January 25, 2022

Volume XII, Number 25


January 24, 2022

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Bridging the Week: October 26 to 30 and November 2, 2015 (Crowdfunding; Malfeasance; TRACE; Overcharges)

A new means for raising capital using the Internet—crowdfunding—was approved last week by the Securities and Exchange Commission. Otherwise, there were few material developments worldwide impacting financial services firms. As a result, only the following few matters are covered in this week’s edition of Bridging the Week:

  • SEC to Permit Capital Raising Through Crowdfunding (includes Totally Irrelevant (But Is It?));

  • Investment Bank Group Fined US $50 Million by NY State Agency for Actions of Malfeasant Employee;

  • SEC Approves FINRA Proposal Requiring Certain TRACE-Eligible Securities to Be Reported as Soon as Practicable;

  • More Broker-Dealers Sanctioned for Overcharging Charities and Retirement Accounts for Mutual Funds; and more.

Video Version:

  • SEC to Permit Capital Raising Through Crowdfunding: The Securities and Exchange Commission finalized rules that will permit eligible companies to raise money through Internet offerings of their securities—a practice known as “crowdfunding.” Under the SEC’s final rules, a company may raise up to US $1 million in any 12-month period through crowdfunding. Companies taking advantage of the SEC’s new rules will have ongoing SEC-reporting and customer disclosure obligations, including filing an annual report with the SEC and providing it to customers. However, in general, such obligations will be far less onerous than requirements for companies that raise funds through traditional public or even private offerings. All crowdfunding transactions must occur either through an SEC-registered broker-dealer or on a new type of SEC-registered entity—a funding portal. Investors would be limited, during any 12-month period, to purchasing a maximum of US $100,000 in securities through all crowdfunding sources, and potentially much less, depending on their annual income and net worth. As noted by Commissioner Michael Piwowar in his dissenting statement in connection with the SEC’s new rule, “even if you are Warren Buffet or Bill Gates, you are limited to investing no more than $100,000 during any 12-month period in all crowdfunding investments.” In addition, crowdfunding-purchased securities cannot be resold for one year. The SEC’s new crowdfunding rules will be effective 180 days after they are published in the Federal Register, although forms enabling funding portals to register with the SEC will be effective January 29, 2016. At the same time as the SEC issued its final rules on crowdfunding, it also proposed rules to ease some restrictions on exclusively intrastate securities offerings.

Totally Irrelevant (But Is It?): In order to more forcefully express his concerns regarding many of the restrictions in the SEC’s final rules related to crowdfunding, Commissioner Michael Piwowar employed  timely Halloween imagery: “While crowdfunding was intended to be a treat for the smallest and least sophisticated companies seeking to raise capital, today’s rules are full of tricks. The rules will spin a complex web of provisions and requirements for compliance … . Such burdens will spook many small businesses from pursuing crowdfunding as a viable path to raising capital.” Clever writing, for sure—whether you agree with Mr. Piwowar’s position or not!

  • Investment Bank Group Fined US $50 Million by NY State Agency for Actions of Malfeasant Employee: The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. agreed to pay a fine of US $50 million to the New York State Department of Financial Services for allegedly failing to institute and maintain procedures to preclude the firm’s possession of the department’s confidential supervisory information. According to an agreed Order, Goldman Sachs hired an unnamed individual who previously was a bank examiner at the Federal Reserve Bank of New York. Shortly after commencing his employment, the individual forwarded guidance from the New York Fed to his Goldman Sachs supervisor, saying he was prohibited for one year from directly working “on matters for, or on behalf of” an unnamed regulated entity that he previously had served as the principal contact for while at the New York Fed, said the Order. Notwithstanding, according to the Order, the individual was placed on matters for the regulated entity from the outset of his Goldman Sachs employment. The Order alleged that the individual also “wrongfully obtained confidential information” from the New York Fed, including approximately 35 documents, at least nine of which the NYS DFS claimed was “confidential supervisory information” under New York law. According to the Order, the individual shared some confidential information regarding the regulated entity with other Goldman Sachs employees, including his supervisor. The Order acknowledged that, following its own investigation, Goldman Sachs terminated both the individual and his supervisor in October 2014. As part of its settlement, Goldman Sachs agreed to enhance its relevant policies and procedures and not to accept for three years any new consulting engagements that require the NYS DFS to disclose confidential information under New York law. News media has reported that the individual who allegedly received confidential information from the New York Fed, Rohit Bansal, and Jason Gross, a former colleague of Mr. Bansal's while both worked at the New York Fed and who purportedly provided Mr. Bansal at least some of the confidential information, will accept plea deals to criminal charges related to this matter from the US Attorneys Office in Manhattan (click here to access a sample article).

