barred

    Financial Crimes

    On July 12, Judge Nicholas Garaufis of the Eastern District of New York issued a 32-page memorandum opinion this week dismissing the SEC’s civil suit against two former executives of an American hedge fund management firm (earlier coverage can be found here and here).

    The SEC’s complaint alleged that the executives violated the FCPA between May 2007 and April 2011 by causing the firm “to pay tens of millions of dollars in bribes to government officials on the continent of Africa.” Specifically, the defendants allegedly induced Libyan authorities to invest in firm managed funds, and directed illicit efforts to secure mining deals by bribing government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo. The case against the two executives was the latest in a line of civil and criminal proceedings involving the hedge fund management firm and its employees and executives, and the firm paid $412 million in criminal and civil penalties to settle its FCPA enforcement actions.

    Judge Garaufis, in dismissing the complaint in its entirety with prejudice, found that the claims were barred by the FCPA’s five-year statute of limitations, and he rejected the SEC’s tolling arguments. A cornerstone of this dismissal is the Supreme Court’s ruling last year in Kokesh v. SEC, which held that SEC disgorgement actions are subject to a five-year statute of limitations.

    Financial Crimes SEC FCPA

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  • Federal Reserve chair delivers semi-annual congressional testimony, discusses U.S. financial conditions and regulatory relief act

    Federal Issues

    On July 17, Federal Reserve Chair Jerome Powell testified before the Senate Banking Committee and spoke the next day before the House Financial Services Committee. In his semi-annual congressional testimony, Powell presented the Federal Reserve’s Monetary Policy Report, and discussed the current economic situation, job market, inflation levels, and the federal funds rate. Powell stressed, among other things, that interest rates and financial conditions remain favorable to growth and that the financial system remains in a good position to meet household and business credit needs. Chairman of the Committee, Senator Mike Crapo, R-Idaho, remarked in his opening statement that, while recent economic developments are encouraging, an effort should be made to focus on reviewing, improving, and tailoring regulations to be consistent with the recently passed Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174 (the Act). During the hearing, Powell confirmed that the Fed plans to implement provisions of the Act as soon as possible. (See previous InfoBytes coverage here.) When questioned by Senator Sherrod Brown, D-Ohio, about the direction the Fed plans to take to address stress test concerns, Powell responded that the Fed is committed to using stress tests, particularly for the largest, most systemically important institutions, and that going forward, the Fed wants to strengthen the tests and make the process more transparent. Powell also indicated the Fed intends to “publish for public comment the range of factors [the Fed] can consider” when applying prudential standards. Powell also stated that he believes government-sponsored-enterprise reform would help the economy in the long term.

    When giving testimony to the House Financial Services Committee, Powell also commented that cryptocurrency does not currently impair the Fed’s work on monetary policy and that the Fed will not seek jurisdiction over cryptocurrency and instead will defer to the SEC’s oversight as well as Treasury’s lead to identify the right regulatory structure.

    Federal Issues Federal Reserve SEC Cryptocurrency Stress Test Consumer Finance S. 2155 Senate Banking Committee House Financial Services Committee

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  • House passes bipartisan package of securities and banking bills focusing on capital market regulations

    Federal Issues

    On July 17, the House passed S. 488, the “JOBS and Investor Confidence Act of 2018” (Act) by a vote of 406 to 4. The package of 32 securities and banking bills now comprises Senate bill S. 488, which previously contained an amendment to the Securities Act Rule 230.701(e) and was included as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174. The Act focuses on capital market regulations and contains many capital formation provisions designed to, among other things, (i) expand access for smaller companies attempting to raise capital; (ii) reduce regulation for smaller companies such as providing federal stress test relief for nonbanks; (iii) revise crowdfunding provisions to allow for crowdfunding vehicles and the registration of crowdfunding vehicle advisers; (iv) exempt low-revenue issuers from Sarbanes-Oxley Act Section 404; (v) grant banks safe harbor when they keep open certain accounts and transactions at the request of law enforcement; and (vi) clarify various rules, review current securities laws for inefficiencies, and establish additional procedures focusing on virtual currency and money laundering efforts. Additional changes would amend a section of the Exchange Act governing SEC registration of individuals acting as brokers or dealers. The Fair Credit Reporting Act would also be amended to permit entities—including HUD—the ability to furnish data to consumer reporting agencies regarding an individual’s history of on-time payments with respect to a lease, or contracts for utilities and telecommunications services, provided the information about a consumer's usage of the service relates to payment by the consumer for such service or other terms of the provision of that service. S. 488 would also allow certain non-profits conducting charitable mortgage loan transactions to use forms required under the TILA-RESPA Integrated Disclosure Rule, and require the director of the CFPB to issue such regulations as may be necessary to implement those amendments. S. 488 now returns to the Senate for further action.

