In This Issue. The Securities and Exchange Commission’s (SEC) Division of Enforcement issued answers to frequently asked questions regarding its recently announced Share Class Selection Disclosure Initiative, the Consumer Financial Protection Bureau (CFPB) finalized an amendment to its “Know Before You Owe” mortgage disclosure rule, and the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) updated its list of anti-money laundering and counter-terrorist financing jurisdictions. These and other recent developments are covered below.
Regulatory Developments
SEC Issues FAQs for Share Class Selection Disclosure Initiative
On May 1, the SEC’s Division of Enforcement issued answers to frequently asked questions (FAQs) on the Share Class Selection Disclosure (SCSD) Initiative, providing additional information about adviser eligibility, disgorgement, and the distribution of funds to clients. As covered in the February 14 edition of the Roundup, the SCSD Initiative is a new self-reporting initiative that aims to protect advisory clients from undisclosed conflicts of interest. To be eligible for the SCSD Initiative, an adviser must self-report by notifying the Division of Enforcement by 12:00 a.m. EDT on June 12, 2018. Investment advisers that have already been contacted by the Division of Enforcement as of the date of the announcement regarding possible violations related to their failures to disclose the conflicts of interest associated with mutual fund share class selection are not eligible for the SCSD Initiative.
CFPB Finalizes Know Before You Owe Disclosure Amendments
On April 26, the CFPB finalized amendments to the Know Before You Owe mortgage disclosure requirements under the Real Estate Settlement Procedures Act and the Truth in Lending Act that are implemented in Regulation Z. The amendments relate to when a creditor may compare charges paid by or imposed on a consumer to amounts disclosed on a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith. Currently, creditors must provide consumers with good faith estimates of loan terms and closing costs on a Loan Estimate. Whether such estimates were in good faith depends in part upon the actual cost’s variance from the estimate (i.e., a “tolerance”). Under certain circumstances, creditors may reset tolerances by providing a revised Loan Estimate not later than four business days prior to consummation. However, circumstances may arise in which a cost increases but the creditor is unable to use an otherwise permissible revised estimate on either a Loan Estimate or a Closing Disclosure for purposes of determining whether an estimated closing cost was disclosed in good faith, especially where the creditor has already provided a Closing Disclosure to the consumer before learning about the cost increase. The final rule removes the four-business-day limit and permits creditors to reset tolerances with either an initial or corrected Closing Disclosure regardless of when the Closing Disclosure is provided relative to consummation. The final rule will take effect 30 days after publication in the Federal Register.
FinCEN Updates List of AML/CFT Jurisdictions
On April 27, FinCEN issued an advisory summarizing recent updates to the list prepared by the Financial Action Task Force (FATF) of jurisdictions with strategic anti-money laundering and combatting the financing of terrorism (AML/CFT) deficiencies. These updates were published on February 23, 2018, with the concurrence of the United States. The list is composed of two separate documents: (1) the “FATF Public Statement” and (2) “Improving Global AML/CFT Compliance: On-going Process.” The first document urges FATF members and other jurisdictions to impose countermeasures against the Democratic People’s Republic of Korea and to apply enhanced due diligence measures proportionate to the risks arising from Iran, based on the strategic AML/CFT deficiencies of each of those jurisdictions. The second document identifies jurisdictions with strategic AML/CFT deficiencies for which the jurisdictions have developed an action plan with the FATF, and includes the following jurisdictions: Ethiopia, Iraq, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Vanuatu, and Yemen. Note that Serbia has been added to, and Bosnia and Herzegovina has been removed from, the list, pursuant to this update.
Enforcement & Litigation
U.S. v. Zaslavskiy: DOJ and SEC Coordination in Enforcing the Securities Laws Over Token Sales
In the fall of 2017, the United States Department of Justice (DOJ) and the SEC each filed actions against Maksim Zaslavskiy for securities fraud in connection with two token offerings, through which he promised token purchasers profits from his companies’ investments in real estate and diamonds. Zaslavskiy’s motion to dismiss the criminal indictment is currently pending before Judge Dearie in the Eastern District of New York. The briefing submitted in connection with this motion reflects the DOJ and SEC’s coordinated approach in applying the securities laws to token sales, emphasizing a focus on “substance over form” and the importance of assessing the present state of a company’s technology in determining whether a token constitutes a security. The briefing also underscores both the DOJ’s and the SEC’s focus on holding companies accountable for fraudulent statements to investors, in whatever form such statements may come. View the Digital Currency & Blockchain Perspectives blog post
