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  • Supreme Court holds SEC ALJs are subject to the Appointments Clause of the Constitution

    Courts

    On June 21, the U.S. Supreme Court held, in Lucia v. SEC, that SEC administrative law judges (ALJs) are “inferior officers” subject to the Appointments Clause (Clause) of the Constitution. The case began when the SEC instituted an administrative proceeding against the petitioner resulting in a decision by the ALJ imposing sanctions against the petitioner, including civil penalties of $300,000 and a lifetime bar from the investment industry. On appeal, the D.C. Circuit Court of Appeals upheld the ALJ’s sanctions and rejected the petitioner’s argument that ALJs are officers of the United States and therefore subject to provisions of the Clause, including the requirement that officers be appointed by the president, the head of a department, or a court of law. The D.C. Circuit decision conflicts with subsequent decisions by the U.S. Court of Appeals for the 10th and 5th Circuits (available here and here).

    In a 6-3 decision, the Supreme Court reversed the D.C. Circuit decision, holding that ALJs are “Officers of the United States” subject to the Clause under the framework the Court used in Freytag v. Commissioner (concluding that U.S. Tax Court “special trial judges” are officers subject to the Clause). In support of this holding, the majority noted that ALJs receive a career appointment, exercise “significant discretion,” and if the SEC decides against reviewing a decision, their decisions become final and are “deemed the action of the Commission.”

    Notably, the ALJ that presided over the petitioner’s case is the same ALJ that presided over the CFPB’s claims against PHH, which ultimately lead to the D.C. Circuit’s en banc decision in PHH v. CFPB and the CFPB’s subsequent dismissal of the action (covered by Buckley Sandler here and here).

    Courts U.S. Supreme Court ALJ SEC PHH v. CFPB

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  • Bitcoin and ether not considered securities by SEC

    Securities

    On June 14, the Director of the SEC Division of Corporation Finance, William Hinman, stated that the SEC does not consider the cryptocurrencies bitcoin and ether to be securities. In his remarks at the Yahoo Finance All Markets Summit, Hinman emphasized a number of factors that are considered when assessing whether a cryptocurrency or ICO should be considered a security. These factors include, primarily, whether a third party drives the expectation of a return—the central test used by the Supreme Court in SEC v. W.J. Howey Co.. According to Hinman, bitcoin’s and ether’s networks are decentralized without a central third party controlling the enterprise and, thus, applying the disclosure rules of federal securities laws to these cryptocurrencies would add little value to the market. Hinman did note that whether something is considered a security is not static and emphasized that if a cryptocurrency were to be placed into a fund and interests were sold, the fund would be considered a security.

    Securities Virtual Currency Blockchain SEC Cryptocurrency

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  • SEC settles RMBS supervision and improper markup allegations with brokerage firm

    Securities

    On June 12, the SEC issued an order against a brokerage firm to settle allegations that it violated antifraud provisions of federal securities laws when it failed to properly supervise traders who persuaded customers with false or misleading statements to overpay for residential mortgage-backed securities (RMBS). According to the SEC, the firm misled customers about how much the firm paid for the securities and illegally profited from the improper markups that were, in some cases, allegedly more than twice as much as what the customers should have paid. The order claims that the firm did not charge a traditional commission on the transactions, but rather derived profits “from the difference between the price at which [the firm] sold securities and the price at which it had purchased them.” Additionally, while the firm had policies and procedures to monitor and prevent excessive markups on RMBS transactions, they were “not reasonably designed and implemented.” While neither admitting nor denying the SEC’s charges, the firm agreed to be censured for failing reasonably to supervise its traders, to pay a fine of approximately $5.2 million, and to pay more than $10.5 million in disgorgement and interest to affected customers.

    Securities SEC RMBS Settlement Enforcement

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  • FDIC, OCC issue final rulemaking to shorten securities transaction settlement cycle

    Securities

    On June 1, the FDIC and OCC issued a final rule shortening to two business days (T+2) the standard settlement cycle for securities purchased or sold by OCC- and FDIC-supervised institutions, national banks, and federal savings associations. The agencies stated that the final rule will shorten the settlement cycle from three business days after the date of the contract to T+2—the number of business days in the standard settlement cycle as implemented by the SEC—“unless otherwise agreed to by the parties at the time of the transaction.” (See OCC press release and FDIC FIL-30-2018.) The final rule will align the settlement cycle requirements of the OCC, FDIC, and Federal Reserve Board, and will become effective 30 days following publication in the Federal Register.

