Details on the CFTC’s New Self-Reporting Policy

Posted in CFTC, Client Alert, Corporate Governance

On Sept. 25, 2017, the Program on Corporate Compliance and Enforcement and the Institute for Corporate Governance and Finance at New York University School of Law hosted a policy speech by James McDonald, Director of the Division of Enforcement, United States Commodity Futures Trading Commission (CFTC). Mr. McDonald presented the CFTC’s new self-reporting and cooperation policy.  The new policy was originally announced in January 2017 and is the first update to the CFTC’s cooperation guidelines since 2007.  The new policy is a by-product of CFTC’s recognition of its limited enforcement resources and the belief that self-reporting incentives will strengthen CFTC’s ability to efficiently investigate misconduct and combat fraud.

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Fred Karlinsky, Rich Fidei, and Jamey Zellner Co-Author Cybersecurity Update in Reactions Magazine

Posted in Cybersecurity, Insurance

Fred Karlinsky, shareholder and co-chair, Insurance Regulatory and Transactions Practice; Rich Fidei, shareholder; and Jamey Zellner, practice group attorney, have co-authored an cybersecurity update article in Reactions magazine. Cybersecurity has emerged over the past several years as one of, if not the greatest threat to the insurance industry, with multiple high-profile data breaches of insurance companies and other entities demonstrating the potential scope of the threat. The growing threat has prompted both industry and regulators to devote additional resources to cybersecurity preparedness. Regulators are stepping up their evaluations of insurers’ cybersecurity measures, and are issuing additional guidance and creating new requirements that insurance entities must comply with. To read the entire article, please click here.

New Bill Introduced in the U.S. Senate to Require the Disclosure of Ultimate Beneficial Owners of Corporations and LLCs Formed or Registered in the United States

Posted in Anti-Money Laundering, Client Alert, Financial Crimes Enforcement Network, Risk Management

On August 2, 2017, United States Senators Marco Rubio (R-FL) and Ron Wyden (D-OR) jointly introduced Senate Bill 1717, entitled the “Corporate Transparency Act of 2017” (the “Act”).  The Act was referred to the U.S. Senate Committee on Banking, Housing and Urban Affairs.  The Act would amend Title 31 of the United States Code, to require the collection of beneficial ownership information for corporations and limited liability companies (“LLCs”) formed or registered in the United States.  A companion bill was introduced in the House of Representatives on June 28, 2017, by Representative Carolyn B. Maloney (D-NY), and was referred to the House Committee on Financial Services.

The recitals in the Act note that few states obtain meaningful information about the beneficial owners of the corporations and LLCs formed under their laws, and that criminals have exploited these weaknesses in state formation procedures to conceal their identities when forming corporations or LLCs in the United States, and have used the newly created entities to commit crimes such as terrorism, drug trafficking, money laundering, tax evasion, securities fraud, financial fraud, and acts of foreign corruption.

The Act would direct the U.S. Department of the Treasury to issue regulations requiring entities formed or registered in the United States to declare their beneficial owners – natural persons who, directly or indirectly, exercise substantial control over the company or have a substantial interest in, or receive substantial economic benefit from, the company.  The Act would require that beneficial owners: (i) be identified by name; (ii) disclose a current residential or business street address; and (iii) provide a unique identifying number from a non-expired U.S. passport or a non-expired U.S. driver’s license (foreign persons must provide a copy of their non-expired foreign government-issued passport).

The Act would apply to both new and currently existing corporations and LLCs.  However, the Act exempts a number of businesses that already provide beneficial ownership information in their normal course of business.  Examples of businesses exempt from the Act include companies registered under Section 12 of the Securities Exchange Act of 1934, depository institutions, credit unions, bank holding companies, broker-dealers, exchange/clearing agencies, investment companies, insurance companies, public accounting firms, entities registered with the Commodity Futures Trading Commission, and  businesses that employ more than 20 full-time employees in the United States, have more than $5,000,000 in gross receipts or sales, and have a physical office in the United States.

The Act would allow for states to participate in the collection of beneficial ownership information voluntarily.  However, companies or LLCs formed in states that will not collect beneficial owner information as described above would be required to disclose information regarding their beneficial owners directly to the U.S. Department of the Treasury, Financial Crimes Enforcement Network.

Congress has made previous attempts to pass similar ultimate beneficial ownership legislation, but these have never made it past a committee of either house.  It is unclear whether this bill will have a better chance of passing.


