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  • DOL Announces No Additional Delay for Fiduciary Rule

    Securities

    On May 22, the U.S. Department of Labor (DOL) issued a news brief providing  Fiduciary Rule guidance in anticipation of the upcoming June 9 partial effectiveness date. The Fiduciary Rule—a 2016 final rule expanding the definition of who qualifies as a “fiduciary” under ERISA and the Internal Revenue Code—will go into effect as planned with full implementation on January 1, 2018. DOL Secretary Alexander Acosta wrote in a Wall Street Journal op-ed that the Administrative Procedures Act, which governs federal rulemaking, would not allow a further delay. “We...have found no principled legal basis to change the June 9 date while we seek public input,” Acosta wrote. “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.” The DOL’s release also includes Frequently Asked Questions, which provides clarification on the release dates of the provisions and related prohibited transaction exemptions. Although Acosta declined to authorize a further delay, he said that the DOL will continue its review of the final rule pursuant to the President’s February 3 Presidential Memorandum on Fiduciary Duty Rule. (See previous InfoBytes summary here.)

    Notably, the DOL asserted that its general approach to implementation will be marked by an emphasis on compliance assistance (rather than citing violations and imposing penalties). Accordingly, during the phased implementation period, the DOL will not pursue claims against “fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions,” or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.

    Securities Department of Labor DOL Fiduciary Rule

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  • CFTC Announces Initiative for Fintechs

    Securities

    On May 17, the U.S. Commodity Futures Trading Commission (CFTC) announced an initiative called “LabCFTC” designed to engage innovators in the financial technology industry and “promot[e] responsible [fintech] innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees.” Located in New York, LabCFTC will address the regulatory challenges of increasingly automated trading and foster a regulatory environment more receptive to emerging fintech companies. The initiative will consist of two major components:

    • GuidePoint will offer opportunities for fintech companies to engage with the CFTC on how to implement innovative technology into existing regulatory framework and navigate the regulatory process.
    • CFTC 2.0 will initiate the adoption of emerging technologies in order to improve the CFTC's effectiveness and efficiency.

    In prepared remarks issued before the New York FinTech Innovation Lab, CFTC Acting Chairman J. Christopher Giancarlo stated that LabCFTC is “[t]wenty-first century regulation for 21st century digital markets and will help the CFTC cultivate a regulatory culture of forward thinking . . . , become more accessible to emerging technology innovators . . . , discover ways to harness and benefit from [fintech] innovation . . ., and become more responsive to our rapidly changing markets.”

    Securities Fintech Agency Rulemaking & Guidance CFTC

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  • SEC Reaches Settlement to Resolve Overcharge Claims

    Securities

    On May 10, the SEC announced a settlement of more than $97 million with a dually-registered investment adviser and broker-dealer (the Firm) over three sets of alleged violations of the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934. The first violation claims that two of the Firm’s advisory programs charged fees to more than 2,000 clients for due diligence and monitoring services of certain third-party investment managers and investment strategies that were, in fact, not being performed. Second, the Firm recommended “more expensive mutual fund share classes when less expensive share classes were available,” thereby collecting excess sales charges or fees of approximately $110,000 from 63 brokerage clients. Finally, 22,138 accounts paid excess fees due to Firm miscalculations and billing errors. In total, from September 2010 through December 2015, the Firm overcharged certain clients nearly $50 million in fees. Neither admitting nor denying the SEC’s findings, the Firm agreed to create a Fair Fund to refund advisory fees to harmed clients. Specifically, the Fair Fund will consist of almost $50 million in disgorgement, close to $14 million in interest, and a $30 million civil money penalty. Under the terms of the settlement, the Firm is also required to pay an additional $3.5 million in remediation to harmed advisory clients who had underperforming (and unmonitored) investments despite paying for third-party managers and investment strategies.

    Securities SEC Enforcement Investment Adviser

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  • SEC Issues Investor Bulletin on “SAFE” Crowdfunding Security Offering

    Securities

    On May 9, the SEC’s Office of Investor Education and Advocacy released an Investor Bulletin addressing crowdfunding risks associated with Simple Agreements for Future Equity (SAFE) securities. Regulation Crowdfunding, adopted by the SEC in November 2015 and effective as of May 16, 2016, “permits individuals to invest in securities-based crowdfunding transactions subject to certain thresholds, limits the amount of money an issuer can raise under the crowdfunding exemption, requires issuers to disclose certain information about their offers, and creates a regulatory framework for the intermediaries that facilitate the crowdfunding transactions,” among other things. According to an updated investor bulletin from the SEC, the rule allows individual investors to participate in securities-based crowdfunding offerings through funding portals that are registered with the SEC and members of FINRA. To assist issuers, the SEC published Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, which outlines investor limits, restrictions, and exemptions.

