InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
SEC issues no-action letter, permitting offering and selling of “tokens” without registration
On April 3, the SEC issued a no-action letter to a Delaware-based airline chartering services company not recommending enforcement action for offering and selling “tokens” without registration under the SEC Act. According to the letter, the SEC relied upon the company’s counsel’s opinion, which assured that consumers are purchasing the tokens solely for prepaid “air charter services and not for investment purposes or with an expectation to earn a profit,” in determining that the “tokens” were not securities. Additionally, the SEC’s relief considered numerous other factors such as: (i) the platform for conducting the sale of the tokens will “be fully developed and operational” at the time any tokens are sold and funds derived from token sales will not be used to develop the platform; (ii) consumers will be able to immediately use the tokens for their intended functionality (i.e., to purchase air charter services) at the time of sale; (iii) the company will restrict the transfer of tokens to company wallets only and not to external wallets; (iv) the tokens will be sold for one dollar to be used solely on the platform to purchase air charter services, and will be treated as having a value of one dollar; (v) if the company offers to repurchase tokens, it will do so at a discount to the face value of the tokens that the holder seeks to resell to the company, unless a court orders the company to liquidate the tokens; and (vi) the tokens will not be marketed in such a way that there is a perceived potential for an increase in the token’s market value.
Financial services firm settles SEC’s American Depositary Receipts allegations
On March 22, the SEC announced a settlement with a financial services firm to resolve allegations that certain associated persons on its securities lending desk allegedly “improperly borrowed” pre-released American Depositary Receipts (ADRs)—“U.S. securities that represent shares in foreign companies”—from non-firm brokers who did not own the foreign shares required to support those ADRs. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if (i) the brokers receiving the ADRs have an agreement with a depositary bank; and (ii) “the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.” The SEC alleged that the firm’s practices violated the Securities Act of 1933 and led to “inappropriate short selling and dividend arbitrage that should not have been occurring.” Moreover, the SEC claimed that the firm’s supervisory policies and procedures “failed to prevent and detect” the securities laws violations. The firm neither admitted nor denied the SEC’s allegations, but agreed to pay more than $4.4 million in disgorgement, roughly $725,000 in prejudgment interest, and a civil money penalty of approximately $2.9 million. The SEC’s order acknowledges the bank’s cooperation in the investigation.
SEC issues $50 million whistleblower award; third-highest ever
On March 26, the SEC announced awards totaling $50 million to two whistleblowers for volunteering information that led to a successful enforcement action, with one whistleblower receiving $37 million (the third-highest SEC award to date) and the other receiving $13 million. While details of the related enforcement action were not made public, the SEC’s award order noted that one of the whistleblowers “provided information and documentation that were of a significantly high quality and critically important,” including documents that “were akin to ‘smoking gun’ evidence.” As previously covered by InfoBytes here and here, the SEC awarded $50 million to two joint whistleblowers in March 2018 and $39 million to a single whistleblower in September 2018—the two highest awards given by the SEC so far. Since the program’s inception in 2012, the SEC has awarded more than $376 million to 61 whistleblowers.
Colorado provides certain digital tokens licensing exemptions
On March 6, the Colorado Governor signed SB 19-23, which provides limited exemptions from the state’s securities registration and licensing requirements for persons dealing in certain types of digital tokens. The “Colorado Digital Token Act” (the Act) provides issuer exemptions for digital tokens sold for a “consumptive purpose”—the token is used in exchange for a good, service, or content—rather than a “speculative or investment purpose.” Specifically, the Act attempts to reduce regulatory uncertainty by providing a safe harbor from state securities laws for persons that meet the specified conditions. Subject to the filing of a referendum petition, the Act will take effect August 2.
CFTC, SEC settle with foreign trading platform conducting Bitcoin transactions without proper registration
On March 4, the CFTC resolved an action taken against a foreign trading platform and its CEO (defendants) for allegedly offering and selling security-based swaps to U.S. customers without registering as a futures commission merchant or designated contract market with the CFTC. The CFTC alleged that the platform permitted customers to transact in “contracts for difference,” which were transactions to exchange the difference in value of an underlying asset between the time at which the trading position was established and the time at which it was terminated. The transactions were initiated through, and settled in, Bitcoin. The CFTC alleged that these transactions constituted “retail commodity transactions,” which would have required the platform to receive the proper registration.
According to the CFTC, the defendants, among other things, (i) neglected to register as a futures commission merchant with the CFTC; and (ii) failed to comply with required anti-money laundering procedures, including implementing an adequate know-your-customer/customer identification program. The consent order entered by the U.S. District Court for the District of Columbia imposes a civil monetary penalty of $175,000 and requires the disgorgement of $246,000 of gains. The consent order also requires the defendants to certify to the CFTC the liquidation of all U.S. customer accounts and the repayment of approximately $570,000 worth of Bitcoins to U.S. customers.