August 2017 Cybersecurity & Risk Alert from SEC

Posted in Cybersecurity, OCIE, Risk, SEC

On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued its third National Exam Program Risk Alert of the 2017 calendar year, detailing OCIE’s findings and observations from its Cybersecurity 2 Initiative. This Cybersecurity 2 Initiative, the name for OCIE’s second round of cybersecurity examinations, builds on OCIE’s prior 2015 Cybersecurity 1 Initiative, and includes more robust validation and testing of cybersecurity controls to evaluate how well firms implement and follow their cybersecurity-related policies and procedures.

This latest OCIE Risk Alert summarizes the exam staff’s findings after conducting examinations of 75 firms, consisting of broker-dealers, investment advisers and investment companies registered with the SEC and includes three key sections. First, the staff provided a summary of its exam observations, including discussions of the use by registrants of risk assessments, penetration testing, tools to monitor loss of personal data, and other policies, procedures and methods for dealing with cybersecurity and related business continuity issues. Second, the staff noted that the vast majority of examinations uncovered one or more cybersecurity-related issues, and highlighted certain of the more prevalent issues observed by the staff. Finally, and perhaps most notably, the staff provided a list of “several elements that were included in the policies and procedures of firms that the staff believes had implemented robust controls.” When creating and implementing cybersecurity programs, other registrants may benefit from considering these good practices identified by the staff. We will be publishing a more detailed summary and analysis of the August 2017 Risk Alert, and in particular these guideposts for registrants consideration, in the coming week.

The August 2017 Risk Alert is the second cybersecurity-related Risk Alert issued by OCIE this year (the May 2017 Risk Alert dealt with ransomware issues), and with the September 2015 Risk Alert is the fifth expressly dealing with cybersecurity since 2014 when OCIE announced its Cybersecurity Preparedness Initiative, the results of which were summarized in a February 2015 Risk Alert. It is safe to say that not only has the SEC’s interest in cybersecurity issues faced by broker-dealers, investment advisers and investment companies not waned but, as is the case in almost every industry, it has intensified.

Financial industry participants registered with or subject to oversight by the SEC need to take notice of the spate of information on this topic produced by the SEC and be mindful of the concepts discussed by OCIE in these releases when creating, reviewing and/or modifying their cybersecurity policies and procedures to comply with and meet SEC regulatory requirements and expectations.

John Kaufmann Authors ‘Caveat Re-Emptor’

Posted in Capital Markets

John Kaufmann, Of Counsel at Greenberg Traurig, has authored an article titled “Caveat Re-Emptor” for Volume 15, Issue 1 of CCH’s Journal of Taxation of Financial Products. The article examines the treatment of both “capital markets repos” (i.e., sale-repurchase transactions entered into with respect to liquid property, using standard documentation) and what he refers to as “bespoke repos” (highly engineered, one-off sale-repurchase transactions entered into with respect to illiquid assets). The article concludes that, although both types of transaction are referred to as “repos,” they are as different from each other as apples and crankshafts, and advisors should not rely on cases and guidance regarding one type of repo to analyze the other type of repo. To view the article, please click here.

The ‘Global Financial City Tokyo’ Initiatives

Posted in Tokyo Metropolitan Government

Tokyo used to be one of the biggest global financial centers, rivaling New York and London. Now, it is viewed by many as having fallen far behind Hong Kong and Singapore as an Asian financial center. However, the Tokyo Metropolitan Government (TMG) now aims to return the city to its status as a top global financial center. In its attempt to once again become a global financial city, TMG appears to be willing to solicit and accommodate demands from foreign financial players.

In June 2017, TMG released the interim report on the “Global Financial City Tokyo” Initiatives (the Initiatives). TMG is widely soliciting ideas on how to revitalize Tokyo’s financial city function and restore its shine as a global financial center. While discussions are currently ongoing to determine specific policies or measures to be included in the Initiatives, there are key items that are proposed in the interim report. For a more detailed summary of the concepts that have been proposed for discussion, please see GT AlertThe ‘Global Financial City Tokyo’ Initiatives.”

