Financial Services Weekly News - August 2015 #3

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Regulatory Developments

FinCEN Rules Digital Precious Metal Certificates Provider is a Money Transmitter

On Aug. 14 FinCEN issued a ruling applying its virtual currency rules to an e-precious metals company. The company at issue engaged in three types of activity: (1) operating an Internet-based brokerage service for buyers and sellers of precious metals, where buyers directly paid sellers; (2) purchasing and selling precious metals on its own account; and (3) taking custody of precious metals for customers, opening a digital wallet on its platform, and issuing negotiable digital certificates to customers that are linked to Bitcoin’s blockchain and permit transfer along the rails of the Bitcoin network. FinCEN ruled that, to the extent the business was only engaged in brokering the purchase and sale of precious metals between buyers and sellers, it was exempt from money service business requirements. However, because it purchased and sold precious metals on its own account, it could be considered a dealer in precious metals if it crossed over the relevant monetary thresholds. Finally, FinCEN ruled the digital precious metal certificates were virtual currencies, and to the extent the company permitted customer-to-customer transfers, or transfers of value between customers and third parties (either in the form of the certificates or otherwise), it was engaged in money transmission.

SEC Provides Guidance on Interpretation of Whistleblower Provisions of the Exchange Act

The staff of the SEC recently issued an interpretative rule clarifying that, for purposes of the employment retaliation protections provided by Section 21F of the Exchange Act, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a), but is determined solely by the terms of Exchange Act Rule 21F- 2(b)(1). The rule became effective Aug. 10 when it was published in the Federal Register.

Client Alert: SEC Adopts CEO Pay Disclosure Rule

As covered in the Aug. 5 Roundup, the SEC recently adopted a final rule requiring public companies to disclose the ratio of its CEO compensation to the median compensation of its employees, as mandated by the Dodd-Frank Act. Disclosure of the pay ratio will be required in registration statements, proxy and information statements, and annual reports that require executive compensation disclosure. Subject to certain transition provisions, the final rule will first apply to compensation paid for a company’s first full fiscal year that begins on or after January 1, 2017 and, therefore, will not require new disclosure in SEC filings by calendar year-end companies until 2018.

Enforcement & Litigation

Consultant and NYDFS Reach Agreement on Access to Confidential Supervisory Information

The New York Department of Financial Services (NYDFS) has announced that Promontory Financial Group, LLC (Promontory) has entered into an agreement (the Agreement) with NYDFS with respect to conduct described by NYDFS in its August 3, 2015 report relating to Promontory’s consulting work at Standard Chartered Bank. In the report, NYDFS asserted that Promontory “exhibited a lack of independent judgment in the preparation and submission of certain reports” to NYDFS relating to Standard Chartered Bank’s compliance with anti-money laundering laws. As a result, NYDFS stated that it intended to deny requests under Section 36(10) of the New York Banking Law to permit Promontory to access confidential supervisory information related to supervised entities. According to the NYDFS, the Agreement with Promontory requires Promontory to pay $15 million to NYDFS and subjects Promontory to a 6-month voluntary abstention from new consulting agreements that require NYDFS to authorize the disclosure of confidential supervisory information under Section 36(10) of the Banking Law. In connection with pending and future matters in which Promontory or its client submits a report to NYDFS, the Agreement requires Promontory to document any changes to the report that it makes at the suggestion of the client or the client’s counsel.

Bank to Pay $14.8 Million to Settle FCPA Charges Related to Student Internships

The SEC announced Tuesday that The Bank of New York Mellon Corporation has agreed to pay $14.8 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. The SEC’s order finds that the company lacked sufficient internal controls to prevent and detect the improper hiring practices. The company did have an FCPA compliance policy, but maintained few specific controls around the hiring of customers and relatives of customers, including foreign government officials. In addition to the FCPA violation, the order found that the company violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934. Without admitting or denying the findings, the company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.

Broker to Pay $15 Million to Settle Compliance and Surveillance Violations

The SEC announced today that Citigroup Global Markets has agreed to pay $15 million to settle charges that it violated: (1) Section 15(g) of the Exchange Act by failing to enforce policies and procedures to prevent and detect securities transactions that could involve the misuse of material, nonpublic information; and (2) Section 206(4) of the Advisers Act by failing to adopt and implement policies and procedures to prevent and detect principal transactions conducted by an affiliate. In the press release issuing the SEC’s order, the Director of the SEC’s Enforcement Division stated that “[t]oday’s high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance, [and] [f]irms must ensure that they have devoted sufficient attention and resources to trade surveillance and other compliance systems.” Without admitting or denying the findings, the company agreed to pay a $15 million penalty and agreed to retain a consultant to review and recommend improvements to its trade surveillance and advisory account order handling and routing.

 

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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