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Bates News, Events  |  02-29-24

Attending ETH in Denver? Connect with FinTech and AML Consultant John Ashley

Attending ETH in Denver? Between the interactive workshops, insightful talks, and dynamic panels, Bates Managing Consultant John Ashley, CIPP/US, CCRS, CRCMP, will be available meet with you to discuss the top issues and concerns for the blockchain community.

Learn how Bates Group supports FinTech firms with compliance services, independent reviews, and training. Feb. 23 – Mar. 3 in the heart of Denver, Colorado.

CONNECT WITH JOHN

About Bates Group:

Bates Group is a leading financial services consulting firm providing end-to-end solutions on compliance. Our Compliance Team offers customized solutions for your compliance, licensing, training, and banking needs. Our experienced professionals, from traditional banks to crypto startups, can guide you through your regulatory challenges.

Bates News, Bates Research  |  02-29-24

Addressing Transaction Fraud Litigation with Expert Consulting and Preventative Compliance

As a leading provider of financial consulting services, Bates Group has extensive experience assessing claims of transaction fraud. We understand transaction fraud on brokerage and bank accounts can manifest in various ways, including unauthorized access, phishing and social engineering, account takeover, malware and keyloggers, insider threats, and wire fraud. Victims of such fraud often allege their financial institution failed to develop, implement, and maintain internal policies, procedures, and controls to detect and prevent such fraudulent activities from occurring. These claims also allege the financial institution’s policies, procedures, and controls did not meet industry standards.

Defending allegations of transaction fraud on brokerage or bank accounts, Bates Group can help you assess the validity of these claims and provide expert testimony if necessary. Our team of experienced industry professionals has the knowledge and expertise to analyze the facts of the case and opine as to whether the financial institution’s policies, procedures, and controls were sufficient to protect their customers from the alleged financial exploitation, and whether those policies, procedures, and controls met industry and regulatory standards.

In addition, Bates Group has assisted financial institutions in preventing and deterring transaction fraud in the following areas:

  • Monitoring and Detection Systems: Reviewing advanced monitoring systems to detect unusual or suspicious activities and real-time monitoring of transactions for irregular patterns or large or unusual transactions.
  • Customer Verification and Authentication: Assisting clients in implementing robust authentication processes for customer identity verification and regularly evaluating current authentication methods and making best practice recommendations for enhancements.
  • Education and Awareness: Conducting regular training programs for customers and staff to recognize and report potential fraud and to raise awareness about common fraud tactics.
  • Encryption and Secure Communication: Reviewing and assessing security protocols to ensure that communications and transactions are encrypted to protect sensitive information and to address emerging threats.
  • Regulatory Compliance: Advising clients on adherence to regulatory guidelines and standards for effective AML programs, and regularly reviewing and updating AML programs to align with industry best practices.
  • Incident Response and Reporting: Helping clients establish a robust incident response plan for swift action in case of a security breach, ensuring timely reporting of incidents to relevant authorities and affected customers.

 

If you are representing a financial institution being sued for transaction fraud on brokerage or bank accounts, contact Bates Group today to learn more about how we can help you assess the validity of these claims and protect your client’s interests.

Practice Area Contacts:

Addressing Transaction Fraud Litigation with Expert Consulting and Preventative Compliance

Julie Johnstone

Managing Director, Practice Leader - Securities and Financial Services Litigation & Consulting

jjohnstone@batesgroup.com

971-250-4319

Addressing Transaction Fraud Litigation with Expert Consulting and Preventative Compliance

Rhonda Davis

Managing Director, Bates Compliance

rdavis@batesgroup.com

Learn More:

SECURITIES & FINANCIAL SERVICES LITIGATION & ARBITRATION

BATES COMPLIANCE

About Bates Group:

Bates Group is a financial services consulting firm that provides expert advice and guidance to our partners in compliance, litigation, and regulatory matters. Our subject matter experts are highly regarded in their respective fields.

For over 40 years, Bates’ exposure to industry challenges, litigation matters, and enforcement actions has given us unique insight into matters that allow us to benefit all our partners.

Events  |  02-21-24

Bates Group Sponsors the 2024 IBDC/RIAC Annual Risk Management Conference, March 4-6 in San Diego

Join Bates Group at the IBDC-RIAC Risk Management Conference, March 4-6, 2024 in San Diego, California. Bates is a proud sponsor of this “go-to” event for serious risk management professionals. It’s where COOs, CEOs and Risk Management Officers interact with leading securities litigators and compliance, cybersecurity, and insurance specialists. Set at the beautiful Fairmont Grand Del Mar resort and spa, attendees are treated to compelling presentations – plus, the absolute smartest methods to address complex issues affecting the industry. Not to mention, IBDC conferences offer luxurious opportunities to relax, network and socialize on the golf course, in the spa, or during a variety of activities.

Bates cybersecurity expert Patrick Cox (below, L) will be speaking on the Monday panel "How to Create a Sound Cybersecurity Breach Strategy." March 4th at 11:45 a.m.

Jennifer Stout (below, R) will also be in attendance and would welcome the opportunity to speak with you about why our BD, RIA and hybrid firms clients choose Bates. Jennifer serves as Vice-Chair of the Bates Board of Directors, is Senior Executive Advisor, and former CEO. She.has attended the IBDC-RIAC conference for many years and feels it is one of the best conferences for high-quality content specific to firms in the independent space.

Bates Group Sponsors the 2024 IBDC/RIAC Annual Risk Management Conference, March 4-6 in San Diego Bates Group Sponsors the 2024 IBDC/RIAC Annual Risk Management Conference, March 4-6 in San Diego

Conference Details and Registration

Your conference registration includes:
  • Attendance to all conference sessions
  • One Tuesday afternoon activity (extra charge for golf club rentals)
  • All food and beverages during conference sessions, scheduled meals, and conference cocktail parties
  • Return transportation from the Grand Del Mar to the San Diego airport on the morning of Wednesday, March 6

About Bates:

Bates Group is a financial services consulting firm that provides expert advice and guidance to our partners in compliance, litigation, and regulatory matters. Our subject matter experts are highly regarded in their respective fields. For over 40 years, Bates’ exposure to industry challenges, litigation matters, and enforcement actions has given us unique insight into matters that allow us to benefit all our partners.

Contact us today to learn more.

Events  |  02-19-24

Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512

Bates is a proud sponsor of the 2024 SIFMA C&L Annual Seminar, March 17-20, 2024 in Orlando, Florida. Hosted by SIFMA’s C&L Society, this is a must-attend event for professionals in the financial services compliance and legal arena. Hear from the industry’s top leaders on the current regulatory and enforcement environments, lessons learned thus far, and what they're seeing on the horizon. Network with 1,800+ attendees from over 300 organizations.

Visit us at booth #512 to reconnect with Bates colleagues and to learn about our latest products and services. Speak with our representatives to find out what they are seeing and hearing  and how our team of experienced industry consultants and experts can help you with your litigation, regulatory, and compliance matters, including support to address 2024 regulatory priorities.

Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512
Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512 Bates is a Proud Sponsor of the SIFMA 2024 C&L Annual Seminar - Booth #512

Register now to join us in Orlando – we’ll see you there!

Conference Details and Registration

About Bates:

Bates Group is a financial services consulting firm that provides expert advice and guidance to our partners in compliance, litigation, and regulatory matters. Our subject matter experts are highly regarded in their respective fields. For over 40 years, Bates’ exposure to industry challenges, litigation matters, and enforcement actions has given us unique insight into matters that allow us to benefit all our partners.

Contact us today to learn more.

Events  |  02-19-24

Meet Bates Compliance at the 2024 IAA Investment Advisor Compliance Conference

Meet Bates Compliance leaders at the 2024 IAA Investment Advisor Compliance Conference, March 6-8, 2024 in Washington, D.C. This annual, in-person program provides investment advisers with the most up-to-date information available on the changing regulatory landscape.

The conference features a distinguished roster of speakers, including SEC officials, investment adviser industry professionals, and legal experts. Hear Bates Managing Director Kurt Wachholz (below, L) speak on the "Compliance 101" panel on Thursday, March 7 at 1:00 p.m. This panel will share best practices to execute a proactive and tailored compliance program, including fostering an appropriate tone at the top of the firm, risk management, conflicts of interest, and remediation. Hear also about the SEC Division of Enforcement’s focus on creating a culture of proactive compliance.

Meet Managing Director Hank Sanchez (below, R) during the conference to learn about Bates Compliance services for RIAs, including practical insights and best practices that can help you maintain a successful compliance program.

Meet Bates Compliance at the 2024 IAA Investment Advisor Compliance Conference Meet Bates Compliance at the 2024 IAA Investment Advisor Compliance Conference

Conference Details and Registration

How Bates Helps:

The Bates Compliance team of experienced compliance professionals provide comprehensive offerings for Registered Investment Adviser, Broker-Dealer, and hybrid firms, as well as Private Fund and Hedge Fund clients, assisting them with compliance, risk mitigation, AML, supervision, and internal control functions. Our seasoned professionals closely review and test policies and procedures, supervisory and compliance processes, and the related practices involved in operating your business, recommending changes and industry best practices to supplement and enhance your compliance and supervisory systems, and remediate the results of regulatory, litigation, and internal audit findings. We also assist our clients in forming new Investment Advisory and Broker Dealer firms with the preparation and implementation of their compliance and supervisory programs, as well as the operational infrastructure and required regulatory filings.

Contact us today to learn more.

Compliance and Regulatory Alerts  |  02-14-24

FinCEN Proposes AML Requirements for SEC-Registered Investment Advisers and Exempt Reporting Advisers

FinCEN issued a Notice of Proposed Rulemaking (NPRM) Tuesday which would add SEC-registered investment advisers and exempt reporting advisers to the definition of financial institutions subject to the application of "Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA), including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements."

Read The News Release

How Bates Helps:

For financial institutions already subject to compliance with the AML/CFT requirements under the Bank Secrecy Act, Bates provides a wide range of AML Compliance services

For financial institutions impacted by proposed regulatory rules, Bates provides tailored, organization-specific assessments and implementation assistance once new compliance requirements are adopted.   

 

Contact Bates Today to Learn More

Events  |  02-13-24

Meet Bates at the 2024 NMLS Conference and Training for State Licensing Support

Meet Bates Compliance Director Matt Summers at the NMLS 2024 Annual Conference & Training, February 13, 2024 – February 16, 2024 in San Antonio, TX. This virtual and in-person event attracts a growing number of State and federal regulators, state licensees and federal registrants across the broad spectrum of financial services industries, consultants, law firms, and NMLS education providers, who come together to exchange invaluable information on NMLS user and regulatory compliance issues.

The 2024 NMLS Conference connects attendees to the NMLS ecosystem to meet with peers, network with both regulators and industry partners, and hear about the latest trends and updates from the world of supervision. Attendees will have the opportunity to choose from concurrent breakout sessions, listen into roundtable discussions with experts, meet the regulators, and much more! 

Find Matt during the conference and learn more about Bates Group's comprehensive services, including state license acquisition and maintenance, independent reviews, compliance support, and training.

Conference Details and Registration

Compliance and Regulatory Alerts, Bates Research  |  01-31-24

Identity Theft Week - Preventing Unauthorized Account Takeovers

This week is Identity Theft Awareness week, sponsored by the FTC.  ID Theft occurs when an individual pretends to be someone else, typically to obtain credit or other benefits in the victim’s name.  Financial institutions are required to implement an ID Theft Prevention Program as part of the FACTA Red Flags Rule, and a number of other consumer regulations require institutions to reimburse consumers for unauthorized payments from their account due to ID Theft and to refrain from collections activities on loans obtained via ID Theft.  The financial loss to institutions is staggering.  FinCEN recently reported that ID Theft was the second highest category for SARs related to identity, with approximately 423,000 SARs covering $45 billion in suspicious activity for 2021 – the most recent data available.  (see https://www.fincen.gov/news/news-releases/fincen-issues-analysis-identity-related-suspicious-activity)

An increasingly harmful form of ID Theft is Account Takeover, where a bad actor gains unauthorized access to a victim’s account.  This is done on deposit accounts and HELOCs in order to transfer funds out of the account.  It can also be done on HELOCs and other loans to obtain the routing # and account # of a bank account linked for making auto payments.  Then that account is victimized. 

