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Volume 9, no. 38 |
October 13, 2014 |
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The SEC Whistleblower Program, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires the SEC to pay an award to eligible whistleblowers whose tips lead to the successful enforcement of federal securities law violations. The largest award in the program’s history – $30 million – was granted just a few short weeks ago.
While frustration with the speed of the program’s payouts has been in the news recently, the agency has indicated a renewed focus in enforcing Rule 21F-17, which prohibits any action taken “to impede a whistleblower from communicating directly with [SEC] staff about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement” (with exceptions based on attorney-client privilege) (see the ruling). The head of the SEC’s Office of the Whistleblower stated back in March that the SEC was actively investigating contracts that violate Rule 21F-17 and noted that lawyers who draft them could potentially be barred from practicing before the SEC.
Gray areas remain as the SEC’s enforcement of Rule 21F-17 continues to evolve, but confidentiality agreements, non-disclosure agreements, severance agreements and other employment-related agreements, together with employee handbooks and codes of conduct, should be carefully drafted and reviewed in light of Rule 21F-17. We will keep you apprised of further developments and any additional concrete guidance in this area. |
| Owen Zingraff |
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The remarks made at this month’s conference of the Association of Certified Anti-Money Laundering Specialists were summarized by the Wall Street Journal’s Risk and Compliance Journal. Speakers noted the stricter internal control procedures being employed and the adoption of “know your customer” expectations. Those improvements, however, came with a warning. As larger institutions implement tighter anti-money laundering (“AML”) procedures, money launderers have turned to community banks and credit unions to conduct their transactions.
Separately, the Risk and Compliance Journal discussed how regulators use suspicious activity reports (“SAR”) and other AML data. Current and former FBI officials said that the suspicious activity reports filed by firms do not disappear into a “black hole.” Although it may take years for a given report’s significance to appear, the data the reports contain apply to almost every FBI investigation. SARs.
The Director of the Financial Crimes Enforcement Agency (“FinCEN”), Jennifer Shasky Calvery, spoke at another recent AML conference, the Mexican Bankers Association AML/CFT Seminar. Calvery discussed how FinCEN and Mexico are working together to disrupt the finances of transnational organized crime, including those organizations engaged in drug trafficking, human trafficking and smuggling. Among the activities being monitored are funnel accounts and trade-based money laundering (“TBML”), where an individual or business account in one geographic area receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are quickly withdrawn in a different geographic area. A May 28, 2014 FinCEN Advisory describes how banks can spot funnel accounts and TBML. Calvery Remarks.
Calvery also discussed FinCEN’s October 2, 2014 Geographic Targeting Order (“GTO”) which requires enhanced AML recordkeeping and reporting for several classes of businesses in the Los Angeles Fashion District. The GTO further supports a recent law enforcement operation in Los
Angeles in which 1,000 federal, state, and local law enforcement officials conducted a takedown at locations across the Fashion District. Law enforcement authorities executed dozens of search and arrest warrants on businesses suspected of using “Black Market Peso Exchange” schemes to launder narcotics proceeds for drug trafficking organizations. During the operation, agents seized more than $90 million in currency found in various residences and businesses, stored in file boxes, duffel bags, backpacks, and even the trunk of a Bentley.