  • SEC Approves FINRA Proposal Requiring Certain TRACE-Eligible Securities to Be Reported as Soon as Practicable: The Securities and Exchange Commission approved amended rules proposed by the Financial Industry Regulatory Authority to require quicker reporting of so-called “TRACE”-eligible securities by firms required to report transactions. Under TRACE—FINRA’s trade reporting and compliance engine—broker-dealers must report transactions in certain fixed income securities within certain time frames (typically 15 minutes; click here for precise time frames). This information is then generally made available to the public. Under the new FINRA rules approved by the SEC, firms must report transactions in TRACE-eligible securities subject to public disclosure “as soon as practicable.” FINRA’s new rules are effective November 30, 2015. (Click here for details)

  • More Broker-Dealers Sanctioned for Overcharging Charities and Retirement Accounts for Mutual Funds: Five more broker-dealers agreed to pay back more than US $18 million to retirement accounts and charities for overcharging them mutual fund sales charges following disciplinary actions filed by the Financial Industry Regulatory Authority. The firms were Edward D. Jones & Co., Stifel Nicolaus & Company, Inc., Janney Montgomery Scott, LLC, AXA Advisors, LLC and Stephens Inc. Earlier this year, FINRA filed a similar action and affected US $30 million in restitution for similar conduct by five other broker-dealers. (Click here for details)

And more briefly:

  • Broad Range of Cleared Derivatives Industry Petition BASEL Banking Supervisors for Leverage Ratio Relief: Ten financial services entities, including a customer broker, exchanges, clearinghouses and principal trading firms, submitted a letter to the Basel Committee on Banking Supervision expressing their “grave concern” over the failure of the Committee to permit banks to offset their exposures to clearinghouses by the amount of margin posted by customers in computing their so-called “leverage ratio.” According to the letter, the failure “will result in vastly increased capital requirements for General Clearing Members, as well as their underlying clients, which will fundamentally threaten these business models to the detriment of the liquidity and stability of European and global markets.” According to the financial entities, the Committee’s current interpretation fails to differentiate adequately between margined and non-margined transactions.

  • LME Sets Position Limits for Premium Aluminum Contract: The London Metal Exchange announced the specific position limits for its new aluminum premium contracts. The contracts—which will cover four principal regions of worldwide aluminum demand—will have position limits of 2,500 lots for the nearest maturity month and 2,500 lots for other maturity months. Position limits will apply to any member or client trading a premium contract and members are responsible for ensuring compliance by their clients.

  • Federal Reserve Proposes Tougher Financial Requirements on the Biggest Banks to Avoid Government Bailouts: The Board of Governors of the Federal Reserve System proposed a new rule to require globally systemic top-tier bank holding companies to maintain a minimum amount of loss-absorbing instruments to help mitigate the likelihood they will require government bailouts if they suffer catastrophic financial events. These instruments would be issued by the covered entities to third-party investors in order to pass potential losses of the companies to them. The goal of the rule, says the Fed, is to “mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure of large, interconnected financial companies, including by ending market perceptions that certain financial companies are ‘too big to fail’ and would therefore receive extraordinary government support to prevent their failure.” The Fed estimates the annual aggregate cost of its proposed new measures to all covered entities would be between US $650 million and US $1.5 billion.

  • CFTC Chairman Says CFTC Considering MAT and Other Swap Reforms: In a speech before SEFCON VI—the annual gathering of swap execution facilities—last week, Timothy Massad, Chairman of the Commodity Futures Trading Commission, said he supports amendments to CFTC rules to give the Commission a greater role in “made available to trade” determinations related to swaps. Under CFTC rules, a swap execution facility or a designated contract market, not the CFTC, can mostly control when a swap is subject to a mandatory on-exchange trading obligation. However, according to Mr. Massad, no proposal is likely before spring 2016.

  • Korea and Japan Clearinghouses Granted Exemption by CFTC From Registration as DCOs: Two non-US clearinghouses were exempted from registration by the Commodity Futures Trading Commission as derivatives clearing organizations for the clearing of swaps. The CFTC said it granted the exemption to these clearinghouses—the Japan Securities Corporation and the Korea Exchange, Inc.—because they were subject to “comparable, comprehension supervision and regulation by the appropriate government authorities” in their respective home countries.

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume V, Number 306

About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...