    SAFE securities. Unlike common stock, SAFE purchasers do not receive a current equity stake in a company. Rather, a SAFE offering is an agreement to provide a future equity stake based on the investment amount only if a particular triggering event occurs. Because of this, the SEC cautioned that investors should pay particular attention to the terms of a given SAFE offering, since there is no guarantee that the necessary triggering event will occur. Furthermore, the SEC warned investors to review other SAFE provisions such as conversion terms, repurchase rights, dissolution rights, and voting rights. The SEC noted that SAFEs were developed to give “sophisticated venture capital investors” the opportunity to invest in “hot” startups in need of capital while avoiding some of the more labored negotiations associated with equity offerings. Moreover, since SAFEs are not standardized, the SEC stressed the importance of investors having a detailed understanding of the terms of these types of offerings.

    Securities SEC Crowdfunding

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  • NCUA Collects $445 Million from International Bank Due to Faulty Mortgage-Backed Securities, Recovers Nearly $4.7 Billion to Date

    Securities

    On May 1, the National Credit Union Administration (NCUA) announced it has collected $445 million from a Switzerland-based bank over claims stemming from losses borne by two liquidated credit unions related to faulty mortgage-backed securities they bought from the bank. As part of the settlement, NCUA will dismiss its 2012 lawsuit filed in the U.S. District Court in Kansas on behalf of the credit unions and brought against the bank for violations of federal and state laws through its alleged misrepresentations in the sale of mortgage-backed securities. Notably, the bank is not admitting fault as part of the deal. The $445 million in recoveries will be used to pay claims against the liquidated corporate credit unions, “including those of the Temporary Corporate Credit Union Stabilization Fund.” “This latest recovery . . . provide[s] a measure of accountability for the firms that sold faulty securities to the corporate credit unions,” acting NCUA Chairman Mark McWatters said. “It remains incumbent on NCUA to provide transparency in terms of the settlements, the legal fees and other costs that go with them, and how these affect the Stabilization Fund.” To date, NCUA’s recoveries from financial institutions alleged to have sold faulty securities to five corporate credit unions, leading to their collapse, have reached nearly $4.8 billion.

    Securities Mortgages credit union NCUA

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  • FINRA Releases New Guidance on Rules Concerning Digital Communications

    Privacy, Cyber Risk & Data Security

    On April 25, FINRA issued new guidance on the application of its rules governing communications with the public concerning social media networking sites and online business communications. In 2010 and 2011, FINRA released Regulatory Notices 10-06 and 11-39 to provide initial guidance on these specific rules, and in 2013, “adopted amendments to Rule 2010 that codif[ied] guidance provided in the Notices with respect to the supervision of interactive social media posts by member firms.” In December 2014, FINRA issued its Respective Rule Review Report, which was designed to “assess whether the communications rules are meeting their intended investor protection objectives . . . and to take steps to maintain or improve the effectiveness of the rules.” FINRA Regulatory Notice 17-18 is the response to the report’s request for additional guidance and provides examples of how FINRA applies its rules to the following topics: text messaging, personal communications, hyperlinks and content sharing, native advertising, online testimonials and endorsements, correction of third-party content, and BrokerCheck. FINRA further notes that Regulatory Notice 17-18 is intended to deliver further guidance and does not alter principles previously provided in prior notices.

    Privacy/Cyber Risk & Data Security FINRA Agency Rulemaking & Guidance Securities

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  • District Court Says Bank/RMBS Trustee Must Face Suit Filed by Institutional Investors Claiming Breach of Trust Agreement

    Securities

    On March 30, a federal court in the Southern District of New York denied in part a bank’s motion to dismiss claims brought in five consolidated actions by institutional investors alleging breach of contract and conflict of interest in connection with billions of dollars of alleged losses stemming from the bank’s role as a trustee of 53 residential mortgage-backed securities (RMBS). The RMBS investors alleged, among other things, that the trustee took “virtually no action” to require lenders to repurchase or cure defaulted or improperly underwritten loans that backed the securities, despite having knowledge of “systemic violations.” The investors further alleged that the trustee’s failure to take corrective action was due to concerns that it might expose its own “misconduct” in other RMBS trusts and/or jeopardize its business dealings with lenders and servicers.

