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Financial Services Law Insights and Observations


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  • SEC extends deadline for FINRA SLATE rule decision


    On June 10, the SEC extended the review period for a proposed rule change by FINRA. The proposed FINRA Rule 6500 Series, concerning the Securities Lending and Transparency Engine (SLATE), would require the reporting of securities loans and provide dissemination of related information for the public. Initially published for public comment on May 7, the rule's decision deadline has now been moved to August 5 to allow the SEC adequate time to consider feedback and deliberate on the rule’s changes.

    Securities Agency Rule-Making & Guidance Securities Exchange Commission Federal Issues FINRA

  • FINRA imposes censure and $250,000 fine on “influencer” company for misconduct and privacy notice violations


    On June 10, FINRA agreed to a Letter of Acceptance, Waiver, and Consent (AWC) from a company, addressing various regulatory infractions for improper use of social media influencers in promotional activities. From 2020 to 2022, the firm was found to have compensated influencers for social media content that was not fair and balanced and contained exaggerated claims, violating FINRA Rules 2210(d)(1) and 2010. The firm also failed to review influencer-produced videos prior to their distribution and lacked adequate supervisory procedures to monitor its influencers’ communications, contravening the Securities Exchange Act Section 17(a), Exchange Act Rule 17a-4(b)(4), and additional FINRA rules. Furthermore, the company issued misleading privacy notices to its customers, violating Regulation S-P and FINRA Rule 2010. Specifically, the company stated in its privacy notice that it disclosed nonpublic personal information “only when it is both permitted by law and required for the ordinary course of business,” when in fact it shared such nonpublic personal information with non-affiliated third parties for marketing purposes. To resolve these claims, FINRA imposed a censure and a $250,000 fine. The company concurred.

    Securities FINRA Social Media

  • SEC provides companies the opportunity to review their diversity policies


    On June 5, the SEC began its biennial collection of Diversity Self-Assessment Submissions from regulated entities. Regulated entities included, among others, brokers and dealers, investment advisers, and transfer agents. Notably, publicly-traded companies were not included. The Commission will provide organizations the opportunity to review their own diversity and inclusion policies for strengths, opportunities, and risks as part of the voluntary self-assessment. The data collection supported an interagency policy statement issued in 2015 which established joint standards for assessing regulated entities diversity policies and practices. The SEC used data from the submissions to assess and report on progress and trends in regulated entity diversity-related activities. Participation will be voluntary and will not be part of any examination process. Regulated entities may use the Diversity Self-Assessment Tool or submit self-assessments in another format.

    Securities Securities Exchange Commission Diversity Diversity and Inclusion Assessments

  • NYDFS pens guidance for virtual currency companies on customer service


    On May 30, NYDFS issued an industry guidance letter for all virtual currency businesses licensed under 23 NYCRR Part 200 and others. The guidance was created in the hopes to foster a more transparent and responsive environment for customers engaging with virtual currency businesses. The guidance emphasized the need for virtual currency businesses to address customer inquiries and complaints in a "timely and fair manner." NYDFS provided specific recommendations for maintaining effective communication channels, including using phone lines and electronic text communication staffed by trained representatives during normal business hours. Additionally, the guidance emphasized the importance of monitoring and responding to customer inquiries outside of regular business hours.

    While the guidance saw the value in employing AI tools for customer service, it stressed the importance of informing customers when they are interacting with AI. It also required that customers should always have the option to escalate to a human customer service representative. Rigorous testing and monitoring of AI tools were recommended to ensure the accuracy of information provided to customers.

    To assess the effectiveness of their customer service practices, virtual currency businesses were advised to track and analyze key metrics such as the volume of inquiries, response times, and customer feedback. Finally, the guidance mandated that businesses submit quarterly reports to the regulator detailing the number of customer inquiries, complaint topics, and average resolution times. The guidance will go into effect on November 1, and businesses will be expected to have all recommended practices in place by then. 

    Securities NYDFS Guidance Artificial Intelligence Virtual Currency Customer Due Diligence

  • SEC’s Division of Examinations provides guidance on broker-dealer examination process


    On June 5, the SEC’s Division of Examinations issued a risk alert to help broker-dealers prepare for an examination by the Division. The alert highlighted: (1) information that may be considered when selecting firms to examine; (2) areas of focus for the examination; and (3) types of information and documents that may form part of an initial exam request. The alert noted various reasons why the Division staff may consider firms for examination, including:

    1. A firm’s examination history
    2. Supervisory and disciplinary concerns
    3. Tips or complaints on the firm
    4. The length of time since the firm’s last examination
    5. Customer base of the firm
    6. Products and services offered by the firm
    7. Any signals of financial stress the firm may experience
    8. New reports on the firm
    9. Filings by the firm with the SEC
    10. If the firm holds cash or securities

    The alert also included a sample request list of information and documents that Division staff would request. Although the list was not necessarily meant to be exhaustive, the sample request list was grouped into the following categories:

    • General Information: Organizational Information; Business and Operations: Financial Information; Legal and Disciplinary.
    • Supervisory and Compliance Structure: Books and Records, and Compliance and Oversight Processes; Branch Office Oversight; Information Processing, Reporting, and Protection.
    • Regulatory Requirements (Select Topics): Sales Practices, Regulation Best Interest, and Form CRS; Anti-Money Laundering; Net Capital and Customer Protection

    Securities Broker-Dealer Securities Exchange Commission Examination Supervision

  • House passes resolution to nullify SEC’s rule on crypto accounting guidance


    On May 8, the U.S. House of Representatives passed H. J. Res. 109, the first step in an attempt to nullify the SEC’s Staff Accounting Bulletin No. 121 (SAB 121) under the Congressional Review Act. SAB 121 describes how the SEC expects entities to account for and disclose their custodial obligations to “safeguard crypto-assets held for their platform users,” and has been in effect since April 11, 2022. As previously covered by InfoBytes, in October 2023, the GAO found SAB 121 was a rule, not guidance, making SAB 121 subject to the Congressional Review Act.

    Securities Accounting SEC Congress Agency Rule-Making & Guidance Congressional Review Act

  • Texas issues a cease and desist order against a securities firm


    On April 22, the Securities Commission of the State of Texas issued an Emergency Cease and Desist Order pursuant to the Texas Securities Act against respondents for allegedly offering investments in a digital gold vault that “purportedly secured physical gold and generates passive income using fintech and blockchain technology,” and are therefore subject to the Securities Act. The Securities Commission alleged that the investments were being “illegally, deceptively and fraudulently offered in Texas” and issued the Emergency Cease and Desist Order to “stop the scheme and protect the public from immediate and irreparable harm.” Respondents were ordered to immediately cease and desist from: (i) offering any security in Texas until the security is properly registered or exempt from registration; (ii) acting as securities dealers, agents, investment advisors, or investment advisor representatives in Texas until they are registered with the Securities Commissioner or exempt from registration; (ii) engaging in any fraud in connection with the offer for sale of any security in Texas; and (iv) offering securities in Texas through an offer containing a statement that is materially misleading or otherwise likely to deceive the public.

    Securities Fraud Financial Crimes Cease and Desist Texas

  • Tennessee updates its UCC to amend “money” definition and include CBDCs


    On April 11, the Governor of Tennessee signed into law SB 2219 (the “Act”) that amended Section 47-1-201(b) of the Tennessee Code by redefining “money” and codifying “central bank digital currency.” The term “money” was updated to include a new provision that will state that money does not include a central bank digital currency. “Central bank digital currency” will instead be defined as a digital currency issued by a federal reserve, foreign government or foreign reserve system, and will include a digital currency, digital medium of exchange, or digital monetary unit of account processed by the entity. The Act will go into effect on July 1.

    Securities State Issues Cryptocurrency CBDC

  • UK financial regulators issue new authority on securities sandbox


    On April 3, the U.K.’s Financial Conduct Authority and the Bank of England released a consultation paper seeking comments on their proposal to implement the Digital Securities Sandbox (DSS), a new regime for financial firms to work on a testing ground for new technologies regarding digital assets. The goal of this testing ground would allow these firms to better issue, trade, and settle digital securities. The U.K. regulators believed that using securities on distributed ledgers (i.e., digital securities) has the potential to consolidate trade functions and reduce settlement times, reducing risk and streamlining processes. The DSS would oversee developing financial technologies, such as distributed ledger technology (DLT), during security trading. The three aims of the DSS would include promoting a safe and efficient financial system by removing potential barriers, protecting financial stability using DLT, and promoting market integrity. The securities regulated by the DSS include equities, bonds, money market instruments, and emissions allowances; however, unbacked cryptocurrencies (e.g., bitcoin) would remain outside the scope. The first sandbox entrants are expected after fall 2024.   

    Securities Of Interest to Non-US Persons UK Digital Assets

  • SEC to expand “dealer” definition after adoption of two rules


    On February 6, the SEC announced its adoption of rules expanding application of the Securities Exchange Act of 1934 (the Exchange Act) to require market participants that “take on significant liquidity-providing roles” to register with the SEC as “dealers” under Sections 15(a) or 15C. In the introduction to the final rule, the SEC explained that “advancements in electronic trading across securities markets” have led to new market participants playing a larger role in market activity that was traditionally supplied by dealers. Additionally, as noted in the SEC’s Fact Sheet, the rules require such market participants to become members of a self-regulatory organization (SRO) and comply with federal laws. The SEC’s rule changes address the phrase “as part of a regular business” in sections 3(a)(5) and 3(a)(44) of the Exchange Act such that market participants that “take on significant liquidity-providing roles” are included in the statutory definition of “dealer” and “government securities dealer.” However, the final rules will exclude any person that has total assets of less than $50 million, or investment companies registered under the Investment Company Act of 1940, central banks, sovereign entities, and international financial institutions. The final rules will go into effect 60 days following Federal Register publication, and the compliance date will be one year after the effective date of the final rules.

    Securities Broker-Dealer Securities Exchange Act Securities Exchange Commission


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