Joint Statement Emphasizes Risk-Focused Approach to Examinations of Banks’ BSA/AML Compliance Programs

Posted in Anti-Money Laundering, banking, Banks, Client Alert, Compliance, Corporate Governance, FDIC, Financial Crimes Enforcement Network, Financial Regulation, GT Alert, Regulatory Compliance, Risk Management

On July 22, 2019, the federal bank regulatory agencies and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (collectively, the “Agencies”), issued a Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Supervision. The Joint Statement emphasizes their risk-focused approach to examinations of banks’ BSA/AML compliance programs and is the third statement from a working group tasked to improve the effectiveness and efficiency of the BSA/AML regime. The prior statements focused on encouraging banks to take innovative approaches to improving their BSA/AML compliance programs. Although the Joint Statement does not establish new requirements, it reminds banks of the Agencies’ risk-focused approach for scoping and performing BSA/AML examinations, and serves as additional guidance to banks in ensuring their BSA/AML compliance programs comply with BSA requirements and satisfy the Agencies’ expectations.

Banks seeking assistance with the review and/or enhancement of their BSA/AML compliance programs including their BSA/AML risk assessments, or with BSA/AML audit or examination remediation, may contact any of the authors in this GT Alert or their GT counsel of preference. GT’s Financial Regulatory  & Compliance team can assist with any questions regarding the Joint Statement and/or any other BSA/AML compliance matter.

Click here for the full GT Alert.

SEC/FINRA Joint Statement on Broker-Dealer Custody of Digital Assets

Posted in Blockchain, Blockchain Technology Task Force, Brokers, Client Alert, Compliance, cryptocurrency

The SEC’s Division of Trading and Markets and the Office of the General Counsel of FINRA (Financial Industry Regulatory Authority) published on July 8, 2019, a joint staff statement (Custody Release) on broker-dealer custody of digital assets. The statement has been eagerly awaited by market participants, including broker-dealers, given significant uncertainty in the application of securities laws to novel digital asset transactions.

In the new digital world, broker-dealers currently grapple with possession and control to safeguard customers’ digital asset securities and their own duties and responsibilities under Rule 15c3-3 of the Securities Exchange Act of 1934, also known as the Customer Protection Rule. This rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the broker’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure. Digital assets present heightened risk for broker-dealers charged with maintaining custody of the assets. Unlike having possession of a tangible stock certificate stored in a vault, in the digital asset realm, a broker-dealer could be victimized by fraud or theft through the loss of a “private key” necessary for the transfer of the asset, and potentially have no recourse.

The Custody Release additionally addresses financial responsibility rules, the maintenance of books and records, noncustodial broker-dealer models, regulatory approvals needed for existing broker-dealers engaging in digital asset securities for the first time, and limited coverage under SIPA (Securities and Investor Protection Act of 1970) unless the security meets the definition of a “security” under SIPA (which is different than under the Securities Act of 1933 by, in general, limiting it to securities which are subject to a filed and approved registration statement). If the digital asset security does not meet the definition of “security” under SIPA, protection likely would not apply in the event of failure of the broker-dealer and holders of those digital asset securities would have only unsecured general creditor claims against the failed broker-dealer.

As a practical matter, the Custody Release makes clear that broker-dealers are encouraged to engage with the SEC Staff to discuss solutions for compliance issues. Unregistered broker-dealer entities that intend to engage in broker-dealer activities involving digital assets will be required to submit New Membership Applications to FINRA. Existing registered broker-dealer firms will be wise to now evaluate the need for a Continuing Membership Application (CMA). Under FINRA rules, an existing broker-dealer is prohibited from changing its business operations to incorporate material digital asset securities activities for the first time without FINRA’s prior approval of the CMA.

This GT Alert is part of the firm’s Blockchain & Cryptocurrency Newsletter – Spring/Summer 2019, available here.

Amendments to ‘Volcker Rule’ to Exclude Certain ‘Small’ Banks From Key Prohibitions

Posted in banking, Banks, Compliance, Consumer Lending, Dodd-Frank, Financial Regulation, GT Alert, Lending, SEC, Securities, Securities and Exchange Commission, Volcker Rule

In connection with the U.S. financial crisis 10 years ago, legislation was adopted to enhance the safety and soundness of the commercial banking system in the United States. Amendments to the Bank Holding Company Act of 1956 required five federal financial agencies to adopt joint regulations to (i) limit the authority of commercial banking institutions to place capital at risk in certain areas involving investment banking, and (ii) forbid banks to permit the name of the bank or certain affiliates of the bank to be used in connection with the operations of private funds. That provision, placed in Section 13 of the 1956 Act, is generally referred to as the “Volcker Rule.”

