When Can Futures Commission Merchants and Broker-Dealers Be Deemed Banks?

Posted in banking, Banks, Brokers, Client Alert, Financial Services Litigation, GT Alert, investment advisor, Litigation

On March 21, 2019, in Whitaker v. Wedbush Securities, an Illinois appellate court for the first time addressed the liability of a futures commission merchant (FCM) or broker-dealer (BD) under Section 4A-105 of the Uniform Commercial Code (UCC).

By way of background, a customer of an FCM dually registered as a BD ostensibly requested a series of wire transfers from his commodity trading accounts. Unbeknownst to the FCM, in reality a third-party hacker had breached the customer’s computer system and thereafter interposed himself as the customer in connection with the request for the wire transfers. The FCM honored the requests and transferred the money to what the FCM thought was the customer’s account, but was really the fraudster’s bank account. When the customer discovered the fraud, he sued the FCM under Article 4A of the UCC, alleging that (notwithstanding the fact that the FCM was not a bank, savings and loan, or trust company) it was “deemed to be in the business of banking” by virtue of its involvement in connection with the handling of the requested wire transfers. The trial court held the FCM was not engaged in the business of banking and therefore not subject to Article 4A.

The core issue on appeal focused on what constitutes being “engaged in the business of banking” under Article 4A, and whether the FCM was engaged in the business of banking.

What did the appellate court find? Click here to read the full GT Alert.

Illinois Supreme Court Rules Annuities Are Not Securities Under Illinois Securities Act

Posted in annuity, Client Alert, Financial Services Litigation, GT Alert, Insurance, insurance producer, investment advisor, Securities

On March 21, 2019, in Van Dyke v. Jesse White, the Illinois Supreme Court issued a long-awaited opinion relating to Illinois Securities Department authority to regulate annuities under the Illinois Securities Law of 1953 (Act).

By way of background, in 2011, the Illinois Securities Department audited Richard Lee Van Dyke following complaints from the adult children of one of his deceased clients. Van Dyke was registered with the Securities Department as an investment advisor and licensed by the Illinois Department of Insurance as an insurance producer. The auditors reviewed Van Dyke’s insurance files, as opposed to his investment files, and subsequently alleged that he had defrauded 21 clients. Specifically, the Securities Department claimed Van Dyke liquidated the clients’ indexed annuities and replaced them with other annuities, from which Van Dyke purportedly earned $312,278 in commissions while his clients paid $263,822 in surrender charges, penalties, and other fees.

The Securities Department initiated administrative proceedings alleging Van Dyke violated Section 130.853 of its administrative regulations, which prohibits investment advisors from effectuating “any transactions of purchase or sale that are excessive in size or frequency or unsuitable.” The Securities Department also charged Van Dyke with violating four administrative sections that expressly implicate transactions involving “securities,” and one that makes it unlawful, generally, to employ any device, scheme, or artifice to defraud any client while acting as an investment advisor. Van Dyke moved to dismiss, arguing the Securities Department had no jurisdiction over him because the Act expressly excludes annuities from the definition of a security and because he was not acting as an investment advisor at the time of the transactions.

Following an administrative hearing with the Securities Department, the secretary of state issued a final order finding Van Dyke committed fraud by offering unsuitable annuities. The secretary revoked Van Dyke’s investment advisory registration, permanently prohibited him from selling securities in Illinois, and fined him $300,000 plus costs of the investigation. The circuit court affirmed the administrative order, and Van Dyke appealed.

The appellate court agreed but held that Van Dyke was nevertheless acting as an investment advisor and thus subject to the Securities Department’s jurisdiction under Section 12(J). At the same time, the appellate court found the Securities Department did not prove Van Dyke violated Section 12(J) in the sale of replacement annuities or perpetrated a fraud on his clients. Accordingly, it reversed the secretary of state’s final order.

The secretary of state appealed to the Illinois Supreme Court, arguing the sale of indexed annuities falls under the definition of a security under the Act, and that it put forth sufficient evidence Van Dyke committed violations of the Act. Van Dyke sought cross-relief, maintaining section 12(J) of the Act did not apply because he was acting as an insurance producer, not an investment advisor.

