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  • SEC charges bank with SAR violations

    Securities

    On May 20, the SEC announced charges against a national bank for allegedly failing to file Suspicious Activity Reports (SARs) in a timely manner in violation of the Securities Exchange Act and Rule 17a-8. According to the SEC’s order, the bank’s internal anti-money laundering (AML) transaction monitoring and alert system allegedly failed to reconcile the different country codes used to monitor foreign wire transfers because the bank allegedly failed to test a new version of the system. The bank also allegedly did not timely file SARs related to suspicious transactions in its customers’ brokerage accounts involving the wire transfers to or from foreign countries that it determined to be at a high or moderate risk for money laundering, terrorist financing, or other illegal money movements. Additionally, in April 2017, the bank allegedly failed to timely file additional SARs due to a failure to appropriately process wire transfer data into its AML transaction monitoring system in certain other situations. In addition to the $7 million penalty, the bank, without admitting or denying the SEC’s findings, agreed to a censure and a cease-and-desist order.

    Securities SEC Enforcement Securities Exchange Act Anti-Money Laundering SARs Financial Crimes

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  • SEC awards whistleblowers $3.5 million

    Securities

    On May 6, the SEC announced awards totaling nearly $3.5 million to four whistleblowers whose information and assistance led to successful SEC enforcement actions. According to the redacted order, three joint whistleblowers provided SEC staff with information that led to the opening of a new investigation, which resulted in a successful enforcement action. These joint whistleblowers’ information also caused another agency to open an investigation and led to a separate successful action. Another whistleblower provided insights based on an independent analysis of information that focused the staff’s attention on allegations that were not previously known to staff that advanced the investigation. The SEC has awarded approximately $1.3 billion to 273 individuals since issuing its first award in 2012.

    Securities SEC Enforcement Whistleblower

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  • SEC advises companies on Ukraine-related disclosure obligations

    Securities

    On May 3, the SEC Division of Corporation Finance released a sample letter advising companies that they should provide “detailed disclosure[s]” if they have direct or indirect operations in Russia, Belarus or Ukraine or if they trade securities in Russia or are affected by financial sanctions imposed on Russia. Companies should also report any other related uncertainties caused by the conflict in Ukraine, and disclose supply chain disruptions, cybersecurity risks, and volatility related to commodity trading prices. Additionally, companies should report whether they rely on goods or services sourced in Russia or Ukraine (or in certain cases, countries supporting Russia) as well as any business relationships or assets based in Russia, Belarus, or Ukraine. “The sample comments do not constitute an exhaustive list of the issues that companies should consider,” the Division said. “As always, companies should evaluate whether they have experienced or been impacted by matters characterized as potential risks and, if so, update disclosures accordingly.”

    Securities Financial Crimes Privacy/Cyber Risk & Data Security Ukraine Ukraine Invasion Russia Of Interest to Non-US Persons

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  • SEC to expand crypto asset and cyber unit team

    Securities

    On May 3, the SEC announced it will nearly double the size of its Crypto Assets and Cyber Unit within the Division of Enforcement. “By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity,” SEC Chair Gary Gensler stated. Since the unit’s inception, more than 80 enforcement actions have been brought against actors related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion. The unit has also “brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents.” The expanded unit will focus on investigations related to: crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance platforms, non-fungible tokens, and stablecoins.

    Securities Digital Assets Cryptocurrency Privacy/Cyber Risk & Data Security Enforcement

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  • SEC awards $6 million to whistleblowers

    Securities

    On April 25, the SEC announced awards totaling nearly $6 million to two groups of whistleblowers whose information and assistance led to a successful SEC enforcement action. According to the redacted order, the first group of whistleblowers provided the SEC with key documents that led the staff to seek additional documents from the respondent, and the second group provided firsthand accounts of the misconduct at issue. Both groups, which consisted of five individuals, provided ongoing assistance throughout the investigation.

    The SEC has awarded approximately $1.2 billion to 268 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement

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  • SEC 2022 examination priorities include information security, emerging technologies, and crypto-assets

    Securities

    On March 30, the SEC’s Division of Examinations announced that its 2022 examination priorities will focus on key risk factors related to private funds, environmental, social and governance investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. SEC registrants, including investment advisers, broker-dealers, self-regulatory organizations, clearing firms, and other registrants, are reminded of their obligations to address, manage, and mitigate these key risk areas. The SEC stated that examiners will continue to review whether firms are taking appropriate measures to safeguard customer accounts to prevent intrusions. Firms are expected to implement procedures to respond to incidents, identify and detect red flags for identity theft, and manage operational risk, including oversight of vendors and service providers. With respect to emerging technologies and crypto-assets, the SEC announced it will review whether firms are considering emerging financial technologies when designing their regulatory compliance programs. The SEC will also focus on firms that offer new products and services or employ new practices “to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.” Additionally, examinations of market participants engaged in crypto-assets will continue to focus on custody arrangements for such assets, as well as “the offer, sale, recommendation, advice, and trading of crypto-assets” offered by these participants. The SEC also warned that it will be investigating whether registered investment advisors are “overstating or misrepresenting” environmental, social, and governance factors in their portfolios or disclosures.