In a speech given last August, Calvery discussed how to implement a risk-based approach to AML and the importance of a culture of compliance. Corporate Counsel expanded on Calvery’s remarks, noting the six principles for a culture of compliance: engage leadership; resist compromising compliance with revenue interests; share information throughout the organization; provide adequate human and technological resources; test compliance; and understand the Bank Secrecy reporting process. |
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| On October 9th, the Federal Reserve Board published answers to frequently asked questions regarding the competitive review process for bank acquisitions, mergers, and other transactions. The FAQs provide answers to questions often raised by banking organizations considering filing applications and explain changes to the application process mandated by the Dodd-Frank Act. Developed jointly with the Department of Justice, the FAQs also address the factors considered by both agencies in conducting competitive analysis for bank applications. Federal Reserve Board Press Release. |
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| On October 9th, the Office of the Comptroller of the Currency (“OCC”) published its Quarterly Report on Bank Trading and Derivatives Activities. Among other things, the report notes U.S. commercial banks and savings associations reported trading revenue of $6.4 billion in the second quarter of 2014, up $0.2 billion from $6.2 billion in the first quarter. Trading revenue in the second quarter was $0.7 billion lower than the $7.1 billion recorded in the second quarter of 2013. Credit exposures from derivatives also increased during the second quarter. The notional amount of derivatives held by insured U.S. commercial banks increased $6.1 trillion from the first quarter to $237 trillion. OCC Press Release. |
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| On October 7th, Simon Potter, Executive Vice President of the Federal Reserve Bank of New York, discussed the use of overnight reverse repurchase agreements while the Federal Reserve normalizes interest rates. The Federal Open Market Committee’s recent test of aggregate caps as well as individual caps on overnight reverse repos proceeded smoothly and there was no evidence of market disruption from unfilled bids during the auction. Potter Remarks. See also Reuters (describing auction process and noting the possibility of multiple auctions). |
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| On October 7th, the OCC issued a Bulletin on the proposed rule it issued jointly with, among others, the Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”), and the Federal Housing Finance Agency which would establish minimum margin requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants subject to agency supervision. The proposed rule was published in the Federal Register on September 24, 2014 and comments should be submitted on or before November 24, 2014. |
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| On October 7th, the FDIC and the Consumer Financial Protection Bureau (“CFPB”) launched a Spanish-language version of Money Smart for Older Adults. The free financial resource tool is designed to help aid older adults (age 62 and older) and their caregivers prevent, identify and respond to elder financial exploitation. FDIC Press Release. |
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| On October 8th, the Consumer Financial Protection Bureau published proposed amendments to the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for automobile financing. The new section would define a market that includes grants of credit for the purchase of an automobile, refinancings of such credit obligations, and purchases or acquisitions of such credit obligations (including refinancings). It would also include automobile leases and purchases or acquisitions of such automobile lease agreements. The proposed rule would identify a market for automobile financing and define as larger participants of this market certain nonbank covered persons that would be subject to the Bureau’s supervisory authority. The proposal would also define certain automobile leases as a “financial product or service” under Section 1002(15)(A)(xi)(II) of the Dodd-Frank Act. Comments should be submitted on or before December 8, 2014. 79 FR 60762. |
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| On October 9th, the Securities and Exchange Commission (“SEC”) published a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers. The publications accompany an enforcement action against two firms for improperly selling billions of shares of penny stocks through such unregistered offerings. The Risk Alert summarizes deficiencies that were discovered by the SEC’s Office of Compliance Inspections and Examinations during a targeted sweep of 22 broker-dealers frequently involved in the sale of microcap securities. The sweep uncovered widespread deficiencies including insufficient policies and procedures to monitor and identify potential red flags in customer-initiated sales; inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration; and failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities. The Division of Trading’s FAQs remind broker-dealers of the requirements of Section 4(a)(4) of the Securities Act, which provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act. SEC Press Release. |
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| On October 9th, Investment News summarized the SEC Investor Advisory Committee’s vote to recommend changes to the “accredited investor” definition. Instead of relying on income and net worth to determine accredited investor status, the Committee suggested considering such things as an investor’s educational background, professional credentials, and investment experience. Defining Moment. |