    Securities FDIC OCC SEC

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  • FDIC FIL addendum: Federal banking agencies will not enforce Volcker rule for financial institutions exempt under S.2155

    Agency Rule-Making & Guidance

    On June 4, the FDIC issued FIL-31-2018, which contains an addendum describing legislative changes to Section 13 of the Bank Holding Company Act (Volcker rule) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/P.L. 115-174) that are applicable to FDIC-insured depository institutions with total assets under $10 billion. (See previous InfoBytes coverage on S.2155 here.) Effective immediately, any financial institution that “‘does not have and is not controlled by a company that has (i) more than $10,000,000,000 in total consolidated assets; and (ii) total trading assets and trading liabilities as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5 percent of total consolidated assets’” is exempt from the rule. As result, the federal banking agencies will no longer enforce the Volcker rule for qualifying financial institutions in a manner inconsistent with the statutory amendments to the Volcker rule, and announced plans “to address these statutory amendments outside of the current notice of proposed rulemaking.”

    The federal banking agencies responsible for developing the proposal (the Federal Reserve Board, CFTC, FDIC, OCC, and SEC) also formally announced on June 5 a joint notice and request for public comment on the proposed revisions. Comments will be accepted for 60 days following publication in the Federal Register.

    Visit here for InfoBytes coverage on the federal banking agencies’ proposed revisions to the Volcker rule announced May 30.

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

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  • Federal Reserve Board issues proposed joint revisions to Volcker rule

    Federal Issues

    On May 30, the Federal Reserve Board (Board) announced proposed revisions 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). The proposal, subject to public comment for 60 days after publication in the Federal Register, was developed in coordination with the OCC, FDIC, SEC, and CFTC, and would modify regulations finalized in December 2013 to reduce compliance costs for banks. Two information collections were issued along with the proposal: Information Schedules and Quantitative Measurements Daily Schedule.

    According to a Board memo, the proposed amendments would tailor Volcker rule requirements to better align with a bank’s level of trading activity and risks. The proposal would establish the following three categories based on trading activity: (i) “significant trading assets and liabilities,” which would consist of banks with gross trading assets and liabilities of at least $10 billion, and require a comprehensive compliance program tailored to reflect the Volcker rule’s requirements; (ii) “moderate trading assets and liabilities,” which would include banks with gross trading assets and liabilities of at least $1 billion but less than $10 billion, and impose reduced compliance obligations; and (iii) “limited trading assets and liabilities,” which would include banks with less than $1 billion in gross trading assets and liabilities, and subject them to the lowest level of regulatory compliance.

    In addition, the proposal would, among other changes:

    • provide more clarity by revising the definition of “trading account” to be an account used to buy or sell financial instruments recorded at fair value under commonly used accounting definitions;
    • clarify that banks whose trades do not exceed appropriately developed internal risk limits are engaged in permissible market-making-related activity;
    • streamline the criteria that applies when a bank relies on the hedging exemption from the proprietary trading prohibition, and remove a requirement that a trade “demonstrably reduces or otherwise significantly mitigates” a specific risk;
    • ease the documentation requirement banks face when demonstrating trades are hedges, and eliminate requirements that a bank with only moderate or limited trading activity must develop “a separate internal compliance program for risk-mitigation hedging”;
    • eliminate the 60-day rebuttable presumption for trades;
    • expand the scope of the “liquidity management exclusion” in the Volcker rule to allow banks to use foreign exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps as a part of liquidity management activities;
    • limit the impact of the Volcker rule on foreign banks’ activity outside of the U.S.; and
    • simplify the type of trading activity information that banks will be required to provide to the agencies.

    Federal Reserve Board Chair Jerome Powell noted that after nearly five years of experience applying the Volcker rule, the proposed rule is a way to “allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.”

    Federal Reserve Board Governor Lael Brainard also commented that “[r]ather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review.”

    Federal Reserve Board Vice Chair of Supervision Randal Quarles stated that while the regulatory relief bill signed into law on May 24 exempts banks with less than $10 billion in total assets from the Volcker rule (see previous InfoBytes coverage here), the “proposed rule, however, would recognize that small asset size is not the only indicator of reduced proprietary trading risk.” Furthermore, the proposed rule is a “best first effort at simplifying and tailoring the Volcker rule” and does not represent the “completion of [the Board’s] work.”