In 2018 legislation amended the requirements to permit the adopting agencies to revise their rules to exclude from the prohibitions of the Volcker Rule smaller banks previously covered by the rule that have total assets of less than $10 billion and liabilities that aggregate less than five percent of the total assets of the entity.

Click here for the full GT Alert, which provides background on the Volcker Rule and summarizes the changes made under the latest amendments.

SEC Clears First Two Regulated Token Offerings

Posted in Blockchain, Blockchain Technology Task Force, cryptocurrency, Token offering

In July 2019, the SEC qualified the first token offerings under Regulation A+, approving blockchain startup Blockstack’s bitcoin-like digital tokens on July 10, and live video streaming platform YouNow’s offering of its “Props” tokens on July 11. These decisions will likely serve as new fundraising templates for many blockchain businesses.


Blockstack describes its services as being an open-source decentralized computing platform, whose software libraries enable developers to build decentralized applications, that have no single point of failure or control. The company provides decentralized protocols for authentication, data storage, and software distribution.

According to Blockstack’s filings on EDGAR, it intends to conduct a cash offering under the Regulation A+, Tier 2, framework. Unlike traditional registered IPO filings, this framework allows the sale of Blockstack’s tokens to retail investors as well as to accredited investors and institutions. As part of the offering, an additional supply of tokens is proposed to be allocated to Blockstack’s App Mining Program, which rewards developers who create the top-ranked applications within the Blockstack ecosystem.


Following on the heels of the Blockstack qualified offering, on July 11, 2019, the SEC approved YouNow’s “Props” token offering under the Regulation A+, Tier 2 framework. According to its filings on EDGAR, YouNow has created an Ethereum-based blockchain token, which it intends to distribute to those who create content using its app for activities that “drive community engagement” or as a reward for administration of its own blockchain. The Reg A+ offering also includes a secondary distribution of tokens to be distributed by its affiliated foundation for grants to persons developing key apps or otherwise contributing to the development of the network. The company also said that users will begin to receive tokens for engaging with the platform.

Both offerings are significant in that they establish a basic framework for companies that have sought to issue tokens as rewards for specific platform users and developers. In the past, issuers have attempted to structure such tokens to fall outside the Howey test as something other than a security. The Blockstack and YouNow precedents clarify that such attempted structures are unlikely to be acceptable to the SEC in the absence of fact-specific no-action relief. This is not surprising in light of the two recent no-action letters issued by the SEC in TurnKey Jet and Pocketful of Quarters, as highlighted in this newsletter. The SEC draws a clear line between tokens developed for use strictly on a particular platform or “in-app” versus tokens that may be transferred outside the platform or publicly traded on an ATS or other exchange.

The Howey test is based on the U.S. Supreme Court’s landmark case, SEC v. W.J. Howey Co., setting the standard for what arrangement constitutes an investment contract and is therefore regulated as a security.  In the context of blockchain tokens, the Howey test asks if a party has invested funds, in a common enterprise, with the expectation of profits, based on the efforts of a third party.

Click here for the full GT Blockchain & Cryptocurrency Newsletter for Spring/Summer 2019.

SEC Issues ‘No-Action’ Letters Allowing Sales of Utility Tokens

Posted in Blockchain, Blockchain Technology Task Force, convertible virtual currency, cryptocurrency, Financial Crimes Enforcement Network, Financial Regulation, FINRA, Fintech, Investment Regulation, Regulatory Compliance, SEC, Securities, Securities and Exchange Commission, Tax, Technology

In a significant step forward for the cryptocurrency industry, the U.S. Securities and Exchange Commission issued its first “no-action” letter (NAL) to a U.S.-based company using utility tokens created for consumptive use rather than investment. The regulator sent the letter to TurnKey Jet, Inc. (TKJ) on April 3, 2019, agreeing with the Florida-based air charter and air taxi service’s interpretation that the tokens it uses in its token membership program for sale of air charter services via a private blockchain network are not securities. Therefore, the SEC noted, TKJ can use them under certain conditions.

