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SEC Announces First-Ever Enforcement Action Against Credit Ratings Agency
On January 21, the SEC announced a settlement with a credit rating agency in connection with its rating of certain commercial mortgage-backed securities (CMBS). The ratings agency agreed to pay the SEC more than $58 million for allegedly (i) misrepresenting its conduit fusion CMBS ratings methodology; (ii) publishing a “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress;” and (iii) failing to maintain and enforce internal controls regarding changes to its surveillance criteria. In a separate administrative order, the SEC instituted a litigated administrative proceeding against the former head of the agency’s CMBS Group for “fraudulently misreprent[ing] the manner in which the [ratings agency] calculated a critical aspect of certain CMBS ratings in 2011.”
SEC Announces 2015 Examination Priorities
On January 13, the SEC announced its Office of Compliance Inspections and Examinations’ examination priorities for 2015. The examination priorities cover a wide range of financial institutions and focus on three areas: (i) protecting retail investors, especially those saving for or in retirement; (ii) assessing market-wide risks, including cybersecurity compliance and controls; and, (iii) using data analytics to identify signals of potential illegal activity. As to the risks to retail investors, the SEC noted that such investors are being sold products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products. In addition, financial services firms are offering information, advice, products, and services to help retail investors plan for retirement. The SEC intends to assess the risks to retail investors that can arise from these trends.
SEC Adopts New Rules, Regulatory Framework for Swap Data Repositories
On January 14, the SEC adopted new rules for security-based swap data repositories (SDRs), which store swap trading data. The rules require SDRs to register with the SEC and set reporting and public dissemination requirements for security-based swap transaction data. That reporting requirement, known as Regulation SBSR, outlines information that must be reported and publicly shared for each security-based swap transaction. The new rules are designed to increase transparency in the security-based swap market and are anticipated to reduce risks of default, improve price transparency, and hold financial institutions accountable for misconduct. The rules implement mandates under Title VII of the Dodd-Frank Act and will become effective 60 days after publication in the Federal Register. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register.
SEC Fines Stock Exchanges
On January 12, the SEC fined two stock exchanges $14 million dollars for allegedly violating the Exchange Act by failing to accurately describe in their rules the order types being used on the exchanges. In its investigation, the SEC found that while operating under rules that described a single “price sliding” process for handling buy or sell orders, the exchanges actually offered three variations of “price sliding” order types. The SEC found that the “exchanges’ rules did not completely and accurately describe the prices at which those orders would be ranked and executable in certain circumstances, and they also failed to describe the execution priority of the three order types relative to each other and other order types.” Additionally, the SEC found that the exchanges disclosed certain information regarding how the order types operated to only some and not all of their members. The SEC determined that not all market participants were aware of how these order types operated. In addition to the $14 million penalty, the SEC order requires both exchanges, among other things, to (i) create and implement written policies and procedures related to the development of order types, and (ii) provide sufficient resources and regulatory staff to ensure regulatory functions are independent from their commercial interests. This is the SEC’s largest penalty against national securities exchanges.
NCUA Files Latest Suit Over Purchased RMBS
On December 23, the NCUA announced its latest suit against a major bank. Filed in the SDNY, the 122-page complaint alleges that the bank violated state and federal laws by failing to fulfill its duties as trustee to 27 RMBS trusts. The NCUA is suing the bank in its capacity as liquidating agent for five failed federal credit unions who purchased the RMBS. This latest suit comes less than a week when the NCUA filed a similar suit against another large global bank.
SEC Publishes List of Rules Scheduled For Review
On December 29, pursuant to section 610 of the Regulatory Flexibility Act, the SEC published a list of rules scheduled for review by the agency. The list is intended to invite public comment on whether the rules should be continued, amended, or rescinded to minimize economic impact on small entities. Comments are due by January 28, 2015.
SEC Settles FCPA Charges Against Global Manufacturer
On December 15, the SEC settled charges against a global manufacturer for allegedly violating the FCPA by providing non-business payments and travel expenses to Chinese government officials with the expectation of obtaining business. The SEC investigation revealed that approximately $230,000 in improper payments were allegedly made out of the company’s China-based offices and were falsely recorded as business and marketing expenses in the company’s records. The SEC alleged that insufficient internal controls allowed for the payments to continue and that as a result the company profited $1.7 million in contracts with state-owned entities in China. The company self-reported its misconduct and provided “extensive cooperation” during the SEC’s investigation, and will pay $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.
FINRA Fines Financial Firms for Anti-Money Laundering Failures
On December 18, FINRA announced a joint $1.5 million penalty against two broker-dealers for anti-money laundering failures. According to anti-money laundering compliance program requirements, broker-dealers opening new accounts must identify each customer through an established written Customer Identification Program (CIP). FINRA alleges that the broker-dealers had a deficient CIP system, which over nine years resulted in the failure to conduct customer identity verification for nearly 220,000 new accounts. The firms neither admitted nor denied FINRA’s charges, but agreed to the entry of the agency’s findings.
SEC Fines Virtual Currency Operator For Alleged Registration Violations
On December 8, the SEC fined a computer programmer $68,387.07 for operating two separate online exchanges that traded securities using virtual currency without registering the businesses as broker dealers. Further, the SEC charged that the programmer failed to register the online enterprises as exchanges as required by SEC regulations. Without admitting or denying the allegations, the programmer agreed to be barred from the securities industry for two years.
FINRA Sanctions 10 Banks for Conflicts-Of-Interest Violations
On December 11, FINRA fined 10 financial firms a total of $43.5 million dollars for allegedly violating the industry-regulator’s conflict of interest rules. According to FINRA, in pitch meetings, the firms’ equity research analysts offered favorable research coverage in exchange for an underwriting role in a 2010 planned IPO of a large retail company.