Financial Fraud Law Report

Transcription

1 Financial Fraud Law Report An A.S. Pratt & Sons PUBlication June 2013 Headnote: the Perfect fcpa Storm? Steven A. Meyerowitz Unprecedented fcpa Wake-Up Call for U.S. Broker-Dealers and Foreign Banks: Has the Perfect fcpa Storm Finally Arrived for U.S. Financial Markets? Mauro M. Wolfe and John Goselin Sec Targets Another fund Board in Recent Enforcement Case Christopher P. Harvey, Catherine Botticelli, and Emily E. Shea Sec Adopts Final Identity theft Red Flag rules for Broker-Dealers and Investment Advisers Hoyt Stastney Sec Cites Strong fcpa Compliance as Key Factor in Decision Not to Prosecute multinational Company Paul McNulty and John Cunningham finra FocUSes on Anti-Money Laundering Procedures and Red Flags Daniel A. Nathan and Kiersten A. Fletcher finra Reinforces Retention and Review Requirements Gregory D. DiMeglio and Rachel Tausend U.K. Deferred Prosecution Agreements: NeW enforcement Tool or Blunt Instrument? James Kitching and Salah Mattoo the Impact of Noel CaNNing on Richard Cordray s DirectorSHip of the cfpb and on cfpb Post-aPPointment Activity Marianne Casserly and Frank Hirsch, Jr. the ConSUmer Financial Protection Bureau Raises the Stakes Aurora Cassirer and Eric Unis A Look at the ConSUmer Financial Protection Bureau s New Loan Originator Compensation rule Under the Truth in Lending Act Jacquelyn M. Hutzell Final fatca Regulations: Additional Relief But Are Intergovernmental Agreements the Way Forward? Cynthia D. Mann, Benjamin Berk, Ehab Farah, and Bridget M. Weiss Dodd-Frank Wall Street Reform and ConSUmer Protection Act Update David A. Elliott, Rachel Blackmon Cash, and S. Kristen Peters

2 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc. Board of Editors Frank W. Abagnale Author, Lecturer, and Consultant Abagnale and Associates Stephen L. Ascher Jenner & Block LLP Thomas C. Bogle Dechert LLP David J. Cook Cook Collection Attorneys David A. Elliott Burr & Forman LLP William J. Kelleher III Corporate Counsel People s United Bank James M. Keneally Kelley Drye & Warren LLP Richard H. Kravitz Founding Director Center for Socially Responsible Accounting Frank C. Razzano Pepper Hamilton LLP Sareena Malik Sawhney Director Marks Paneth & Shron LLP Mara V.J. Senn Arnold & Porter LLP John R. Snyder Bingham McCutchen LLP Jennifer Taylor McDermott Will & Emery LLP Bruce E. Yannett Debevoise & Plimpton LLP The Financial Fraud Law Report is published 10 times per year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , Copyright 2013 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For permission to photocopy or use material electronically from the Financial Fraud Law Report, please access or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, [email protected], (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to the Financial Fraud Law Report, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC ISSN

3 FINRA Reinforces Retention and Review Requirements Gregory D. DiMeglio and RACHEl TAUSEND Regulated entities must be rigorous in their efforts to know and follow retention and review requirements, ensure that their data collection and review systems keep pace with technological developments and firm growth, and address any apparent issues promptly and effectively upon detection. In the first five months of 2013, the Financial Industry Regulatory Authority ( FINRA ) has brought against member firms several noteworthy settled actions that relate solely to issues. Coupled with continued Securities and Exchange Commission ( SEC ) enforcement activity in this area, these matters strongly signal that regulated entities must be rigorous in their efforts to know and follow retention and review requirements, ensure that their data collection and review systems keep pace with technological developments and firm growth, and address any apparent issues promptly and effectively upon detection. Failure to do so could result in significant adverse consequences, including but not limited to a substantial fine. Gregory D. DiMeglio, a partner in the Washington, D.C., office of Stradley Ronon Stevens & Young, llp, represents and counsels public companies, investment companies, investment advisers, broker-dealers, and individuals in connection with examinations, investigations, and enforcement actions by the U.S. Securities and Exchange Commission, Department of Justice, state regulators, and industry self-regulatory organizations. He can be reached at [email protected]. Rachel Tausend, who also is a partner in the firm s office in Washington, D.C., focuses her practice on securities enforcement, and securities and business litigation, with an emphasis on e-discovery issues. She can be reached at [email protected]. 516 Published by A.S. Pratt in the June 2013 issue of the Financial Fraud Law Report. Copyright 2013 Reed Elsevier Properties SA

4 Complex Systems FINRA Reinforces Retention and Review Requirements FINRA recently announced that a member firm had agreed to pay $9 million to resolve what FINRA found to be numerous system issues over a six-year period. 1 According to FINRA, the firm s network of registered representatives had grown dramatically from 2006 to 2013, nearly doubling in size to approximately 13,300. These registered representatives operated as independent contractors and often had one or more doing business as ( DBA ) accounts in addition to their firm addresses. The registered representatives also sent messages through Bloomberg. As the result of its rapid growth, the firm had a complex system and captured through a variety of sources, including 23 financial institutions and three outside vendors. FINRA identified 35 system issues that it found prevented the firm from collecting or reviewing electronic records as required and affected more than 28 million s. These issues included the firm s failure to collect and supervise DBA accounts; to access a large volume of for several months in 2009, when the firm changed vendors; to archive and review messages sent through Bloomberg; and to archive s sent to customers through third-party advertising platforms. According to FINRA, the firm s system deficiencies caused the firm not to produce all s requested by regulators and likely also resulted in the firm s not producing all s to private parties in litigation and arbitration proceedings. FINRA also found that the firm could have discovered and resolved certain of the issues earlier than it did. As part of the settlement, the firm agreed to pay a $7.5 million fine and establish a $1.5 million escrow account to compensate brokerage customer claimants. The firm also retained a consultant to assist it in resolving its retention and review issues and was censured. Outside Accounts FINRA also recently entered into a settlement agreement with another firm arising out of the firm s failure to review, maintain, and preserve securities-related sent to or from outside business accounts. 2 FINRA found that during a four and a half-year period, two of the firm s registered representatives used outside business accounts to communicate with custom- 517

