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  • House Appropriations Committee Approves Fiscal 2018 Funding Bill Designed to Overhaul Existing Financial Regulations

    Federal Issues

    On July 13, the House Appropriations Committee approved the fiscal year 2018 financial services funding bill by a vote of 31-21. The bill totaling $20.231 billion—$1.284 billion below fiscal year 2017 and $2.483 billion less than President Trump’s budget request—incorporates several provisions of the Financial CHOICE Act designed to, among other things, overhaul existing financial regulations and restructure the CFPB. The bill provides funding for the Treasury Department, Judiciary, SEC, Federal Reserve, CFPB, and other related agencies. According to the press release issued by the committee, the bill “provides the funding necessary for federal regulators to do their jobs in a timely and appropriate manner, while stopping burdensome regulations before they can damage [the] economy irreparably.”

    A summary of the bill is available here.

    A copy of the legislative text of the bill is available here.

    A copy of the bill report is available here.

    Federal Issues Federal Legislation Financial CHOICE Act Treasury Department SEC Federal Reserve House Appropriations Committee

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  • SEC Chairman Outlines Regulatory Agenda

    Securities

    On July 12, SEC Chairman Jay Clayton spoke at the nonpartisan Economic Club of New York about the principles behind his regulatory agenda. In addition to outlining the SEC’s three-part mission on investor protection, market order and efficiency, and capital formation, Clayton stressed the need for cooperation with domestic and foreign regulators to ensure effective, sound regulatory approaches. Noting the SEC’s coordination with the Commodity Futures Trading Commission (CFTC) on issues concerning cybersecurity and swap markets specifically, Clayton highlighted plans to continue to work with the CFTC, under the guidance of Title VII of the Dodd-Frank Act, to “reduce unnecessary complexity as well as costs to both regulators and market participants.” The SEC also plans to continue to encourage strong enforcement and examination programs.

    Securities SEC Regulator Enforcement Enforcement CFTC

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  • SFO Announces Charges Against British Multinational Bank and Four Former Executives in Qatar

    Financial Crimes

    On Tuesday, June 20, the UK Serious Fraud Office (“SFO”) announced charges against a British multinational bank and four former executives for conspiracy to commit fraud and provision of unlawful financial assistance in violation of the Companies Act 1985. These charges relate to the bank’s capital raising arrangements with a Qatar's state-owned holding company and a contract oil and gas land drilling provider in June and October 2008, as well as to a $3 billion loan facility made available to the State of Qatar acting through the Ministry of Economy and Finance in November 2008. According to the SFO press release, the investigation was first announced in 2012, and the individuals charged include a former Chief Executive Officer of the British multinational bank, a former Executive Chairman of the bank’s Capital Investment Banking and Investment Management in Middle East and North Africa, a former Chief Executive of the bank’s Wealth and Investment Management, and a former European Head of the bank’s Financial Institutions Group.

    While no US-based charges have been announced, the SFO’s announcement comes on the heels of the bank’s March 2017 disclosure to the SEC in which the company stated that “the DOJ and SEC are undertaking an investigation into whether the Group’s relationships with third parties who assist the bank to win or retain business are compliant with the U.S. Foreign Corrupt Practices Act.”

    Financial Crimes SEC UK Serious Fraud Office Fraud

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  • FINRA Announces Fintech Outreach Initiative, Hosts Blockchain Symposium in July

    FinTech

    On June 13, the Financial Industry Regulatory Authority (FINRA) announced a new outreach initiative to improve its understanding of fintech innovations and how they impact the securities industry. The Innovation Outreach Initiative will consist of the following components:

    • the launch of FINRA’s new webpage dedicated to fintech topics such as RegTech (covering compliance monitoring, fraud prevention, data management, and the identification and interpretation of regulations affecting the securities industry), artificial intelligence, and social media sentiment investing; and
    • the creation of a cross-departmental team led by the Office of Emerging Regulatory Issues developed to, among other things, foster discussion on fintech developments, develop publications on fintech topics, and increase collaboration with domestic and international regulators.

    Additionally, FINRA announced it will host a Blockchain Symposium in New York City on July 13 to create an opportunity for regulators and industry leaders to join together and discuss opportunities and challenges related to the use of Distributed Ledger Technology, also known as blockchain.

    Fintech Securities FINRA SEC Blockchain

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  • Charges Filed by SEC Allege Bank Secrecy Act Violations

    Financial Crimes

    On June 5, the SEC filed charges against a U.S. brokerage firm (firm) for failure to comply with suspicious activity reports (SARs) filing requirements, in violation of the Bank Secrecy Act (BSA), the Exchange Act Section 17(a), and Rule 17a-8. The complaint, filed in the U.S. District Court for the Southern District of New York, alleges that although the firm had a BSA Compliance Program, the program did not accurately reflect what the firm did in practice. More specifically, the SEC alleges thousands of violations including failure to file SARs, failure to file SARs within the required 30 days after the date the suspicious activity was detected, and filing incomplete SARs that did not include the requisite narratives describing what is “unusual, irregular, or suspicious” about the transaction. According to the SEC press release, “by failing to file SARs, [the firm] deprived regulators and law enforcement of critically important information often related to trades in microcap securities used to investigate potentially serious misconduct.”

    The SEC requested relief in the form of permanent injunctions and monetary penalties and interest.

    Financial Crimes Anti-Money Laundering SEC SARs Litigation Bank Secrecy Act Securities

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  • Attorney General Sessions Issues Memorandum Ending Payments to Third-Party Organizations as Part of Future Settlement Agreements

    Courts

    On June 7, Attorney General Jeff Sessions issued a memorandum entitled “Prohibition on Settlement Payments to Third Parties” instructing the Department of Justice (DOJ) to cease entering into settlement agreements that include payments to third-party organizations. Attorney General Sessions stated in a press release released by the DOJ, “[w]hen the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people—not to bankroll third-party special interest groups or the political friends of whoever is in power.”