Click here for the full GT Alert on the Illinois Supreme Court’s analysis and holding that annuities do not fall under the Securities Department’s jurisdiction.

SEC Guidance on Exhibit Redactions For Immaterial, Competitively Harmful Information

Posted in Client Alert, Compliance, Corporate Governance, SEC, Securities and Exchange Commission

On April 1, 2019, the SEC provided additional guidance relating to its new rules that permit companies to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. The new rules became effective upon their publication in the Federal Register on April 2, 2019.

Primarily located in Regulation S-K Item 601(b), the new rules require companies to identify where information has been omitted from a filed exhibit. Specifically, companies must:

  • mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted;
  • include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed; and
  • indicate with brackets where the information has been omitted from the filed version of the exhibit.

To facilitate consistency across the SEC’s exhibit requirements, the new rules also apply to certain exhibitrelated requirements in specified disclosure forms for which Item 601(b)(10) does not apply, including Form 8-K, Form 20-F (to maintain a consistent approach for domestic and foreign companies) and forms used by investment companies such as Form N-1A and Form N-2.

Click here to read the full GT Alert on the SEC guidance covering compliance reviews, the redacted exhibit review process, Securities Act registration statements, Exchange Act filings, confidentiality of supplemental materials, and transition issues and questions.

UK Review of the Bribery Act 2010 – Committee Concludes New Guidance Needed

Posted in anti-bribery, Client Alert, Government, GT Alert, United Kingdom, white collar

In 2018 the House of Lords announced it would set up an ad hoc Select Committee to conduct a post-legislative review of the Bribery Act 2010. Greenberg Traurig Shareholder Anne-Marie Ottaway was appointed Specialist Advisor to the Committee, which on 14 March 2019 published the report of its findings. The review confirms that the Bribery Act 2010 is “an exemplary piece of legislation” which sets the global benchmark for anti-bribery and anti-corruption legislation.

The Bribery Act was passed, with much fanfare, in 2010 and came into force on 1 July 2011. The Act simplified previous anti-corruption legislation dating back to 1889 and 1906 and introduced for the first time a specific corporate offence of failure to prevent bribery.

Under the Act, the Ministry of Justice (MOJ) was required to publish guidance for businesses on the adequate procedures they would need to implement to have a defence to the failure to prevent offence. The Act applies to UK companies and foreign companies conducting business or part of a business in the UK. It pertains to conduct in both domestic and foreign jurisdictions and applies to bribery in both the public and private sectors.

Following the Act’s introduction, there was much concern about the impact it would have on the ability of UK businesses to conduct business abroad; this concern was a key focus of the Committee’s review, which covered the following:

  • Length of investigations
  • Police resources and training
  • Lack of cooperation and coordination
  • Revisions to the MOJ Guidance
  • Facilitation payments
  • The importance of a risk assessment
  • Corporate criminal liability
  • The adequate v reasonable debate
  • Deferred Prosecution Agreements (DPAs)
  • DPAs not a substitute for prosecuting culpable individuals
  • Scotland

Click here for the full GT Alert on the Select Committee’s findings.

CFTC and NFA Commodities Regulatory Update

Posted in CFTC, Client Alert, Commodities, Financial Regulation, GT Alert, Regulatory Compliance

Departing from its historical practice but following the approach taken by the SEC and FINRA, the Commodity Futures Trading Commission (CFTC) on Feb. 12, 2019, announced its first release of examination priorities for each of its regulatory divisions. In making the announcement, CFTC Chairman J. Christopher Giancarlo indicated the release is part of CFTC’s “initiative to improve the relationship between the Agency and the entities it regulates, while promoting a culture of compliance at our registrants.”

The Release is divided into three main areas:

  1. Division of Market Oversight (DMO)
  2. Division of Swap Dealer & Intermediary Oversight (DSIO)
  3. Division of Clearing and Risk (DCR)

In another regulatory first, the National Futures Association (NFA) issued a notice to members requiring adoption and implementation of certain internal controls by registered commodity pool operators (CPOs).

Click here to read the full GT Alert.