    Federal Issues Federal Reserve Volcker Rule Bank Holding Company Act OCC FDIC SEC CFTC

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  • Baltimore-based investment management firm preparing for FCPA settlement

    Financial Crimes

    On May 30, a Baltimore-based investment management firm, announced in a 10-K SEC filing that it will soon complete negotiations with the DOJ and SEC to resolve FCPA allegations stemming from how a London-based fund purchased by the firm in 2005, managed assets of Libyan governmental entities in 2005-2007. The firm reserved $67 million for the settlement, which reflects, in part, the net revenues of approximately $31 million earned by the fund for managing the assets.

    Financial Crimes DOJ SEC FCPA

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  • SEC obtains court order halting allegedly fraudulent initial coin offering

    Securities

    On May 29, the SEC announced it obtained a court order halting an alleged fraud involving an initial coin offering (ICO) that raised as much as $21 million from investors in the U.S. and overseas. In addition, the court approved an emergency asset freeze and appointed a receiver for the firm allegedly responsible for the scheme, the SEC said in its press release. According to the SEC’s complaint filed May 22 in California federal court, the firm’s president and one of two firms he controls allegedly violated the antifraud and registration provisions of the federal securities laws, by, among other things, (i) making misleading statements to investors about the nature of business relationships with the Federal Reserve and nearly 30 well-known companies, and (ii) including “fabricated, misleading, and/or unauthorized” testimonials from corporate customers on the firm’s website designed to “establish a presence and seeming expertise.” A second firm controlled by the defendant has also been charged with violating antifraud provisions. Among other things, the SEC seeks permanent injunctions, the return of profits associated with the fraudulent activity, plus interest and penalties, and a ban prohibiting the president from participating in ICOs in the future.

    Securities Initial Coin Offerings SEC Fraud Fintech

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  • FINRA, SEC reach settlements with Chinese broker-dealers over anti-money laundering compliance

    Financial Crimes

    On May 16, the Financial Industry Regulatory Authority (FINRA) and the SEC reached settlements (here and here) with a Chinese-based broker-dealer following an inquiry and investigation into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer allegedly failed to implement reasonable processes to ensure that its AML programs were able to detect and report potentially suspicious transactions, particularly those concerning penny stocks. In addition, FINRA claimed the broker-dealer’s AML program compliance testing was “inadequate and failed to uncover any of the deficiencies in the firm’s trade monitoring.” In a separate investigation conducted by the SEC in conjunction with FINRA’s inquiry, the broker-dealer reached a settlement over allegations that it failed to, among other things, file suspicious activity reports as required under the Bank Secrecy Act or comply in a timely fashion with SEC record requests. Under the terms of the settlements, the broker-dealer agreed to pay $5.3 million to FINRA for systemic anti-money laundering compliance failures and $860,000 to the SEC. In agreeing to the settlements, the broker-dealer neither admitted nor denied the charges, but consented to the entry of the findings.

    The SEC’s investigation also resulted in settlements with a second broker-dealer and its AML officer for allegedly violating the Exchange Act and SEC financial recordkeeping and reporting requirements for not reporting the suspicious sales of billions of penny stock shares. The broker dealer agreed to pay a civil money penalty of $1,000,000 to the SEC, was censured, and was ordered to cease and desist from causing or committing any violations or future violations of the SEC’s suspicious activity reporting requirements. The AML officer was assessed a $15,000 civil money penalty and barred from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agency, or national recognized statistical rating organization for a period of three years, among other things.

    Financial Crimes FINRA SEC Enforcement Anti-Money Laundering Bank Secrecy Act Securities

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  • Court preliminarily approves $80 million settlement for shareholders after global internet company data breach

    Privacy, Cyber Risk & Data Security

    On May 9, the U.S. District Court for the Northern District of California granted a preliminary approval of a settlement between a global internet media company and its shareholders over alleged securities law violations related to cybersecurity breaches in 2013 and 2014. The $80 million settlement resolves a consolidated shareholder action accusing the company of making misleading statements to shareholders about the company’s data security. According to the order, the settlement applies to all shareholders who acquired the company’s securities between April 30, 2013 and December 14, 2016. As previously covered by InfoBytes, the company was recently ordered by the SEC to pay $35 million to resolve allegations related to the same cybersecurity incidents.

    Privacy/Cyber Risk & Data Security Securities Data Breach Settlement SEC

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