    Summary of Memorandum. The memorandum, which became effective immediately and applies to future settlements, notes that previous settlement agreements involving the DOJ required “payments to various non-governmental, third-party organizations . . . [that] were neither victims nor parties to the lawsuits.” The memorandum now states that DOJ “attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges . . . that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” The following are “limited” exceptions:

    • “the policy does not apply to an otherwise lawful payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed, including, for example, harm to the environment or from official corruption”;
    • “the policy does not apply to payments for legal or other professional services rendered in connection with the case”; and
    • “the policy does not apply to payments expressly authorized by statute, including restitution and forfeiture.”

    The memorandum states that it applies to “all civil and criminal cases litigated under the direction of the Attorney General and includes civil settlement agreements, cy pres agreements or provisions, plea agreements, non-prosecution agreements, and deferred prosecution agreements.”

    Courts DOJ Securities SEC Disgorgement Appellate Litigation Settlement

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  • Supreme Court Rules Five-Year Statute of Limitations Applies to SEC Civil Penalties

    Courts

    In a unanimous ruling handed down on June 5, the United States Supreme Court held that the SEC is bound by a five-year statute of limitations on civil penalties or the return of illegal profits, citing 28 U.S.C. §2462 of the U.S. Code, which “establishes a [five-year] limitations period for ‘an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.’” Justice Sotomayor delivered the opinion.

    The decision resolves a New Mexico case dating back to 2009, in which a jury found the defendant liable for misappropriating more than $34.9 million from 1995 through July 2007 from four SEC-registered investment companies under his control. See S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The district court judge ordered the defendant to pay a $2.4 million civil penalty, nearly $35 million in disgorgement, and more than $18 million in prejudgment interest after finding that §2462 did not apply because “disgorgement” is not a penalty within the meaning of the statute. The defendant appealed the ruling on the grounds that the disgorgement should be set aside because the claims accrued more than five years before the SEC brought its action against him and are consequently barred under the five-year statute of limitations. However, the 10th Circuit affirmed the ruling of the lower court, agreeing that disgorgement was not a penalty.

    The Supreme Court reversed. Justice Sotomayor explained why the Court disagreed with the 10th Circuit panel’s conclusion that disgorgement was not a penalty under the statute. The Court held that disgorgement “bears all the hallmarks of a penalty” and “is imposed as a consequence of violating a public law and . . . is intended to deter, not to compensate.” Consequently, disgorgement represent a penalty, thus falling within the five-year statute of limitations of §2462.

    Courts U.S. Supreme Court Securities SEC Disgorgement Appellate Litigation

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  • Supreme Court Limits SEC Disgorgement

    Financial Crimes

    On June 5, the Supreme Court ruled in Kokesh v. SEC that the SEC’s authority to disgorge profits from defendants is subject to the five-year statute of limitations applicable to penalties and fines. The Court rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty, resolving a circuit split on the issue. Writing for the unanimous Court, Justice Sotomayor said that disgorgement “bears all the hallmarks of a penalty,” reasoning that it “is intended to deter, not to compensate.” The defendant in Kokesh was an investment adviser who had been ordered to disgorge approximately $35 million for allegedly misappropriating investor funds.

    The SEC routinely seeks disgorgement in FCPA enforcement actions. The Kokesh decision may lead the SEC to seek tolling agreements sooner and in more circumstances, particularly where the alleged conduct occurred over a long period of time. The decision may also impact defendants’ ability to claim insurance coverage for disgorgement because insurers might deny coverage for payment of penalties.

    Financial Crimes SEC SCOTUS

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  • NASAA to Convene Roundtable on Cybersecurity Developments

    Privacy, Cyber Risk & Data Security

    On May 31, the North American Securities Administrators Association (NASAA) announced it will hold a cybersecurity roundtable for industry experts to discuss latest developments as well as strategies for investment advisers and broker-dealers to protect personal client information. In addition to convening representatives from state securities agencies and the financial services industry, roundtable discussions will also feature representatives from the FBI, Treasury, and the SEC. The event will take place June 23 from 9 a.m. to 3:30 p.m. in Washington, DC. Registration information can be accessed here.

    Privacy/Cyber Risk & Data Security Securities FBI Treasury Department SEC

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  • SEC Requests Public Comments on Investment Adviser Conduct Rules

    Agency Rule-Making & Guidance

    On June 2, 2017, Jay Clayton, Chairman of the SEC, requested public input on standards of conduct for investment advisers and broker-dealers. The SEC last solicited input on the regulation of investment advisers in 2013 and Clayton believes that advances in technology and changes in business models have since transformed the market for retail investment advice. Additionally, confusion surrounding investment adviser conflicts of interest, among other things, have prompted the SEC to seek feedback on the standards. Topics touched on in the request include:

    • types of advisers providing investment advice and applicable standards of conduct for each;
    • conflicts of interest;
    • effects of market developments and advances in technology;
    • fee-based vs. commission-based investment advice;
    • department of Labor’s Fiduciary Rule;
    • pros and cons of multiple standards of conduct for advisers;
    • effects on particular segments of the market;
    • disclosure-based vs. standards-of-conduct-based regulatory action;
    • who should be considered “retail investors”;
    • how should “investment advice” be defined;
    • costs and benefits of different regulatory approaches;
    • comparison of U.S. regulation to non-U.S. regulation in this area;
    • material changes since last data solicitation in 2013.

    Clayton hopes his solicitation will garner “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

    Agency Rule-Making & Guidance SEC DOL Fiduciary Rule Broker-Dealer Securities

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