Blockchain & Cryptocurrency Newsletter – Winter 2019

Posted in Blockchain, Blockchain Technology Task Force, Cybersecurity, Tax

2018 was a year of transformation for the blockchain industry. While the market continued to see technological advancements in smart contracts, platform functionality, scalability and security, regulators took a firmer rein in pursuing those seeking to exploit the uninitiated or those engaged in outright fraud. In this issue of Greenberg Traurig’s Blockchain & Cryptocurrency Newsletter, we discuss some of the key enforcement actions and proceedings during 2018 that have shaped the regulatory environment in the United States and the continuing uncertainty over the classification of digital assets as securities.

In this issue:

1. Disrupting the Disruptors: 2018 – The Year in Review

2. Noteworthy Federal Securities Cases During 2018

  • Securities and Exchange Commission v. Blockvest, LLC et al.: SEC’s Request for Preliminary Injunction Denied
  • In the Matter of TokenLot, LLC et al.: SEC Order Against Unregistered Broker-Dealer
  • In the Matter of Crypto Asset Management, LP: SEC Order Against Unregistered Hedge Fund
  • In re Tomahawk Exploration: SEC Deems Token Airdrop as Sale of Securities

3. 2018 State Regulatory Overview

  • NASAA’s Operation Cryptosweep
  • Initial Coin Offering (ICO) Enforcement Actions by States

4. Traps for the Unwary: Federal Income Tax

5. FinCEN Update

Click here to read the full GT Newsletter.

Colorado Digital Token Act Exempts Certain Cryptocurrency Transactions From Colorado Securities Laws

Posted in Blockchain, Blockchain Technology Task Force, Brokers, Client Alert, Compliance, Financial Regulation, GT Alert, Regulatory Compliance, SEC

Colorado recently passed legislation that will facilitate the sale and transfer of digital tokens in Colorado. Under the Digital Token Act, Colorado businesses will be permitted to effect transactions involving the sale and transfer between certain persons of digital tokens secured through a decentralized ledger or database, with a focus on the production, distribution, and consumption of goods (also known as a “cryptoeconomic system”), as opposed to the current centralized internet platforms and applications that serve as intermediaries of such transactions in cryptocurrencies. Not only will these transactions be exempt from the securities registration requirements under the Colorado Securities Act (CSA), but persons dealing in these digital tokens will be exempt from the securities broker-dealer and salesperson licensing requirements under the CSA. However, the exemption will not be self-executing; it will require a notice filing with the Colorado Securities Commissioner prior to any offer, sale, or transfer of the qualifying digital token to satisfy the exemption. The transactions remain subject to the antifraud provisions of the CSA.

In an area still generally unregulated at the state level and where the SEC has taken a more measured approach, the Digital Token Act has the potential to at least encourage other states, including foreign jurisdictions, to address digital tokens for purposes of their securities laws. While the Digital Token Act applies only to intrastate digital token offerings, it does permit the Colorado Securities Commissioner to enter into agreements with federal, state, or foreign regulators to allow digital tokens issued in the state to be issued in another jurisdiction, and vice versa. It is unclear what steps the Colorado Securities Commissioner may propose in influencing other states’ treatment of digital token offerings, especially if and when an offering crosses into other states, or whether any other state would necessarily follow Colorado’s lead. In the absence of current federal guidance, the Digital Token Act is at least a step towards providing some clarity in this area and hopefully less state enforcement.

Click here to read the full GT Alert on Colorado’s Digital Token Act and its potential impact.

LIBOR and “No-Deal” Brexit

Posted in European Union, Global, United Kingdom

One of the consequences of a “no-deal” Brexit would be that the United Kingdom would no longer have access to the European financial market. This would affect LIBOR as a trusted and widely used benchmark.


Currently, two relevant benchmarks exist in the European Union: LIBOR and EURIBOR. LIBOR stands for “London Interbank Offered Rate” and is a benchmark that is used for – among other things – loans based on Loan Market Association documentation. LIBOR is made available in five different currencies: U.S. dollar, British pound, Japanese yen, Swiss franc, and euro. EURIBOR stands for “Euro Interbank Offered Rate” and is, simply put, the interest rate at which European banks lend money to each other. EURIBOR is only available in euros. Both benchmarks are determined daily, but while LIBOR focuses on the London banking system, EURIBOR takes into account the entire European Union.

