Top Story Compliance Related

Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it failed to disclose a conflict of interest arising out of its own business interests in deciding whether to continue to offer clients products managed by an outside third-party advisory firm, reports the SEC. The SEC’s order in the case finds that the conflict of interest arose in Merrill Lynch’s handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million. According to the order, Merrill put new investments into these products on hold due to pending management changes at the third party, and Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC’s order found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process.

The SEC has announced it has adopted amendments to enhance transparency in the municipal securities market. The adopted amendments to Rule 15c2-12 under the Securities Exchange Act will focus on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights. Rule 15c2-12 of the Municipal Securities Disclosure Rule requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (MSRB) timely notice of certain events. The amendments add two new events to the list in the rule:

• Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
• Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The compliance date for the amendments is 180 days after Federal Register publication.

UPDATE: Published on 8/31/18 at 83 FR 44700, with effective date of 10/30/18, and compliance date February 27, 2019.

FDIC FIL-42-2018, released yesterday, explains modifications made to the agency's Statement of Policy (SOP) for Section 19 of the Federal Deposit Insurance (FDI) Act. Section 19 prohibits, without the prior written consent of the FDIC, a person convicted of any criminal offense involving dishonesty, breach of trust, money laundering, or who has entered into a pretrial diversion or similar program (program entry) in connection with a prosecution for such offense, from participating in the affairs of an FDIC-insured institution. On July 19, 2018, after consideration of comments received, the FDIC Board of Directors approved modifications to the SOP's de minimis exceptions to filing an application and made additional technical and clarifying changes. The modifications are expected to reduce the number of Section 19 applications and regulatory burden. The updated SOP was published in the Federal Register on August 3, 2018, with an applicability date of July 19, 2018.

The SEC has announced it has voted to adopt amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (GAAP), or changes in the information environment. The amendments are intended to simplify and update the disclosure of information to investors, including long-term Main Street investors, and reduce compliance burdens for companies without significantly altering the total mix of information available to investors. The amendments would eliminate certain:

• Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.
• Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.
• Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.
• Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.

The amendments will be effective 30 days after publication in the Federal Register.

Minnesota homeowners and their real-estate agent have been charged by HUD with discrimination for refusing to rent thjeir house to a family because of race, national origin and their minor children. HUD’s charge alleges that the owners refused to rent a 7,000 square foot, six-bedroom, house to a family of four adults and seven children because of their race (Native American) and national origin (Hispanic), and because the family has minor children. The charge further alleges that the owner and real-estate agent discouraged the family from renting the home by offering them less favorable rental terms, including increasing the rent by $1,000. After being denied the home, the family had to split up and live in separate residences.

HUD has filed a formal complaint against Facebook for violating the Fair Housing Act by allowing landlords and home sellers to use its advertising platform to engage in housing discrimination. HUD's complaint claims Facebook enables advertisers to control which users receive housing-related ads based upon the recipient's race, color, religion, sex, familial status, national origin, disability, and/or zip code. Facebook then invites advertisers to express unlawful preferences by offering discriminatory options, allowing them to effectively limit housing options for these protected classes under the guise of "targeted advertising."

Yesterday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned four Burmese military and Border Guard Police (BGP) commanders and two Burmese military units for their involvement in ethnic cleansing in Burma’s Rakhine State and other widespread human rights abuses in Burma’s Kachin and Shan States. The designations were made under Executive Order 13818, which builds upon the Global Magnitsky Human Rights Accountability Act of 2016 to target perpetrators of serious human rights abuse and corruption. For identification information, see our OFAC Update.

The SEC announced yesterday that Citigroup has agreed to pay $10.5 million in penalties to settle two enforcement actions involving its books and records, internal accounting controls, and trader supervision. The charges stem from $81 million of losses due to trader mismarking and unauthorized proprietary trading and $475 million of losses due to fraudulently-induced loans made by a Mexican subsidiary.

In the first action, Citigroup Inc. and its U.S. broker-dealer subsidiary Citigroup Global Markets Inc. (CGMI) agreed to pay a $5.75 million penalty to settle charges of inaccurate books and records and CGMI’s failure reasonably to supervise traders. Citigroup and CGMI settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations.

In the second action, Citigroup agreed to pay a $4.75 million penalty to settle charges that it failed to devise and maintain adequate internal accounting controls. Citigroup settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations. An SEC order found that Citigroup subsidiary Grupo Financiero Banamex S.A. de C.V. loaned approximately $3.3 billion to Oceanografia, S.A. (OSA) between 2008 and 2014 based on invoices and work estimates for services that OSA provided to Petroleos Mexicanos (Pemex), the Mexican state-owned oil company. According to the order, many of the OSA work estimates were fraudulent and did not reflect amounts Pemex actually owed to OSA. Citigroup ultimately lost approximately $475 million as a result of OSA’s fraud. The SEC found that Banamex and Citigroup lacked the controls necessary to verify the invoices before making loans to OSA and ignored numerous red flags that should have led to discovery of the fraud.

The OCC has issued Bulletin 2018-23 announcing the revision of Policies and Procedures Manual (PPM) 5000-43, which clarifies the OCC’s policy for applying the regulatory framework to determine the effect of evidence of discriminatory or other illegal credit practices on the Community Reinvestment Act (CRA) rating of a national bank, federal savings association, or federal branch.

The OCC has announced it will host two workshops at the Houston Marriott South at Hobby Airport, September 25 and 26, 2018, for directors of national community banks and federal savings associations supervised by the OCC.

• The Compliance Risk workshop on September 25 focuses on the critical elements of an effective compliance risk management program. It also covers major compliance risks and critical regulations. Topics of discussion include the Bank Secrecy Act, Flood Disaster Protection Act, Fair Lending, Home Mortgage Disclosure Act, Community Reinvestment Act, and other compliance hot topics.
• The Operational Risk workshop on September 26 focuses on the key components of operational risk—people, processes, and systems. The workshop also covers governance, third-party risk, vendor management, internal fraud, and cybersecurity.