SEC and FINRA Continue to Root Out Bad Brokers

Posted in Brokers, FINRA, SEC

On Thursday, July 27, regulators and industry professionals gathered in Washington, D.C. to discuss the current regulatory environment, cybersecurity, and other hot topics at the SEC and FINRA’s 2017 National Compliance Outreach Program for Broker-Dealers. The panelists, including SEC Commissioner Michael Piwowar, FINRA President and CEO Robert Cook, and Susan Axelrod, the Executive Vice President of Regulatory Operations, FINRA, particularly emphasized their agencies’ focus on identifying brokers who may pose a high risk to investors, and said that both the SEC and FINRA will be increasing their examination and enforcement activities relating to high-risk and recidivist brokers. Piwowar said that the SEC will be “relentless” in rooting out such individuals through exams and enforcement, and encouraged members of the brokerage industry to alert regulators to potential bad actors and the firms that attract them. Axelrod similarly noted that FINRA will devote significant attention to firms’ hiring and monitoring procedures, including whether firms adequately diligence their candidates and establish appropriate supervisory and compliance controls. She said the agency will look closely at firms hiring brokers with compliance disclosures, or firms that have “clusters” of reps that seem to move together. “There could not be a more important place for us to spend our time and resources,” said Axelrod. FINRA’s focus on recidivist brokers is consistent with its 12th Annual Regulatory and Examination Priorities Letter released earlier this year, and indicates that it is a recurring issue that continues to impact the financial sector. It is clear that firms that are making hiring decisions should be careful to consider the issues raised in the program, and all firms must assure that they have and carry through on enhanced compliance procedures for associates with a regulatory history.


Final Florida Insurance Legislative Report Following Final Actions by Governor

Posted in Government, Insurance

Florida Governor Rick Scott has acted on all legislation approved during the 2017 Regular Session and Special Session A. As such, we have updated our final report on insurance issues.

This report provides an outline of all insurance issues that were approved and those that did not pass this year. Please note that many of the bills signed by the Governor took effect July 1.

The 2018 Regular Session will run from January 9 to March 9, and legislative committee meetings are scheduled to begin in September and run through December.

Click here to read the updated Final Florida Insurance Legislative Report.

SCOTUS to Resolve Circuit Split Over Dodd-Frank Whistleblowers

Posted in 2d Circuit, Dodd-Frank, SEC, U.S. Supreme Court

On Monday, June 26, 2017, the U.S. Supreme Court agreed to review whether the Dodd-Frank Act (DFA) prohibits retaliation against internal whistleblowers or only covers individuals who report to the U.S. Securities and Exchange Commission (the SEC).

This question has divided practitioners and lower courts alike since Dodd-Frank’s passage in 2010. As reported in our previous Alert on March 29, 2017, the Ninth Circuit Court of Appeals widened the circuit split on this question in Somers v. Digital Realty Trust Inc., 850 F.3d. 1045 (9th Cir., March 8, 2017), when it affirmed the district court’s denial of the defendant’s motion to dismiss a DFA whistleblower claim, where the whistleblower had only reported internally.

In Somers, plaintiff alleged that he was terminated based on “vague, trivial and false allegations of misconduct” after he complained to senior management that a senior vice president had allegedly eliminated some internal corporate controls in violation of SOX. The district court denied Digital Realty’s motion to dismiss the DFA claim, but certified the issue for interlocutory appeal. In a divided 2-1 decision, the Ninth Circuit panel followed a previous Second Circuit decision and concluded that the DFA’s reference to certain provisions of the Sarbanes Oxley Act (SOX) “necessarily bars retaliation against an employee of a public company who reports violations to the boss, i.e., one who ‘provide[s] information’ regarding a securities law violation to a ‘person with supervisory authority of the employee.’” Somers, 850 F.3d. at 1049.

In petitioning for a writ of certiorari to the U.S. Supreme Court, Digital Realty emphasized that the anti-retaliation provision of DFA, 15 U.S.C. § 78u-6(h)(1), only prohibits retaliation against a “whistleblower” and that the DFA defines “whistleblower” as an “individual who provides … information relating to a violation of the securities laws to the Commission, in a manner, established by rule or regulation, by the Commission.” 15 U.S.C. 78u-6(a)(6) (emphasis added). Digital Realty took issue with the SEC’s regulation under DFA which attempts to define “whistleblower” “not by reference to the statutory definition of ‘whistleblower,’ but rather by reference to the activity protected by that provision.” Digital Realty argued that the Ninth Circuit’s decision threatens to render obsolete SOX’s anti-retaliation scheme “because the Dodd-Frank Act affords whistleblowers several distinct advantages that the Sarbanes-Oxley Act does not” and the Ninth Circuit decision would have DFA protect all of the same conduct protected by SOX (and more).