Preventing Account Takeover has become increasingly difficult due to the number of data breaches that have resulted in NPI from a large percentage of the population being posted on the dark web.  An institution might not be able to fully rely on traditional identifiers like Name, Date of Birth, and Social Security number as a means to authenticate to a call center (for example), as it’s likely that a bad actor has that information on a customer.  Because of this, it’s important for an institution’s call center to refrain from the following without obtaining an additional element of authentication:

  • Providing an additional piece of NPI, such as account #, to callers.
  • Allowing the changing of MFA information (typically phone numbers and email addresses).

With the right call center procedures, institutions can make significant strides toward thwarting Account Takeover that results from ID Theft.

Related Services:

BSA/AML/OFAC Compliance

Risk Assessments, Independent Reviews, Policies & Procedures, and Training

Bates Research  |  01-23-24

Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart

Image © [Kristina Blokhin] /Adobe Stock

In its 2024 examination priorities report, the SEC’s Division of Examinations highlights areas where it will intensify scrutiny and regulatory focus in the coming year.  Reviewing their roadmap offers vital insights for firms (investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and other market participants) on where to focus their attention and resources regarding potential risks to ensure proactive compliance in the coming year.  Bates has been tracking the evolution of the Division's published priorities for nearly a decade -- see our 2024 comparison chart below.

Focus areas include:

1. Investment Advisers and Investment Companies:

  • Private Funds: The Division will examine complex and “fee-heavy” private funds, particularly those who are perceived to have opaque strategies, conflicts of interest, and misleading marketing practices. Retail investor protection in this space is paramount.
  • Fees and Valuation: Fee structures, portfolio valuation methods, and transparency will be under the microscope, particularly for advisers catering to retail clients.
  • Suitability and Performance Advertising: Adequacy of advice relative to investor profiles and responsible use of performance advertising in marketing materials will be closely examined.

2. Broker-Dealers:

  • Best Execution and Suitability: Evaluating client interests in relation to commissions charged is the top priority. The suitability of recommendations for individual investors will be rigorously assessed.
  • Margin Lending and Manipulation: Responsible use of leverage and transparency in risk disclosure for margin lending activities will be key focus areas. Potential market manipulation will be actively investigated.
  • Cybersecurity and Sales of Complex Products: Robust data protection measures, incident response plans, and responsible sales practices for complex products are crucial aspects that will be evaluated.

3. Self-Regulatory Organizations (SROs):

  • Oversight Effectiveness: SROs' ability to enforce SEC regulations and compliance within their member firms will be scrutinized.
  • Market Surveillance and Enforcement: The adequacy of SROs' surveillance programs to detect and address market manipulation and misconduct will be assessed.
  • AML/CFT Compliance: SROs must ensure strong AML/CFT programs, particularly for member firms vulnerable to money laundering risks.

Emerging Risks:

  • Information Security: Robust cybersecurity measures, data protection systems, and incident response plans are critical to mitigate cyber threats and ensure business continuity.
  • Crypto Assets: Firms dealing in or offering services related to crypto assets must comply with evolving regulations and adhere to responsible market practices.
  • Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT): Effective AML/CFT programs are essential for all firms, especially those susceptible to money laundering risks.

Actionable Takeaways:

The SEC's 2024 exam priorities offer a roadmap for firms to proactively address potential risks and enhance compliance. Essential action items for firms for the coming year include:

  • Focus on transparency and investor protection: Prioritize clear fee structures, accurate portfolio valuation, and suitability of advice, particularly for retail investors.
  • Implement robust cybersecurity measures: Protect sensitive data, have effective incident response plans in place, and adopt best practices for secure technology use.
  • Ensure responsible sales practices: Avoid misleading marketing tactics, evaluate clients' needs in light of  commissions charged, and offer suitable products based on individual risk profiles.
  • Strengthen AML/CFT programs: Regularly update and test AML/CFT procedures, identify and mitigate money laundering risks, and cooperate with regulatory authorities.
  • Stay informed about evolving regulations: Keep abreast of changes in regulations, particularly regarding complex products like private funds and crypto assets — as well as what the Division may view as "new or emerging risks, products and services, market events, and investor concerns."

By proactively addressing these focus areas and emerging risks in 2024, firms will help build trust with investors, enhance compliance, and confidently navigate the regulatory landscape in the year ahead.


Bates 2024 SEC Priorities Chart

Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart

Key Takeaways from the SEC’s 2024 Examination and Enforcement Priorities with Bates Group’s Comparison Chart
© 2024, Bates Group LLC

Bates Research  |  01-19-24

Expert Insights: The Compliance Risks of Artificial Intelligence

By Brandi Reynolds, CAMS-Audit, Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

While reviewing the State of Financial Crimes 2024 report published by ComplyAdvantage, the survey findings pertaining to Artificial Intelligence-based compliance solutions stood out to me as a compliance professional that uses this technology.   

Artificial Intelligence (AI) refers to the use of technologies to build machines and computers that have the ability to mimic human intelligence, such as being able to analyze data and make recommendations.  This set of technologies can be integrated into a system to enable it to reason, learn and act.  Machine learning is a subset of AI that uses algorithms on data to produce models that can perform those tasks.

The use of AI and machine learning is becoming increasingly widespread in today's digital environment as it can help businesses "see the unseen.”  Financial institutions of all types are encountering the ever-changing nature of financial crimes as well as an increase of transactional data.  As such, regulators and financial institutions must continuously improve their fraud and anti-money laundering strategies and capabilities.  

AI and machine learning can assist in analyzing tremendous volumes of data and can be utilized for a variety of compliance-related obligations including: 

  • Customer identification and verification
  • Transaction monitoring
  • Risk-based monitoring  

The Financial Action Task Force (FATF) has commented on the use of AI and its advanced computational techniques to “perform tasks that typically require human intelligence, such as recognizing patterns, making predictions, recommendations, or decisions.”  As explained, machine learning can be used to train computer systems to “learn from data,” without the need for extensive human intervention.

Many regulators globally have commented on the use of AI.  Two notable published remarks come from the Financial Crimes Enforcement Network (FinCEN) and the New York Department of Financial Services (DFS).  

In the guidance issued by the DFS, it stated that “Blockchain analytics tools provide companies with an efficient, data-driven way to conduct customer due diligence, transaction monitoring, and sanctions screening, among other things, which are all critical elements of our virtual currency regulation.  We expect regulated entities to utilize best practices to uphold the safety and soundness of the virtual currency market and to protect consumers.”

FinCEN in a joint statement indicated, “New technology, such as artificial intelligence and machine learning, can provide better strategies for banks of all sizes to better manage money-laundering and terrorist-financing risks, while reducing the cost of compliance.”

Expert Insights: The Compliance Risks of Artificial Intelligence

While AI can provide many benefits, it also brings with it potential risks that organizations must consider when incorporating AI into their processes.  ComplyAdvantage’s survey indicated that 66% of the respondents believe that AI poses a growing cybersecurity threat.  Additional risks and challenges in using AI for BSA/AML compliance include:

  • Data Quality – Inaccurate or unrepresentative data can lead to false positives or false negatives, potentially undermining the effectiveness of BSA/AML compliance efforts relying on this data.
  • Regulatory Concerns – AI systems must meet legal requirements, including explainability, auditability, and compliance with data protection, anti-discrimination, and consumer protection laws.
  • Interpretability – AI models often make it challenging to understand how they arrive at their decisions. 
  • Adversarial Attacks – malicious actors may attempt to manipulate or deceive the system’s decision-making process.

To address these risks, institutions must ensure the quality and integrity of the data used to train and test AI models before operationalizing them.  Those processes should include regular data validation and monitoring for bias.  They must also invest in techniques and technologies that enhance the interpretability of AI models, enabling regulators to understand and validate the rationale behind a system’s outputs.  This includes model explainability algorithms and rule-based systems.  Institutions should also implement security measures to protect AI models from attacks that could compromise the integrity of the compliance processes.

It is important for compliance professionals to understand the functions of AI systems and keep a check on their performance to identify and address any biases, vulnerabilities, and emerging risks.  However, according to ComplyAdvantage’s findings, 50% of the respondents were “concerned about explaining the decisions and outcomes of AI-based financial crime solutions to various stakeholders and regulators.”  Despite this, 89% of the respondents felt somewhat comfortable compromising explainability for greater automation and efficiency.

Additionally, when considering the type and the extent of how to incorporate AI into an AML compliance program, financial institutions should assess their existing policies and procedures or create new policies and procedures that incorporate the use of the new technology. 

For many financial institutions and compliance professionals, the risk is outweighed by the reward.  However, it is critical to continuously address the risks associated with data quality, bias, regulatory compliance and adversarial attacks.  While AI can add efficiency and recognize patterns and digest large data sets, clearly the human element is needed to monitor the AI systems to ensure integrity and fairness in an institution’s compliance efforts to prevent financial crime.  

About the Author:

Expert Insights: The Compliance Risks of Artificial Intelligence

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Compliance and Regulatory Alerts  |  01-10-24

FINRA Publishes 2024 Regulatory Oversight Report

FINRA has published its 2024 FINRA Annual Regulatory Oversight Report, formerly known as the Report on FINRA’s Examination and Risk Monitoring Program. The report provides member firms with key insights and observations from recent activities of FINRA’s regulatory operations to use in strengthening their compliance programs. According to FINRA's January 9th news release, "Some of the topics covered will be familiar from past reports, updated for 2024, while others are new and represent emerging risks and evolving trends that are of growing importance as we look ahead." This years report highlights new topics, like risk related to Crypto Assets, and returning topics including Cybersecurity, AML, and Reg BI.

Stay tuned for our annual chart and commentary on the reformatted 2024 Report and how its findings may impact your legal, regulatory and compliance matters.

Read the Report at FINRA.org

Compliance and Regulatory Alerts  |  01-04-24

NASAA Publishes New Comment Letter on DOL Rule

NASAA has published a new Comment Letter to the DOL Regarding Retirement Security Rule: Definition of an Investment Advice Fiduciary. Specifically, the letter is in support of eliminatiing of the five-part test under the
1975 rule for determining when a securities registrant acts as an investment advice fiduciary for ERISA purposes.

Read the full letter at nasaa.org

Events  |  12-07-23

Webinar December 12th: Understanding SEC’s 2024 Exam Priorities & Enforcement Agenda

The SEC recently published its 2024 exam priorities, highlighting key examination and compliance priorities as it relates to many areas, including Regulation Best Interest and Investment Advisors. Later in the fall, the SEC’s enforcement branch reported 784 actions, with nearly $5 billion in fines, painting a clear need for action for the 2024 year.

Join Bates Compliance Managing Director Rhonda Davis, along with industry experts from Alphastar Capital, Docupace, InvestorCOM and Scopus Financial Group on December 12th for a webinar discussing:

  • Convergence of best interest principles across Reg BI and DOL’s Fiduciary requirements,
  • Investment advice provided to clients across products, strategies, and account types,
  • Processes for determining the investment advice is provided in clients’ best interest, and
  • How technology can be a key asset in considering reasonably available alternatives (RAA) products, account type and rollover recommendations.

December 12, 2023 at 1:00 PM ET

Presented by InvestorCOM

Webinar Details and Registration

Webinar December 12th: Understanding SEC’s 2024 Exam Priorities & Enforcement Agenda

Rhonda Davis

Managing Director, Bates Compliance

rdavis@batesgroup.com

Events  |  12-04-23

Catch Bates Expert Rob Ayers on the Next CrossTech Virtual Roundtable - Wednesday, December 6

Bates Expert Rob Ayers will be speaking at the December 6, 2024 CrossTech Virtual Roundtable (VRT) titled "FedNow's Instant Effect: Cross-Border Payment Dynamics." This webinar will examine the dynamic world of cross-border payments and its evolving landscape. Panelists will provide comprehensive insights into the profound impact of the Federal Reserve’s real-time payment system, FedNow, on global financial transactions.

