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  • SEC Reaches $3.5 Million Settlement With Broker-Dealer Over Failure to File Suspicious Activity Reports

    Securities

    On November 13, the SEC announced it has reached a settlement in an administrative proceeding against a broker-dealer firm for allegedly willful violations of Section 17(a) of the Securities and Exchange Act, including the firm’s failure to file, or timely file, at least 50 Suspicious Activity Reports (SARs) with the Financial Crime Enforcement Network (FinCEN) from approximately March 2012 through June 2013. As the SEC Order notes, Bank Secrecy Act regulations require a broker-dealer to file a SAR if it knows, suspects or has reason to suspect that a transaction of a certain minimum or aggregated amount involved funds derived from illegal activity or if the transaction was conducted to disguise funds derived from illegal activities. Other factors requiring a broker-dealer to file a SAR include the absence of any business or apparent lawful purpose for the transaction or if the transaction is to facilitate criminal activity.

    When deciding whether to accept the firm’s settlement offer, the SEC considered voluntary remedial efforts undertaken by the firm, including the fact that the firm retained a third-party anti-money laundering (AML) compliance company to conduct a review of some of the firm’s SAR investigations. Under the terms of the settlement, the firm voluntarily agreed to, among other things, conduct a review of its AML policies and procedures for the identification, evaluation and reporting of suspicious activity related to firm accounts; and provide additional training to staff responsible for conducting investigations and filing SARs. Additionally, the firm was assessed a civil money penalty of $3.5 million.

    Securities Bank Secrecy Act Anti-Money Laundering SARs Enforcement FinCEN

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  • SEC Chairman Discusses Corporate Governance, States Enhanced Transparency Can Help Prevent Fraud, and Reveals First-Ever National Database of Barred Brokers and Advisors

    Securities

    On November 8, the Chairman of the SEC, Jay Clayton, spoke before the Practising Law Institute’s annual institute on securities regulation to discuss the role of corporate governance and how enhanced transparency can help prevent fraud. Clayton stated that the SEC would be streamlining and shortening its near-term agenda in an effort to increase transparency and accountability, and that the SEC also would apply this approach to its longer-term strategic plans as well.

    Clayton also commented on approaches to mitigate “misconduct” before an enforcement action would be required. Specifically, Clayton noted, “[l]ooking back at enforcement actions, a common theme emerges – where opacity exists, bad behavior tends to follow.” Clayton highlighted the following areas in which opacity may exist: (i) disclosures involving “hidden or inappropriate fees”; (ii) poor recordkeeping and lack of reliable information related to penny stocks; (iii) transaction processing related to unregistered securities; (iv) online platforms that manage initial coin offerings (ICOs); and (v) investor education.

    Concerning ICOs, Clayton commented that because “[t]here is a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in . . . ICOs . . ., [t]rading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.” The SEC proposed enhanced clarity when listing tokens on these types of platforms, assigning value to tokens, and examining measures designed to protect investors and market integrity.

    Clayton further revealed that the SEC was creating a website that would publish, among other things, a searchable database of those individuals who have been barred or suspended as a result of federal securities law violations.  Clayton noted that this database would be “intended to make the prior actions of repeat offenders and fraudsters more visible to investors” and could be “particularly valuable when bad actors have shifted from the registered space for investment advisers and broker-dealers to the unregistered space.”

    Securities Initial Coin Offerings SEC Fraud

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  • CFTC Issues Primer on Virtual Currencies, Claims Certain Virtual Tokens Fall Under Its Oversight

    Securities

    On October 17, the U.S. Commodity Futures Trading Commission (CFTC) announced the release of “A CFTC Primer of Virtual Currencies” (Primer) issued by its LabCFTC division. As previously discussed in Infobytes, the LabCFTC initiative rolled out in May of this year to engage innovators in the financial technology industry to promote responsible fintech innovation within regulated CFTC markets. In this Primer—a first in a series—the CFTC discusses potential use-cases for virtual currencies and outlines the agency’s role and oversight of virtual currencies. The Primer also highlights the risks associated with virtual currencies, such as (i) the susceptibility of “digital wallets” to cybersecurity hacks; (ii) inadequate safeguards and other customer protection related systems on virtual currency exchanges; and (iii) the susceptibility of virtual currencies to Ponzi schemes and other types of frauds.

    The CFTC noted that there’s no inconsistency between the SEC’s analysis that Initial Coin Offerings or Token Sales may be subject to federal securities law (see previous InfoBytes coverage here) and CFTC’s determination that virtual currencies are commodities and virtual tokens “may be commodities or derivatives contracts, depending on the particular facts and circumstances.” Last month, as discussed in InfoBytes, the CFTC also filed its first-ever antifraud enforcement action for activities involving Bitcoin investment solicitations.