5 Financial FRAUD Law Report ers about securities-related matters. The firm s written supervisory procedures ( WSPs ) permitted this practice, provided that the firm approved and hosted the outside accounts. This was done so that s sent to or from these accounts would be captured on the firm s server and could be included in the firm s regular review processes. according to FINRA, the firm discovered during an annual audit that outside business s were not being captured and maintained and therefore were not being reviewed in accordance with the applicable rules and firm WSPs. FINRA found that the firm did not take the necessary steps to correct this issue and as a result, the issue continued for a few more years. In settling the matter, the firm agreed to pay a $250,000 fine. The firm also agreed to conduct an audit and undertake other steps to ensure that all outside accounts used for securities-related business were being captured, retained, and reviewed as required and was censured. Detection of questionable FINRA also recently settled a matter with a firm that FINRA determined did not have an adequate supervisory system, including WSPs, for electronic communications with its customers during an approximately 11-month period. 3 Specifically, FINRA found that the firm s monitoring system did not identify for further review numerous s that three of the firm s registered representatives sent to customers and that contained alleged material misrepresentations about two private placements. The settlement agreement included the firm s payment of a $100,000 fine. The firm also retained a consultant to assist it in resolving its retention and review issues, and was censured. Account Configuration In February, FINRA agreed to settle a matter with five affiliated firms relating to their alleged failure to retain and review s as required. 4 The respondents retention system was based on maintaining a separate archive. s were supposed to be automatically copied to the archive, where they would be retained and used for supervisory reviews. How- 518

6 FINRA Reinforces Retention and Review Requirements ever, hundreds of addresses were not properly set up for copying to the archive for periods ranging from several months to as long as six years. For four of the firms, the archive system also did not properly capture all secondary addresses ( aliases ), bcc s, s to distribution lists, and encrypted s. in addition to these retention errors, between 2005 and mid-2011, nearly six million s that had been retained and were flagged for supervisory review were never reviewed. For four of the firms, a contributing factor in this large backlog of unreviewed s was that a default setting caused many of the s to no longer appear for review after a certain length of time had expired. In addition, at four of the firms, certain internal s were excluded from the review process, and certain addresses and domains were auto approved and thus never reviewed because they were not believed to be part of the firms securities business. in actuality, many of these addresses and domains were related to the firms securities business and therefore should have been included in the scope of supervisory review. The firms settled FINRA s allegations, agreeing to pay a joint and several fine of $1.2 million. As part of the settlement agreement, the firms also each agreed to conduct a comprehensive review of their capture, retention and review systems, and procedures to confirm that these systems and procedures are reasonably designed to comply with recordkeeping and supervisory requirements and each firm was censured. Practical Takeaways These recent matters reinforce the importance of implementing and maintaining effective systems and procedures for retention and supervision. In doing so, some best practices to keep in mind include: Comprehensive capture. Have procedures in place to ensure that all addresses used for communications that are required to be retained or reviewed are identified and that the archive system is configured to capture them. Effective identification of questionable s. Confirm that the methods used to flag s for further review are robust and reasonably designed 519

7 Financial FRAUD Law Report to identify communications with terms, phrases, or patterns that potentially indicate statements or actions that are inconsistent with FINRA rules or federal securities laws and regulations. Complete review. Make sure that all communications that should be part of the review process are included and that s that have been flagged for supervisory review do get reviewed. Quality-controlled technology upgrades. When a new archive or review system is deployed, take measures at the outset to ensure that any in the old system that is subject to ongoing retention or review is completely and correctly transferred to the new system or otherwise remains accessible. Timely detection of potential problems. Technological glitches and other retention or review deficiencies cannot be cured if they are not known. Periodically test the firm s collection and review systems to ensure that they are working as intended. Prompt and effective action. If an issue is discovered that suggests that may not have been retained or reviewed as required, take prompt steps to investigate the scope and nature of the potential problem and to take appropriate corrective action. Notes 1 LPL Financial llc, FINRA Letter of Acceptance, Waiver and Consent, No (May 21, 2013). The firm also was found to have made misstatements to FINRA during its investigation and previously had entered into a settlement agreement with FINRA in 2011 that also related to the firm s monitoring of employee . See LPL Financial Corp., FINRA Letter of Acceptance, Waiver and Consent, No (Jan. 20, 2011). In each of the settlement agreements discussed in this alert, the member firm consented to the entry of FINRA s findings and agreed to the resulting sanctions and undertakings, without admitting or denying the findings. 2 NEXT Financial Group, Inc., FINRA Letter of Acceptance, Waiver and Consent (AWC), No (May 3, 2013). The awc indicated that FINRA previously had issued awcs to the firm relating to, among other things, other supervisory and review system issues. 520

8 FINRA Reinforces Retention and Review Requirements 3 Securities America, Inc., FINRA Letter of Acceptance, Waiver and Consent, No (Apr. 12, 2013). 4 Directed Services llc, et al., FINRA Letter of Acceptance, Waiver and Consent, No (Feb. 15, 2013). 521