Date: Dec. 6th, 2023
Time: 6:00 PM - 7:00 PM EST

Speakers:

  • Priscilla D’Oliveira - CrossTech (Moderator)
  • Rob Ayers, Consulting Expert - Bates Compliance, CEO - FinTech Advisors
  • Odilon Almeida Jr., Managing Principal - AJ Holdings
  • Anthony Rodriguez, CCO - Corpay
  • Alexander W. Goody, Fintech Product Counsel - Global Innovations Bank

Webinar Details and Registration

Bates Compliance Solutions for MSBs and FinTech

The experienced team at Bates Compliance provides a full suite of Bank Secrecy Act, Anti-Money Laundering and Office of Foreign Assets Control (BSA/AML/OFAC) compliance consulting services, state money transmitter licensing acquisition and maintenance support, independent reviews, and corporate compliance training for Banks, Money Transmitters, Payment Processors, and other MSBs and NBFIs. 

Contact Bates Today to Start Your Solution

Bates Research  |  11-21-23

Consumer Compliance Alert: CFPB Proposes New Rule Covering Digital Payment Apps

Image © [momius] /Adobe Stock

The Consumer Financial Protection Bureau (CFPB) has recently proposed a new rule to define the market for general-use digital consumer payment applications. The proposed market would cover providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making person-to-person payments for personal, family, or household purposes. Larger participants of this market would be subject to the CFPB’s supervisory authority under the Consumer Financial Protection Act (CFPA).

Under the proposed rule, the CFPB would establish a framework for regulating digital payment applications that are not issued by banks or credit unions. These "general-use" payment apps are those that facilitate transactions between consumers and merchants, such as mobile payment apps like PayPal and Venmo. The rule would require these apps to provide consumers with clear and concise information about fees, security measures, and other important details.

One of the key objectives of the new rule is to address the potential risks of using digital payment apps, such as unauthorized transactions, data breaches, and other security issues. The CFPB believes that the lack of regulation in the digital payments market has contributed to these risks, and that the proposed rule will help to mitigate them.

The proposed rule would also require digital payment app providers to conduct periodic risk assessments and implement appropriate risk management measures. This would help to ensure that these apps are able to detect and prevent fraud, as well as protect sensitive consumer data from unauthorized access.

Overall, the proposed rule demonstrates the CFPB's commitment to promoting consumer protection in the digital payments industry. By establishing clear and consistent standards for digital payment app providers, the CFPB hopes to ensure that consumers can make informed decisions about which apps to use, and that their personal and financial information is kept safe and secure.

While the proposed rule is still in the early stages of development, it has already garnered support from a range of stakeholders, including consumer advocacy groups, industry associations, and lawmakers. If implemented, the rule would represent a major step forward in the regulation of the digital payments market, and could have far-reaching implications for the industry as a whole.

As discussed in our recent article, the CFPB engages in rigorous examinations of financial institutions to ensure that they follow all applicable laws and regulations, have effective compliance management systems in place, and provide meaningful consumer protections. 

Examinations help the CFPB assess whether a company complies with consumer financial protection laws and regulations. During an examination, CFPB examiners review company policies and procedures to ensure they meet legal requirements, evaluate the effectiveness of the company’s compliance management system, and assess how well the company is meeting its obligation to protect consumers. Examiners also communicate directly with consumers to understand how products and services are performing in the marketplace. By performing a consumer protection review, businesses can be assured they are compliant with all applicable laws and regulations.

How Bates Helps:

When it comes to safeguarding consumers, Bates Group is a leader in providing comprehensive consumer protection reviews. Our team of industry experts and former state and federal regulators helps companies understand the applicable laws and regulations and how to stay compliant in today’s complex environment.

Bates Group offers independent consumer compliance reviews to evaluate compliance processes and procedures, identify areas where there may be gaps or opportunities for improvement, and develop strategies for compliance. Bates has also helped many organizations comply with CFPB guidelines by providing “readiness” reviews before a CFPB examination.

To book your consumer compliance readiness review and independent consumer compliance review, please contact Bates today.

Contact:

Consumer Compliance Alert: CFPB Proposes New Rule Covering Digital Payment Apps

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  11-15-23

Join Bates for the Greensfelder Annual Securities Symposium in St. Louis - November 15, 2023

Join Bates at the 2023 Securities Industry Symposium, on Wednesday, November 15, 2023. Sponsored by Greensfelder, Hemker & Gale, P.C. and the Bar Association of Metropolitan St. Louis.

The Symposium is an afternoon of highly informative discussions and networking opportunities with securities industry professionals and will include interviews with James Nix, Acting Director of the Illinois Securities Department, and Michael Solomon, Senior VP of Examinations at FINRA, as well as the panel "Examining Artificial Intelligence," featuring Bates cybersecurity expert Patrick Cox (pictured).

Bates consulting and testifying expert and former Missouri Securities Commissioner David Minnick will also be in attendance along with Expert and Director Joe Thomas and Expert Clay Grumke (pictured below, L-R). They will be on hand to share ideas on the increasingly complex and changing regulatory and compliance arenas, and how Bates can assist your firm with Securities Litigation and Arbitration, Expert Witness Testimony and Consulting, Damages, Regulatory Investigations, Compliance, and more.

Accreditation for the symposium is pending.

Event Details and Registration

Join Bates for the Greensfelder Annual Securities Symposium in St. Louis - November 15, 2023 Join Bates for the Greensfelder Annual Securities Symposium in St. Louis - November 15, 2023 Join Bates for the Greensfelder Annual Securities Symposium in St. Louis - November 15, 2023

Events  |  11-14-23

CrossTech World 2023 - November 14-16, 2023 in Hollywood, FL

Join Bates at CrossTech World 2023, November 14-16, 2023 at the Seminole Hard Rock Hotel & Casino in Hollywood, Florida. Meet Managing Director and Compliance team leader Brandi Reynolds, Consulting Expert Rob Ayers, and Managing Director Paul Lambert during three days of compliance courses, workshops, panels, roundtables, and networking for companies involved in cross border transfers and payments, including bank and non-bank financial institutions, financial services organizations, foreign exchange firms, international money transmitters, card companies, payment processors, VCs and blockchain-based financial services providers, as well as providers of complementary industry services such as legal, compliance, bonding, auditing, software, IT, etc.

Don't miss the following panels and workshops featuring Bates Group speakers:

CrossTech World 2023 - November 14-16, 2023 in Hollywood, FL
Brandi Reynolds, CAMS-Audit, CCAS

Managing Director, Bates Compliance

  • CTC Compliance Workshop - Tue Nov 14 (Instructor)
  • Compliance Officers Discussion Forum: Exploring Crypto Compliance Insights and Strategies for Cross-Border Payments - Tue Nov 14, 4:00 PM – 4:45 PM (Panelist)
  • Compliance Officers Discussion Forum: Regulatory Compliance in Cross-Border Payments: Facilitating the Secure Flow of Funds - Wed Nov 15, 10:30 AM – 11:15 AM (Panelist)

CrossTech World 2023 - November 14-16, 2023 in Hollywood, FL
Rob Ayers

Consulting Expert, Bates Compliance

  • Banking Track 1: Roundtable Global Banking Solutions: Exploring the Ideal Bank for International Expansion - Wed Nov 15, 2:30 PM – 3:15 PM (Panelist)
  • Navigating the Global Landscape: Transformations of the Financial Services Industry - Thu Nov 16, 4:30 PM – 5:15 PM (Moderator)

Conference Details & Registration

About Bates:

The Bates compliance team offers customized solutions to meet your compliance, licensing, training, and banking needs. From traditional banks to fintech startups, our experienced professionals help guide clients through their unique compliance challenges. Bates provides a full suite of Bank Secrecy Act, Anti-Money Laundering, and Office of Foreign Assets Control (BSA/AML/OFAC) compliance consulting services, state licensing acquisition and maintenance support, independent reviews, risk assessments, compliance training, outsourced compliance support, and recruitment services.

Contact us today to learn more.

Bates Research  |  11-09-23

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Image © [Andriy Blokhin] /Adobe Stock

With the year wrapping up soon, we are taking a look at what is and is not trending in matters resolved through FINRA arbitration through the first nine months of 2023. The following analysis utilizes data from Securities Arbitration Commentator and FINRA.[1]

The Big Picture – Fewer Cases Closing Each Year

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Through September of each year, and on an annual basis, the number of disputes closed has been declining. This is a long-term trend going back at least a decade following a similar decline in disputes filed – no real surprise to those who work in the FINRA arbitration space and have experienced the impact of recent bull markets[2], the transition of advisors away from broker-dealer firms to registered investment advisory firms[3], and advancements in firms’ compliance and supervisory systems.

The chart below [4] demonstrates the decline in the number of Broker-Dealer Representatives Only and the increasing numbers of Dually Registered Representatives and Investment Adviser Representatives Only.

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?
Source: FINRA

It is worth noting that FINRA reports 2022 as being the first year since 2015 that more FINRA-registered representatives entered the industry than left the industry. [5]

Types of Disputes

Nearly half (49.2%) of the disputes resolved through the FINRA arbitration process in the first nine months of 2023 were Employee–Member cases, and 29.6% were Customer–Member cases.

In the first nine months of 2023, the major case types that were closed were:

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

FINRA classifies types of disputes as either Customer Cases or Intra-Industry Cases, and this data is tracked by the number of cases filed, not closed.

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Employee–Member Disputes

The majority of allegations for Employee–Member disputes that were arbitrated through September 2023 involve Expungement of Customer Disputes and Reformation of U5 Disclosures. Together, these two allegations represent 95.9% of the total Employee–Member dispute allegations.

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Customer–Member Disputes

The main eight allegations associated with Customer–Member disputes that were arbitrated through September 2023 are listed in the table below. These allegations represent 82% of the total allegations seen in Customer-Member disputes arbitrated through September 2023.

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

The Hidden Statistic:

A smaller percentage of Customer–Member disputes are being resolved through direct settlement.

In 2022 and YTD 2023, FINRA reports the percentage of cases decided by Arbitrators has increased when compared to the prior three years. The same trend is exhibited for cases being decided through mediation, with the percentage of cases decided through direct settlement declining by close to 10%.

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

The FINRA arbitration forum is constantly evolving and changing. To discuss any of the above, or how Bates can assist with your customer–member and employee–member cases, please contact:

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Julie Johnstone

Managing Director, Practice Leader - Securities and Financial Services Litigation & Consulting

jjohnstone@batesgroup.com

971-250-4319

A Look At 2023 FINRA Arbitration Award Stats: What’s Trending, What’s Not?

Andrew Daniel

Director, Securities Litigation Expert and Consultant

adaniel@batesgroup.com


[1] https://www.finra.org/arbitration-mediation/dispute-resolution-statistics.

[2] Recent Bull markets include March 2009 to December 2019 and Late March 2020 to January 2022. https://www.forbes.com/advisor/investing/bull-market-history.

[3] Registered Investment Advisors must register with the U.S. Securities and Exchange Commission (SEC) or a state regulatory agency, depending on the value of assets under the RIA's management. Disputes involving Registered Investment Providers are not governed by FINRA and therefore are not reflected in the analysis contained herein.

Learn More:

Securities & Financial Services Litigation & Arbitration

Data Analyses & Analytics

Regulatory & Internal Investigations

Events  |  11-08-23

Bates Expert Patrick Cox to Speak on IBDC Cybersecurity Webinar November 8th

Bates Expert Patrick Cox will be speaking on IBDC's upcoming Zoom webinar titled "How to Create a Sound Cybersecurity Breach Strategy." During this webinar, attendees will learn how to respond to the inevitable breach from experts in the cybersecurity community, including:

  • Patrick Cox - Cybersecurity consulting and testifying expert, Bates Group
  • Laxmi Ramanath - Founder and CEO, La Meer Inc.
  • Paul Horn - Founder and CEO, H2Cyber
  • Lilian Morvay, JD - Founder and principal, IBDC

How to Create a Sound Cybersecurity Breach Strategy

Date: November 8, 2023
Time: 2:00 pm
Duration: 1 hour
Learning Objectives:
  • What new cybersecurity State and Federal Rules and Regulations have been promulgated and proposed and how to comply with these new rules.
  • What does a cybersecurity breach response strategy entail? Each State has its own set of rules governing cyber breach responses. How do you manage an incident before it even happens?
  • Communication is key for your Reps/and Advisors' as well as for their clients. How does a BD or RIA manage communication and its reputation post breach?
  • What to expect from your cybersecurity insurance carrier in case of a breach.