    Securities Fintech Agency Rule-Making & Guidance CFTC Digital Commerce Initial Coin Offerings Virtual Currency Bitcoin SEC

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  • Treasury Report Calls for Extensive Regulatory Relief to Capital Markets

    Federal Issues

    On October 6, the U.S. Treasury Department published a report that focuses on capital market oversight and outlines challenges and recommendations to reduce regulatory burdens. The report, “A Financial System That Creates Economic Opportunities: Capital Markets,” is the second in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772, which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert here.) The report notes that while certain capital market regulatory framework elements function well, there remain significant challenges. Specifically, the report recommends—among other things—reducing fragmentation, overlap, and duplication in the U.S. regulatory structure. This includes focusing on effecting changes to promote efficiency and more clearly defining regulatory mandates that would allow agencies to issue joint rulemaking and foster coordination. 

    Treasury’s recommendations focus primarily on market regulations but also build upon themes identified in the first report published in June 2017, which primarily focused on solutions for providing relief to banks and credit unions. The second report identifies recommendations, actions, and associated “Core Principles” within the following categories:

    • “promoting access to capital for all types of companies, including small and growing businesses, through reduction of regulatory burden and improved market access to investment opportunities”;
    • “fostering robust secondary markets in equity and debt”;
    • “appropriately tailoring regulations on securitized products to encourage lending and risk transfer”;
    • “recalibrating derivatives regulations to promote market efficiency and effective risk mitigation”;
    • “ensuring proper risk management for [central counterparties] and other financial market utilities because of the critical role they play in the financial system”;
    • “rationalizing and modernizing the U.S. capital markets regulatory structure and process”; and
    • “advancing U.S. interests by promoting a level playing field internationally.”

    A fact sheet accompanying the report further highlights Treasury’s recommendations to streamline regulations.

    Federal Issues Department of Treasury Securities Capital Requirements Risk Management

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  • SEC Approves FINRA’s Streamlined Securities Competency Exams for Industry Professionals and Consolidated Registration Rules

    Securities

    On October 5, the Financial Industry Regulatory Authority (FINRA) announced SEC approval of its proposal to consolidate certain registration rules and streamline competency exams for professionals entering or re-entering the securities industry. Under Regulatory Notice 17-30, the NASD and NYSE incorporated registration rules are now consolidated as “FINRA rules” to provide member firms “consistency and uniformity.” The rules will allow member firms to permissively register all associated persons of a firm and establish waiver programs for registered employees who “move to a financial services industry affiliate of a member firm.” Further, as previously discussed in an InfoBytes post concerning the proposed rule, FINRA’s new streamlined examination structure is designed to eliminate duplicative testing and remove outdated categories. The changes include a general knowledge examination that all new representative-level applicants will be required to pass, in addition to a revised qualification examination appropriate to their job functions. Changes to FINRA’s continuing education requirements have also been made. The rule takes effect October 1, 2018.

    Securities FINRA SEC

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  • Second Circuit Upholds Large Monetary Judgment Against International Bank

    Courts

    On September 28, the U.S. Court of Appeals for the Second Circuit affirmed a New York District Court’s 2015 ruling, which requires a major international bank to pay $806 million for selling allegedly faulty mortgage-backed bonds to Fannie Mae and Freddie Mac. In the original suit brought by the Federal Housing Finance Agency (FHFA), FHFA alleged that the bank overstated the reliability of the loans for sale. In upholding the lower court’s decision, the Second Circuit concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact.” Specifically, the prospectus falsely stated that the loans were compiled with the underwriting standards described therein, including standards related to assessing the creditworthiness of the borrowers and appraising the value of properties.

    As previously covered in InfoBytes, the same international bank recently settled with FHFA regarding residential mortgage-back securities trusts purchased in the same timeframe.

    Courts Litigation Second Circuit Appellate Securities FHFA Fannie Mae Freddie Mac Mortgages

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  • Federal Agencies Offer Regulatory Relief for Hurricane Victims

    Federal Issues

    Federal agencies continue to announce regulatory relief for financial institutions aiding consumers affected by recent hurricane disasters. InfoBytes coverage on previous disaster relief measures can be accessed here, here, and here.

    Freddie Mac. On September 25, Freddie Mac issued Bulletin 2017-21 (Bulletin) to extend certain temporary selling and servicing requirements meant to provide flexibility and relief for mortgages and borrowers in areas impacted by all hurricanes occurring on or after August 25 through the 2017 hurricane season. In particular, Freddie Mac will reimburse sellers for property inspections completed prior to the sale or securitization of mortgages secured by properties in disaster areas caused by a 2017 hurricane. Freddie Mac is also requiring servicers to suspend foreclosure sales and eviction activities on property located in eligible disaster areas affected by Hurricane Maria. However, the Bulletin provides that a servicer can proceed with a foreclosure sale if it can confirm that (i) inspection was completed on a mortgaged property “identified as vacant or abandoned prior to Hurricane Maria,” and (ii) the property sustained no “insurable damage.” The Bulletin also reminds servicers to report all mortgages affected by an eligible disaster that are 31 or more days delinquent to Freddie Mac.

    Veterans Affairs (VA). On September 27, the VA issued Circular 26-17-28 to outline measures that it encourages mortgagees to utilize to provide relief to veterans affected by Hurricane Maria. Specific recommendations include: (i) extending forbearance to distressed borrowers; (ii) establishing a 90-day moratorium on initiating foreclosures on affected loans; (iii) waiving late charges; (iv) suspending credit bureau reporting with the understanding that servicers will not be penalized by the VA; and (v) extending “special forbearance” to National Guard members who report for active duty to assist recovery efforts.