Developments around LIBOR

LIBOR has been the subject of increased scrutiny after it emerged that certain banks had manipulated LIBOR rates. Furthermore, insufficient activity in the unsecured interbank market raised questions about the sustainability of the LIBOR benchmark. Closely related to these developments is the new EU Benchmarks Regulation (EU) nr. 2016/11 and the development of a new secured overnight interest rate by the European Central Bank (ECB). The Benchmarks Regulation went into effect on 1 January 2018 and includes a two-year transitional period. The new interest rate for the euro will be based on data already available to the Eurosystem and is anticipated to be finalized before 2020.

The Future of LIBOR

Andrew Bailey, chief executive of the UK Financial Conduct Authority (FCA), has spoken to all current panel banks about agreeing voluntarily to sustain LIBOR until the end of 2021. However, a “no-deal” Brexit most likely will cause LIBOR to lose its authorized benchmark status in the European Union. This would leave nine months for the reference rate’s administrator to reapply as a third-country provider. Thus, even if LIBOR survives until 2020, a no-deal Brexit could come with enormous risks.


Market participants may wish to review and consider the amendment and waivers provision in loan agreements being concluded now, taking into account a possible “no-deal” Brexit and the development of the new overnight interest rate by the ECB. Furthermore, lenders should closely review the requirements posed by the Benchmarks Regulation to ensure they are compliant with its provisions.

To read more about Brexit, click here.

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Prove It or Lose It: Lost It! NCA Uses New Powers to Freeze Accounts and Secure Substantial Asset Forfeiture

Posted in white collar

On Feb. 7, 2019, the UK’s National Crime Agency (NCA) confirmed that it had obtained account forfeiture orders over money held in bank accounts in the name of the former Moldovan prime minister’s son, Vlad Luca Filat.

Part III of our ‘Prove It or Lose It’ series anticipated the use of UK law enforcement authorities’ draconian new powers to obtain orders to freeze bank accounts and to apply for the forfeiture of money held in those accounts, where there are reasonable grounds to suspect that the money constitutes recoverable property. These powers, which lack historically enshrined safeguards, were introduced as part of the Criminal Finances Act 2017, which substantially amends the Proceeds of Crime Act 2002.

Until now, these new powers had been given little publicity, although we predict the controversial new account freezing and forfeiture powers will be widely used. The order against Mr Filat is a high-profile example of the NCA’s intentions and has attracted considerable media attention.

To read the full GT Alert, click here.

FINRA’s 2019 Risk Monitoring and Examination Priorities Letter

Posted in Corporate Governance, FINRA, GT Alert, Regulatory Compliance

On Jan. 22, 2019, the Financial Industry Regulatory Authority (FINRA) released its 14th Annual Risk Monitoring and Examination Priorities Letter, where it identifies its areas of examination focus for 2019. The FINRA president’s cover note points out the addition to the title of a reference to “risk monitoring.” While the Priority Letter describes the multiple issues and concerns on which FINRA will continue to focus during examinations, the president’s note points out that this year’s Priority Letter reflects two changes: (1) the clarification of how the examination process helps to fulfill the risk assessment function of FINRA; and (2) the shift in emphasis from extensive discussions of continuing concerns that have been the focus of examinations for many years to a more detailed explanation of certain new key priorities that now appear in the new letter.

FINRA’s central examination priorities have been and still include: obligations related to suitability determinations; outside business activities; private securities transactions; private placements, communications with the public; anti-money laundering (AML); best execution; fraud; insider trading and market manipulation; net capital and customer protection; trade and order reporting; data quality and governance; recordkeeping; risk management; and general supervision. However, in contrast to previous years, the 2019 Priority Letter attempts to limit repetitive discussions of certain topics that have been central to its focus in the past.

FINRA’s 2019 highlighted priorities are online distribution platforms, fixed-income mark-up disclosure, and regulatory technology. Reflecting FINRA’s concern with identifying risk factors, the Priority Letter also draws attention to the risks relating to the sales practices, operations, market, and financial practices of FINRA member firms.

To read the full GT Alert, click here.