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SEC settles with U.S. affiliate of Japanese financial institution for mortgage-backed securities failures
On July 15, the SEC announced an approximately $25 million settlement with the U.S. affiliate of a Japanese financial holding company, resolving allegations that the company failed to adequately supervise mortgage-backed securities traders. According to the orders, covering commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS), from approximately January 2010 through April 2014 several traders allegedly made false or misleading statements while negotiating the sales of CMBS and RMBS, including information about (i) the company’s purchase price of the securities; (ii) the compensation the company would receive on the trades; and (iii) the current ownership of the securities. The SEC alleges the company failed to reasonably supervise traders to prevent the alleged violations of federal antifraud provisions. The orders acknowledge the company’s significant cooperation in the matter and require the company to reimburse customers the full amount of profits earned from the identified trades, totaling over $4.2 million to CMBS customers and over $20.7 million to RMBS customers. Additionally, the orders penalize the company $500,000 related to the CMBS trades and $1 million related to the RMBS trades.
Agencies again defer action against foreign funds under Volcker Rule
On July 17, the FDIC, the Federal Reserve Board, and the OCC (collectively, the “agencies”) announced that they will not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for an additional two years. The announcement notes that the agencies consulted with the SEC and the CFTC on the decision. Since 2017, the agencies have deferred action on qualifying foreign funds that might be covered under the Volcker Rule (covered by InfoBytes here and here). In a joint statement, the agencies note that they have not finalized revisions to regulations implementing Section 13 of the Bank Holding Company Act, and in order to “provide interested parties greater certainty about the treatment of qualifying foreign excluded funds in the near term,” the agencies are proposing not to take action through July 21, 2021.
SEC defends whistleblower award delay in foreign bribery case
On July 11, the SEC responded to a petition asking the U.S. Court of Appeals for the District of Columbia to compel a whistleblower award determination from the agency. In April 2017, the “John Doe” petitioner had applied for an SEC whistleblower award, claiming that beginning in May 2011 and continuing for the next several years, he voluntarily provided original information to the Commission that led to the SEC and DOJ’s $519 million resolution of foreign bribery claims against a multinational pharmaceutical company (previously reported here). Under the SEC Whistleblower Program established by the Dodd-Frank Act, the petitioner could be eligible for up to 30% of that $519 million recovery. In April 2019, after the SEC still had not issued a preliminary determination in connection with his application, the petitioner sought relief in court. The petitioner argued that it was a “simple task” to evaluate his claim, and the agency’s two-year delay was “unreasonable.”
In its response, the SEC argued that the petitioner “greatly misapprehends the work, effort, and time involved in reviewing whistleblower claims,” “overlooks the substantial complexities involved in adjudicating claims regarding the matter,” and “ignores that the SEC is processing a voluminous number of other whistleblower applications that require the attention of the Commission in addition to his claim.”
For additional information about SEC whistleblower awards and procedures under the SEC Whistleblower Program, see the article published here by Buckley LLP attorneys.
SEC, FINRA address digital asset securities compliance requirements
On July 8, the SEC and the Financial Industry Regulatory Authority (FINRA) issued a joint statement in response to compliance questions received from broker-dealer participants who handle digital asset securities. While recognizing that the application of federal securities law and FINRA rules to digital asset securities, as well as related innovative technologies, “raise novel and complex regulatory and compliance questions and challenges,” the joint statement encourages “reasonably practicable” efforts to address these issues. Among other things, the guidance emphasizes that broker-dealer participants who try to maintain custody of clients’ digital asset securities must comply with the SEC’s Customer Protection Rule to safeguard customers’ assets and prevent investor loss or harm. In situations involving noncustodial digital asset securities activities, relevant laws, rules, and requirements must also be followed, even if these activities generally do not raise the same level of concern. The SEC and FINRA also acknowledge that compliance with these rules may be challenging as technological enhancements and situations unique to digital asset securities continue to develop, and emphasize that they will continue to engage with broker-dealer participants as the marketplace evolves.
