FINRA issued Regulatory Notice 14-50 requesting comment on proposed “pay-to-play” and related rules that would regulate in a manner similar to Rule 206(4)-5 under the Investment Advisers Act (the “Adviser Pay-to-Play Rule”) the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. The proposal includes a two-year time out on engaging in distribution or solicitation activities for compensation with a government entity on behalf of any investment adviser after a member firm or specified officers or personnel make a contribution to an official of the government entity. The proposal responds to a provision of the Adviser Pay-to-Play Rule that, upon its compliance date (currently the earlier of April 1, 2015 or the adoption of a comparable FINRA rule), will prohibit an investment adviser from paying a person to solicit a government entity on the adviser’s behalf unless the person is a “regulated person” subject to a rule of a national securities association (which includes FINRA and the MSRB) that imposes restrictions substantially equivalent to, or more stringent than, those under the Adviser Pay-to-Play Rule, and is consistent with the objectives of the Adviser Pay-to-Play Rule. Comments may be submitted no later than December 15, 2014.
Litigation & Enforcement
In an order issued November 14, 2014, SEC Administrative Law Judge Carol Fox Foelak ruled that Section 21B(a)(2) of the Securities Exchange Act of 1934, added by the Dodd-Frank Act, does not apply retroactively to conduct that occurred prior to the effective date of the law. The SEC, therefore, could not seek ex post facto civil penalties in an administrative proceeding, even though it could seek civil penalties for the same conduct in the U.S. District Courts under law in effect prior to the Dodd-Frank Act. In re Marc Sherman, SEC Release No. 2020 (November 14, 2014).
The SEC settled administrative proceedings against Eureeca Capital SPC, a Cayman Islands-based internet crowdfunding platform, over the SEC’s findings that the platform had offered and sold unregistered securities to U.S. persons and should have been registered with the SEC as a broker-dealer. The SEC found that the platform, which hosted offerings by non-U.S. based companies, violated the requirements of the Securities Act of 1933 by, among other things, making an offering of securities to U.S. persons through a general solicitation and then failing to meet the requirement of the registration exemption under Rule 506(c) of Regulation D regarding reasonable steps to verify the investors’ status as accredited investors. The SEC faulted the platform for allowing two U.S. investors to self-certify by replying to emails that sought confirmation of their status as accredited investors without defining or otherwise explaining the meaning of “accredited investor.” Three U.S. investors invested approximately $20,000 total in four separate offerings through the platform, which agreed to pay a civil penalty of $25,000. In the Matter of Eureeca Capital SPC, SEC Release No. 33-9678 (Nov. 10, 2014).
In a speech delivered at the ALI CLE 2014 Conference on Life Insurance Company Products, Norm Champ, Director of the SEC’s Division of Investment Management, discussed the Division’s monitoring of variable products and the fund industry more generally. Mr. Champ commented on the increased use by underlying funds of derivatives to hedge risks associated with living benefit riders and other general account obligations under variable insurance contracts and the importance of clear, balanced prospectus disclosure regarding variable contract features, particularly enhanced death benefits and living benefits. Noting the growth of alternative mutual funds as underlying investment options for variable products, Mr. Champ reiterated past remarks regarding disclosure of derivatives use in registration statements, marketing materials and shareholder reports.
In remarks to the ABA/ABA Money Laundering Enforcement Conference, U.S. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen discussed a number of proposed and ongoing anti-money laundering (AML) initiatives and concerns. Under Secretary Cohen spoke in favor of legislative action to clarify and extend the existing statutory safe harbor from civil liability for filing a suspicious activity report (SAR) and to enable information sharing among financial institutions on any suspicious transaction relevant to a possible violation of law or regulation, regardless of any direct link to money laundering or terrorist financing. He noted that the Financial Crimes Enforcement Network (FinCEN), in consultation with the SEC, is working to extend AML program and suspicious activity reporting requirements to SEC-registered investment advisers. His remarks touched on the proposed customer due diligence rule and the White House legislative initiative to require newly formed legal entities to provide the IRS with information on the entities’ beneficial owners. Under Secretary Cohen expressed concern over the phenomenon of “de-risking” in which a financial institution terminates or restricts business relationships to avoid perceived regulatory risk rather than in response to an assessment of the actual risk of illicit activity. He concluded his remarks with a discussion of the Treasury’s strategy with respect to money service businesses (MBSs), which includes further guidance for banks taking on MSBs as customers, additional engagement with the MSBs on strengthening compliance matters, enhanced oversight of MSBs (e.g., through reliance on examinations by state supervisory agencies), and cooperation with international partners.
We reported in last week’s Roundup that the OCC, the FDIC and the Federal Reserve Board have released FAQs related to their March 2013 guidance concerning leveraged lending. In this Client Alert, Goodwin partners Anna Dodson and Bill Stern provide a more in-depth discussion of the robust risk management practices the banking agencies expect to see in banking institutions engaged in leveraged lending.
Amber Dolman and Bob Bishop, co-leaders of Goodwin Procter’s Fintech Practice, were recently featured by Banker & Tradesman, a publication of The Warren Group. In the article, Amber and Bob talk about how Goodwin expanded its Fintech platform by consolidating market-leading expertise throughout the firm to provide a ‘one-stop’ shop for Fintech and offer insights on how financial technology is quickly changing the landscape of the financial services industry.