These conditions include:

  • the tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
  • TKJ will restrict transfers of tokens to TKJ Wallets only, and not to wallets external to the platform;
  • TKJ will sell tokens at a price of one USD per token throughout the life of the program, and each token will represent a TKJ obligation to supply air charter services at a value of one USD per token;
  • If TKJ offers to repurchase tokens, it will only do so at a discount to the face value of the tokens (one USD per token) that the holder seeks to resell to TKJ, unless a court within the United States orders TKJ to liquidate the tokens; and
  • the token is marketed in a manner that emphasizes its functionality, and not the potential for the increase in market value of the token.

A second NAL was issued by the SEC on July 26, 2019, to Pocketful of Quarters, Inc., an online video gaming company, allowing the company to issue its “Quarters” to video gamers. The Quarters are described as a “universal gaming token” and an in-game currency having an unlimited supply and fixed price. The conditions outlined in the NAL mirrored those in TKJ while also adding an additional condition that the Quarters could only be exchanged by the game’s developers and influencers (with approved accounts) for ETH at pre-determined exchange rates. The SEC Division of Corporation Finance’s response further provided those developers and influencers with the ability to exchange their Quarters. Developers and influencers must undergo Know Your Customer/Anti-Money Laundering checks on an ongoing basis.

Both NALs indicate that the SEC is willing to allow a token offering to proceed without registration under the Securities Act of 1933, or reliance upon an exemption therefrom, in the narrow circumstances where, among other things, the tokens are limited to use on a particular platform/network/application and have no external transfer capability or trading market.

See the SEC’s letters to TurnKey Jet and Pocketful of Quarters here and here.

Click here for the full GT Blockchain & Cryptocurrency Newsletter for Spring/Summer 2019.


New Regulations in Japan on Security Token Offerings

Posted in Blockchain, Blockchain Technology Task Force, Compliance, Corporate Governance, cryptocurrency, Securities

A bill to amend the Act on Settlement of Funds and the Financial Instruments and Exchange Act (FIEA) has passed both the upper and lower houses of Japan’s National Diet and was enacted on May 31, 2019. The amendments enhance the regulations on ICOs (Initial Coin Offerings) by applying the securities regulations under the FIEA when an ICO is an investment program, i.e., the investors expect to receive distribution of profits from the issuer. This form of ICO is sometimes referred to as an STO (Security Token Offering), and the tokens or the rights represented on such tokens issued in an STO are called “security tokens.” STOs will be subject to disclosure requirements, and the issuers or brokers who deal with STOs will be subject to registration requirements under the amended FIEA.

In this GT Alert we explore the following:

  • Security Tokens as Collective Investment Scheme Interests
  • Disclosure Regime
    • Basic Rules
    • Private Placement
  • Distribution & Investment Management Business Registrations
    • Self-Offering by Issuers
  • Broker-Dealer or Investment-Manager Registration
    • Article 63 Exemption – Specially Permitted Business for Qualified Institutional Investors (QIIs)
  • Schedule

Click here for the full GT Alert.

FINRA Wants to Hear From Firms BEFORE They Go Crypto

Posted in Blockchain, Blockchain Technology Task Force, Brokers, Compliance, cryptocurrency, FINRA

In 2018 the Financial Industry Regulatory Authority (FINRA) undertook efforts to have member firms contact FINRA before engaging in activities involving digital assets by issuing Regulatory Notice 18-20. That approach led to many discussions between FINRA staff and member firms, and FINRA found that process useful to help it become aware of developing practices and concerns. Now, a new Regulatory Notice 19-24 has been issued to reaffirm the standing request for member firms to consult with FINRA in advance of commencing new activities in the crypto space.  In addition, any firm that is seeking authority through a continuing membership application (CMA) to expand its operations into such an area also is directed to advise the firm’s Regulatory Coordinator.

The issuance of this new regulatory notice reaffirming the need for advance consultation makes clear the continuing interest that FINRA has regarding this area of growing consequence. The Notice also identifies key members of the Office of the General Counsel who can be contacted to initiate inquiries and discussions.

Finally, though not exhaustive, the new Notice includes a list of more than a dozen examples of activities that would be within the scope of the consultation requirement, including:

  • purchases, sales or executions of transactions in digital assets or in a pooled fund investing in digital assets;
  • creation of, management of, or provision of advisory services for, a pooled fund related to digital assets;
  • participation in an initial or secondary offering of digital assets;
  • creation or management of a platform for the secondary trading of digital assets, or custody or similar arrangement of digital assets;
  • using distributed ledger technology or any other use of blockchain technology;
  • mining of cryptocurrencies.

