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Financial Services Law Insights and Observations


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  • Broker-Dealer settles with SEC for improper handling of ADRs


    On February 6, the SEC announced a settlement with a broker-dealer to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the broker-dealers receiving the ADRs have an agreement with a depository bank; and (ii) the broker-dealer or the broker-dealer’s customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s Order Instituting Administrative Proceedings (order), the broker-dealer improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker-dealer failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker-dealer neither admitted nor denied the SEC’s allegations, but agreed to pay more than $326,000 in disgorgement, roughly $80,970 in prejudgment interest, and a $179,353 penalty. The SEC’s order acknowledged the broker-dealer’s cooperation in the investigation and that the broker-dealer had entered into tolling agreements.

    Securities SEC Enforcement Settlement American Depositary Receipts Broker-Dealer

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  • CFTC Enters into First-Ever Non-Prosecution Deals in Spoofing Investigation


    On June 29, the Commodity Futures Trading Commission (CFTC) entered into non-prosecution agreements with three futures traders who admitted to engaging in “spoofing” in the U.S. Treasury futures market between 2011 and 2012 (see non-prosecution agreements here, here, and here). Spoofing involves placing bids or offers with the intent to cancel before execution. Here, the traders placed a small bid or offer on one side of the market and a large bid or offer on the opposite side of the market to be cancelled almost immediately (often in less than one second). The traders used the strategy to get smaller orders filled (and filled more quickly) at favorable prices.

    This is the first time the CFTC has used non-prosecution agreements, which the Director of Enforcement called “a powerful tool to reward extraordinary cooperation in the right cases, while providing individual and organizations strong incentives to promptly accept responsibility for their wrong doing and cooperate with the Division’s investigation.” In announcing the agreements, the CFTC lauded the traders’ “timely and substantial cooperation,” noting that their efforts provided assistance in connection with a $25 million settlement with the multinational bank they worked for earlier this year.

    Securities Litigation Federal Issues CFTC Broker-Dealer Enforcement

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  • SEC Requests Public Comments on Investment Adviser Conduct Rules

    Agency Rule-Making & Guidance

    On June 2, 2017, Jay Clayton, Chairman of the SEC, requested public input on standards of conduct for investment advisers and broker-dealers. The SEC last solicited input on the regulation of investment advisers in 2013 and Clayton believes that advances in technology and changes in business models have since transformed the market for retail investment advice. Additionally, confusion surrounding investment adviser conflicts of interest, among other things, have prompted the SEC to seek feedback on the standards. Topics touched on in the request include:

    • types of advisers providing investment advice and applicable standards of conduct for each;
    • conflicts of interest;
    • effects of market developments and advances in technology;
    • fee-based vs. commission-based investment advice;
    • department of Labor’s Fiduciary Rule;
    • pros and cons of multiple standards of conduct for advisers;
    • effects on particular segments of the market;
    • disclosure-based vs. standards-of-conduct-based regulatory action;
    • who should be considered “retail investors”;
    • how should “investment advice” be defined;
    • costs and benefits of different regulatory approaches;
    • comparison of U.S. regulation to non-U.S. regulation in this area;
    • material changes since last data solicitation in 2013.

    Clayton hopes his solicitation will garner “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

    Agency Rule-Making & Guidance SEC DOL Fiduciary Rule Broker-Dealer Securities

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  • SEC Charges Brokerage Firm with AML Failures


    On June 1, the SEC announced that a Wall Street-based brokerage firm agreed to pay a $300,000 penalty to settle charges that it failed to sufficiently evaluate or monitor customers’ trading for suspicious activity and to file suspicious activity reports (SARs) in an alleged willful violation of Section 17(a) of the Exchange Act and Rule 17a-8. The broker-dealer was required to have written AML policies and procedures, which outlined specific examples of suspicious activities that, according to the SEC, “should have triggered internal reviews and, in a number of instances, [(SAR)] filings.” According to the SEC, the broker-dealer failed to file SARs on the following activity: (i) accounts that traded an aberrational percentage of a given stock in a particular day; (ii) accounts of entities that had executives charged with criminal securities fraud; (iii) customer trading that was the subject of grand jury subpoenas and regulatory inquiries; (iv) liquidation of securities followed immediately by large cash transfers; (v) transactions in securities that were subsequently subject to SEC trading suspensions; and (vi) rejections by other broker-dealers of attempts by the firm to transfer customers’ securities. Despite these red flags, the brokerage firm failed to file SARs for more than five years. The case represents the SEC’s first against a firm for solely failing to file SARs.

