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Treasury Fines Foreign Investment Firm Over Iran Sanctions Violations
On October 21, the Treasury Department’s Office of Foreign Assets Control (OFAC) imposed a $1.5 million civil penalty in an enforcement action against a UAE-based investment and advising company for violating the Iranian Transactions and Sanctions Regulations. OFAC determined that the firm recklessly or willfully concealed or omitted information pertaining to $103,283 in funds transfers processed through U.S.-based financial institutions for the benefit of persons in Iran. OFAC determined that the firm’s actions were egregious because (i) it did not voluntarily self-disclose the violations to OFAC, has no OFAC compliance program, and did not cooperate in the investigation, (ii) the firm’s management had actual knowledge or reason to know of the conduct, and (iii) the conduct resulted in potentially significant harm to the U.S. sanctions program against Iran.
SEC Administrative Action Resolves Foreign Bribery Allegations
On October 24, the SEC released a cease-and-desist order that resolves FCPA allegations against a Michigan-based medical technology company. The SEC alleged that the company’s subsidiaries in five different countries—Argentina, Greece, Mexico, Poland, and Romania—bribed doctors, health care professionals, and other government officials to obtain or retain business. The alleged activities involved approximately $2.2 million in direct payments, travel and conference expenses, and donations to a university associated with a foreign official made over a four-and-a-half year period. The SEC investigation found that the payments were incorrectly described as legitimate expenses in the company’s books and records and were described as, among other things, charitable donations, consulting and service contracts, travel expenses, commissions, and legal expenses. Without admitting the allegations, the company agreed to disgorge approximately $7.5 million in profits obtained through the alleged activities, and to pay a $3.5 million civil penalty plus an additional $2.3 million in pre-judgment interest.
Prudential Regulators Propose Large Institution Liquidity Rule
On October 24, the Federal Reserve Board issued a proposed rule it developed with the OCC and the FDIC to establish a minimum liquidity coverage ratio (LCR) consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework. The proposal would create for the first time a minimum liquidity requirement for certain large or systemically important financial institutions. The covered institutions would be required to hold (i) minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, and (ii) liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The requirements would apply to all internationally active banking organizations—i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions designated by the FSOC. The proposal also would apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets. The regulators propose various categories of high quality, liquid assets and also specify how a firm's projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations. Comments on the proposed rule must be submitted by January 31, 2013.
SEC Announces Compliance Penalties Against Investment Advisory Firms, Executives
On October 23, the SEC announced penalties totaling $400,000 against three investment advisory firms and their executives for allegedly repeatedly ignoring problems with their compliance programs, which the SEC deemed inadequate to prevent misleading statements in marketing materials or inadvertent overbilling of clients. The penalties ranged from $25,000 for individuals to $100,000 for one of the firms. Among other things, the SEC highlighted the following deficiencies, which varied among the firms: (i) failing to complete annual compliance reviews, (ii) making misleading statements on company’s website and investor brochures by overstating the amount of assets under management while contradicting the amount the firm presented in its SEC filing, (iii) failing to adopt and implement written compliance policies and procedures, (iv) making false and misleading disclosures about historical performance, compensation, and conflicts of interest, (v) repeatedly over- and under-billing clients, (vi) failing to disclose known compliance deficiencies to potential clients in response due diligence questionnaires or requests for proposals, (vii) inflating the amounts of assets under management in SEC filings, and (viii) improperly removing and retaining nonpublic personal client information by an executive who left one of the firms. In addition to agreeing to the penalties, the firms agreed to hire compliance consultants and adopt specific compliance enhancements. The SEC took the actions as part of its Compliance Program Initiative, which targets firms that fail to effectively act upon SEC warnings about compliance deficiencies.
NIST Releases Preliminary Cybersecurity Framework
On October 22, the National Institute of Standards and Technology (NIST) released its Preliminary Cybersecurity Framework pursuant to President Obama’s Executive Order 13636 title Improving Critical Infrastructure Cybersecurity. The Preliminary Framework seeks to help critical infrastructure owners and operators reduce cybersecurity risks through voluntary best practices. The financial services sector is one of the many sectors identified as a critical sector, and NIST notes that the Preliminary Framework can be applied by organizations beyond those contemplated by the Executive Order. The Preliminary Framework outlines steps that can be customized to various sectors and adapted by organizations of any size while providing a consistent approach to cybersecurity. It offers a common language and mechanism for organizations to determine and describe their current cybersecurity posture, as well as their target state for cybersecurity. The Preliminary Framework is intended to help all organizations identify and prioritize opportunities for improving cybersecurity risk management. NIST will accept public comments for 45 days, will hold a workshop on the Preliminary Framework on November 14 and 15 at North Carolina State University, and will release the finalized framework in February 2014, as required by the Executive Order.