    FDIC. On September 27, the FDIC released a financial institution letter to provide additional guidance for depository institutions assisting affected consumers. As previously covered in Infobytes, the FDIC released guidance for Hurricane Harvey disaster relief, and issued a joint press release in conjunction with the Federal Reserve Board, Conference of State Bank Supervisors, and the OCC as a response to those affected by Hurricane Irma. The newest release, FIL-46-2017, announced regulatory relief for financial institutions affected by Hurricane Maria, and steps to facilitate recovery in affected areas, which include: (i) “extending repayment terms, restructuring existing loans, or easing terms for new loans,” and (i) “encourage[ing] depository institutions to use non-documentary verification methods permitted by the Customer Identification Program requirement of the Bank Secrecy Act for affected customers who cannot provide standard identification documents.” Further, banks that support disaster recovery efforts, the FDIC noted, may receive favorable Community Reinvestment Act consideration.

    SEC. On September 28, the SEC issued an order providing regulatory relief to companies and individuals with federal securities law obligations who have been affected by recent natural disasters. The order provides conditional exemptions to certain securities laws requirements for specified periods of time. The Commission additionally adopted “interim final temporary rules” applicable to Regulation Crowdfunding and Regulation A filing deadline extensions.

    Financial Crimes Enforcement Network (FinCEN). On October 3, FinCEN issued a notice to financial institutions that file Bank Secrecy Act reports to encourage communication with FinCEN and their functional regulator regarding any expected filing delays caused by recent hurricanes.

    Federal Issues Consumer Finance Compliance Disaster Relief Flood Insurance Mortgages Foreclosure Freddie Mac Department of Veterans Affairs FDIC SEC FinCEN Bank Secrecy Act CRA Securities

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  • CFTC Orders Large Financial Institution to Pay for Supervision Failures

    Securities

    On September 28, the Commodity Futures Trading Commission (CFTC) announced a concurrent filing and settling of charges against a large financial institution/clearing firm (Firm) for failing to adequately supervise fee processing. The Order alleges that between 2009 and 2016, the Firm did not implement and maintain adequate procedures and systems that could account for and help prevent the risk of overcharging customers for exchange and clearance fees. In 2015, according to the Order, the Firm modified its processes to prevent future overcharges to customers.

    The settlement requires the Firm to pay a $500,000 civil penalty.

    Securities Enforcement CFTC Financial Institutions Compliance Settlement

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  • CFTC Director of Enforcement Offers Incentives to Regulated Companies for Self-Reporting and Cooperation

    Securities

    On September 25, the U.S. Commodity Futures Trading Commission Director of the Division of Enforcement James McDonald spoke before the New York University Institute for Corporate Governance & Finance to address the Division’s priorities and outline its self-reporting and cooperation program. Director McDonald described the Division’s enforcement actions as part of a “broader mission to facilitate healthy, robust, and resilient markets,” with the goal of deterring misconduct. “Optimal deterrence,” he stressed, requires receiving buy-in from regulated companies and financial institutions, which is the premise of the Division’s cooperation and self-reporting program. The Division’s program requires companies to comply with three specific criteria: (i) voluntarily report wrongdoing to the Division in a timely and fully disclosed manner prior to the announcement of a government investigation; (ii) proactively cooperate with the Division throughout the investigation; and (iii) engage in timely and appropriate remedial measures to prevent future misconduct, and implement fixes to internal compliance and control programs. Should a company follow these steps, Director McDonald stated, the Division “will recommend a substantial reduction in the penalty,” and in “extraordinary circumstances . . . may recommend declining to prosecute a case.”

    Securities Agency Rule-Making & Guidance CFTC Enforcement Financial Institutions Compliance

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  • District Court Grants $30 Million Settlement in Payday Lending Securities Class Action Suit

    Courts

    On September 20, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania issued a memorandum signing off on a settlement between a payday lender and a class of institutional investors, resolving allegations that the lender violated securities laws when it made “materially false and misleading statements” about its financial health and the nature of its U.K. lending practices. According to the plaintiffs, the lender’s misstatements artificially inflated the common stock during the class period (January 28, 2011 through February 3, 2014), so that when the lending practices were revealed, the stock prices declined. Further, the lender allegedly (i) “routinely lent to borrowers without conducting any affordability checks”; (ii) “permitted borrowers to roll over loans that [they] could not afford to repay, enriching [the lender] with fees”; and (iii) presented “loan loss reserves [that] were understated as a result of its poor lending practices, its failure to adequately monitor the quality of its loans, and its failure to properly account for loans that were rolled over.” In 2016, the court granted class certification and the parties reached a settlement after extensive discussions. The final settlement approved in the memorandum creates a settlement fund of $30 million, of which $7.5 million will go towards attorneys’ fees and costs. The court signed a judgment approving the class action settlement the same day.

    Courts Payday Lending Securities Settlement Litigation International

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