Several amicus briefs have been filed in support of Digital Realty’s petition to the Supreme Court, including from the U.S. Chamber of Commerce, which argued that the Ninth Circuit’s interpretation of the DFA “would greatly expand the number of employees authorized to pursue the enhanced remedies of the Act, and the period of time for which they may sue for retaliation, without yielding the law enforcement benefits Congress intended when it enacted a ‘bounty’ and heightened protections for persons who complain to the Securities and Exchange Commission.” The Chamber also argued that “[t]he interpretation of the Dodd-Frank Act espoused by the Ninth and Second Circuits has profound implications for employers across the country and in every industry. If allowed to stand, it would severely disrupt the carefully constructed anti-retaliation programs established by Congress, and open the door to countless lawsuits that Congress never intended Dodd-Frank to cover.”

Other commentators have countered that narrowing the protection of internal whistleblowing may result in more whistleblowers disclosing securities law violations directly to the SEC, without any internal disclosure, thereby dealing a pyrrhic victory to employers should Realty Trust prevail before the Supreme Court.

Of particular interest to Supreme Court watchers is the possibility that Somers may provide an opportunity for the Court to revisit its Chevron deference doctrine, which is a doctrine under which courts may, under certain circumstances, defer to administrative agencies’ interpretations of allegedly ambiguous statutes. In ruling that the DFA whistleblower protections covered internal reporting, the Ninth Circuit stated that to the extent there was any ambiguity in the statute, the SEC’s regulation, 17 C.F.R. § 240.21F-2 (Rule 21F-2), which interpreted the DFA to protect those who made only internal disclosures, was entitled to Chevron deference.

The Court’s newest member, Justice Gorsuch, has expressed skepticism of the Chevron doctrine, once referring to it during his time on the Tenth Circuit Court of Appeals as the “elephant in the room” and stating that “[m]aybe the time has come to face the behemoth.” Guitierrez-Brizuela v. Lynch, No. 14-9585, at *15 (10th Cir. 2016) (Gorsuch, J., concurring). Justice Gorsuch has also called Chevron “a judge-made doctrine for the abdication of the judicial duty.” Id. * 8. Notably, among Monday’s orders, Justice Gorsuch issued a dissent in Mathis v. Shulkin in which he raised questions about a presumption of competence allowed to another government agency, the Department of Veteran Affairs, and noted that the presumption’s “days may be numbered.” See Matthis v. Shulkin, No. 16-677, 582 U.S. ____ (2017), *2 (Gorsuch, J.) (dissenting).

The Supreme Court may also view Somers as an opportunity to cabin King v. Burwell, 135 S.Ct. 2480, 2489 (2015), a decision interpreting provisions of the Patient Protection and Affordable Care Act (ACA). King was relied upon by the Ninth Circuit to reconcile the express definition of “whistleblower” in the DFA with its holding, as King had held that terms can have different operative consequences in different contexts. Of course, in King, such an approach may have been guided by a desire to avoid vitiating an entire statutory scheme, while in the whistleblower context individuals who are not covered by the DFA would still have SOX remedies if retaliated against following an internal report. In fact, in his dissent in Somers, Judge Owens wrote that “[i]n my view, we should quarantine King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level.” Somers, 850 F.3d. at 1051 (Owens, J.) (dissenting).

Whether the Court uses the Somers case to delve into Chevron deference or the statutory construction principles set forth in King, the Court’s long-awaited consideration of this issue should provide a definitive answer on whether internal whistleblowers may rely on the anti-retaliation provisions of the DFA. Of course, a decision one way or another may potentially lead Congress to enact legislative changes to the law.

U.S. House Financial Services Committee Hearing on Flood Insurance Reform and Passes Legislation

Posted in Government, Insurance, Tax

On June 7, 2017, the U.S. House Financial Services Committee held a hearing entitled “Flood Insurance Reform: A Taxpayer’s Perspective.” The hearing examined the National Flood Insurance Program (NFIP) and six legislative concepts to reform the program. Witnesses discussed how the reforms would strengthen taxpayer protections; provide greater private market access, competition, and consumer choice; enhance mitigation efforts; encourage flood mapping fairness; address consumer costs and affordability; and incorporate NFIP claims processing reforms.

Please click here to read the GT Alert reviewing the testimony and the measures that were passed by the Committee.