    Securities Examination Digital Assets Fintech Climate-Related Financial Risks Compliance Privacy/Cyber Risk & Data Security

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  • SEC seeks investor protections related to SPACs and shell companies

    Securities

    On March 30, the SEC proposed rules and amendments regarding special purpose acquisition companies (SPACs), shell companies, and projections disclosure. The proposed rules are intended to enhance investor protections in initial public offerings (IPOs) by SPACs and in subsequent business combination transactions between SPACs and private operating companies. The proposed rules will also address the treatment under the Securities Act of 1933 of business combination transactions involving a reporting shell company and amend the financial statement requirements for private operating companies applicable to transactions involving shell companies. Additionally, the SEC proposed “specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions.” The SEC issued a corresponding Fact Sheet recognizing that the rapid increase in the number of SPAC IPOs over the past two years has “heightened investor protection concerns” and raised questions as to whether certain SPACs may be investment companies subject to the requirements of the Investment Company Act. The proposed rule also includes a new safe harbor designed to “provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under [the Investment Company Act].”

    “[I]f adopted, [the proposed rule] would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chair Gary Gensler said.

    Comments on the proposed rule are due 60 days following publication of the proposing release on the SEC’s website or 30 days after publication in the Federal Register, whichever is later.

    Securities Agency Rule-Making & Guidance SPAC Shell Companies Disclosures

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  • SEC seeks to include market participants as dealers or government securities dealers

    Securities

    On March 28, the SEC announced two proposed rules, which would require market participants, such as proprietary (or principal) trading firms, who assume certain dealer functions, in particular those who as act as liquidity providers in the markets, to register with the SEC, to become members of a self-regulatory organization (SRO), and comply with federal securities laws and regulatory obligations. According to the SEC, the rules would establish that a market participant engaging in the activities described in the rules is a “dealer” or “government securities dealer” and, absent an exception or exemption, is required to: (i) register with the Commission under Section 15(a) or Section 15C, as applicable; (ii) become a member of an SRO; and (iii) comply with federal securities laws and regulatory obligations, including as applicable, SEC, SRO, and Treasury rules and requirements. A footnote in the proposal indicates that its new rules would apply to any digital asset that is regarded as a security or a government security within existing laws. The SEC also released a Fact Sheet regarding the proposals, which provides information on why the proposal matters and how it applies. Comments are due 60 days after publication of the proposing release on the SEC’s website or 30 days after publication in the Federal Register, whichever period is longer. SEC Chair Gary Gensler released a statement stating he believes that the proposed rules “reflect[] Congress’s statutory intent that firms engaging in important liquidity-providing roles in the securities markets, including in the U.S. Treasury market, be registered with the Commission.”

    Securities Agency Rule-Making & Guidance Digital Assets SEC Federal Register

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  • FINRA fines firm $2.3 million for misusing customer funds and charging unreasonable fees

    Securities

    On March 22, a decision was entered in a disciplinary proceeding between FINRA’s Department of Enforcement and a securities firm over whether the firm engaged in unauthorized trading and misused customer funds in response to mounting financial challenges in 2018. FINRA’s extended hearing panel alleged that the firm, in light of declining profits, informed customers that it would stop carrying retail accounts and levied “unreasonable and unnecessary” fees in a discriminatory manner on retail customers who did not close their accounts—including a $5,000 monthly account fee—without providing proper notice. According to the panel, the monthly fee was applied in a discriminatory manner, wherein the fee was waived for profitable accounts and certain customers. Other customers were required to pay a portion or all of the monthly fee in order to regain possession of other holdings. Moreover, the panel claimed that in most instances, “customers were not even aware of the $5,000 monthly account fee, let alone that the firm was taking their cash and securities to cover it.”

    The firm argued that the monthly fee should be considered reasonable because it resulted from an “arm’s-length agreement” between the firm and its customers, but the panel rejected the firm’s defense, pointing out that customers did not agree to the fee “as part of a contract freely negotiated at arm’s length between sophisticated parties with equal bargaining power.” The panel further asserted that, among other things, the firm also allegedly charged customers unfair prices in securities transactions, moved securities from customer accounts to firm accounts without authorization, and executed an unauthorized capital withdrawal disguised as a payment.

    In issuing its decision, the panel found no mitigating factors but identified several aggravating factors, including that the firm “continued a disturbing pattern of misconduct” after a temporary cease and desist order was issued. The firm is ordered to pay more than $2.3 million in restitution and must permanently cease and desist from converting or misusing customer funds or securities, effecting unauthorized transactions in customer accounts, charging unreasonable or discriminatory fees, or causing harm to investors, among others. The panel cautioned that it was “highly likely” that the firm’s misconduct would recur if it remained a FINRA member firm and stressed that expulsion was “the only alternative for protecting the investing public.” The firm denied all allegations.

    Securities FINRA Enforcement Fees

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  • CFTC awards $625,000 to whistleblowers

    Securities

    On March 28, the CFTC announced approximately $625,000 in awards to four whistleblowers whose information led the agency to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants “provided the Commission with original information,” and “each provided ongoing cooperation and assistance to Division staff, which significantly contributed to the success of the Covered Action.” One claimant received a higher award percentage to recognize that he or she provided the highest level of ongoing assistance and cooperation.

    The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping prosecute enforcement actions leading to more than $3 billion in monetary sanctions.

    Securities CFTC Whistleblower Enforcement Commodity Exchange Act

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