For more on FINRA, click here.

SEC Issues Concept Release to Overhaul Current Framework for Exempt Offerings

Posted in Client Alert, Exempt offerings, GT Alert, Investment Regulation, SEC, Securities, Securities and Exchange Commission

The SEC is seeking public comment (due by September 24, 2019) on possible ways to improve the framework for exempt offerings under the Securities Act of 1933 and related SEC rules and regulations, via a June 18 concept release. The SEC seeks input from issuers, investors, and other market participants on potential updates to the exempt offering framework aimed at promoting capital formation and expanding investment opportunities within the exempt market while maintaining appropriate investor protections. The release and the comment process will be of particular interest to hedge funds, private equity funds, securitization vehicles, issuers who raise funds in the private market, and virtually any other person or entity who invests in or issues into the private market under the current regulatory scheme.

The SEC explains that market participants have conveyed concerns over the complexity of the exempt offering framework, which in part stems from the fact that the current capital-raising exemptions were not adopted as part of one cohesive regulatory scheme, but rather evolved over time through various SEC rules and legislative developments. In light of the significant changes implemented over the years with respect to the exempt offering framework, as well as the increased activity within the exempt market today, the SEC is undertaking a comprehensive review of the available exemptions from registration requirements under current federal securities laws, and requests comment on broad themes and specific comment on issues relating to the following:

  • Overall framework of exempt offerings, including whether overlapping exemptions create confusion for issuers in determining the most efficient path towards raising capital, and identifying potential gaps in the framework that make it difficult for smaller issuers to rely on one of the exemptions at a key stage of capital formation;
  • Specific conditions of the capital-raising exemptions under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, Rules 147 and 147A under Section 3(a)(11) of the Securities Act, and Section 4(a)(6) of the Securities Act and Regulation Crowdfunding;
  • “Accredited investor” definition, including whether investor eligibility limitations should be revised to focus on the sophistication of the investor, the investment amount, or other criteria instead of just the income or wealth of the individual investor;
  • Integration analyses applied in the context of exempt offerings, including whether further guidance should be provided to issuers on their ability to transition from one offering to another;
  • Exempt offerings by pooled investment funds, including whether retail investors should be permitted greater exposure to growth-stage issuers through pooled investment funds; and
  • Secondary trading of securities initially issued in exempt offerings, including whether revisions are needed for the current resale exemptions in light of limited secondary market liquidity concerns.

Click here for the full GT Alert.

Cryptocurrencies and Unclaimed Property: Potential Implications of State Escheat Laws for the Blockchain Technology Industry

Posted in Blockchain, Blockchain Technology Task Force, Client Alert, cryptocurrency, Financial Regulation, Unclaimed Property & Escheat

The use of blockchain technology and the issuance of cryptocurrencies have grown considerably in recent years, inviting heightened scrutiny and regulation. While federal securities, tax, and other financial services regulatory agencies, such as the SEC, the IRS, state securities commissioners and others, have begun applying their rules and regulations to cryptocurrency businesses, the cryptocurrency industry has not yet faced significant enforcement from state unclaimed property administrators. This GT Advisory considers the application of state unclaimed property laws to cryptocurrencies, and the potential implications and challenges of such application for both industry participants and state unclaimed property administrators.

Click here for the full GT Advisory, which explores the following:

  • Overview of Unclaimed Property Laws
  • Can Cryptocurrencies Constitute Unclaimed Property Subject to Escheat?
  • Potential Implications and Considerations

The Newest SEC OCIE Risk Alert: Cloud Storage Is Great, If Your Cloud Is Secure!

Posted in Brokers, Client Alert, Cloud Data Storage, OCIE, Risk Management, SEC, Securities and Exchange Commission

On May 23, 2019, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert on the importance of storing customer and data in a cloud environment in a secure fashion. Titled “Safeguarding Customer Records and Information in Network Storage – Use of Third Party Security Features,” the risk alert addresses proper cloud storage practices, and in particular, what potential problems the registered investment adviser and broker-dealer community should be on guard for to avoid or control. OCIE hinted at some of the problems in its opening paragraph: “Although the majority of these network storage solutions offered encryption, password protection, and other security features designed to prevent unauthorized access, examiners observed that firms did not always use the available security features. Weak or misconfigured security settings on a network storage device could result in unauthorized access to information stored on the device.”

Click here for the full GT Alert.