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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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  • 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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  • 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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  • SEC Reaches Settlement With Investment Adviser for Allegedly Overcharging Clients

    Securities

    On September 14, the SEC announced a settlement in an administrative proceeding against a national bank’s investment adviser subsidiary that allegedly overcharged more than 4,500 clients a total of over $1.1 million for costlier mutual fund share classes that carried 12b-1 marketing and distribution fees when shares of the same mutual funds were available without such fees. The SEC alleged that, from at least December 2011 through approximately June 2015, the investment adviser breached its fiduciary duties, made inadequate disclosures regarding conflicts of interest between the investment adviser and its representatives (who ultimately shared in the gains from the 12b-1 fees as compensation), and did not update its compliance policies and procedures to require its investment adviser representatives to identify or evaluate available share classes. The order cites violations of the Investment Advisers Act of 1940, as well as Rule 206(4)-7. While the investment adviser has neither admitted nor denied the allegations, it has, among other things, agreed to pay a penalty of more than $1.1 million, will provide disgorgement plus interest on any 12b-1 fees that have not yet been refunded to customers, and has been censured.

    Securities SEC Investment Adviser Settlement Enforcement

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  • China Bans Commercial Trading of Initial Coin Offerings

    Securities

    On September 4, the People’s Bank of China and several Chinese regulators reportedly jointly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies. This measure, announced in a statement issued by the Ministry of Industry and Information Technology of the People’s Republic of China, will outlaw all fundraising Initial Coin Offerings (ICOs), and declares ICOs and the sale of virtual currency as unauthorized illegal financing behavior, suspected of illegal sale tokens, illegal securities issuance, and illegal fund-raising, including financial fraud, pyramid schemes and other criminal activities. The statement reportedly stresses that virtual currency in China will not be recognized as a legal form of currency and must not be circulated as currency when financing activities. Furthermore, going forward, all cryptocurrency trading platforms are prohibited in China from acting as central counterparties to facilitate the exchange of tokens for virtual currencies. Additionally, one of China’s bitcoin exchanges reportedly published an announcement on its website saying it will close its bitcoin currency trading platform in the country on September 30.

    The SEC recently released an investor bulletin about ICO investment risks and offered fraud prevention guidance. (See previous InfoBytes summary here.) ICO sales are often used to raise capital, and the SEC is monitoring companies who use this method for fraudulent purposes.

    Securities Fintech Initial Coin Offerings International Cryptocurrency Bitcoin Fraud Virtual Currency

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  • SEC Issues Investor Bulletin Concerning Fraud Related to Initial Coin Offerings

    Securities

    On August 28, the SEC Office of Investor Education and Advocacy (OIEA) released an Investor Bulletin about the risks associated with investing in companies that claim to be related to, or assert that they are engaged in, Initial Coin Offerings (ICOs). ICOs are also known as coin or token launches, and sales are often used to raise capital. However, the OIEA warns investors that while some companies employ ICOs for lawful opportunities, the agency is cracking down on companies who use emerging technologies like ICOs for fraudulent purposes, such as announcing ICOs in order to affect the price of their common stock. The OIEA issued guidance, including (but not limited to) the following, to help investors spot potential fraud:

    • Investors should consider past trading suspensions as warning signs of possible microcap fraud when considering whether to invest, especially if there is a lack of current, reliable information about the company and its stock offerings.
    • Investors should be cautious about “pump-and-dump” schemes where companies manipulate the price of a stock to urge investors to buy quickly through false and misleading statements, and then unload shares of those stocks at artificially inflated prices, causing investors to lose money.
    • Investors should understand the risks of investing with companies that are not required to file reports with the SEC (“non-reporting companies”);
    • Investors should be very cautious of stock promotions offered by companies that do not provide details on whether the ICOs are compliant with securities law.

    The bulletin also includes links to additional investor resources, including an Investor Bulletin on ICOs.

    Securities Fintech Initial Coin Offerings

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  • SEC Issues Regulatory Notice Approving Amendments to FINRA Arbitration Proceedings

    Securities

    Earlier this month, the SEC released Regulatory Notice 17-25 approving amendments to FINRA customer and industry arbitration procedures, which will impact Rules 1240212403, and 13403. The changes will require the Director of FINRA’s Office of Dispute Resolution to make lists of arbitrators available to all parties at the same time “within approximately 30 days after the last answer is due.” Party agreements to extend answer due dates will no longer have any bearing on when the arbitrator list is provided. The amendments will affect cases filed on or after September 18, 2017.

    Securities Agency Rule-Making & Guidance FINRA Arbitration

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