Bates Group will provide a 10% discount to attendees for any Broker-Dealer or Registered Investment Adviser compliance service purchased within 30 days of the webinar, which includes annual reviews.

Webinar Details and Registration

Compliance and Regulatory Alerts  |  11-07-23

Three Years Later, FINRA Continues to Scrutinize Rights of Reinstatement. Is Your Firm Next?

FINRA is continuing its focus on eligible customers receiving Rights of Reinstatement (“ROR”)* benefits where appropriate.  This is the third year in a row that we have seen regulatory activity arising from this issue, and we are seeing significant activity now.

FINRA continues to scrutinize firms’ policies and procedures through examination and enforcement to ensure they are proper and working as intended, and that investors are receiving the benefits they are due. FINRA also expects remediation in instances where the policies or procedures did not work as intended.

We highly encourage firms to continue to review the effectiveness of their ROR-related procedures considering this ongoing regulatory focus and make updates to policy or remediation where necessary. Firms should be tracking mutual fund transaction activity and verifying that clients received the benefit of the ROR. 

 *ROR allows a customer to redeem or sell shares in the fund and reinvest some or all of the proceeds and receive a waiver of the sales load or a rebate on the CDSC paid on the sale, within a specified period of time (for example, 90 days), in the same share class of that fund or another fund within the same fund family subject to certain terms and conditions. The terms and conditions vary among funds. See previous Bates alert.

 

How Bates Helps Your Firm in ROR Matters:

Regulatory Investigations and Enforcement

Bates Group’s ROR assistance  predates the 2020 Targeted Exam Letter inviting firms to self-report. Specifically, we have recently assisted eight firms in ROR-related matters—including three of the largest firms with settlements in this area—as well as dozens of other firms more broadly in relation to Share Class matters.

We work with firms subject to an ROR-related inquiry or examination by importing the firm’s mutual fund trading activity into our programmatic analysis environment, reviewing for ROR-eligible trading activity and identifying records evidencing that the ROR benefit that we identified as due (whether a front load waiver or CDSC rebate) were handled contemporaneously. Any  missed benefits are then quantified and summarized at the investor or account level. Bates also provides insight into how FINRA has responded to various issues in prior ROR matters, assisting with any requests for additional information or support, until a result is agreed upon. We then prepare a repayment file, including calculating prejudgment interest, for the firm to use.

FINRA’s Changing Scope – What We Are Seeing

Bates has been involved in many in-house and outside counsel discussions with FINRA about the required analysis, acceptable approaches, and calculation methodologies employed to concretely identify instances in which clients were entitled to a front load waiver on a mutual fund purchase because of an ROR benefit. We have also seen the scope of FINRA’s focus change over time, for instance, to include missed rebates of Contingent Deferred Sales Charges (CDSC) in addition to missed front load waivers.

We are confident in our ability to help firms address and resolve their ROR regulatory and related issues. As a result of the volume of our work in this space over the years, Bates has established a proprietary database of historical mutual fund information, resulting in significant savings to our clients.

 

Bates Regulatory and Internal Investigation Services

Contact us to learn more about how our team’s deep experience and significant resources can help your firm.

Three Years Later, FINRA Continues to Scrutinize Rights of Reinstatement. Is Your Firm Next?

Alex Russell

Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com

971-250-4353

Three Years Later, FINRA Continues to Scrutinize Rights of Reinstatement. Is Your Firm Next?

David Birnbaum

Managing Director, Business Development and Strategy

dbirnbaum@batesgroup.com

917-273-2682

Events  |  11-03-23

Join Bates at the SIFMA C&L Forum in St. Petersburg, FL - Friday, November 3, 2023

Join Bates leaders Jennifer Stout, Board Vice-Chair and Senior Executive Advisor, and Hank Sanchez, Managing Director, Bates Compliance, at the SIFMA C&L Forum on Friday, November 3, 2023, in St. Petersburg, FL. Co-Hosted by the Florida Securities Dealers Association (FSDA).

They will be on hand to share best practices and guidance in the increasingly complex and changing regulatory and compliance arenas, and how Bates can assist your firm with Securities Litigation and Arbitration, Expert Witness Testimony and Consulting, Damages, Regulatory Investigations, Compliance and AML, and more.

Said Ms. Stout, "I am eager to meet with our clients, industry peers, and regulators at the Forum, and, as a past president of the Florida Securities Dealers Association, I'd like to congratulate the FSDA on their 90-year legacy as the oldest and largest state securities association in the country."

Forum Details and Registration

Events  |  11-02-23

Congratulations to the FSDA on their 90th Anniversary!

Bates is a proud Diamond Sponsor of the Florida Securities Dealers Association's (FSDA) 90th Anniversary Celebration, Thursday, November 2, 2023. The celebration will be held at the amazing James Museum of Western & Wildlife Art in beautiful downtown Saint Petersburg, Florida. Presented by Raymond James.

Established in November 1933, the FSDA is a not-for-profit organization formed to advance the securities industry through advocacy, collaboration, and education and is proud to celebrate their 90-year legacy. Their stated mission is "to advocate on behalf of the industry and provide education opportunities for our members and Florida's investing public."

Congratulations to the FSDA on their 90th Anniversary! Congratulations to the FSDA on their 90th Anniversary!

Bates leaders Jennifer Stout, Board Vice-Chair and Senior Executive Advisor, and Hank Sanchez, Managing Director, Bates Compliance, (pictured) will be in attendance as individual sponsors of the celebration. Be sure to catch them the following day at the SIFMA C&L Forum, also in St. Petersburg.

Said Ms. Stout, "As a past president of the organization and chair of the anniversary committee, I'd like to congratulate the FSDA on 90 years as the oldest and largest state securities association in the country."

Event Details:

Thursday, November 2, 2023
6:30 - 8:00 p.m. ET
The James Museum of Western & Wildlife Art, St. Petersburg, FL

Please contact FSDA Administrator Jacqueline Farina at jacqueline.farina@fsda.org to rsvp and for more details.

Compliance and Regulatory Alerts  |  10-30-23

5 Tips to Prepare for NMLS Annual License Renewal Season - Starting November 1

Image © [Berk] /Adobe Stock

State regulators are encouraging individuals and businesses in the mortgage, money transmission, debt collection, and consumer financial services industries to start preparing now for the Nov. 1 start of Nationwide Multistate Licensing System (NMLS) annual license renewal. In their release, the NMLS provided:

5 Tips for Licensees to Prepare for NMLS Renewal
  • Update your NMLS record – log in and check to make sure your profile is accurate
  • Reset your NMLS password – update your password now to ensure it is current when you are ready to access NMLS
  • Provide a current email address – take this step to ensure you receive important updates from NMLS during renewals
  • Review state-specific renewal requirements – state agencies begin publishing requirements, including deadlines and fees, in September
  • Access free, on-demand renewal training – CSBS develops a variety of resources for licensees to become familiar with the renewal process

How Bates Helps:

Federal and state regulations are strict regarding all types of monetary transmissions, and you must first obtain the proper license and authority before you can work in these types of businesses. At Bates Group, we assist clients in obtaining state licensing (e.g., money transmitter licenses [MTL], Virtual Currency [VC]), as well as with license maintenance and NMLS renewals following acquisition and the start of operations. Talk to our team today to learn how Bates licensing solutions can help you.

Learn More About Our Licensing Solutions

Contact:

Events  |  10-22-23

Join Bates at Money 20/20, October 22-25, 2023

Join Bates Director Michael Lindemann, CAMS, CCI, at the Money 20/20 Conference, October 22-25, 2023, in Las Vegas.

Billed as the world’s biggest, most influential gathering of the global money ecosystem, this conference brings together industry leaders, speakers, and service providers on issues concerning banks, payments, tech, startups, retail, fintech, financial services, and policy, among other hot topics.

Join Bates at Money 20/20, October 22-25, 2023

Meet Michael at the conference to discuss Bates Group's consulting solutions for Compliance, AML, Licensing, FinTech, and more.

Conference Details and Registration

Learn More about our Services:

Compliance & AML Solutions

Compliance & AML by Entity/Industry

Events  |  10-17-23

Bates Sponsors The 2023 Raymond James Valor Golf Outing October 28th

Image © [thaninee] /Adobe Stock

Bates is proud to be a sponsor of the 5th annual Raymond James Valor golf outing, Saturday, October 28th, 2023.

Valor, the Veterans' Inclusion Network at Raymond James, sponsors this annual golf tournament and raffle to benefit local veterans and their families.

Event Details

Events  |  10-16-23

Bates is a Proud Sponsor of the 2023 NSCP National Conference

Join Bates at the NSCP National Conference, October 16-18, 2023 in Dallas, TX. We are a proud sponsor of this year's event.

Hear Kurt Wachholz, Managing Director and Compliance practice co-leader, speak on the panel:

Bates is a Proud Sponsor of the 2023 NSCP National Conference

8c. ALL LAB – Integrating Ethical Awareness into the Compliance Program (Intermediate) Tuesday, 10/17, 3:15 PM - 4:30 PM

Conference Details and Registration

Meet Bates leaders Jennifer Stout, Rhonda Davis, Hank Sanchez, and Shelley Dragon (pictured below, L-R) at the conference to discuss BD-RIA annual support and compliance solutions for your firm.

Contact Bates today to schedule a meeting before or during the conference.

Bates is a Proud Sponsor of the 2023 NSCP National Conference

About Bates Compliance

The Bates Compliance team of experienced compliance professionals provide comprehensive offerings for Registered Investment Adviser, Broker-Dealer, and hybrid firms, as well as Private Fund and Hedge Fund clients, assisting them with compliance, risk mitigation, AML, supervision, and internal control functions. Our seasoned professionals closely review and test policies and procedures, supervisory and compliance processes, and the related practices involved in operating your business, recommending changes and industry best practices to supplement and enhance your compliance and supervisory systems, and remediate the results of regulatory, litigation, and internal audit findings. We also assist our clients in forming new Investment Advisory and Broker Dealer firms with the preparation and implementation of their compliance and supervisory programs, as well as the operational infrastructure and required regulatory filings.

Compliance and Regulatory Alerts  |  10-16-23

SEC Division of Examinations Announces 2024 Examination Priorities

The Securities and Exchange Commission’s Division of Examinations has just released its 2024 examination priorities report, focusing on Investment Advisers, Investment Companies, Broker-Dealers, Self-Regulatory Organizations, Clearing Agencies, and Other Market Participants, as well as on current risk areas, including Information Security, Crypto and FinTech, Regulation Systems Compliance, and AML. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. You can read the press release here

Stay tuned for our annual commentary and chart, coming soon, on the SEC's 2024 exam priorities and how they may impact your legal, regulatory and compliance matters.

Bates News  |  10-06-23

Bates Group Welcomes Chris Riper as Managing Director, Litigation and Regulatory Practice

Bates is pleased to announce Chris Riper, CFE, CAMS, as a Managing Director in the Litigation and Regulatory Practice, where he will focus on complex litigation and regulatory matters. With over 16 years of experience in complex dispute consulting, forensic data analytics, and investigatory services, Chris is a seasoned leader who helps clients navigate high-stakes legal and regulatory challenges. His expertise in applying business and technical skills to solve complex financial issues has made him a valued and sought-after partner to attorneys, individuals, and corporate clients.    

"Bates brings unparalleled expertise in the financial services sector and a wealth of experience as a trusted advisor to clients in legal and regulatory matters," said Chris. "I am thrilled to reunite with Bates Group and contribute to the growth of the firm's complex litigation services."  

Chris returns to Bates Group after holding progressive leadership roles in FTI Consulting's Dispute Advisory Services practice group, as well as consulting roles at Axiom EPM and Bates Private Capital/LECG. Chris is a Certified Fraud Examiner and a Certified Anti-Money Laundering Specialist, and he holds an M.B.A. and B.S. in computer science from Oregon State University.

"We are excited to announce the return of Chris, an experienced and knowledgeable leader, to our litigation and regulatory team," said CEO Ben Pappas. “Bates Group is committed to providing exceptional support and guidance to our clients, and having Chris back on the team only reinforces this commitment. With his specialized expertise, Bates Group is well positioned to continue delivering top-notch services in complex litigation and regulatory matters.” 

