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Bitcoin and ether not considered securities by SEC
On June 14, the Director of the SEC Division of Corporation Finance, William Hinman, stated that the SEC does not consider the cryptocurrencies bitcoin and ether to be securities. In his remarks at the Yahoo Finance All Markets Summit, Hinman emphasized a number of factors that are considered when assessing whether a cryptocurrency or ICO should be considered a security. These factors include, primarily, whether a third party drives the expectation of a return—the central test used by the Supreme Court in SEC v. W.J. Howey Co.. According to Hinman, bitcoin’s and ether’s networks are decentralized without a central third party controlling the enterprise and, thus, applying the disclosure rules of federal securities laws to these cryptocurrencies would add little value to the market. Hinman did note that whether something is considered a security is not static and emphasized that if a cryptocurrency were to be placed into a fund and interests were sold, the fund would be considered a security.
SEC settles RMBS supervision and improper markup allegations with brokerage firm
On June 12, the SEC issued an order against a brokerage firm to settle allegations that it violated antifraud provisions of federal securities laws when it failed to properly supervise traders who persuaded customers with false or misleading statements to overpay for residential mortgage-backed securities (RMBS). According to the SEC, the firm misled customers about how much the firm paid for the securities and illegally profited from the improper markups that were, in some cases, allegedly more than twice as much as what the customers should have paid. The order claims that the firm did not charge a traditional commission on the transactions, but rather derived profits “from the difference between the price at which [the firm] sold securities and the price at which it had purchased them.” Additionally, while the firm had policies and procedures to monitor and prevent excessive markups on RMBS transactions, they were “not reasonably designed and implemented.” While neither admitting nor denying the SEC’s charges, the firm agreed to be censured for failing reasonably to supervise its traders, to pay a fine of approximately $5.2 million, and to pay more than $10.5 million in disgorgement and interest to affected customers.
FDIC, OCC issue final rulemaking to shorten securities transaction settlement cycle
On June 1, the FDIC and OCC issued a final rule shortening to two business days (T+2) the standard settlement cycle for securities purchased or sold by OCC- and FDIC-supervised institutions, national banks, and federal savings associations. The agencies stated that the final rule will shorten the settlement cycle from three business days after the date of the contract to T+2—the number of business days in the standard settlement cycle as implemented by the SEC—“unless otherwise agreed to by the parties at the time of the transaction.” (See OCC press release and FDIC FIL-30-2018.) The final rule will align the settlement cycle requirements of the OCC, FDIC, and Federal Reserve Board, and will become effective 30 days following publication in the Federal Register.
FINRA issues enhancements to disclosure review process for public records
On May 18, the Financial Industry Regulatory Authority (FINRA) issued a notice covering enhancements to its disclosure review process. According to the notice, the enhancements will allow firms, for purposes of compliance with public record search requirements, to rely on FINRA’s verification process. Specifically, beginning on July 9, FINRA will conduct a public records search for bankruptcies, judgements, and liens within fifteen calendar days of receiving a firm’s Uniform Application for Securities Industry Registration or Transfer (Form U4). FINRA will provide any information to the firm that is different from what was provided on the Form U4. FINRA expects these enhancements to (i) reduce the cost associated with public records searches for firms; (ii) result in timelier reporting of disclosure information; and (iii) significantly reduce late disclosure fees.
SEC obtains court order halting allegedly fraudulent initial coin offering
On May 29, the SEC announced it obtained a court order halting an alleged fraud involving an initial coin offering (ICO) that raised as much as $21 million from investors in the U.S. and overseas. In addition, the court approved an emergency asset freeze and appointed a receiver for the firm allegedly responsible for the scheme, the SEC said in its press release. According to the SEC’s complaint filed May 22 in California federal court, the firm’s president and one of two firms he controls allegedly violated the antifraud and registration provisions of the federal securities laws, by, among other things, (i) making misleading statements to investors about the nature of business relationships with the Federal Reserve and nearly 30 well-known companies, and (ii) including “fabricated, misleading, and/or unauthorized” testimonials from corporate customers on the firm’s website designed to “establish a presence and seeming expertise.” A second firm controlled by the defendant has also been charged with violating antifraud provisions. Among other things, the SEC seeks permanent injunctions, the return of profits associated with the fraudulent activity, plus interest and penalties, and a ban prohibiting the president from participating in ICOs in the future.
