Weekly RoundUp February 14, 2018

Financial Services Weekly News

Editor's Note

In This Issue. The Consumer Financial Protection Bureau (CFPB) released its five-year Strategic Plan and issued a request for information on its enforcement processes; the New York State Department of Financial Services (NYDFS) issued guidance to virtual currency businesses designed to curtail virtual currency fraud and manipulation; and the Securities and Exchange Commission (SEC) announced (1) plans to hold a national outreach compliance seminar for investment companies and investment advisers, (2) a new self-reporting initiative for investment advisers that have failed to explicitly disclose conflicts of interest associated with receiving 12b-1 fees and (3) the 2018 National Examination Program priorities. These and other recent developments are covered below.

Please note: The Roundup will be on hiatus due to the federal holiday next week. We will resume publication on February 28.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

CFPB Releases New Strategic Plan

On February 12, the CFPB released its five-year Strategic Plan, under which the CFPB intends to regulate financial products under existing law instead of pursuing new enforcement actions and rulemaking. In the new Strategic Plan, the CFPB has committed “to fulfill the [CFPB]’s statutory responsibilities, but go no further,” said Acting Director Mick Mulvaney. “By hewing to the statute, this Strategic Plan provides the [CFPB] a ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers.” According to the press release announcing the plan, the CFPB “will now focus on equally protecting the legal rights of all, including those regulated by the CFPB, and will engage in rulemaking where appropriate to address unwarranted regulatory burdens and to implement federal consumer financial law and will operate more efficiently, effectively, and transparently.”

CFPB Issues Request for Information on Enforcement Processes

On February 7, the CFPB issued a Request for Information (RFI) about its enforcement processes. The CFPB is seeking information to help assess the overall efficiency and effectiveness of its processes related to the enforcement of federal consumer financial law. This is the third in a series of RFIs announced as part of Acting Director Mick Mulvaney’s call for evidence to ensure the CFPB is fulfilling its proper and appropriate functions to best protect consumers. This RFI will provide an opportunity for the public to submit feedback and suggest ways to improve outcomes for both consumers and covered entities. The CFPB will accept comments until April 13, 2018.

NYDFS Issues Guidance Targeting Virtual Currency Fraud and Manipulation

On February 7, the NYDFS issued guidance (Guidance) to virtual currency businesses licensed under 23 NYCRR Part 200 or chartered as a limited purpose trust company under the New York Banking Law, including businesses also holding a money transmitter license (Virtual Currency Entities). The Guidance reminds Virtual Currency Entities that they are required to implement measures designed to effectively detect, prevent and respond to fraud, attempted fraud and similar wrongdoing; and that market manipulation is a form of wrongdoing deserving of special attention.

The Guidance directs Virtual Currency Entities to adopt measures that include, at a minimum, effective implementation of a written policy that:

  • Identifies and assesses the full range of fraud-related and similar risk areas, including, as applicable, market manipulation;
  • Provides effective procedures and controls to protect against identified risks;
  • Allocates responsibility for monitoring risks; and
  • Provides for periodic evaluation and revision of the procedures, controls and monitoring mechanisms in order to ensure continuing effectiveness, including continuing compliance with all applicable laws and regulations.

As part of its procedures and controls to protect against identified risks, Virtual Currency Entities must provide for the effective investigation of fraud and other wrongdoing, whether suspected or actual, including, as applicable, market manipulation.

Immediately upon the discovery of any wrongdoing, a Virtual Currency Entity must submit a report to NYDFS, as well as further reports of related material developments. The reporting Virtual Currency Entity must also submit to NYDFS statements of: (1) any responsive actions taken or proposed; and (2) any operational changes implemented or proposed to avoid similar events. A Virtual Currency Entity is expected to submit its further reports and its statements within 48 hours of the original report.

SEC to Hold National Compliance Outreach Seminar for Investment Companies and Investment Advisers

On February 13, the SEC announced plans to hold a national seminar pertaining to its compliance outreach program for investment companies and investment advisers intended to help chief compliance officers and other senior personnel at investment companies and investment advisory firms to enhance their compliance programs for the protection of investors. The compliance outreach program is jointly sponsored by the SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management (IM) and the Asset Management Unit (AMU) of the Division of Enforcement. 

The national seminar will be held on April 12 at the SEC’s Washington, D.C., headquarters from 8:30 a.m. to 5:30 p.m. EDT. The agenda for the seminar includes discussion of OCIE, IM and AMU program priorities in 2018, issues related to fees and expenses, portfolio management trends, regulatory hot topics, cybersecurity, compliance and rulemaking.  Investment adviser and investment company senior officers must register online to attend the event in-person. The event will also be made available via live and archived audio webcast.

SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors

On February 12, the Division of Enforcement (the Division) of the SEC announced a new self-reporting initiative, the Share Class Selection Disclosure Initiative (SCSD Initiative), that aims to protect advisory clients from undisclosed conflicts of interest. Under the SCSD Initiative, the Division will recommend standardized, favorable settlement terms to investment advisers that self-report that they have failed to explicitly disclose conflicts of interest associated with receiving 12b-1 fees for investing client funds in 12b-1 fee-paying shares when a lower cost share class of the same mutual fund was available for those clients. The settlements recommended for eligible advisers under the SCSD Initiative will require the adviser to disgorge its ill-gotten gains and pay those amounts to harmed clients, but will not impose a civil monetary penalty. The Division warns that it expects to recommend stronger sanctions in any future actions against investment advisers that have engaged in this misconduct but failed to take advantage of this initiative. To be eligible for the SCSD Initiative, an adviser must self-report by notifying the Division by 12:00 a.m. EDT on June 12, 2018. Investment advisers that have already been contacted by the Division 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.

SEC’s OCIE Announces 2018 National Examination Program Priorities

On February 7, the SEC’s OCIE announced its 2018 examination priorities. The 2018 priorities are organized around five themes, including: (1) matters of importance to retail investors, including seniors and those saving for retirement; (2) compliance and risks in critical market infrastructure; (3) the Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB); (4) cybersecurity; and (5) anti-money laundering (AML) programs.

  • Retail Investors: OCIE will focus its examinations on the information disclosed to investors regarding the fees charged and other compensation their financial professionals may receive, the way in which broker-dealers supervise their representatives’ selling of products and services to investors, best execution of fixed income orders, and mutual funds that (1) have experienced poor performance or liquidity in terms of their subscriptions and redemptions relative to peers, (2) are managed by advisers with little experience managing registered investment companies, or (3) hold securities which are potentially difficult to value during times of market stress. OCIE will focus on ETFs and mutual funds that seek to track custom-built indexes to review for any conflicts the adviser may have with the index provider and the adviser’s role with respect to the selection and weighting of index components. OCIE also will pay particular attention to the growth of cryptocurrency and initial coin offerings and markets as they relate to registrants’ disclosures about the risks associated with these investments. OCIE will continue its 2017 focus on registered investment advisers and broker-dealers that offer investment advice through automated or digital platforms (e.g., “robo-advisers” and firms that interact primarily with clients online) or those associated with wrap fee programs and newly registered or never-before examined advisers.
  • Compliance and Risks in Critical Market Structure: OCIE’s focus will continue to examine entities providing critical services to the proper functioning of the capital markets such as systemically important clearing agencies, national securities exchanges and transfer agents.
  • FINRA and MSRB: OCIE will continue to focus on FINRA’s operations and regulatory programs; the quality of its examinations of broker-dealers and municipal advisors that are also registered as broker dealers; and MSRB’s evaluation of the effectiveness of select operational and internal policies, procedures and controls.
  • Cybersecurity: OCIE will continue to focus and prioritize governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response.
  • AML Programs: Examiners will review compliance with applicable AML requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.

Yahoo Finance: What to Expect in Cryptocurrency Policy

On February 7, Grant Fondo, partner and chair of Goodwin’s Digital Currency + Blockchain Technology practice, participated in a Yahoo Finance discussion regarding the outlook for regulating cryptocurrencies. View the video

Client Alert: SEC Approves NYSE Non-IPO Listing Amendments

On February 2, the SEC approved amendments to the listing standards of the New York Stock Exchange that will permit companies to seek a direct listing of their common equity securities without completing an initial public offering. The amendments, which require the company to demonstrate that these securities have a market value of at least $250 million, will be effective on March 1, 2018. For more information, please read the client alert issued by Goodwin’s Public Companies practice.

Enforcement & Litigation

Federal Reserve Announces It Will Restrict Growth of National Bank Until It Improves Governance

On February 2, the Board of Governors of the Federal Reserve System announced that it would restrict the growth of a national bank based on its past consumer abuses and compliance failures and its need to remedy deficiencies in its management oversight of sales practices. View the Enforcement Watch blog post.

Goodwin News

ABA National Conference for Community Bankers – February 25 - 28

The American Bankers Association National Conference for Community Bankers is the premier event developed for and by community bank CEOs. Community banks are transforming, and the industry as a whole continues to experience a paradigm shift. With an ever-changing definition of success and survival, the fast road ahead begins with versatility. Join the American Bankers Association as they map out the steps required to get to community banking’s next destination. Learn from experts, network under the palm trees and return refreshed with new ideas. Matt Dyckman and Bill Stern will be speaking on “Financial Regulatory Reform in the Trump Administration” and Samantha Kirby will facilitate a board peer exchange. Goodwin will also sponsor the Pennsylvania Bankers Association dinner at the conference.

Israel’s 4th Annual Foreign Law Firms Conference – February 26

This year’s 4th Annual Foreign Law Firms Conference in Israel will be bigger and better than ever, with +400 of the best attorneys in Israel and around the world. Join us for the largest international networking event in Israel’s legal market in 2018. Goodwin partner Amber Dolman will be speaking on the Fintech panel. For more information, please visit the event website.

This week’s Roundup contributors: Alex Callen, Christina Hennecken and Will Lane.