“I am delighted to be colleagues with Chris once again,” said Alex Russell, Managing Director and Head of Bates Group’s Litigation and Regulatory Practice. “Chris’ passion for delivering best-in-class outcomes for his clients is a perfect fit for Bates, and I look forward to the opportunity to assist new and existing clients alongside him.”

Read Chris' Full Bio Here

About Bates:

Bates Group is a trusted partner to financial services clients, counsel, and non-banking financial institutions, delivering leading industry expertise, knowledge, and data-driven solutions for legal, regulatory, and compliance matters. With a team of experienced professionals and a commitment to client satisfaction, Bates Group helps clients navigate complex challenges and achieve favorable outcomes in litigation, regulatory enforcement and internal investigations, AML and compliance, forensic accounting, damages, and big data consulting matters.

Events  |  10-02-23

Join Bates Group at ACAMS 2023 - The Assembly Las Vegas

Join Bates Group at ACAMS 2023 - The Assembly Las Vegas, October 2-4 at the ARIA Resort & Casino. The ACAMS annual conference is a leading AFC and AML event for professionals from across the compliance spectrum. 

Attendees will hear thought leaders and expert practitioners from both the public and private sectors as they share insights with fellow compliance and law enforcement professionals. Take advantage of interactive workshops, curated sessions, and networking events to ensure you are on top of the latest trends and solutions to fight evolving criminal strategies.

Join Bates Group at ACAMS 2023 - The Assembly Las Vegas

Meet Bates Group AML Compliance expert Connie Fenchel, CAMS to learn about AML, AFC, and Independent Review solutions for your firm or organization.

ACAMS members can earn 16 ACAMS Credits for the main event. 

Conference Details & Registration

How Bates Helps

Bates Group is a financial services consulting firm providing industry-leading solutions on compliance and litigation matters. Our experienced AML and Compliance team offers customized solutions to meet your compliance, licensing, training, and banking needs. From traditional banks and brokerages to fintech startups, our experienced professionals can guide you through your compliance and regulatory challenges.

Contact us today to learn more.

Bates Research  |  09-26-23

FinCEN Alert: “Pig Butchering” Scams and the Importance of Suspicious Activity Reporting for Financial Institutions

Image © [Rawpixel.com] /Adobe Stock

Financial institutions play a vital role in detecting and reporting suspicious activity that may be related to financial crimes. One of the critical responsibilities of financial institutions is to monitor transactions and report any suspicious activity that may be indicative of money laundering, terrorist financing, or other illegal activity. In this article, we will discuss the latest alert from the Financial Crimes Enforcement Network (FinCEN) regarding “pig butchering” scams and their implications for financial institutions.

What is “Pig Butchering”?

FinCEN describes “pig butchering” scams as “resembling the practice of fattening a hog before slaughter.” The victim is conned or “fattened up” by scammers into believing they are in a trusted partnership to buy legitimate virtual currency investments before they defraud the victims of their assets — the “butchering.” FinCEN reports that these scams are “largely perpetrated by criminal enterprises based in Southeast Asia who use victims of labor trafficking to conduct outreach to millions of unsuspecting individuals around the world.”

There are several red flags that financial institutions should look out for to detect suspicious activity related to pig butchering.[1]

Behavioral Red Flags

  • A customer with no history or background of using, exchanging, or otherwise interacting with virtual currency attempts to exchange a high amount of fiat currency from an existing or newly opened bank account for virtual currency, or attempts to initiate high-value transfers to Virtual Asset Service Providers (VASPs).
  • A customer mentions that they were instructed by an individual who recently contacted them to exchange fiat currency for virtual currency at a virtual currency kiosk and deposit the virtual currency at an address supplied by the individual.

Financial Red Flags

  • A customer uncharacteristically liquidates savings accounts prior to maturation, such as a certificate of deposit, and then subsequently attempts to wire the liquidated fiat currency to a VASP or exchange it for virtual currency.
  • A customer receives what appears to be a deposit of virtual currency from a virtual currency address at or slightly above the amount that the customer previously transferred out of their virtual currency account. This deposit is then followed by outgoing transfers from the customer in substantially larger amounts.

Technical Red Flags

  • System monitoring and logs show that a customer’s account is accessed repeatedly by unique IP addresses, device IDs, or geographies inconsistent with prior access patterns. Additionally, logins to a customer’s online account at a VASP come from a variety of different device IDs and names inconsistent with the customer’s typical logins.
  • A customer receives a large amount of virtual currency such as Ether (ETH) at an exchange, subsequently converts the amount to a virtual currency with lower transaction fees such as Tronix (TRX), and then abruptly sends it out of the exchange.

How to Minimize Risk to Your Institution and Clients

Financial institutions must ensure that they have proper policies, procedures, and systems in place to identify, investigate, and report suspicious activity related to pig butchering or any other illicit activity. As part of their anti-money laundering (AML) compliance program, financial institutions should conduct ongoing risk assessments to identify the specific money laundering and terrorist financing risks associated with their business.

Financial institutions should also provide regular training to staff on how to detect and report suspicious activity related to money laundering and terrorist financing and ensure that they are aware of the latest trends and typologies related to financial crimes.

Conclusion

The FinCEN alert highlights the importance of financial institutions in detecting and reporting suspicious activity related to money laundering and other financial crimes. Pig butchering scams demonstrate how criminals are becoming increasingly more sophisticated in their methods. The burden lies with financial institutions to ensure that they have the necessary policies, procedures, and systems in place to identify and report suspicious activity in a timely and accurate manner. By doing so, they can help prevent financial crimes and support the efforts of law enforcement and regulators in combating money laundering and terrorist financing. If you need assistance updating policies and procedures or training, reach out to our experienced Bates team of industry AML and compliance professionals. We can help.


[1] October 2022 FBI PSA, supra note 10

How Bates Helps:

It is essential for firms to have a well-developed BSA/AML/OFAC compliance program in place that manages compliance risks and promotes best practices for your industry. FinCEN expects each institution to tailor its AML program specifically to its location, customers, and services. At Bates, our certified consulting experts and former AML regulators help you identify and understand the requirements for your businesses and develop an AML compliance program based on your individual risk profile.

Contact:

FinCEN Alert: “Pig Butchering” Scams and the Importance of Suspicious Activity Reporting for Financial Institutions

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  09-26-23

Rob Ayers to Speak at IPR Global 2023 Payments and Remittance Conference September 26-27 in London

Bates Group Money Services Business (MSB) and money transmitter expert Rob Ayers will be representing Bates in London at the 2023 Innovation in Payments and Remittance (IPR) Global Conference, taking place live at Convene in London, UK, as well as on a dedicated online events platform, from 26-27 September 2023.

This premier hybrid event welcomes financial services firms, payment processors, and fintech innovators from all over the world to discuss innovations that are changing cross-border payments, remittance digitalisation patterns by regions, and technologies such as open-banking and blockchain. Attendees will learn about the latest industry insights from influential speakers from across the money transfer supply chain and discuss compelling topics such as emerging trends, the evolving payments ecosystem, compliance practices, blockchain innovations, cryptocurrency advancements, AI and much more.

Rob will be serving in several roles throughout this 2-day event, including:

  • Speaker on the panel “Seizing Opportunities in the US—Navigating Banking, Licensing and Risk”
  • Moderator for the panel “Mastering Modern Compliance: Adapting to the Changing Landscape”
  • Judge and Presenter for the IPR Awards

Event Details and Registration

Events  |  09-19-23

SIFMA 2023 Women’s Leadership Forum

SIFMA’s Women’s Leadership Forum convenes legal and compliance leaders from across financial services to hear from industry leaders, participate in impactful facilitated breakout discussions, and network with colleagues. Attendees can access insightful conversations with legal and compliance leaders, valuable professional development opportunities, and timely and topical discussions.

Meet Bates Group Leaders and Experts David Birnbaum and Ira Hammerman (pictured below).

SIFMA 2023 Women’s Leadership Forum SIFMA 2023 Women’s Leadership Forum

September 19, 2023 | 3:00 PM – 6:00 PM ET

WilmerHale - 250 Greenwich Street, New York, NY

Event Details and Registration

Bates News  |  09-14-23

So Long Summer – Hello Fall! What You Missed and What is Happening This Fall

Image © [nito] /Adobe Stock

The summer has flown by, and now back-to-school (and back-to-office) is here again.

We’ve compiled some items you might have missed and some upcoming events to look forward to this fall, and we have even included a bonus track in honor of the man who knew how to keep that summer feeling going.

Compliance and Alerts

  • NASAA Report on Compliance with Reg BI Phase II (B) (nasaa.org)

  • Investment Advisers: Assessing Risks, Scoping Examinations, and Requesting Documents (sec.gov)

  • SEC Adopts Private Fund Rules, Instructing All Investment Adviser Firms to Document Annual Reviews Now (batesgroup.com)

  • Preventing Elder Financial Exploitation: Solutions to a Growing Threat (batesgroup.com)

  • Investment Adviser New Marketing Rule Examinations Focus on Additional Areas (batesgroup.com)

  • Legislative Alert: Louisiana Enacts New Virtual Currency Act; North Dakota Adopts Money Transmission Modernization Act (batesgroup.com)

  • The Compliance Risk of Artificial Intelligence (batesgroup.com)

  • SEC Bulletin Offers Staff’s Views on Standards of Conduct for Investment Advisers and Broker-Dealers When Addressing Care Obligations: What You Need to Know (batesgroup.com)

On-Demand Webinars

In the News

So Long Summer – Hello Fall! What You Missed and What is Happening This Fall

Bates Consulting and Testifying Clay Grumke was interviewed by CNBC for their short video documentary, “Why Insider Trading Is So Difficult To Stop,” published online on August 10, 2023. Watch Here.

So Long Summer – Hello Fall! What You Missed and What is Happening This Fall

Patrick Cox, Bates Consulting and Testifying Expert, was interviewed by Financial Advisor IQ reporter concerning the Securities and Exchange Commission’s recent July 26, 2023 proposal around mitigating conflicts of interest relating to predictive data analytics and the implications, including with Reg BI. Read Here.

New Expert Compliance Training

Let the Expert Compliance Team at Bates keep your organization in compliance with our specially tailored training programs for money services businesses and non-banking financial institutions. We offer a range of courses including AML and BSA compliance, OFAC, elder financial abuse, prepaid card programs, Regulation E, and more! We also offer custom training solutions to help your organization stay on top of industry standards and regulatory obligations.

Learn More about Online Compliance Training from Bates

Check out course previews on the new Bates Group YouTube channel. Like, comment, and subscribe today!

Join Us This Fall!

Need Assistance?

For additional information and practice support, please use the links below to browse Bates Group’s practice areas and services. Contact Us today or give us a call at 503-772-6770.

Compliance & AML Solutions
Compliance & AML by Entity/Industry
Securities and Financial Services Litigation & Consulting
Regulatory and Internal Investigations
Data Analyses & Analytics
Actuarial Services, Annuity & Insurance Product Litigation
State Licensing & Other Support
Find an Expert

Bonus Track:

Keep that summer feeling going. RIP Jimmy.

Events  |  09-11-23

Bates Sponsors the 2023 MTRA Annual School and Conference

Join Bates Group at the 2023 Money Transmitter Regulators Association (MTRA) Annual School and Conference. This annual educational event for MTRA members and MSBs, as well as associated industries, will be taking place September 11-14, 2023 in Portland, OR.

Meet Bates Compliance and Licensing experts Matt Summers, Director, Connie Fenchel, Strategic Advisor, and Justin Vick, Managing Consultant, to discover how your firm can take advantage of our 50-state licensing program.

Bates is proud to sponsor the 2023 Women in Money Transmission Breakfast (Organized by the MSBA) on September 12, 2023 from 10am - Noon PT.

Register Here for this limited-space event!

Full Conference Details & Registration

Events  |  09-11-23

Join Bates at the SIFMA C&L Regional Seminar Charlotte - Monday, September 11, 2023

Join Bates leaders Hank Sanchez, Managing Director, Joe Thomas, Director & Expert, and Patrick Cox, Expert, at the SIFMA C&L Society 2023 regional seminar on September 11, 2023, in Charlotte, NC.

