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  • Global Bank and U.S. Subsidiaries Fined $246 Million for Deficiencies in Internal Foreign Exchange Trading Controls

    Securities

    On July 17, the Board of Governors of the Federal Reserve (Board) fined a global bank and two of its U.S. subsidiaries $246 million for allegedly lacking appropriate oversight and controls to ensure the bank’s foreign exchange (FX) trading activities were in compliance. According to the cease and desist order, the Board alleged that the bank’s “deficient policies and procedures” prevented it from detecting unsafe and unsound conduct and communications between bank traders and traders at other financial institutions concerning their trading positions. In addition to the fine, the bank is required to improve its oversight and controls over its FX trading activities, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program, subject to Board approval. Furthermore, the bank is prohibited from re-employing any individuals involved in the illegal communications.

    It was noted in the order that the bank conducted a review of its FX trading activities covering the investigation time period, identified and reported the illegal conduct to the Board and the Federal Reserve Bank of New York, and fully cooperated with the investigation. Improvements to address identified deficiencies have already begun.

    Securities Enforcement Federal Reserve Bank Compliance Federal Reserve Bank of New York

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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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  • International Bank Settles RMBS Claims with FHFA for $5.5 Billion

    Securities

    On July 12, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac (GSEs), announced a $5.5 billion settlement with an international bank. The settlement resolves FHFA’s claims, lodged in a federal lawsuit in the District of Connecticut, that the bank violated federal and state securities laws in relation to residential mortgage-backed securities (RMBS) trusts purchased by the GSEs between 2005 and 2007. The settlement covers all RMBS “issued, sponsored, sold, or underwritten by . . . [d]efendant between January 1, 2004 and December 31, 2008,” which is intended to include all securities for which FHFA brought claims against the bank in the District of Connecticut action. Under the terms of the agreement, the bank will pay $4.525 billion of the settlement amount to Freddie Mac, and approximately $975 million to Fannie Mae.

    Securities Federal Issues Settlement RMBS Freddie Mac Fannie Mae FHFA Litigation

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  • FINRA Fines Financial Firms $2.4 Million for Improper Customer Records Storage

    Securities

    On July 5, the Financial Industry Regulatory Authority (FINRA) announced that several investment firms agreed to pay fines totaling $2.4 million for allegedly failing to maintain customer records in an electronic format that cannot be altered or destroyed. The firms all signed FINRA’s letters of Acceptance, Waiver, and Consent (AWC) containing allegations and proposed settlement terms for the alleged violations. See agreements here, here, and here.

    In the agreements, FINRA emphasizes that financial firms are storing more and more sensitive customer data. FINRA asserts that broker-dealer electronic records must be complete and accurate to assist FINRA and other regulators in examinations and to ensure that member firms can conduct audits. Increasingly aggressive hacking attempts also enhance the need for firms to keep these records in the required format. According to the allegations in the agreements, the firms violated Section 17(a) of the Exchange Act of 1934 (the "Exchange Act"), NASD Rule 3110 and FINRA Rule 4511 by not maintaining electronic brokerage records in non-erasable and nonrewritable format, known as “WORM” format. The electronic records contained information about millions of securities transactions, millions of customer account records, numerous financial records, and records regarding anti-money laundering compliance.

    FINRA also asserts that the firms: (i) failed to give 90-day advance notice to FINRA before storing records electronically; (ii) failed to set up audit systems for retaining records electronically; (iii) failed to obtain attestation letters from vendors agreeing to provide all firm records to regulators, if needed; and (iv) failed to set up and enforce written procedures to ensure electronically stored records were retained in compliance with FINRA and federal securities laws.

    In addition to monetary sanctions, the firms agreed to review and update policies and procedures to ensure compliance with FINRA and federal securities laws. Additionally, the firms must submit remediation plans to FINRA for approval.

    Securities Privacy/Cyber Risk & Data Security FINRA Enforcement Settlement Investment Adviser

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  • CFTC Enters into First-Ever Non-Prosecution Deals in Spoofing Investigation

    Securities

    On June 29, the Commodity Futures Trading Commission (CFTC) entered into non-prosecution agreements with three futures traders who admitted to engaging in “spoofing” in the U.S. Treasury futures market between 2011 and 2012 (see non-prosecution agreements here, here, and here). Spoofing involves placing bids or offers with the intent to cancel before execution. Here, the traders placed a small bid or offer on one side of the market and a large bid or offer on the opposite side of the market to be cancelled almost immediately (often in less than one second). The traders used the strategy to get smaller orders filled (and filled more quickly) at favorable prices.

    This is the first time the CFTC has used non-prosecution agreements, which the Director of Enforcement called “a powerful tool to reward extraordinary cooperation in the right cases, while providing individual and organizations strong incentives to promptly accept responsibility for their wrong doing and cooperate with the Division’s investigation.” In announcing the agreements, the CFTC lauded the traders’ “timely and substantial cooperation,” noting that their efforts provided assistance in connection with a $25 million settlement with the multinational bank they worked for earlier this year.

    Securities Litigation Federal Issues CFTC Broker-Dealer Enforcement

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  • NYDFS Fines Global Bank $350 Million for Alleged Foreign Exchange Trading Violations

    Securities

    On May 24, the New York Department of Financial Services (NYDFS) announced that it had assessed a $350 million fine against a global bank and its New York branch (Bank) as part of a consent order addressing allegations that the Bank’s foreign-exchange business had engaged in long-term violations of New York banking law. According to the announcement, NYDFS investigated alleged misconduct occurring between 2007 to 2013 and found the improper conduct “included collusive activity by foreign exchange traders to manipulate foreign exchange currency prices and foreign exchange benchmark rates; executing fake trades to influence the exchange rates of emerging market currencies; and improperly sharing confidential customer information with traders at other large banks.” Specifically, the violations include the following:

    • collusion through on-line chat rooms to manipulate securities prices and artificially increase profits;
    • improperly exchanging information about past and impending customer trades, including sharing confidential customer information via personal email, in order to maximize profits at customers’ expense;
    • manipulating “the price at which daily benchmark rates were set—both from collusive market activity and improper submissions to benchmark-fixing bodies”; and
    • “misleading customers by hiding markups on executed trades, including by using secretive hand signals when customers were on the phone; or by deliberately ‘underfilling’ a customer trades, in order to keep part of a profitable trade for the Bank’s own book.”

    In addition to the $350 million monetary penalty, the Bank must, within 90 days of the consent order, submit written plans to (i) improve senior management’s oversight of the Bank’s compliance with New York laws and regulations governing its foreign exchange trading business; (iii) enhance internal controls and compliance to adhere to state and federal laws and regulations; and (iii) improve its compliance risk management and internal audit programs. Additionally, the Bank terminated certain employees involved in the misconduct and has agreed it will not—directly or indirectly—re-hire these individuals in the future. As part of this process, the Bank conducted an “employee accountability review” and disciplined other employees “for misconduct or supervisory failures.”

    Securities Enforcement NYDFS

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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 Rule-Making & 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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