Financial Services Weekly News

Regulatory Developments

SEC and FINRA Announce National Compliance Outreach Program for Broker-Dealers

The SEC and FINRA announced the opening of registration for their 2015 National Compliance Outreach Program for Broker-Dealers to be held on July 14 at the SEC’s Washington, D.C. headquarters. The program, which is targeted at compliance, audit and risk officers of broker‑dealers and their branch offices, will focus on 2015 priorities for OCIE and FINRA as well as current topics of interest including cybersecurity, anti-money laundering and supervision and sales practices. In-person attendance is limited to 500 on a first-come, first-served basis with a maximum of 10 attendees per firm. The event will be webcast live on the SEC’s website. Additional details, including the agenda and registration information, are available on the SEC’s website.

NYSDFS Grants Trust Company Charter to itBit Trust Company, LLC

The New York State Department of Financial Services (DFS) last week granted a trust company charter to itBit Trust Company, LLC (itBit). According to the DFS, itBit is the first virtual currency company to receive a charter from DFS. The DFS announcement indicates that DFS is continuing to review and accept applications from other virtual currency companies.

Client Alert: Commerce Department Survey of U.S. Direct Investment Abroad Due as Soon as May 29

Goodwin Procter’s National Security & Foreign Trade Regulation Practice issued a client alert highlighting the potential reporting obligation for U.S. companies with foreign affiliates under the periodic BE-10 benchmark survey conducted by the U.S. Commerce Department’s Bureau of Economic Analysis. The client alert reviews the informational requirements of the BE-10 benchmark survey, which applies to all U.S. companies that own, directly or indirectly,10% or more of the voting securities of an incorporated “foreign affiliate” or an equivalent interest in an unincorporated foreign business, and discusses the survey’s submission requirements, which include a deadline for certain filers that is as early as May 29, 2015.

Enforcement & Litigation

FINRA Sanctions LPL Financial LLC $11.7 Million for Supervisory Failures

On May 6, FINRA announced that it had accepted a Letter of Acceptance, Waiver and Consent (AWC) from LPL Financial LLC (LPL) in which LPL accepted the FINRA findings without admitting or denying them. FINRA found that, during the period from 2005 to 2015, there were failures by LPL’s supervisory systems in several areas, including the following: (1) suitability of sales of non-traditional ETFs, such as leveraged, inverse and inverse-leveraged ETFs not intended for longer-term investing; (2) disclosure of information to customers being switched into variable annuity contracts or mutual funds out of other variable annuity contracts or mutual funds; (3) procedures concerning the thresholds for Class C mutual fund shares and volume discounts for non-traded REIT shares; (4) review of potentially problematic trades (low priced securities, actively traded accounts and concentrated positions); (5) LOPR, RTRS and TRACE reporting; (6) delivery of contemporaneous trade confirmations; and (7) effective monitoring for suspicious activities as part of its AML compliance program. With respect to supervisory oversight of advertising and other communications, FINRA found that LPL representatives in many cases provided consolidated reports (combining information concerning most or all of the customer’s financial holdings, regardless of where the assets are held) that were created by means other than LPL’s proprietary system and that included reports prepared by third-party providers and reports created by representatives themselves using Word or Excel programs. FINRA noted that, because representatives contracted directly with third-party providers, LPL was unable to determine whether the third-party providers stored confidential customer information on their systems. FINRA also found that LPL had failed to monitor radio transmissions in Farsi by two registered representatives on a call-in show in California called “Radio Iran.” Finally, FINRA found supervisory failures relating to the timely review of written correspondence, the receipt of non-solicitation letters from customers, registration requirements for representatives and compliance with Rule 204 of Regulation SHO. FINRA ordered LPL to pay approximately $1.7 million in restitution to certain customers who purchased non-traditional ETFs in addition to a fine of $10 million. In its Corrective Action Statement, LPL noted, among other things, that it had increased the number of persons in its Governance, Risk and Compliance Department from 392 employees at the end of 2012 to 599 employees at the end of 2014, an increase of 53 percent, and had made significant capital expenditures and commitments to improve its systems and technology infrastructure.

FinCEN Director Discusses FinCEN Enforcement Efforts and Money Laundering Risks

FinCEN Director Jennifer Shasky Calvery, in remarks last week at the West Coast AML Forum, addressed recent enforcement efforts on the part of FinCEN. Of note, Director Shasky Calvery mentioned that FinCEN is “working closely” with Bank Secrecy Act examiners at the Internal Revenue Service to “determine whether virtual currency exchangers and administrators are meeting their compliance obligations under the applicable rules” through conducting a “series of supervisory examinations of businesses in the virtual currency industry.” Director Shasky Calvery also noted that FinCEN is concerned about the use of shell companies to purchase luxury real estate and highlighted the possibility that real estate can be used to launder money. She also identified third party money launderers—which she defined as third parties that may include professionals such as attorneys and accountants who enable criminals to access the financial system—as a “priority target” of FinCEN’s enforcement efforts. Director Shasky Calvery noted that FinCEN is currently in the process of reviewing issues raised by commenters in response to FinCEN’s proposed beneficial ownership rule, but she did not indicate in her remarks any expected timetable for FinCEN action on that proposal.