They will be on hand to share ideas on the increasingly complex and changing regulatory and compliance arenas, and how Bates can assist your firm with Securities Litigation and Arbitration, Expert Witness Testimony and Consulting, Damages, Regulatory Investigations, Compliance, and more.

In-person program attendees will be eligible for CLE credits in North Carolina, South Carolina, and New York.

Seminar Details and Registration

Bates News  |  09-01-23

Bates Expert Clay Grumke on CNBC’s Insider Trading Video

Bates Consulting and Testifying Clay Grumke was recently interviewed by CNBC for their short video documentary, “Why Insider Trading Is So Difficult To Stop,” published online on August 10, 2023, and produced by CNBC Video Journalist Charlotte Morabito. Watch now!

Learn More:

Bates Regulatory and Internal Investigation Services

Contact Bates

Compliance and Regulatory Alerts  |  09-01-23

SEC Adopts Private Fund Rules, Instructing All Investment Adviser Firms to Document Annual Reviews Now

On August 23, 2023, the Securities and Exchange Commission adopted new rules and amendments concerning the regulation of private fund advisers. Although the new Private Fund Rules impact only those investment advisers with private fund offerings, buried in at the end of the rulemaking is an amendment to the Compliance Rule. Previously, registered investment advisers were required to review their compliance programs annually.  The rule was silent on whether documentation of the review was required. This is no longer the case. With the adoption of the Private Fund Rules, the amendment now requires registered investment advisers to document their annual review in writing. 

For more information on the requirements, see the Rule release here.

We  are here to assist you with the Annual Review process, regardless of your firm's size or complexity. Whether you're looking for a one-time third-party review or establishing an ongoing partnership with someone who understands your business model, we can help deliver consistent results.

About Bates Compliance

Bates Compliance, a division of Bates Group, brings tailored compliance consulting solutions to our investment adviser, broker-dealer, and hybrid firm clients on an as-needed or ongoing basis.  Our compliance team includes senior compliance staff and former regulators who test policies, procedures, supervisory and compliance processes, recommending changes and best practices to enhance compliance and supervisory systems, and to remediate the results of regulatory and litigation findings. 

Events  |  08-28-23

Join Bates at the 2023 NAPSA Conference in Boston

Join Bates Group Director and Expert Joe Thomas at the 2023 National Adult Protective Services Association (NAPSA) Conference. August 28-30, 20203 in Boston, MA.

The NAPSA Conference is the only national conference that focuses solely on Adult Protective Services (APS) and bring together attendees from Adult Protective Service units across the U.S. as well as allied professionals in government, law enforcement, medicine, banking & finance, legal systems, nursing homes/ombudsman, community-based organizations and more.

August 28, 2023 – August 31, 2023

7:00 AM-3:30 PM ET

Omni Boston Hotel at Seaport

Meet Joe during the conference to learn how Bates can help financial services firms protect their elderly and vulnerable clients from financial exploitation . If you'd like to schedule a time to talk, please contact us today or email contact@batesgroup.com.

For more about preventing Elder Financial Exploitation (EFE), please read our recent article here.

Conference Details and Registration

Events  |  08-15-23

Live Webinar - Asset Custody: Regulations and Best Practices

Join us for an informative live webinar where we will delve into the crucial aspects of managing asset custody, including regulatory requirements, best practices, risk management, and key considerations for businesses.

In today's fast-paced and ever-changing financial landscape, staying up-to-date with the rules and regulations governing asset custody is crucial. Whether you are a financial institution looking to enhance your compliance framework, a non-bank entity seeking to navigate the complexities of asset custody, or a crypto firm aiming to establish secure and reliable practices, this webinar will provide you with essential insights. Our expert panelists will guide you through the intricacies of regulatory compliance, share practical tips on effective risk management, and highlight key considerations that can enhance your business operations.

Date: Tuesday, August 15, 2023

Time: 2:00 p.m. ET

Register now for this informative webinar on asset custody, compliance, and risk management.

Webinar Details and Registration

Featuring:

Brandi Reynolds (Host) - Managing Director, Bates Group

Alexandra Scheibe (Moderator) - Partner, McDermott Will & Emery

Lee Schneider - General Counsel, Ava Labs

Will Brannan - Partner, Lowenstein Sandler

Eden Doniger - General Counsel | Chief Compliance Officer

Bates News  |  08-14-23

Bates Expert Patrick Cox Quoted in Financial Advisor IQ Article on New SEC Proposal

Patrick Cox, Bates Consulting and Testifying Expert, was recently interviewed by Financial Advisor IQ reporter Brianna Monsanto concerning the Securities and Exchange Commission’s recent July 26, 2023 proposal around mitigating conflicts of interest relating to predictive data analytics and the implications, including with Reg BI.

Read The Article

Learn More About Our Practices

Events  |  08-02-23

Webinar: How to Make Adverse Media Your Secret Risk Detection Weapon

Webinar: How to Make Adverse Media Your Secret Risk Detection Weapon

Join this panel of industry experts as they discuss how firms can deploy adverse media effectively to inform and identify risk.

Every financial institution is faced with the need to meet diverging regulatory expectations worldwide while identifying ways to work more efficiently and support the growth of the business. 

However, not every financial institution deploys adverse media effectively to help achieve these goals. This practical webinar will show you how. Topics will include: 

  • How insights from adverse media can inform and identify risks.
  • Assessing the cost of implementing and maintaining adverse media.
  • Weighing up the benefits and risks of an adverse media solution. 

Hosted by ComplyAdvantage and featuring Bates Managing Director Brandi Reynolds.

Webinar Details and Registration

Events  |  07-26-23

Join Bates for the MSBA Lunch & Learn Series on MTMA implementation - July 19 & July 26

Join Bates for the MSBA Lunch & Learn Series on MTMA implementation - July 19 & July 26

Join the MSBA and experts from Bates Group, McClinchey, and Orrick as they discuss the Money Transmission Model Act from an implementation perspective. July 19th and 26th, 2023, at 2 p.m. ET.

Bates Managing Consultant Andrea LaMothe, CAMS will be speaking on the July 26th panel. Bates is a proud sponsor!

Event Details and Registration

Events  |  07-19-23

Webinar - Risk Assessments: The Compliance Officer’s Trusty Sidekick!

Discover the power of the BSA/Patriot Act Requirement and the User Manual for the Risk Assessment in our upcoming webinar. Learn how these essential tools meet compliance needs, understand risks, and design appropriate controls for banks and crypto companies. We'll explore their role in navigating regulations, meeting expectations of licensed MSBs and banking partners, and ensuring business continuity.

Join experts from Bates Group, Gusto, TRM Labs, and FirstBank as they share practical insights on control evaluation, aligning controls with your business model, and leveraging residual risk as a guide for improvement. Register now for this informative webinar on compliance and risk management. 

Date: July 19, 2023

Time: 2:00 - 3:00 p.m. ET

Register for this Zoom Webinar

Compliance and Regulatory Alerts  |  06-30-23

Legislative Alert: Louisiana Enacts New Virtual Currency Act; North Dakota Adopts Money Transmission Modernization Act

Louisiana Enacts Virtual Currency Act

The governor of Louisiana recently signed SB 185 (the “Act”) pertaining to the regulation and licensing of virtual currency businesses. The amended legislation covers the authority, functions, and duties of the office of financial institutions, provides definitions, specifies applicability, sets licensure requirements, allows for reciprocity of licensure, establishes qualifications, procedures for issuing, denying, and renewing licenses, enforces regulations, sets penalties for violations, defines administrative rules, terms, conditions, and procedures, requires reporting, ensures effectiveness, and covers related matters.

The legislation went into effect on June 13, 2023. 

Read the full text of the Act here.

North Dakota Adopts MTMA

In March 2023, the North Dakota governor signed SB 2119 to enact the Money Transmission Modernization Act (the "MTMA"). Provisions under the Act are intended to (i) reduce regulatory burden by promoting coordination among the states in areas of regulation, licensing, and supervision; (ii) protect the public from financial crime; (iii) standardize activities that are subject to, or otherwise exempt from, licensure; and (iv) modernize safety and soundness requirements to protect customer funds while supporting innovative and competitive business practices.

This chapter goes into effect August 1, 2023. For current licensees, the effective date is upon license renewal, but no later than December 21, 2023.

Read the full text of the MTMA here.

How Bates Helps

Reach out to Bates Group for compliance and licensing support. Our MSB and FinTech Team offers customized solutions to meet your compliance, licensing, training, and banking needs. From traditional banks to crypto startups, our experienced professionals can help guide your business through license acquisition maintenance, and renewal.

Contact Bates Today to Learn More

Events  |  06-22-23

Bates is a Proud Sponsor of the Carolinas RIA Summit, June 22, 2023 in Charlotte, NC

Bates is a proud sponsor and exhibitor at the Carolinas RIA Summit, Thursday, June 22, 2023 in Charlotte, NC. Presented by Portfolio Summits, the second annual Carolinas RIA Summit is a one day meeting of insightful panel discussions, presentations, Q&A, and networking.

Stop by the Bates booth and connect with Bates Compliance leaders to learn about practical insights and best practices that can help you maintain a successful compliance program, including:

  • Annual Updating Amendment
  • Annual Compliance Meeting
  • Policies & Procedures
  • Annual Review
  • Compliance Calendar

While you're there,  pick up materials on compliance solutions for your firm, including individual and firm-wide training on the new Marketing Rule, SEC 2023 Exam Priorities, and more to help you achieve regulatory and compliance success.

Summit Details and Registration

Looking to train your team on the SEC’s New Marketing Rule?

Bates Group and Innova’s online New Marketing Rule Training courses will teach your staff the “dos and don'ts” of the new rule.

Learn More about IAR CE from Bates Group

Events  |  06-20-23

Webinar - Managing Risk: What Your Banks Want You to Know

When deciding to do business with a Money Services Business (MSB) or a Non-banking Financial Institution (NBFI), banks have to be extremely careful in the current legal and regulatory landscape, as they must take proper precautions against the risk of money laundering and other illegal financial activities using their accounts. 

Join experts from Bates Group, Circle, Cross River, and Veritex Community Bank as we dive into: 

  • Bank partner expectations 
  • Red flags your bank looks for 
  • Market developments 
  • And much more, including Q&A session! 

Date: June 20, 2023

Time: 12:00 - 1:00 p.m. ET

Register for this Zoom Webinar

Meet the Speakers

Webinar - Managing Risk: What Your Banks Want You to Know

Brandi Reynolds, CAMS-Audit, CCI, CCCE (Host)

Managing Director, MSB, FinTech & Virtual Assets Practice Leader - Bates Group

Bates Managing Director Brandi Reynolds has nearly 20 years’ experience in the financial services industry that includes over eleven years serving as in-house Deputy Chief Compliance Officer. Brandi has received both the Certified Anti-Money Laundering Specialist (CAMS) and Certified Anti-Money Laundering Specialist- Audit (CAMS-Audit) certifications. Since 2015, Brandi has served as outsourced Chief Compliance Officer to a variety of financial institutions. Ms. Reynolds is often sought for her extensive experience in cryptocurrency compliance. She has delivered efficient and effective solutions in areas of compliance program development, compliance monitoring and testing, and training. Her background includes a combination of both anti-money laundering as well as consumer protection compliance.

Webinar - Managing Risk: What Your Banks Want You to Know

Mandeep Walia

Chief Compliance & Risk Officer - Circle

Mandeep leads Circle’s compliance and risk management globally. Mandeep has played senior leadership roles driving global compliance and enterprise risk at financial services/fintech companies such as PayPal, LendUp, State Street, and most recently, was the Chief Compliance Officer/Head of Enterprise Risk at Novi — Facebook’s digital wallet business.

Webinar - Managing Risk: What Your Banks Want You to Know

Keith Vander Leest

Head of Payments - Cross River

Keith Vander Leest leads the Payments team at Cross River. Payments at Cross River consists of our ACH, RTP, Wires, Push to Card, and Acquiring products offered through our APIs on our bank core COS. Keith joined Cross River in 2020 as Head of Channels. Prior to Cross River Keith was at American Express holding roles on both their issuing and acquiring businesses. Prior to American Express Keith was at First Data. Keith holds a MBA from Purdue University and a Bachelor of Science in Engineering from Calvin University.