In a parallel action, the SEC entered into a final judgment the same day to resolve claims that, among other things, the defendants failed to properly register as a security-based swaps dealer. The defendants are permanently restrained and enjoined from future violations of the Securities Act of 1933 and are required to pay disgorgement of approximately $53,393. This action demonstrates the potential application of CFTC and SEC registration requirements to non-U.S. companies engaging in covered transactions with U.S. customers.
Wyoming law classifies digital assets as personal property
On February 26, the Wyoming Governor signed SF 125, which classifies digital assets, including virtual currency, as personal property. Specifically, the bill divides digital assets into three categories of intangible personal property within the existing Wyoming Uniform Commercial Code: (i) digital consumer assets are considered “general intangibles”; (ii) digital securities are considered “intangible personal property” and classified as securities and investment property; and (iii) virtual currency is classified as money. Among other things, SF 125 also establishes an opt-in framework for banks to provide custodial services for digital assets as custodians (and authorizes supervision fees for banks that provide such services), and clarifies the jurisdiction of Wyoming courts to hear claims related to digital assets.
FHFA issues rule on GSE uniformity in TBA market
On February 28, the Federal Housing Finance Authority (FHFA) issued a final rule that requires government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs) to harmonize programs, policies, and practices affecting the cash flows of To-Be-Announced (TBA)-eligible mortgage-backed securities (MBS). The final rule—which codifies requirements that take effect May 6—takes into account commenter feedback by, among other things, making explicit the consequences of misalignment and directing the GSEs to lower the maximum mortgage note rate eligible for MBS inclusion. The final rule applies to both the GSEs’ current offerings of TBA MBS, as well as to the new uniform MBS, which the GSEs will start issuing June 3 (previously covered by InfoBytes here).
District Court denies class certification in RMBS action
On February 15, the U.S. District Court for the Southern District of New York denied class certification in an action brought by an investment company against a bank acting as trustee for five residential mortgage-backed securities trusts in which the company invested. The investment company filed a class action suit against the trustee asserting claims for breach of contract, breach of the duty of trust, and violations of the Trust Indenture Act. Among other things, the allegations concern whether the trustee “failed to fulfil certain contractual duties triggered by the discovery of breaches of ‘representations and warranties’” when the underlying mortgages allegedly were found not to be of the promised quality. The investment company also alleged that the trustee failed to exercise its rights to require the companies that sold the mortgages in question “to cure, substitute, or repurchase the breaching loans.”
In dismissing class certification, the court found that questions of law or fact common to all class members did not dominate individual issues. The court held that there was no proof that the liability claims of potential class members who held certificates in one trust would be relevant to the claims of other potential class members in one of the other trusts, and that the individualized questions “involve relatively complex legal and factual inquiries—requiring considerable resources in comparison to those questions which are capable of class-wide resolution.”
SEC: No fine for self-reported unregistered ICO
On February 20, the SEC announced a cease-and-desist order with a cybersecurity startup for conducting an unregistered Initial Coin Offering (ICO), which the company self-reported. According to the order, in late 2017, the startup conducted an unregistered ICO, which raised approximately $12.7 million in digital assets. The money was used to finance the startup’s plan to “develop[] a network in which participants could rent spare bandwidth and storage space on their computers and servers to others for use in defense against certain types of cyberattacks.” The SEC noted that the tokens offered and sold were considered securities because a purchaser would have a reasonable expectation of obtaining a future profit from the investment. The startup did not register the ICO nor did it qualify for an exemption to the registration requirements. The SEC did not impose a monetary penalty because, according to the order, in the summer of 2018 the startup self-reported the unregistered ICO and offered to take prompt remedial actions. The order requires the startup to return the funds to investors who purchased the tokens and register the tokens as securities.
NYDFS fines London-based bank $40 million for alleged FX violations
On January 29, NYDFS announced a $40 million settlement with a London-based financial services company to resolve allegations the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to the consent order, the company did not implement and maintain sufficient controls to identify illegal tactics used by traders to maximize profits or minimize losses at the expense of the company’s customers, competitors, and the market as a whole. Among other things, the order states that between 2007 and 2013 the company’s FX traders (i) improperly coordinated trading through a chat room; (ii) improperly shared confidential consumer information; and (iii) engaged in “deliberate underfills” of consumer accounts. In addition to the fine, the company 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. NYDFS acknowledged the company’s full cooperation with the investigation, in addition to taking disciplinary action against those identified as engaging in the misconduct.