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| On October 9th, Financial News reported the SEC has delayed a vote on the adoption of new rules that would require exchanges and other clearing firms to adopt new safeguards against inadvertent trading errors. Delay. |
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| On October 7th, CFO.com described George Washington University School of Business’s “Initiative on Rethinking Financial Disclosure.” The initiative challenged teams of two people from the school’s graduate business programs to devise ways of improving issuer disclosure in annual reports. The winning team’s proposal will be submitted to the SEC as part of the agency’s disclosure effectiveness project. Case Study. |
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| On October 6th, the Division of Corporation Finance invited issuers of asset-backed securities to request staff review of their draft registration statements. On September 24, 2014, the SEC published revisions to the rules governing disclosure, reporting, and the offering process for asset-backed securities. ABS issuers must comply with the new rules and forms, other than asset-level disclosures, no later than November 23, 2015. The Division of Corporation Finance is inviting ABS issuers to request staff review of their registration statements in draft form, prior to filing. Corporation Finance Announcement. |
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| On October 10th, CoinDesk summarized the comments made at the Commodity Futures Trading Commission’s (“CFTC”) Global Markets Advisory Committee Meeting concerning bitcoin. The meeting coincided with the launch of the first bitcoin derivative. Bitcoin Launch. See also CFTC Advisory Committee Meeting Webpage (with links to archived webcast and prepared statements). |
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| On October 8th, the CFTC’s Division of Market Oversight and Division of Clearing and Risk announced they have issued a time-limited no-action letter stating that the Divisions will not recommend that the Commission take enforcement action against the Singapore based derivatives clearing organization Singapore Exchange Derivatives Clearing Limited (“SGX-DC”) for failure to comply with the applicable swap data reporting requirements of Commission Regulations 45.3 and 45.4. The relief expires on the earlier of such time as SGX-DC is able to comply with the applicable swap data reporting requirements of Regulations 45.3 and 45.4; or April 30, 2015. The relief is also conditioned upon SGX-DC reporting “backloaded” data for swaps cleared during the pendency of the period of relief to a registered swap data repository by no later than May 30, 2015. CFTC Press Release. |
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| On October 8th, the CFTC’s Division of Clearing and Risk granted ICE Clear Europe’s and LCH.Clearnet’s separately requested relief from the requirement to obtain or provide the CFTC with an executed version of the template acknowledgment letter required by Regulation 1.20(g)(4) for customer accounts maintained at the Bank of England (“BoE”). Instead, ICE and LCH.Clearnet will be permitted to submit the BoE’s Acknowledgement Letter. The Division also granted exemptions to ICE and LCH.Clearnet from the requirements of Regulation 1.49(d)(3) to permit them to hold customer funds at the BoE. |
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| October 27, 2014 |
Exclusion of Utility Operations-Related Swaps With Utility Special Entities From De Minimis Threshold for Swaps With Special Entities. 79 FR 57767. |
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| December 1, 2014 |
Defining Larger Participants of the International Money Transfer Market. 79 FR 56631. |
| November 17, 2014 |
Electronic Fund Transfers (Regulation E). 79 FR 55970. |
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| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
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| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
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| October 3, 2014 |
Unfair or Deceptive Acts or Practices; Technical Amendments. 79 FR 59627. |
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| November 10, 2014 |
OCC Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches; Integration of Regulations. 79 FR 54517. |
| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
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| November 14, 2014 |
Nationally Recognized Statistical Rating Organizations. 79 FR 55077. |
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[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g-3(a)(7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g-2(a)(9), (b)(13) through (15), Sec. 240.17g-5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g-7(a) and (b), and Form ABS-15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga-2, 240.17g-8, 240.17g-9, 240.17g-10, and Form ABS Due Diligence-15E are effective June 15, 2015.] |
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| October 10, 2014 |
Department of the Treasury Regulations for the Gulf Coast Restoration Trust Fund. 79 FR 48039. |
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| On October 10th, the Financial Industry Regulatory Authority announced that the Securities Industry/Regulatory Council on Continuing Education released its Fall 2014 Firm Element Advisory, which identifies regulatory and sales practice topics that firms should consider in their Firm Element training plans. FINRA Regulatory Notice 14-41. |
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| On October 9th, the Financial Industry Regulatory Authority reminded firms that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the SEC, FINRA, or any federal or state regulatory authority regarding a possible securities law violation. FINRA Regulatory Notice 14-40. |