Webinar - Managing Risk: What Your Banks Want You to Know

Andy Salemi

Executive Vice President & Director of Specialty Finance - Veritex Community Bank

Andy has over 20 years of experience in financial services. He specializes and leads a team at Veritex Bank that helps companies in highly regulated industries grow and prepare for the ever-changing financial landscape. He has help everything from startups to publicly traded firms manage their debit issuance, AML programs, payment and receivable efficiencies: Money transmitters • FinTech • Check cashiers • Currency exchange • International payments (Fx) • Wallet / card issuers / stored value cards • BIN sponsorship • Broker dealers • Nonbank financial institutions (lenders) • Third party service providers • E2 / EB5 • Gaming • Pawn shops • Collections industry. Andy received his Bachelors of Science from DePaul University, Chicago and has his Certified Treasury Professional (CTP) Certification.

Webinar - Managing Risk: What Your Banks Want You to Know

John Ashley, CIPP/US, CCRS, CRCMP (Moderator)

Managing Consultant - Bates Group

John Ashley is a Bates Managing Consultant who has over seven years of experience in financial regulatory compliance with startups WorldRemit Corp. and Etana Custody. He specializes in establishing and maintaining robust and productive working relationships with U.S. financial regulators both during license application, and license maintenance. John has experience in compliance program, policy, and procedure development; product compliance; regulatory analysis; and consumer protection programs. In addition, John has experience in the cryptocurrency space, including development of KYC and transaction monitoring programs and procedures specific to cryptocurrency risk. He also specializes in U.S. data privacy compliance and holds a CIPP/US certification from the International Association of Privacy Professionals.

About Bates

Bates Group is a leading financial services consulting firm, providing end-to-end solutions on compliance and legal matters. Our MSB and FinTech Team offers customized solutions to meet your compliance, licensing, training, and banking needs. From traditional banks to crypto startups, our experienced professionals can guide you through your regulatory challenges. 

Compliance and Regulatory Alerts  |  06-16-23

Investment Adviser New Marketing Rule Examinations Focus on Additional Areas

The Securities and Exchange Commission (SEC) issued a new risk alert on June 8, 2023. Exams Division staff re-emphasized their initial areas of review:

  • Policies and procedures
  • Substantiation requirement
  • Performance advertising requirements
  • Books and records

In addition to their continuing review of compliance with the General Prohibitions, the staff will now also be reviewing additional Marketing Rule areas of emphasis, including:

  • Testimonials and Endorsements
  • Third-Party Ratings 
  • Form ADV

Have you reviewed your disclosures, oversight, agreements, and eligible persons related to your promoter activities? Have you reviewed your rating’s disclosures and conditions? Have you accurately responded to your firm’s ADV questions? Bates can help confirm your answers. 

Bates Investment Adviser Marketing Rule Support and Training:

The Bates Compliance team, made up of senior compliance staff and former regulators, addresses investment adviser concerns and supports efforts to conform oversight, recordkeeping and disclosure requirements of the new rule. We review materials for compliance with the rule and assist in the development of marketing/advertising policies, procedures, supervisory and compliance processes, and best practices. We also offer IAR CE training on the new rule for individuals and teams. Contact us today to learn more.

Bates Research  |  06-15-23

Preventing Elder Financial Exploitation: Solutions to a Growing Threat

Image © [Vitalii Vodolazskyi] /Adobe Stock

Elder abuse is a devastating problem that affects millions of seniors every year. In its 2022 Elder Fraud Report, the FBI’s Internet Crime Complaint Center reported total losses of $3.1 billion reported by victims over 60 years oldan 84 percent increase in losses from 2021. This alarming statistic reveals just how important it is to be aware of elder abuse and take steps to prevent it.  

The most common type of elder abuse is financial exploitation, which occurs when someone takes advantage of an older person’s assets for financial gain. Unfortunately, seniors are particularly vulnerable to these types of scams due to their age, diminished physical or mental capacity, lack of familiarity with modern technology, and fewer available resources than younger generations. Perpetrators often use a variety of tactics such as impersonation scams, investment frauds, identity theft schemes, and other fraudulent activities in order to take advantage of seniors’ finances.

Elder Financial Exploitation

FinCEN noted that in 2021, financial institutions submitted 72,000 suspicious activity reports (“SARs”)—nearly 10,000 more than the prior year—and cited CFPB estimates that Elder Financial Exploitation (“EFE”) suspicious transactions grew from an estimated value of $2.6 billion in 2019 to $3.4 billion in 2020. Citing the Department of Justice, FinCEN stated that EFE affects at least 10 percent of older adults each year in the United States. And, citing the Federal Trade Commission, FinCEN stated that “older adults now account for 35 percent of the victims associated with filed fraud reports in cases when a consumer provided an age.”

FinCEN categorized EFE as either related to theft or to scams, the former concerning stolen “assets, funds, or income by a trusted person,” and the latter related to the wrongful transfer of senior assets to a stranger or imposter. Based on its analysis of SARs relating to elder theft, FinCEN found that family members were involved in 46 percent of stolen asset cases reported between 2013 and 2019.

Regarding EFEs perpetrated by strangers, FinCEN identified the following prevalent typographies: government imposter scams, romance scams, emergency/person in need scams, lottery and sweepstakes scams, and tech or customer support scams.

FinCEN reminded financial institutions that it is critical for “customer-facing staff to identify and consider [ ] behavioral red flags when conducting transactions involving their older customers,” and that the details should be incorporated in SARs filings. They listed twelve behavioral red flags in all, among them sudden and unusual changes in contact information, an unusual degree of fear or submissiveness by a client toward a caregiver, and unexplainable or unusual account activity.  Other financial red flags include sudden or frequent non-sufficient fund activity, customer purchases of large numbers of gift cards or prepaid access cards, and uncharacteristic attempts to wire large sums of money, among others.

In addition to potential SAR reporting requirements, financial institutions may have state reporting. The U.S. Department of Justice provides valuable resources regarding state statutes, including a list of state-level reporting obligations.

Conclusion

World Elder Abuse Awareness Day, launched in 2006 by the International Network for the Prevention of Elder Abuse and the World Health Organization at the United Nations, is intended to raise “awareness of the cultural, social, economic and demographic processes affecting elder abuse and neglect.” In 2022, President Biden issued a proclamation officially recognizing June 15th as World Elder Abuse Awareness Day in the United States. He highlighted the administration’s “comprehensive, collaborative efforts to respond to elder abuse, neglect, and exploitation [through] initiatives to reform guardianship, support adult decision-making, crack down on scammers and fraudsters, and empower victims of exploitation.” As to elder financial exploitation, the statistics from FinCEN, the FTC and CFPB show how aware we are of the problem of EFE, but also how far away we are from getting it under control.  Bates will keep you apprised.
 

How Bates Helps

Bates Expert Compliance Training provides custom training programs for firms and individuals on EFE and other important topics. Please also contact us for additional services below:

Contact

Preventing Elder Financial Exploitation: Solutions to a Growing Threat

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  06-14-23

NYCLA Live CLE Webinar: How To Handle a Securities Regulatory Investigation - Wednesday, June 14, 2023

How you handle a securities regulatory investigation is critical, and being uninformed or ill-prepared could lead to significant consequences for your client. It is also important to understand your ethical obligations before, during, and after an investigation, as representation lines may become blurred. Register today for this upcoming CLE webinar from the New York County Lawyers Association (NYCLA) Securities & Exchanges Committee.

Our panel of experienced practitioners will discuss:

  • the various stages of a securities regulatory investigation
  • the initial contact
  • demand for documents
  • gathering and distilling data
  • on the record interviews (OTRs)
  • how to avoid full-blown enforcement actions
  • how to protect your client’s public CRD, and
  • ethical considerations to avoid conflicts of interest and rule violations

Date: June 14, 2023

Time: 12:30 p.m. ET

CLE credit: 1.5 NY Credits: 1 Skills; 0.5 Ethics; Transitional and Non-transitional; 1.5 NJ Credits: 1.5 General

Webinar Details and Registration

Faculty:

Program Chairs and Moderators:

Susan L. Harper, Esq., Managing Director, Bates Group LLC, Co-Chair, NYCLA’s Securities & Exchanges Committee and Benjamin F. Jackson, Esq.Associate, Cohen Milstein, Co-Chair, NYCLA’s Securities & Exchanges Committee

Events  |  06-14-23

Join Bates at the SIFMA C&L Regional St. Louis, June 14, 2023

Join Bates Expert and Director Joe Thomas and Expert Clay Grumke at the SIFMA C&L Society 2023 regional seminar June 14th, 2023, in St. Louis, MO.

Joe and Clay will be on hand to share ideas on the increasingly complex and changing regulatory and compliance arenas, and how Bates can assist your firm with Securities Litigation and Arbitration, Expert Witness Testimony and Consulting, Damages, Regulatory Investigations, Compliance, and more.

Join Bates at the SIFMA C&L Regional St. Louis, June 14, 2023 Join Bates at the SIFMA C&L Regional St. Louis, June 14, 2023

Also meet Bates Group independent consulting and testifying experts: former Missouri Securities Commissioner and General Counsel (of two NYSE Member Firms) David M. Minnick; and Jeff Jamieson, former Litigation and Compliance Counsel for major financial institutions (pictured, L-R).

CLE Credit pending for Missouri and New York

Seminar Details and Registration

Events  |  06-06-23

Bates Compliance’s Rhonda Davis to speak on “Evidencing Best Interest” at NICE Actimize Engage - June 6, 2023 in NYC

Bates Compliance Managing Director Rhonda Davis, JD, CAMS, CFE, will be speaking at the NICE Actimize Engage conference, taking place June 6-7, 2023 in New York City. Ms. Davis will appear in the session "Suitability Regulation: Evidencing 'Best Interest' and 'Consumer Duty'” Tuesday, June 6th at 1:30 p.m. ET.

Session Details:

With regulators increasing their focus on retail investor protections, firms need to ensure they have the right systems and programs in place to monitor for client abuse and poor sales practices. We’ll look at a number of regulations, such as Regulations Best Interest, and Consumer Duty, and we’ll share what you need to stay ahead.

Event Details and Registration

About Bates:

Bates supports firms navigating compliance with SEC rules. Our compliance team includes senior compliance staff and former regulators with expertise in the development of policies, procedures, supervisory and compliance processes, and best practices to enhance compliance and supervisory systems.

Contact Our Team to Learn More

Events  |  05-24-23

Bates Group’s John Ashley to Speak on “Banking Digital Currency” Webinar, Hosted by the American Bankers Association, May 24, 2023

Background image © [Montri] /Adobe Stock

Bates Group Managing Consultant John Ashley (pictured) will be speaking at an upcoming webinar on "Banking Digital Currency," sponsored by the American Bankers Association. Attendees will be able to expand their knowledge of the digital currency space, including regulatory controls and the current regulatory environment.

May 24, 2023 | 3 - 4 PM ET

Discussion Highlights:

  • The basics of digital currencies
  • The current regulatory landscape for digital currencies
  • Discussion of what banks are seeing today with customers buying and selling digital currency through 3rd parties like Venmo, Coinbase or FTX
  • Is your bank in the digital asset space? What should you know how you should review? 
  • Explore digital related businesses being banked and businesses that may be selling equipment related to mining
  • The risks to keep in mind when banks add digital currencies

Speakers:

  • Rebecca Schauer Robertson, CAMS-Audit, CFE, CAFP, SVP, Dir. Financial Investigations Unit, Atlantic Union Bank (moderator)

  • Mike Gallagher, BSA High Risk Manager, Old National Bank

  • John Ashley, CIPP/US, CCRS, CRCMP, Managing Consultant, Bates Group

Webinar Details and Sign-up

About Bates Group:

Bates Group assists firms and counsel throughout their legal, regulatory, compliance and AML matters. Our experienced staff and consultants offer a suite of AML and Compliance consulting services to established and start-up companies in banking, broker-dealer, RIA, Fintech, virtual assets/cryptocurrency, Money Services Businesses (MSBs), and Non-Banking Financial Institutions (NBFIs). 