    Federal Issues U.S. House Federal Legislation Securities FCRA SEC Virtual Currency Stress Test Consumer Finance CFPB TRID Mortgages S. 2155

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  • Agencies publish proposed joint revisions to Volcker rule

    Agency Rule-Making & Guidance

    On July 17, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC (the Agencies) published their joint notice of proposed rulemaking designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds (the Volcker rule). As previously covered in InfoBytes, the Agencies’ announced the proposal on May 30, noting that the amendments would reduce compliance costs for banks and tailor Volcker rule requirements to better align with a bank’s size and level of trading activity and risks. Comments on the proposal are due by September 17.

    Agency Rule-Making & Guidance FDIC Federal Reserve OCC CFTC SEC Bank Holding Company Act Volcker Rule

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  • DOJ announces task force on market integrity and consumer fraud

    Federal Issues

    On July 11, the Deputy Attorney General, Rod Rosenstein, announced the establishment of a new task force on market integrity and consumer fraud pursuant to an Executive Order (EO) issued by President Trump on the same day. The task force, led by Rosenstein, will provide guidance for the investigation and prosecution of cases involving fraud on the government, financial markets, and consumers. The announcement lists a wide range of fraudulent activities, including (i) cyber-fraud; (ii) fraud targeting older Americans and service members; (iii) securities and commodities fraud; and (iv) corporate fraud affecting the general public, such as money laundering and other financial crimes. Rosenstein emphasized that the task force will work to achieve “more effective and efficient outcomes” to identify and stop fraud “on a wider scale than any one agency acting alone.”

    While the EO requests senior officials from numerous federal agencies be invited by the DOJ to participate in the task force, Rosenstein was joined by acting Director of the CFPB, Mick Mulvaney; Chairman of the SEC, Jay Clayton; and Chairman of the FTC, Joe Simons in the announcement. Mulvaney stated, “[t]he Bureau takes its mandate to enforce the law seriously, and the Bureau will continue to apply the law to achieve this end of combatting fraud against Americans…. This task force is an example of the growing cooperation of the Bureau’s work with other federal and state authorities to combat a multitude of bad actors out there today.”

    Federal Issues Fraud Consumer Finance Anti-Money Laundering Financial Crimes DOJ SEC FTC CFPB

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  • Trump issues Executive Order removing ALJs from competitive service

    Federal Issues

    On July 10, President Trump issued an Executive Order (EO) excepting Administrative Law Judges (ALJs) from the federal government’s competitive hiring service. The EO is in response to the recent Supreme Court decision in Lucia v. SEC, which held that ALJs are “inferior officers” subject to the Appointments Clause of the Constitution. (Previously covered by InfoBytes here.) The EO allows federal agencies to hire ALJs without going through the Office of Personnel Management (OPM) competitive selection process, which will give agencies the ability to select candidates who meet the agency’s specific needs— providing greater “flexibility and responsibility for ALJ appointments,” according to the White House announcement. The announcement emphasizes that the EO “reduces the legal uncertainty” over new ALJ appointments under the Appointments Clause in order to safeguard agencies’ enforcement of federal laws.

    Federal Issues ALJ U.S. Supreme Court SEC Trump Executive Order

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  • SEC and broker-dealer settle charges for allegedly failing to report suspicious transactions

    Financial Crimes

    On July 9, the SEC announced it had reached a settlement with a broker-dealer for allegedly failing to file suspicious activity reports (SARs), as required by the Bank Secrecy Act. According to the SEC’s complaint, the broker-dealer allegedly “knew, suspected, or had reason to suspect” that at least 47 advisors previously terminated by the broker-dealer had engaged in suspicious transactions. However, the broker-dealer filed SARs related to only 10 of the advisors—3 of which were filed after the SEC brought an enforcement action against the advisors. Suspicious transactions by the advisors involved (i) engaging in suspicious transfers of funds; (ii) engaging in “cherry-picking” patterns; (iii) charging excessive advisory fees; (iv) improperly accessing customer accounts to make trades; and (v) using the broker-dealer’s custodial platform despite registration lapses. The SEC asserted that the broker-dealer’s failure to file SARs for suspicious transactions violated the Securities Exchange Act. While neither admitting nor denying the allegations, the broker-dealer has agreed to the entry of a permanent injunction and will pay a $2.8 million civil penalty.

    Financial Crimes SARs SEC Securities Bank Secrecy Act

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