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| On October 8th, the Financial Industry Regulatory Authority announced the availability of a new template that will allow members to file electronically the statement required by Securities Exchange Act Rule 17a-5(f)(2), as revised, regarding the identification of a broker-dealer’s independent public accountant. FINRA is also providing a set of Frequently Asked Questions for members’ guidance. FINRA Regulatory Notice 14-39. |
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| On October 8th, the SEC approved the Financial Industry Regulatory Authority’s proposed amendment of Rule 12104 of the Customer Code and Rule 13104 of the Industry Code to broaden arbitrators’ authority to make referrals during an arbitration proceeding. The amendments will permit arbitrators to refer to FINRA any matter or conduct that an arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken. SEC Release No. 34-73319. |
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| On October 7th, the SEC instituted proceedings to determine whether to approve or disapprove the Financial Industry Regulatory Authority’s proposed adoption of rules relating to quotation requirements for over-the-counter equity securities and to delete the rules relating to the OTC Bulletin Board Service and thus cease its operation. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of October 13. Rebuttal comments should be submitted within 35 days. SEC Release No. 34-73313. |
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| On October 7th, the Financial Industry Regulatory Authority advised members that the SEC is operating under a continuing resolution that will extend until December 11, 2014. As such, the Section 31 rate applicable to specified securities transactions on the exchanges and in the over-the-counter market will remain at the current rate of $22.10 per million dollars until 60 days after the enactment of a new fiscal year appropriation for the SEC. FINRA Information Memo. |
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| On October 6th, the Financial Industry Regulatory Authority updated the imbedded text of Securities Exchange Act financial responsibility rules for broker-dealers in the Interpretations of Financial and Operational Rules. The updates reflect the effectiveness of SEC amendments to Rules 15c3-1, 15c3-1a, 15c3-1e, 15c3-1f, 15c3-1g, 15c3-3a and 17a-4. FINRA is also making available related updates of the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC’s Division of Trading and Markets. The updated interpretations relate to Rule 15c3-1. FINRA Regulatory Notice 14-38. |
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| On October 6th, NYSE Group announced NYSE Regulation will directly perform the market surveillance, investigation and enforcement functions for NYSE Group’s three equities exchanges and two options exchanges upon the expiration of the contract with the Financial Industry Regulation Authority on December 31, 2015. FINRA will retain the cross-market surveillance and investigation functions and will continue to conduct the registration, testing, and examinations of broker-dealer members of NYSE Group’s exchanges. NYSE Group Press Release. |
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| On October 10th, Reuters highlighted two risks U.S. residents may want to consider before investing in the Canadian medical marijuana industry. The investments may be considered violations of the U.S. Controlled Substance Act and as money laundering. Risk Factors. |
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| On October 9th, Bloomberg summarized the comments made by Bill Coen, Secretary General of the Basel Committee on Banking Supervision, during an interview. The Basel Committee has prepared new rules which will limit how banks measure their credit risk. Variability Limits. |
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| On October 9th, DealBook reported U.S. prosecutors have withdrawn their request for restitution from a former trader, Jesse C. Litvak, who had been convicted on various charges related to defrauding the Troubled Asset Relief Program. Because the federal government had not been singled out as the victim of Litvak’s fraud, prosecutors conceded that insufficient support existed for the restitution request. Withdrawn Request. |
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| On October 7th, Bloomberg reported the Financial Stability Board has drafted additional capital requirements for the largest international banks. Among other things, the proposal would require these banks to issue junior debt and similar securities that could be written-down immediately during period of financial stress. Capital Requirements. |
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| On October 7th, the Public Investors Arbitration Bar Association published a report which found that the pool of arbitrators available to consider investor disputes lacks diversity. PIABA Press Release. In response, the Financial Industry Regulatory Authority issued a statement summarizing its efforts to seek individuals from diverse backgrounds to serve as arbitrators. FINRA Statement. |
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| On October 6th, Bloomberg summarized draft International Swaps and Derivatives Association amendments to its standard language for swaps contracts. Under the draft, counterparties to a bank seeking bankruptcy protection would have to wait 24 hours before requiring the bank to post additional collateral. Staying Demand. |
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| The Real Deal, “Broken Window” Filings will be held on October 23, 2014 from 12:00 - 1:00 p.m. (Central). The Real Deal is a webinar series addressing current trends, challenges, and legal topics pertinent to M&A and securities professionals. Webinar. |
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