Fannie Mae Updates Selling Guide
On October 22, Fannie Mae issued Selling Guide Announcement SEL-2013-08, which updates policies regarding (i) the use of a power of attorney, (ii) DU Refi Plus and Refi Plus eligibility, and (iii) master or blanket insurance for unaffiliated projects, among other miscellaneous updates. The Announcement updates provisions for use of a power of attorney in connection with the final loan application, restrictions on certain transaction types for which a power of attorney may be used, and requirements specifying who may not act as the attorney-in-fact or agent due to a potential financial connection to the transaction, except under limited circumstances. It also addresses the growing practice of lenders using powers of attorney as a matter of convenience or cost savings through a closing transaction facilitated by an online, interactive session between the borrower and a lender-chosen attorney-in-fact. In addition, the Announcement states that the eligibility date for DU Refi Plus or Refi Plus, which previously required the original loan to have been acquired by Fannie Mae on or before May 31, 2009, will now be based on the note date of the original loan. Finally, effective February 1, 2014, Fannie Mae will no longer permit master hazard insurance policies that provide coverage for multiple unaffiliated projects in a single insurance policy.
Freddie Mac Updates Foreclosure, Abandoned Property Requirements
On October 18, Freddie Mac issued Bulletin 2013-22, which updates servicing requirements related to foreclosures and management of abandoned properties. The Bulletin states that servicers may, without obtaining prior written approval, instruct foreclosure counsel to conduct a foreclosure in Freddie Mac’s name when applicable law precludes the servicer from conducting the foreclosure in its own name, and establishes other requirements for servicers that do so. The Bulletin also updates requirements regarding vesting the title after foreclosure, stating that for conventional mortgages servicers must ensure that the title to the property is vested in Freddie Mac’s name (if the property is not purchased by a third party), unless it is in Freddie Mac’s best interest to have the title vested in the servicer’s name after the foreclosure sale, and then have the title to the property transferred to Freddie Mac via quitclaim deed. With regard to preservation of abandoned properties, the Bulletin, for example, (i) informs servicers of new expense codes and limits, (ii) introduces new pricing requirements for property preservation expense items that identify the per unit cost that Freddie Mac finds reasonable, and (iii) removes the requirement that servicers obtain pre-approval for reimbursement of certain vacant property registration fees. The Bulletin also announces certain other changes related to foreclosures and abandoned properties.
New York Announces Mortgage Discount Fees Enforcement Action
On October 23, New York Governor Andrew Cuomo announced a $3 million penalty against a mortgage lender that the New York State Department of Financial Services (DFS) determined engaged in deceptive practices concerning interest rate charges and related conduct. The DFS identified the violations during a 2010 examination. The consent order states that the lender (i) collected loan discount fees from certain borrowers to reduce the initial rate but failed to provide the discounted rates, (ii) facilitated originations through unlicensed originators, (iii) conducted business with unlicensed entities and through unauthorized websites and unlicensed branches, (iv) conducted business through improper “affiliated business arrangements,” (v) failed to disclose loan origination information, (vi) failed to issue commitment agreements to certain borrowers, and (vii) failed to properly maintain books and records. The lender consented to the penalty, agreed to refund $427,155 of unearned loan discount fees to 270 borrowers, and agreed to submit a written compliance program within 120 days, submit quarterly compliance progress reports over a three-year period, and take other corrective actions. The consent order noted that in 2011 the company entered into a $3.1M settlement with HUD over similar alleged conduct.
New York Banking Regulator Urges Broad Changes To Debt Collection Affidavits
On October 18, New York DFS Superintendent Benjamin Lawsky commented on the New York Unified Court System’s proposal to require debt collectors to use standardized affidavits as evidence of ownership of debt when seeking default judgments in consumer credit actions following an assignment of the original creditor’s interest. Superintendent Lawsky urged the Court System to pursue “bolder reform,” including requiring debt collectors to (i) present “stronger affidavits” to prevent “robo-signing” and ensure debt collectors review a consumer’s file, (ii) include information about the reviewed debts in the affidavit, (iii) include documentation evidencing the debt with the complaint, (iv) send consumers a pre-complaint notice before commencing a collection lawsuit, and (v) demonstrate proof of service when moving for a default judgment. The Superintendent also recommended that consumers be provided an opportunity to vacate a default judgment if a debt collector violates court rules. The Court System is accepting comments on its proposal through December 4, 2013.
DOJ Secures Jury Verdict In First GSE Civil Fraud Suit
On October 23, a jury found a bank liable on one civil mortgage fraud charge arising out of a program operated by a lender the bank had acquired. The jury also found against a former executive of the acquired lender. The verdict followed a four week trial in the first DOJ case alleging violations of the FCA and FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. Judge Jed Rakoff of the Southern District of New York will consider briefing on the penalty—the DOJ originally had sought damages close to $1 billion. The bank stated that it will evaluate its options for an appeal. For more information about the government’s expanding FCA/FIRREA civil fraud initiative, please visit our resource center.