    Ultimately, the Court granted in part and denied in part the bank-trustee’s motion to dismiss, finding that the plaintiffs may pursue breach of contract and conflict of interest claims related to the trusts, as well as certain claims alleging breaches of fiduciary duty and due care. In reaching its conclusion, the Court explained that, having identified internal bank documents that raise legitimate questions about whether bank officials knew about lenders’ “alleged breaches of the trusts’ governing agreements” and failed to address the problems, the plaintiffs’ allegations “go far beyond many other RMBS trustee complaints, which themselves have been found sufficient to state a claim.” The Court did, however, dismiss the investors’ claims that alleged negligence and those alleging a breach of the covenant of good faith and fair dealing and negligence because, among other reasons, “[a] tort claim cannot be sustained if it ‘do[es] no more than assert violations of a duty which is identical to and indivisible from the contract obligations which have allegedly been breached.’” The Court also nixed several claims asserting violations of certain provisions of the New York law governing mortgage trusts for which no private right of action exists.

    Securities SDNY Mortgages

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  • DOL Extends Fiduciary Rule Applicability Date by 60 Days

    Securities

    On April 4, the U.S. Department of Labor (DOL) issued a 60-day extension of the applicability dates of its “Fiduciary Rule”—a 2016 final rule expanding the definition of who qualifies as a “fiduciary” under ERISA and the Internal Revenue Code. The rule treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA as fiduciaries in a wider array of “advice relationships.” The extension also delays (by 60 days) the applicability of certain prohibited transaction exemptions. Accordingly, exemptions such as the “Best Interest Contract Exemption” and the “Principal Transaction Exemption” will become applicable on June 9, 2017. In its press release announcing the issuance of the final rule, the DOL noted, among other things, that the extensions are necessary to enable the DOL to perform the examination of the fiduciary rule directed by the President in his February 3 Presidential Memorandum (see previously posted InfoBytes summary regarding February 3 memo) to consider possible changes with respect to the fiduciary rule and related Prohibited Transaction Exemptions based on new evidence or analysis developed pursuant to the examination.   

    The 60-day extension was published in the Federal Register on April 7. As previously covered on InfoBytes, the DOL has released two sets of “frequently asked questions” about the Fiduciary Rule.

    Securities Department of Labor DOL Fiduciary Rule Trump

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  • SEC Announces Investigation Concerning Alleged $6.7 Million Michigan Real Estate Scheme

    Securities

    On March 30, the SEC announced charges against a Michigan pastor, his company, and business associate (Defendants) for allegedly cheating church members, retirees, and laid-off autoworkers out of approximately $6.7 million by convincing them to invest in a “successful” real estate scheme. The complaint alleges the pastor presented the investment opportunity at churches nationwide and through media outlets using “faith-based rhetoric” and guaranteed high returns. The Defendants—who were never registered to sell investments—raised the money from more than 80 investors who were told their money would be kept in qualified IRAs and could be rolled over tax-free. However, investors stopped receiving agreed-upon interest payments, and to date, Defendants owe more than 40 Michigan-based investors $2 million in past due promissory notes and also allegedly have obligations to investors outside the State of Michigan. The complaint claims violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.

    Securities Mortgage Fraud SEC Enforcement

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  • Supporting America’s Innovators Act of 2017 Passes in House Vote

    Federal Issues

    On April 6, a bipartisan bill entitled, Supporting America’s Innovators Act of 2017 (H.R. 1219) was received in the Senate after passing through the House by a 417-3 margin. The securities-related bill – which is now pending before the Senate Committee on Banking, Housing, and Urban Affairs, amends the provisions of the Investment Company Act of 1940 that require venture capital funds with more than 100 investors to register with the SEC. As previously reported in InfoBytes, the bill would serve to raise the cap on the number of investors from 100 to 250, thereby facilitating greater access to venture capital funding for small businesses and startups. In a press release issued by the House Financial Services Committee, the bill’s sponsor, Rep. Patrick McHenry explains that H.R. 1219 is intended to, among other things, “address the challenges facing angel investing so that startups and small businesses can have better access to capital,” by “creating a regulatory framework that encourages innovation and growth, while ensuring that shareholder and investor protections remain strong.”

    Federal Issues House Financial Services Committee Securities Senate Banking Committee

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