Financial Services Alert - May 27, 2014 May 27, 2014
In This Issue

NFA to Impose Fee for Failing to Disclose Disciplinary Matter

The National Futures Association (the “NFA”) issued Notice to Members I-14-11 (the “Notice”) announcing its adoption of new rule amendments that provide for payment of a $1,000 late disclosure fee when an applicant for registration fails to disclose a disciplinary matter or when a registrant fails to promptly update an existing registration to disclose a new disciplinary matter.  The rule will become effective on June 1, 2014, and will apply to registration applications filed after that date and updates to report matters occurring after that date.  The fee will be imposed regardless of whether or not the NFA initiates action that could result in the disqualification of a firm or individual from registration (an “adverse registration action”) based on the failure to disclose or the underlying matter.

The NFA will also adopt a policy of not taking an adverse registration action when the failure to disclose is the result of negligence or carelessness.  This replaces the policy adopted in 2007 under which even a non-intentional failure to disclose a disciplinary matter could nonetheless constitute a willful failure to disclose and therefore subject the firm or individual to an adverse registration action.   Under the new policy, in coordination with imposing the late disclosure fee, the NFA will evaluate the explanation for a non-disclosure to determine whether the surrounding circumstances evidence that the non-disclosure was the result of negligence or carelessness, or whether the non-disclosure was truly willful, in which case the non-disclosure could be the basis for an adverse registration action.

The Notice states that, as part of its supervisory obligations, the sponsor of a principal or associated person is responsible for ensuring that all matters requiring disclosure are in fact disclosed.  As a result, the obligation to pay a late disclosure fee assessed as a result of a principal’s or associated person’s failure to disclose a disciplinary matter is the sponsor’s, not the principal’s or associated person’s, although the Notice states that a sponsor is not prohibited from requiring the principal or associated person to reimburse the sponsor for this expense.  With respect to the disclosure of new matters, a sponsor must ensure that disciplinary matters are reported “promptly.”  The Notice states that the NFA generally considers a matter to have been promptly disclosed if the matter is disclosed to NFA before NFA discovers it and requests that it be disclosed.

Credit Suisse Pleads Guilty to DOJ Charge of Conspiracy to Aid Tax Evasion; FRB and NYDFS Take Related Actions

As widely reported in the financial press, Credit Suisse AG (“Credit Suisse”), a large Swiss bank that maintains a branch and other offices in the United States pleaded guilty to the felony of conspiracy to aid tax evasion by U.S. taxpayers and agreed to pay an aggregate penalty of approximately $2.6 billion.  Credit Suisse’s plea and penalty payment settled a three-year investigation by the U.S. Department of Justice (the “DOJ”).  Credit Suisse was the first bank of its size to plead guilty to a crime in the U.S. in more than a decade.  In prior cases, in part to avoid significant collateral consequences from a bank’s criminal conviction to employees, shareholders, others not personally involved in the crime or to avoid harm to the U.S. economy, the DOJ had often accepted a guilty plea from a subsidiary of the applicable bank and a deferred prosecution agreement from the bank itself.

The DOJ stated that it told Credit Suisse in 2011 that it was a target of its investigation.  The DOJ also said that its decision to seek a guilty plea from Credit Suisse was based in part upon what the DOJ found to be Credit Suisse’s failure to cooperate fully with the DOJ, the slow pace of its document production, its deletions of important emails, the length of time it took before Credit Suisse began to conduct an internal investigation of the matter, and its failure to interview a number of culpable individuals.

Credit Suisse’s $2.6 billion aggregate payment included a $100 million payment to the FRB, a $715 million payment to the New York Department of Financial Services (the “NYDFS”) and an approximately $1.8 billion payment to the DOJ (which includes nearly $670 million in restitution to the IRS).  Under the terms of the settlement, Credit Suisse was not required to turn over the names of account holders to the DOJ, but Deputy Attorney General James Cole stated that the information provided by Credit Suisse is expected to be sufficient to lead the DOJ and FRB, over a period of time, to specific account holders.

Credit Suisse paid the above-noted $100 million penalty to the FRB “for unsafe and unsound practices and failure to comply with the federal banking laws governing its activities in the United States.”  Credit Suisse also entered into a Cease and Desist Order (the “FRB Order”) with the FRB under which Credit Suisse agreed to strengthen its risk management and compliance programs to address deficiencies in the oversight and management of, and controls over, compliance with U.S. laws.  Under the FRB Order and Credit Suisse’s plea agreement with the DOJ, Credit Suisse agreed to terminate certain employees who were found to be involved in the above-described illegal activities and to terminate additional individuals, if any, who are determined to have been involved in the tax evasion scheme.  None of Credit Suisse’s senior executives was required to be terminated.  In an effort to see that the felony conviction did not endanger the ongoing business of Credit Suisse, under the FRB Order, the FRB agreed not to terminate the activities and operations of Credit Suisse’s U.S. offices.

In conjunction with the above-mentioned $715 million payment by Credit Suisse to the NYDFS, Credit Suisse entered into a consent order (the “NY Order”) with the NYDFS.  The NY Order cited, among other stipulated facts, that Credit Suisse aided thousands of U.S. clients in opening and maintaining undisclosed accounts and concealing offshore assets and income from the IRS and New York.  Under the NY Order, in addition to the $715 million payment, Credit Suisse agreed to hire an independent monitor (selected by the NYDFS after consultation with Credit Suisse) to conduct a comprehensive review of Credit Suisse’s “compliance programs, policies and procedures in place at the time of the [illegal] conduct.”  The monitor is required under the NY Order to prepare a written report on its findings and Credit Suisse agrees to improve and enhance its compliance programs and implement any recommendations made by the monitor (or explain to the NYDFS why a recommendation by the monitor is not being implemented into Credit Suisse’s compliance program and governance process).  The NY Order addresses the termination of the nine Credit Suisse employees noted in the FRB Order and takes no step to terminate the license of Credit Suisse’s New York representative office.  

Importantly, in steps related to the government and regulatory actions described above, the Federal Reserve Bank of New York (the “FRB-NY”) indicated that, despite Credit Suisse’s criminal conviction, it would remain a primary dealer of the FRB-NY, i.e., a broker-dealer that deals in government securities directly with the FRB-NY.  In addition, the SEC granted a waiver from the “bad actor” disqualification provision of Rule 506 under the Securities Act of 1933 that would otherwise prevent certain funds, third party issuers and portfolio companies affiliated with Credit Suisse from relying on the Rule 506 private offering exemption as a result of the conviction that will result from Credit Suisse’s guilty plea.