Financial Services Bulletin: Senate, CFTC, and Fed Action

by Perkins Coie
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Bi-Partisan Senate Bill Proposed to Authorize Larger SEC Penalties

On Monday, July 23, 2012, U.S. Senators Charles Grassley (R-IA) and Jack Reed (D-RI) introduced S.3416, the Stronger Enforcement of Civil Penalties Act of 2012. S.3416 would increase the statutory limits on the amounts that the Securities and Exchange Commission (the "SEC") may seek to penalize individuals and entities charged with securities law violations in administrative and civil actions. Under current law the maximum amount the SEC may impose on an individual is $150,000 per violation, and on an entity is $725,000 per violation. Penalties in excess of these amounts may be sought only if the matter is litigated in federal court.

Under S.3416, the SEC may impose increased maximum penalties in administrative proceedings without being required to submit the matter to civil litigation:

  • For serious securities law violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses to victims or substantial pecuniary gain to the violator, the greater of (a) $1 million for individuals and $10 million for entities, (b) three times the gross pecuniary gain, or (c) the losses incurred by the victims as a result of the violation;
  • For less serious law violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses to victims or substantial pecuniary gain to the violator, the greater of (a) $100,000 for individuals and $500,000 for entities, or (b) the gross pecuniary gain as a result of the violation;

  • For violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, the greater of (a) $10,000 for individuals and $100,000 for entities, or (b) the gross pecuniary gain as a result of the violation; and

  • For individuals or entities who within the preceding five years were criminally convicted of securities fraud or subject to a judgment or order concerning securities fraud, the otherwise applicable cap is tripled.

S.3416 is now before the Senate Committee on Banking, Housing and Urban Affairs.

Read the Senate Bill

The CFTC Proposes New Ownership and Control Reports Rules and Forms

On Thursday, July 26, 2012, the Commodity Futures Trading Commission (the "CFTC") proposed new rules and related forms to enhance its identification of futures and swap market participants pursuant to title VII of the of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The proposed rules would leverage the CFTC's existing position and transaction reporting programs by requiring the electronic submission of trader identification and market participant data on amended Forms 102 and 40, and on new Form 71. The proposed rules also incorporate a revised approach to the CFTC's previous initiative to collect ownership and control information, through a dedicated ownership and control report, for trading accounts active on reporting markets that are designated contract markets or swap execution facilities.

Read the CFTC rules

The Fed Adopts Final Debit Card Fraud-Prevention Adjustment Rule

On Friday, July 27, 2012, the Federal Reserve Board (the "Fed") announced the approval of a final rule that amends the provisions in Regulation II (Debit Card Interchange Fees and Routing) that permit a debit card issuer subject to the interchange fee standards to receive a fraud-prevention adjustment. The final rule, adopted pursuant to Section 920 of the Electronic Fund Transfer Act, as amended by 1075 of the Dodd-Frank Act, revises provisions that are currently in effect as an interim final rule.

Under the final rule, an issuer will be eligible for an adjustment of no more than 1 cent per transaction--the same amount as in the interim final rule--if it develops and implements policies and procedures that are designed to reduce the occurrence and costs of fraudulent debit card transactions. The final rule makes changes simplifying the elements required to be included in an issuer's fraud-prevention policies and procedures. To receive an adjustment, an issuer will be required to review its fraud-prevention policies and procedures, and their implementation, at least annually. An issuer also will be required to update its policies and procedures as necessary in light of their effectiveness and cost-effectiveness and, as currently required, in light of changes in the types of fraud and available methods of fraud-prevention.

Read the Fed press release

The Fed Adopts Rule Establishing Risk-Management Standards for Systemically Important Financial Market Utilities

On Monday, July 30, 2012, the Fed announced the approval of a final rule establishing risk-management standards for certain financial market utilities ("FMUs") designated as systemically important by the Financial Stability Oversight Council. The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures, or operations of certain designated FMUs. FMUs, such as payment systems, central securities depositories, and central counterparties, provide the infrastructure to clear and settle payments and other financial transactions.

The final rule (Regulation HH) implements two provisions of Title VIII of the Dodd-Frank Act. It establishes risk-management standards governing the operations related to the payment, clearing, and settlement activities of designated FMUs, except those registered as clearing agencies with the SEC or as derivatives clearing organizations with the Commodity Futures Trading Commission. The risk-management standards are based on the recognized international standards developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions that were in existence at the time of the proposed rulemaking, which were incorporated previously into the Fed's Policy on Payment System Risk.

The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures, or operations of a designated FMU for which the Fed is the supervisory agency under Title VIII of the Dodd-Frank Act. The advance notice requirements set the threshold above which a proposed change would be considered material and thus require an advance notice to the Fed, and also include provisions on the length of the review period.

Read the Fed press release

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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