CFTC, NASAA enter cryptocurrency, fraud information sharing partnership; CFTC releases virtual currency derivative guidance
On May 21, the U.S. Commodity Futures Trading Commission (CFTC) announced it had signed a mutual cooperation agreement with the North American Securities Administrators Association (NASAA) to increase cooperation and information sharing on cryptocurrencies and other potential market fraud. The memorandum of understanding (MOU) is designed to “assist participants in enforcing the Commodity Exchange Act, which state securities regulators and state attorneys general are statutorily authorized to do alongside the CFTC,” leading to the possibility of additional enforcement actions brought under other areas of law. In order to receive the benefits—including investigative leads, whistleblower tips, complaints, and referrals provided to NASAA members by the CFTC—individual jurisdictions will be required to sign the MOU.
The same day, the CFTC’s Division of Market Oversight and Division of Clearing and Risk (DCR) issued a joint staff advisory providing guidance on several enhancements to which CFTC-registered exchanges and clearinghouses should adhere when listing derivatives contracts based on virtual currencies. The advisory addresses the following five key areas for market participants: (i) “[e]nhanced market surveillance”; (ii) “[c]lose coordination with CFTC staff’; (iii) “[l]arge trader reporting”; (iv) “[o]utreach to member and market participants”; and (v) “Derivatives Clearing Organization risk management and governance.” According to the DCR director, the information provided is intended in part, “to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products . . . [and] to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”
National bank reaches $480 million settlement with investors over incentive compensation sales program
On May 4, a national bank announced it reached an agreement in principle to pay $480 million to certain investors to resolve a consolidated securities fraud class action, related to the bank’s previous incentive compensation sales program. The class action stems from the September 2016 consent order between the bank and the CFPB which resolved allegations that the bank’s employees opened deposit and credit card accounts for consumers without obtaining consent to do so (previously covered by InfoBytes here). The class action alleges that the bank made misrepresentations and omissions in certain securities disclosures related to its sales practices matters. The bank acknowledged the agreement, which is still pending court approval, in its May 4 10-Q securities filing.
Global banking firm fined $110 million for alleged FX violations
On May 1, the Federal Reserve Board (Fed) and the New York Department of Financial Services (NYDFS) announced (press releases available here and here) a combined nearly $110 million settlement with a global banking firm to resolve allegations that the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to consent orders issued by the Fed and NYDFS, the bank did not maintain sufficient policies and procedures to identify and prevent “unsafe and unsound” activities conducted by certain FX traders. Among other things, between 2008 and 2012 (NYDFS’ time frame goes through 2013), certain FX traders allegedly disclosed confidential customer information and trading activity with competitors through electronic chatrooms. NYDFS additionally alleged that the traders discussed coordinating their trading activities and other ways to manipulate currency prices to increase trading profits, and claimed that while the bank had policies in place intended to prevent such activity, the policies were not adequately enforced.
The bank did not admit to any wrongdoing in agreeing to the terms of the settlement, and the Fed and NYDFS noted the bank’s full cooperation with the investigations. In addition to the fine, the bank is prohibited from employing certain traders involved and is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program.
SEC gives first “safe harbor” whistleblower award
On April 5, the SEC announced an award of over $2.2 million given to a whistleblower who initially reported information to another federal agency and then later to the SEC. The award was the first paid under the “safe harbor” of the Exchange Act Rule 21F-4(b)(7), which provides that the SEC will treat information submitted to it, by a whistleblower, as though it received the information at the same time as another federal agency as long as the whistleblower submits the information to the SEC within 120 days after its submission to the other agency. According to the announcement, the SEC opened an investigation into the reported conduct after it received a referral from the other federal agency. The whistleblower then reported the same information to the SEC and later provided substantial cooperation in the investigation.
Bank and shareholders reach settlement over BSA/AML compliance allegations
On March 30, a regional bank reached a $13 million settlement with a group of its shareholders over allegations of misleading statements and omissions regarding the bank’s compliance with fair lending laws, and Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. The shareholders—purchasers of the bank’s stock between July 2013 and July 2014—allege that the bank’s misrepresentations regarding their compliance with BSA/AML laws, as well as other laws and regulations, artificially inflated the price of the bank’s stock. According to the settlement, both parties’ decisions to enter into the agreement were partially due to the length and expense of continued litigation, which began in 2014. The shareholders initiated the class action litigation in July 2014; however, the U.S. Court of Appeals for the 6th Circuit vacated the initial class certification in September 2016, remanding to the district court for further proceedings. The class was recertified by the district court in June 2017 with the 6th Circuit denying the bank’s petition for appeal of the recertification. The bank denies all allegations of wrongdoing and liability in the settlement.