Over the last several years, the Securities and Exchange Commission (the “SEC”) and the Commodities Futures Trading Commission (“CFTC”) have been laser-focused on the use of so called “off-channel communications” in the financial services industry. On the theory that employees’ use of personal devices to communicate about business matters violates the “books and records” rules as these communications are not saved in company systems, regulators have conducted intrusive and extensive investigations requiring employees to turn over their personal devices for review. SEC Chairperson Gary Gensler recently stated that “bookkeeping sweeps are ongoing,” having resulted in well over $1 billion in fines so far. While the first round of investigations focused on the large banks, this “sweep” has since spread to hedge funds, credit rating agencies, online banking platforms, and now, to regional banks.
Christopher Bosch is an associate in the Governmental Practice in the firm's New York office.
SEC Showcases Lesser-Known Legal Theory in Crypto Lending Suit
The Securities Exchange Commission (“SEC” or “Commission”) has taken action against Genesis Global Capital, LLC (“Genesis”) and Gemini Trust Company, LLC (“Gemini”) (collectively, “Defendants”) in a recently-filed complaint alleging that the crypto companies violated federal securities laws by engaging in the unregistered offer and sale of securities in the form of their “Gemini Earn Agreements.” In doing so, the Commission not only relied upon the mainstay Howey Test for determining whether an agreement is a security, but also summoned Howey’s lesser-known cousin, the Reves Test, notably leading with the latter in its complaint.…
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NYAG’s Warning to Crypto Businesses Muddies Regulatory Waters; Compliance Requirements Remain Elusive
New York’s chief law enforcement agency recently squandered an opportunity to bring much needed guidance to the digital assets space. On October 18, 2021, the Office of New York Attorney General, Letitia James (“NYAG”), issued a press release warning New York businesses that offer interest-bearing accounts to customers depositing virtual currency without having registered under New York General Business Law § 352, et seq. (the “Martin Act”) are breaking the law.
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A September to Remember: Coinbase Avoids SEC Clash by Dropping Crypto Lend Product
Last week, Coinbase Global Inc. (“Coinbase”) headed off confrontation with the Securities and Exchange Commission (“SEC”) by announcing it was shelving a much ballyhooed digital asset lending product, Lend. The announcement came two weeks after Coinbase revealed that it had received a Wells notice from the SEC warning the company of its plans to sue over Coinbase’s planned October Lend launch.
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Second Circuit Upholds Enforceability of SEC Tolling Agreements
In Securities & Exchange Comm’n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission (“SEC”) civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading. The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933. On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. § 2462 despite the parties having entered into tolling agreements. Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm’n, 140 S. Ct. 1936 (2020). After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that § 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties’ tolling agreements. The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries. The court also rejected defendant’s arguments alleging improper civil penalty and disgorgement calculations.
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New York Attorney General Sues to Shutter Cryptocurrency Trading Firm Coinseed
The Office of New York State Attorney General Letitia James (“NYAG”) has filed a lawsuit to shut down technology company Coinseed. The state has accused the firm of selling unregistered securities in the form of digital tokens and operating as an unregistered broker-dealer while making material misrepresentations about the company, its management team, and fees charged to investors in connection with cryptocurrency trades.
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Ninth Circuit Reverses SEC Disgorgement Award and Remands in First Decision Post-Liu
For the first time outside of the originating case itself, a federal appeals court was called upon to apply the principles governing disgorgement in SEC enforcement actions established by the United States Supreme Court’s high-profile decision in Liu v. Securities & Exchange Comm’n, No. 18-1501, 2020 WL 3405845 (U.S. June 22, 2020) (see our prior blog article here). In Securities & Exchange Comm’n v. Yang, No. 19-55289, 2020 WL 4530630 (9th Cir. Aug. 6, 2020), the United States Court of Appeals for the Ninth Circuit reviewed a district court order, issued eighteen months before the Supreme Court spoke in Liu, awarding the SEC disgorgement. In an unpublished memorandum decision, the Court of Appeals reversed the disgorgement awards and remanded the case to the district court to explicitly determine whether the awards comported with the requirements for such relief under Liu. The Yang decision drew attention because it served as an example of how the high court’s decision is impacting appellate review of disgorgement awards. If Yang is any indication, courts of appeal will be remanding cases to district courts with instruction to reach specific findings regarding compliance with Liu’s disgorgement requirements.
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FINRA Settlement Highlights Importance of Anti-Money Laundering Due Diligence and Monitoring
A recent enforcement action offers a glimpse of the Financial Industry Regulatory Authority’s (“FINRA”) expectations for firms conducting anti-money laundering (“AML”) due diligence and transaction monitoring. On July 27, 2020, FINRA settled with broker-dealer JKR & Company (“JKR”) over allegations that the firm failed to detect, investigate, and report suspicious activity in four customer accounts in violation of FINRA Rules 3310(a) and 2010. JKR agreed to a $50,000 fine and a censure to resolve the matter. The settlement is notable in that FINRA applied transaction monitoring and due diligence expectations common in the banking industry to a broker-dealer. It also serves as a reminder that FINRA expects member firms to not only establish written AML policies and procedures, but also to put their AML programs into practice in order to meet their regulatory obligations. …
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SEC Offers Limited Rule Relief to Spur Small Business Crowdfunding During Pandemic
On May 4, 2020, the Securities and Exchange Commission (“SEC”) issued a temporary final rule easing some restrictions on small businesses seeking to raise capital pursuant to Regulation Crowdfunding (“Reg CF”). The SEC made the move in response to feedback from its Small Business Capital Formation Advisory Committee and other outreach conducted by SEC staff regarding the industry’s urgent need for expedited access to capital while maintaining investor protections as the COVID-19 pandemic persists.
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FINRA’s COVID-19 Response
In response to the outbreak of COVID-19, FINRA has announced that most FINRA staff will be working remotely, but will utilize remote work capabilities to remain “fully operational.” FINRA has also published guidance on its website regarding narrow regulatory relief, business continuity, arbitration, mediation, and disciplinary hearings, membership applications, FINRA-administered exams, events, and investor strategy.
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SEC and FINRA Signal Renewed Focus on Vendor Management in Two Key Areas: Cybersecurity and Market Access Rule Compliance
The Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) recently issued guidance in connection with firms’ relationships with third-party service providers. These publications serve as a reminder…
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