Agencies adopt final rules excluding community banks from the Volcker Rule; simplify regulatory capital rules
On July 9, the Federal Reserve Board (Fed), CFTC, FDIC, OCC, and SEC adopted a final rule implementing sections of the Economic Growth, Regulatory Relief, and Consumer Protection Act to grant an exclusion for community banks from the Volcker Rule, which generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds. Qualifying financial institutions must have fewer than $10 billion in total consolidated assets and total trading assets, as well as liabilities that are equal to or less than five percent of their total consolidated assets. The rule also permits, under certain circumstances, a hedge fund or private equity fund organized and offered by a banking entity to share a name with a banking entity that is its investment advisor that is not an insured bank or bank holding company. The rule will take effect upon publication in the Federal Register.
The same day, the Fed, FDIC, and OCC also finalized a rule “intended to simplify and clarify a number of the more complex aspects of the agencies’ existing regulatory capital rules” for banks with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Among other changes, the rule alters the capital treatment for mortgage servicing assets, certain deferred tax assets, as well as investments in the capital instruments of unconsolidated financial institutions. The final rule will be effective as of April 1, 2020, for the amendments to simplify capital rules, and as of October 1, 2019 for revisions to the pre-approval requirements for the redemption of common stock and other technical amendments.
House Fintech Task Force holds first hearing
On June 25, the House Financial Services Committee’s Task Force on Financial Technology held its first-ever hearing, entitled “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.” As previously covered by InfoBytes, the Committee created the task force to explore the use of alternative data in loan underwriting, payments, big data, and data privacy challenges. The hearing’s witness panel consisted of high-ranking innovation officials across various agencies and associations, including the CFPB, OCC, SEC, CSBS, and the U.K.’s Financial Conduct Authority. Among other things, the hearing discussed whether digital currency is considered a security, the OCC’s special purpose national bank charter, and the U.K.’s regulatory sandbox approach.
SEC representative, Valerie Szczepanik, stated that she believes the SEC has been “quite clear” with regard to initial coin offerings, noting that “[e]ach digital asset is its own animal. It has to be examined on its facts and circumstances to determine what in fact it is. It could be a security, it could be a commodity, it could be something else. So we stand ready to provide kind of guidance to folks if they want to come and talk to us. We encourage them to come talk to us before they do anything so they can get the benefit of our guidance.”
While much of the OCC special purpose bank charter discussion focused on a social media’s plan to launch its own virtual currency, CSBS representative, Charles Clark, emphasized that “[s]tate regulators oppose the special purpose charter because it lacks statutory authority” and that it should be up to Congress to decide whether the OCC can regulate non-bank entities. Clark noted that a federal system would create an unlevel playing field compared to a state system where “a small company can enter the system, scale up, and be competitive with an innovative idea.”
Lastly, the FCA representative, Christopher Woolard, emphasized that fintech firms participating in the country’s sandbox program are “fully regulated” and probably the U.K.’s “most heavily supervised,” noting that the FCA believes “sandbox firms have to work in the real world from day one.” Additionally, Woolard asserted that the sandbox program is making a difference in the market stating that of their 110 tests, 80 percent of the firms that enter the program go on to fully operate in the market. He concluded asserting, “we believe that around millions of consumers have [] access to new products [] geared around better value or greater convenience.”
Multinational retailer settles FCPA claims by DOJ and SEC for $282 million
On June 20, the DOJ announced a $137 million settlement with a U.S.-based multinational retailer (the Retailer) and its wholly owned Brazilian subsidiary (the Subsidiary) to resolve claims they violated the FCPA. The Retailer entered into a non-prosecution agreement, while the Subsidiary pleaded guilty. On the same day, the SEC issued an administrative order requiring the Retailer to pay $144 million in disgorgement and interest. The SEC stated that the Retailer failed to “operate a sufficient anti-corruption compliance program for more than a decade as the retailer experienced rapid international growth.” In total, the Retailer will pay more than $282 million to settle the charges.