    Anti-Money Laundering SEC SARs Broker-Dealer

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  • FinCEN Proposes Imposing BSA Requirements on Crowdfunding Portals


    On April 4, FinCEN issued a proposed rule to amend the definitions of “broker or dealer in securities” and “broker-dealer” under the regulations implementing the BSA. Specifically, FinCEN proposed that the definitions be amended to “explicitly include funding portals that are involved in the offering or selling of crowdfunding securities pursuant to section 4(a)(6) of the Securities Act of 1933.” Intended to help prevent money laundering, terrorist financing, and other financial crimes, the amendments would require funding portals to implement policies and procedures reasonably designed to ensure compliance with the BSA requirements currently applicable to brokers or dealers in securities. Comments on the proposal are due by June 3, 2016.  

    Anti-Money Laundering FinCEN Bank Secrecy Act Broker-Dealer Combating the Financing of Terrorism

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  • Department of Labor Publishes Final Rule to Define Fiduciary of an Employee Benefit Plan

    Consumer Finance

    On April 7, the Department of Labor issued a final rule defining who is a fiduciary investment advisor of an employee benefit plan under the Employee Retirement Income Security Act of 1974. The Final Rule requires financial advisors and brokers handling 401(k) accounts, as well as Individual Retirement Accounts and Annuities (IRAs), to “put their clients’ best interest before their own profits.” The final rule is scheduled to be published in the Federal Register on April 8. Compliance with the rule is not required until April 10, 2017, providing “adequate time” for financial services and other services providers affected by the rule to adjust their statuses from non-fiduciary to fiduciary.

    Broker-Dealer Agency Rule-Making & Guidance

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  • SEC Outlines 2016 Examination Priorities


    On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.

    Examination Anti-Money Laundering SEC Broker-Dealer Privacy/Cyber Risk & Data Security

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  • FINRA Releases 2016 Regulatory and Examination Priorities Letter


    On January 5, FINRA released a letter regarding its regulatory and examination priorities for 2016. The letter focuses on the following three broad issues within the securities industry: (i) culture, conflicts of interest and ethics; (ii) supervision, risk management and controls; and (iii) liquidity. Regarding FINRA’s assessment of firm culture, the letter notes that FINRA “will focus on the frameworks that firms use to develop, communicate, and evaluate conformance to their culture,” assessing five specific indicators of a firm’s culture, including (among others) whether policy or control breaches are tolerated. In connection with supervision and risk management, FINRA will focus its examination efforts on the following four areas that continue to affect firms’ business conduct and market integrity: (i) management of conflicts of interest; (ii) technology; (iii) outsourcing; and (iv) anti-money laundering. Finally, in connection with liquidity, FINRA plans to review firms’ contingency funding plans as they relate to their business models, noting that the framework for FINRA’s reviews will be driven by the effective practices contained in Regulatory Notice 15-33. Additional areas of regulatory and examination focus for FINRA in 2016 will include but are not limited to: (i) protecting seniors and vulnerable investors from fraud, sales practice abuse, and financial exploitation; (ii) private placements and Regulation A+ public offerings; (iii) financial and operational controls concerning exchange-traded funds and fixed-income prime brokerage; and (iv) market integrity.

    Examination FINRA Investment Adviser Broker-Dealer Risk Management

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  • SEC Appoints New Head of Examination Program in Atlanta Regional Office


    On September 29, the SEC named William Royer as the Atlanta Regional Office’s Associate Director of the examination program. Since June of this year, Royer has served as the examination program’s Acting Associate Director. In his role, Royer will supervise staff responsible for the examination of broker-dealers, investment advisers, investment companies, transfer agents, along with other SEC registrants. Prior to joining the SEC in 2013 as an Assistant Director within the Office of Compliance and Inspections and Examinations’ Office of the Chief Counsel, Royer worked as a securities attorney in private practice and served as General Counsel for two international investment management firms.

    SEC Investment Adviser Broker-Dealer

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  • SEC Settles with Broker-Dealer over Market Access Allegations


    On November 20, the SEC announced that a California based broker dealer agreed to settle alleged market access violations by paying a $2.44 million penalty. The SEC alleged that the broker-dealer failed to implement adequate risk controls before providing customers with access to the market. In addition to the penalty, two former senior employees agreed to settle allegations, without admitting or denying wrongdoing, against them for their alleged roles in causing the violations for a combined total of more than $85,000. Notably, the two employees were the first individuals the SEC had charged with violations of the market access rule.

    SEC Broker-Dealer

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