Financial Services Weekly News Roundup - January 2015 #4


The CFTC Exercises Expanded Jurisdiction Over Retail Transactions in Physical Commodities. Title VII of the Dodd-Frank Act of 2010 amended the Commodity Exchange Act (CEA) to add new authority over certain leveraged, margined or financed retail commodity transactions. New section 2(c)(2)(D) applies to any agreement, contract or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged or margined basis, or financed by the offeror, the counterparty or a person acting in concert with either of them. An agreement, contract or transaction of this type is treated as if it were a contract of sale of a commodity for future delivery, and thus subject to provisions of the CEA. The CEA provides exceptions for certain transactions from section 2(c)(2)(d), including an exception for a contract of sale that results in “actual delivery” within 28 days. On January 26, the CFTC announced that it had accepted an offer of settlement in Matter of Gold Coast Bullion, Inc. and Anthony Lauria, an administrative case against a self-described precious metals broker and its president and sole officer. The CFTC found that telemarketers for Gold Coast Bullion (GCB) told customers that they could buy precious metals with a payment of 25% of the purchase price, with the remaining 75% of the purchase price being covered by a loan to the customer on which the customer paid interest. GCB did not purchase or sell any physical metals, but instead contracted with another company, AmeriFirst Management LLC, to execute the customer’s order. AmeriFirst, itself the subject of a suit in federal court by the CFTC, also did not purchase or sell any physical metals in connection with the GCB customer transactions, but instead managed its own exposure using derivatives in margin trading accounts with several entities, and made book entries which tracked the value of the customer’s account. On these facts the CFTC was able to find that the GCB transactions were transactions with non-eligible contract participants entered into on a leveraged basis, and that they did not result in actual delivery of the precious metals within 28 days. Having found that the transactions were covered by the provisions of the CEA, the CFTC order found that GCB had committed fraud in connection with the transactions and had failed to registered as a futures commission merchant (FCM), and that Lauria was responsible as a controlling person of GCB for its violations. While it appears that the activities of GCB were fraudulent in intent, the CFTC’s order is a reminder that merchants who deal in precious metals and other commodities for actual delivery should be careful not to get pulled into the requirements of the CEA because they offer financing to retail customers.

Because of the snowstorm in the Northeast, we are publishing on Thursday this week.

Regulatory Developments

SEC Announces Roundtable on Proxy Voting

The SEC announced that it will host a February 19, 2015 roundtable on potential improvements to the proxy voting process focused on universal proxy ballots and retail participation in the proxy process. The roundtable’s first panel will focus on the state of contested director elections and whether changes should be made to the federal proxy rules to facilitate the use of universal proxy ballots by management and proxy contestants, and will also address the state law, logistical, and disclosure issues presented by a possible universal proxy ballot process. The roundtable’s other panel will focus on strategies for increasing retail shareholder participation in the proxy process. This panel will discuss how technology – by providing better access to information or easier means of voting – might affect retail participation. The second panel will also discuss whether the format of disclosure could be improved to increase shareholder engagement and how the mechanics of voting could be improved to affect retail shareholder participation. The roundtable will be open to the public and webcast live on the SEC’s website.

Client Alert: Important Changes to the U.S. Sanctions Against Cuba

Goodwin Procter’s National Security & Foreign Trade Regulation practice issued a Client Alert on the Obama administration’s recently announced changes to U.S. sanctions against Cuba, allowing expanded travel, trade, and exchange in targeted areas. Financial services-related changes detailed in the Alert include relaxation of limits on remittances, credit and debit card use and operations of U.S. banks and credit unions.

Federal Reserve Issues Strategies for Improving the U.S. Payment System

On January 26, 2015, the Federal Reserve Board issued its long-anticipated plan for working with payments systems stakeholders to enhance the speed, security, efficiency and cross-border capabilities of the U.S. payment system. "Strategies for Improving the U.S. Payment System" outlines plans to establish task forces focused on implementation and fraud reduction and improve the system through work on standards, directories and business-to-business payment improvements. The paper also describes the Federal’s Reserve’s plans to enhance Fed-provided services for same-day automated clearing house (ACH), risk management and settlement. The Federal Reserve hosted a webcast on January 29 to discuss the report and the Federal Reserve’s plans for collaboration with stakeholders. Teleseminars will also be held on February 4 and 10 to present an overview of the strategies and answer questions.