According to the DOJ announcement, from 2001 to 2011, the Retailer failed to implement and maintain internal accounting controls related to anti-corruption, and senior officials were aware of the failures. The failures allegedly allowed the Retailer’s foreign subsidiaries in Mexico, India, Brazil and China to hire third-party intermediaries (TPIs) “without establishing sufficient controls to prevent those TPIs from making improper payments to government officials in order to obtain store permits and licenses,” which, in turn, allowed the foreign subsidiaries to open stores faster, earning the company additional profits. In its non-prosecution agreement with the DOJ, in addition to the monetary penalty, the Retailer agreed to: (i) appoint an independent compliance monitor for a two-year term; and (ii) continue to cooperate with the DOJ’s investigation. The monetary penalty amount was calculated by reducing by 25 percent the bottom of the U.S. Sentencing Guidelines fine range for the portion of the penalty applicable to conduct in Brazil, China, and India, and reducing by 20 percent the bottom of the U.S. Sentencing Guidelines fine range for the portion of the penalty applicable to conduct in Mexico.
SEC separately settles ADR allegations against international bank subsidiary and securities company
On June 14, the SEC announced a $42 million settlement with a wholly-owned subsidiary of an international bank to resolve allegations that certain associated persons on its securities lending desk allegedly improperly pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares in foreign companies.” The SEC announcement explains that “[t]he practice of ‘pre-release’ allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.” According to the SEC, the subsidiary “improperly obtained pre-released ADRs from depositary banks when [the subsidiary] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC asserts that this resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. The SEC alleged that these practices violated the Securities Act of 1933 and claimed that the subsidiary failed to reasonably supervise its securities personnel. The consent order requires the subsidiary to pay more than $24 million in disgorgement, roughly $4.4 in prejudgment interest, and a civil money penalty of approximately $14.3 million. The order acknowledges the subsidiary’s cooperation in the investigation.
On the same day, the SEC announced an $8.1 million consent order with a securities company to resolve allegations that the company allegedly improperly pre-released American Depositary Receipts (ADRs). According to the SEC, the company, in violation of the Securities Act of 1933, “improperly obtained pre-released ADRs from depositary banks when [the company] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC announcement asserts that the lack of shares to support the ADRs resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. Additionally, the SEC alleges the company failed to establish and implement effective policies and procedures to address whether the company was in compliance with its obligations in connection with pre-release transactions. The consent order requires the company to pay more than $4.8 million in disgorgement, approximately $800,000 in prejudgment interest, and a civil money penalty of more than $2.4 million. The order acknowledges the company’s cooperation in the investigation.SEC charges issuer with conducting sale of unregistered digital tokens
On June 4, the SEC announced it had filed a lawsuit in the U.S. District Court for the Southern District of New York against a tech company issuer for allegedly raising approximately $100 million through an unregistered initial coin offering. According to the complaint, the issuer failed to provide required disclosures to investors and did not register the offer or sale of its digital tokens with the SEC, as required by Section 5 of the Securities Act of 1933. The SEC contends that the issuer marketed the digital tokens as an investment opportunity and told investors that they could earn future profits from the issuer’s efforts to create, develop, and support a digital “ecosystem.” According to the SEC, “[f]uture profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.” The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and a civil penalty.
SEC awards $3 million to joint whistleblowers
On June 3, the SEC announced awards totaling $3 million to two whistleblowers for jointly volunteering information that led to a successful enforcement action involving an alleged securities law violation that impacted retail investors. The SEC noted that the whistleblowers “undertook significant and timely steps to have their employer remediate the harm caused by the alleged violations.” The order does not provide any additional details regarding the whistleblowers or the company involved in the enforcement action. Since the program’s inception in 2012, the SEC has awarded approximately $384 million to 64 whistleblowers.