Weekly RoundUp
August 19, 2015

Financial Services Weekly News

As we move into the dog days of summer the pace of new rulemaking developments has been slow; however, as highlighted below this week was not without some regulatory highlights. Among the most notable of this week’s developments was the decision by a U.S. federal court in Manhattan to grant a preliminary injunction against the SEC’s continued prosecution of a former Standard & Poor's officer in an agency-run administrative proceeding, finding that the SEC's method of appointing administrative law judges violates the U.S. Constitution. The impact of this decision and other recent U.S. federal court decisions finding constitutional fault with the SEC’s administrative process are discussed in detail in a client alert by Goodwin Procter’s Securities Litigation & White Collar Defense practice highlighted below.


In other news, continuing the enforcement trend witnessed throughout 2015 this week also saw the settlement by the SEC of enforcement proceedings with some large financial institutions related to compliance violations.

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. Goodwin Procter’s Capital Markets practice has issued a client alert providing additional detail on this development.

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.

Client Alert: Federal Court Deflates, For Now, SEC’s Efforts to Proceed Before Its In-house Courts

Goodwin Procter’s Securities Litigation & White Collar Defense practice has issued a client alert on the preliminary injunction recently issued by a federal judge in Manhattan against the SEC’s continued prosecution of a former Standard & Poor's officer in an agency-run administrative proceeding, finding that the SEC's method of appointing administrative law judges violates the U.S. Constitution. On a more fundamental level, the Constitutional challenge reflects defendants’ frustration with the perceived unfairness of the SEC's administrative proceedings, where the agency enjoys substantive and procedural advantages before judges it employs, and where its track record far exceeds its record in federal court before independent judges and juries.

Goodwin Procter News

Three Goodwin Procter Partners Named “Lawyer of the Year” by Best Lawyers 2016

Three Goodwin Procter attorneys, including Financial Institutions Group co-chair Bill Mayer, were recognized as 2016 “Lawyers of the Year” by Best Lawyers. Bill was recognized as Boston’s Banking & Finance “Lawyer of the Year.” The distinction, based on peer-review, is presented annually to a single stand-out lawyer in each practice and major metropolitan area. Also recognized was William Whitledge, chair of the firm’s Tax practice.

Goodwin Procter Partners Honored by Massachusetts Lawyers Weekly

Amber Dolman, member of the firm’s Financial Institutions Group and co-leader of its Fintech Practice was recently recognized by Massachusetts Lawyers Weekly in a list of “Top Women of Law” in 2015. This year’s honorees included women who have demonstrated outstanding leadership in private practice, the corporate arena, and social advocacy.

Lawdragon Honors Goodwin Attorneys in 10th Anniversary Edition

Goodwin Procter Chairman Emeritus Regina Pisa, a member of the firm’s Financial Institutions Group, was recognized as a leader in the Lawdragon Hall of Fame, which recognizes past members of the Lawdragon 500 and other outstanding lawyers who have made remarkable contributions. The Lawdragon 500 Leading Lawyers in America profiles the year’s most influential lawyers and most important legal matters. Brian Pastuszenski, co-chair of our Securities Litigation and White Collar Defense Group, was recognized as part of an elite group comprising the top 500 lawyers in the United States.