Enforcement & Litigation

SEC Grants Relief From 2-Year Compensation Timeout Under Advisers Act Pay-to-Play Rule Triggered When Firm Principal Contributed to Texas Governor’s Presidential Campaign

Crestview Advisors, L.L.C., an SEC-registered adviser, was granted exemptive relief pursuant to Rule 206(4)-5 under the Investment Advisers Act, often referred to as the “Pay-to-Play Rule,” from the Rule’s two-year prohibition on receiving compensation with respect to the investments made by a Texas state pension plan in a private equity fund managed by the adviser. The prohibition was triggered when Jeffrey A. Marcus, a senior investment professional of the adviser, made a $2,500 campaign contribution in 2011 to the Presidential campaign of the Governor of Texas. By virtue of his office, the Texas Governor had the power to appoint all the members of the board of trustees that oversees investment decisions for the pension plan in question. The adviser maintained compliance procedures more restrictive than the limitations in the Pay-to-Play Rule, including a pre-clearance process for contributions to any national political candidate, party or action committee. The adviser attributed the violation of its compliance procedures by Mr. Marcus to a mistaken belief on his part that all contributions to federal campaigns were permissible and exempt from the adviser’s pre clearance requirements. Immediately upon learning of the contribution, the adviser’s chief compliance officer instructed Mr. Marcus to request the return of the campaign contribution, and the contribution was subsequently returned by the Governor’s campaign office. The adviser’s amended and restated application for exemptive relief on which the SEC granted the proposed relief is available here. Crestview Advisors, L.L.C., SEC Release No. IA-3997 (Jan. 15, 2015).

Investment Adviser Settles With SEC Over Compliance Program and Form ADV Shortcomings

The SEC settled administrative proceedings against du Pasquier & Co., Inc., a formerly registered investment adviser, based on SEC findings that the adviser failed to maintain adequate compliance policies and procedures and did not meet various Form ADV disclosure requirements with respect to the SEC and its clients. Among other findings, the SEC determined that the adviser (1) relied on an off-the-shelf compliance manual template without tailoring it to the firm’s business; (2) did not fully implement the compliance procedures it did adopt, e.g., the firm did not conduct adequate best execution reviews and did not adequately review marketing materials; (3) failed to conduct annual reviews of its compliance program; and (4) failed to conduct adequate reviews of its personnel’s securities transactions. A number of the violations noted in the settlement involved conduct identified by the SEC examination staff in 2004 and 2007. The SEC found that the adviser addressed some of the deficiencies identified in those examinations, but failed to prevent the violations identified in the settlement. In determining to accept the Offer, the Commission considered the adviser’s remedial efforts and cooperation with the SEC staff, including steps taken by the adviser before it became aware of the staff’s investigation. The adviser agreed to pay a $50,000 civil money penalty. In the Matter of du Pasquier & Co., Inc., SEC Release No. IA-4004 (Jan. 21, 1015).

FINRA Fines Broker-Dealer Over Disclosure of Customer Information in Response to Requests Related to Class Action Notices

FINRA entered into a settlement with member firm Scottrade, Inc. related to FINRA’s findings that in 2012 the firm violated Regulation S-P by disclosing the names and addresses of more than 300,000 customers in response to requests from a class action administrator and law firms regarding the delivery of class action notices to Scottrade’s customers. FINRA found that Scottrade’s disclosure did not fall within any exception to Regulation S-P’s prohibitions regarding the disclosure of nonpublic personal information about its customers, noting particularly that the requests did not fall within the exception allowing for disclosures to comply with a subpoena or respond to judicial process. FINRA also determined that Scottrade had inadequate supervisory policies and procedures related to the disclosure of confidential customer information by the department handling the class action notice requests. In addition to undertaking specific measures to address and correct the violations identified in the settlement, Scottrade agreed to pay a $200,000 fine.

Industry Developments

ICI and IDC Issue Report on Use of Proxy Advisory Firms by Registered Funds

The Investment Company Institute (ICI) and the Independent Directors Council (IDC) released their Report on Funds’ Use of Proxy Advisory Firms, which is designed to assist registered fund advisers and boards in responding to June 2014 guidance from the SEC staff about advisers’ proxy voting responsibilities relating to use of proxy advisory firms. The report addresses the following topics: (i) proxy advisory firm services generally, (ii) board oversight of proxy advisory firms, (iii) fund adviser due diligence and oversight of proxy advisory firms, which represents the bulk of the report, and (iv) miscellaneous considerations related to proxy advisory firm oversight. An appendix provides references to additional resources, including SEC releases and staff guidance, ICI and IDC publications (such as the ICI and IDC’s Oversight of Fund Proxy Voting paper, which discusses the board’s role in overseeing proxy voting more broadly), and other resources.

Lynne Barr Presenting on FDIC Overdraft Protection Guidance, February 5, 2015

On February 5, 2015, Banking and Consumer Financial Services chair Lynne Barr will be presenting a live CLE webinar program entitled “Trending Tips on FDIC Guidance on Overdraft Protection” in association with Lorman Education Services. Please view program details here, and note the special 50% discount codes offered on the cover which we are pleased to extend to clients and friends of the firm.


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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