Events  |  05-24-23

Brandi Reynolds to Speak at the 2023 1CryptoWorld Virtual Conference - May 24, 2023

Bates Managing Director and Virtual Assets practice leader Brandi R. Reynolds, CAMS-Audit, will be a guest speaker at the 2023 1CryptoWorld | Global Crypto Conference. This virtual conference will take place on May 24th, 2023. Ms. Reynolds' panel at 2:30 PM ET will give an overview of the current state of Cryptocurrency Compliance and Regulation, including:

  • Overview of the crypto ecosystem
  • Regulatory framework
  • Stakeholder analysis
  • Crypto issues and challenges

This virtual event--open to seasoned investors, blockchain developers, service providers, as well as newcomers--provides a comprehensive look at the latest developments and opportunities in the world of crypto. The program includes keynote speakers, panel discussions, and networking opportunities, where attendees can explore the latest trends, gain invaluable insights, and be part of shaping the future of finance and technology.

Conference Details and Registration

Learn more about how Bates can help strengthen your cryptoasset AML and compliance program:

Bates assists firms and counsel throughout their legal, regulatory, compliance and AML matters. Our experienced staff and consultants offer a suite of AML and Compliance consulting services to established and start-up companies in banking, broker-dealer, RIA, Fintech, virtual assets/cryptocurrency, Money Services Businesses (MSBs), and Non-Banking Financial Institutions (NBFIs). We consult, develop programs, manage audits, conduct reviews, design training, and more to meet your specific demands and requirements.

Events  |  05-16-23

Meet Bates Leaders at the 2023 FINRA Annual Conference

Join Bates Group leaders Jennifer Stout, Ira Hammerman, David Birnbaum, and Hank Sanchez (pictured) at the 2023 FINRA Annual Conference, May 16-18 in Washington, D.C., and get solutions for your ongoing compliance, regulatory and litigation matters. 

FINRA's premier event—the Annual Conference provides the opportunity for practitioners, peers and regulators to exchange ideas on today's most timely compliance and regulatory topics. The conference offers industry professionals a variety of sessions related to current trends in technology, cybersecurity, risk management and much more. 

CONTACT BATES TODAY to schedule a time to meet with Bates attendees before, during, or after the conference.

Conference Details and Registration

About Bates:

Bates supports firms navigating compliance with FINRA and SEC rules and matters. Our compliance and regulatory teams include senior compliance staff and former regulators with expertise in the development of policies, procedures, supervisory and compliance processes, and best practices to enhance compliance and supervisory systems. . Our Securities and Financial Services Litigation practice provides retail and institutional litigation expert witness consultation and data-driven analytic solutions for broker-dealers, RIAs, banks and insurance companies.

Bates Research  |  05-12-23

The Compliance Risk of Artificial Intelligence

Image © [Jimerb] /Adobe Stock

The use of Artificial Intelligence (AI) and algorithms is becoming increasingly widespread in today's digital environment. This technology can provide many benefits, but it also brings with it a unique set of potential risks that organizations must consider when incorporating AI into their processes, as financial services regulators have noted in recent years.

Compliance risk is one such risk to consider. Compliance risks associated with using AI include the potential for bias or discrimination in decision-making as well as the threat of data breaches due to inadequate security measures. (See, e.g., Bates article “Errors, biases and algorithms: how to interpret automated results” by Alex Russell.) In April 2023, the Federal Trade Commission (FTC) issued business guidance to help companies understand the compliance risks that come with using AI and algorithms, including strategies to manage associated consumer protection risks. We take a look at some of the compliance considerations here.

Assess Compliance Policies and Procedures

Organizations should assess their existing policies and procedures related to privacy and data security to ensure they are designed to address the potential risks associated with AI. Organizations should also consider developing new policies and procedures specific to the use of AI, such as ensuring that algorithms are tested for bias before they are used in decision-making processes.

In addition, organizations must be aware of the potential for malicious actors to exploit AI technology for fraud or other illegal activities. Deep fake technology is a particularly concerning example of this risk: deep fakes can be used to produce false audio or video recordings of people saying or doing things they never actually did or said.

Test Security Vulnerabilities and Threats

One way to gauge consumer trust is through a luring test — a process by which developers can identify possible security vulnerabilities by replicating techniques used by malicious actors. The Federal Trade Commission (FTC) recently released guidelines on conducting luring tests responsibly, urging companies to think carefully about the data collection and storage policies associated with such tests. These include ensuring customer consent before collecting any data and properly disposing of it once the test is complete. Companies should also build safeguards into their systems to protect against unauthorized access and use of customer data. By taking steps to ensure consumer trust in AI engineering, companies can improve not only their products’ performance but also their customers’ satisfaction.

Cybersecurity

Organizations should take measures to protect themselves and their customers from these threats by investing in strong cybersecurity practices, keeping up with technological developments, and monitoring their systems for unauthorized access. By taking proactive steps to address the compliance risks of using AI technologies, organizations can protect themselves and their customers from potential harm.

Conclusion

Through responsible data collection and storage policies, businesses can ensure that their AI engineering meets both user expectations and privacy regulations. Doing so will benefit both companies and consumers in the long run as they continue to take advantage of the advancements made possible by AI technology. Non-compliance can lead to FTC violations as referenced in the April 2023 article regarding the appropriate use of AI.

About Bates:

Bates Group has been a trusted partner to our non-banking financial institutions and financial services clients and their counsel for over 40 years, delivering superior quality and results on a cost-effective basis. With a full professional staff and a roster of over 175 financial industry and regulatory compliance experts, Bates offers services in AML and compliance, regulatory enforcement and internal investigations, litigation consultation and testimony, forensic accounting, damages, and big data consulting.

Bates Group's MSB, FinTech and Cryptocurrency team provides a full suite of Bank Secrecy Act, Anti-Money Laundering and Office of Foreign Assets Control (BSA/AML/OFAC) compliance consulting services, consumer compliance consulting, state money transmitter licensing acquisition and maintenance support, independent reviews, and corporate compliance training. 

Contact Bates today for services and expertise you can count on

About the author:

The Compliance Risk of Artificial Intelligence

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Bates News, Events  |  05-10-23

Bates Managing Consultant Lindsey Dean to speak at the May 10th CA Department of Financial Protection Enforcement Division Conference

Bates Regulatory and Internal Investigations Managing Consultant Lindsey Dean, CPA, CFE (pictured) will be speaking at the California Department of Financial Protection and Innovation’s Enforcement Division Staff Conference  Wednesday, May 10, 2023 in San Diego, CA — on the topic of financial statement analysis, forensic accounting principles, and how to analyze financial statements to determine the financial health of a company. Ms. Dean recently spoke at the NASAA 2023 Enforcement Training on the “Attorneys’ Guide to Identifying Red Flags in Financial Disclosures.”

Ms. Dean specializes forensic accounting and litigation consulting services and has significant experience in accounting and financial consulting services as they relate to litigation and dispute resolution for companies, government entities, and law firms. Her engagement experience includes financial statement analysis, interpretation of accounting standards and industry-specific authoritative literature, auditor malpractice examinations, and complex liability and damages analyses for a variety of industries, specializing in insurance companies.

Learn more about our practices:

Securities and Financial Services Litigation & Consulting
Regulatory & Internal Investigation Services & Consulting
Forensic Accounting & Economic Damages Consulting
Data Analytics Consulting & Analyses Services
Compliance & AML Solutions

Reach out today to have a Bates representative contact you

Events  |  05-07-23

Bates Sponsors IBDC-RIAC Risk Management Conference May 7-10, 2023 - Ira D. Hammerman Speaking

Join Bates at the IBDC-RIAC Risk Management Conference May 7-10, 2023, at the beautiful St. Regis Hotel in Park City, Utah. Our colleague Ira D. Hammerman (pictured above R) will be featured on the panel “A look at the SEC’s and FINRA’s 2023 priorities and guidance for IBDs and RIAs on how to navigate regulatory scrutiny.” Bates is a proud sponsor of the conference.

Bates Group CEO Jennifer Stout (pictured above L) will also be in attendance and would welcome the opportunity to spend time with you. Jennifer has attended the IBDC-RIAC conference for many years and feels it is one of the best conferences for high-quality content specific to firms in the independent space.

Conference Details and Registration

About:

IBDC-RIAC ANNUAL RISK MANAGEMENT CONFERENCE

May 7-10, 2023 - Park City, Utah

Independent Broker Dealer Consortium conferences are the “go-to” event for serious risk-management professionals. It’s where COOs, CEOs and Risk Management Officers interact with leading securities litigators and compliance, cyber security and insurance specialists. Set at one of the premier resorts in the country, attendees are treated to compelling presentations – plus, the absolute smartest methods to address complex issues affecting the industry. Not to mention, IBDC conferences offer luxurious opportunities to relax, network and socialize on the golf course, in the spa or during a variety of unique, privately-scheduled activities.

 
Your conference registration includes:
  • All food and beverage Monday, May 8- Tuesday, May 9.
  • May 9 afternoon activity:  spa treatment, round of golf or a Mines and Wines tour of Park City.
  • Return transportation from the resort to Salt Lake City airport the morning of Wednesday, May 10.  

Bates Research  |  05-05-23

SEC Bulletin Offers Staff’s Views on Standards of Conduct for Investment Advisers and Broker-Dealers When Addressing Care Obligations: What You Need to Know

Image © [wutzkoh] /Adobe Stock

In a 20-question and answer format, the SEC staff offered its latest guidance[i] on the obligations and duties of care expected of broker-dealers and investment advisers toward their retail clients. The April 24, 2023, Bulletin honed in on the “care obligations” under both the broker-dealer Regulation Best Interest (Reg BI) standard and under the investment adviser fiduciary standard emphasizing that the two standards are derived from the same principles and “yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.” In this regard, the SEC guidance narrows the differences between the two. Here is the latest. 

Two Standards or One?

Core commonalities between the two standards include three “overarching and intersecting components,” according to SEC staff. These components are (i) understanding key elements of the investment product or investment strategy (such as risks, rewards and costs); (ii) regularly updating and understanding the retail customer’s investment profile; and (iii) offering the investor reasonable investment alternatives in their best interest based on (i) and (ii). Staff asserted repeatedly that evaluating whether a recommendation or advice meets the standard is an “objective evaluation, turning on the facts and circumstances.”

Investment Products and Strategies

Staff stressed the importance of understanding investment products, asserting that a broker or adviser will not have a reasonable basis for making a recommendation in the best interest of the investor without such an understanding. Indeed, the Staff reiterated that understanding the firm’s investment products and/or strategies is both a Firm responsibility and the personal responsibility of the representative/advisor. The Staff said that the professional remains on the hook, even where the firm has “compiled an approved list of investments for retail investors.” Relevant factors to understanding these products and strategies may—depending on the facts—include understanding the strategic objectives, (e.g., income, principle preservation or growth); all fees and costs associated with the investment (e.g., commissions, markups, sales loads or charges, advisory or management fees; administrative and service fees, revenue sharing, and transfer agent fees); risks (e.g. potential losses, volatility, margin calls, early repayments); performance expectations (in light of economic conditions); and, special features of the investment (e.g., tax impact).   

Investor Profiles

The Bulletin reminds broker-dealers and advisers to fully understand the investor’s profile, and to continue to obtain updated information. They gave examples of investor information that should be collected, including but not limited to the investor’s “financial situation; [other] investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objective[s] and financial goals;” and, depending on the circumstances, additional information such as “level of financial sophistication; preference for making their own investment decisions … and need or desire for account monitoring or ongoing account management.” They also warned brokers and advisors against providing recommendations or advice without the necessary investor profile (or to document why such information may not be relevant under the circumstances).

Reasonable Alternatives

The Staff made clear that broker-dealers and investment advisers cannot satisfy their duty of care to retail investors if they have not considered “alternatives that are reasonably available to achieve the investor’s investment objectives.” (Staff noted that the SEC has brought enforcement actions against advisers for failing to consider available alternatives when recommending investments.)

The guidance also includes a recommendation that firms implement a process for “establishing and understanding the scope of such reasonably available alternatives,” which should include “evaluation of alternatives prior to investment and consideration of alternative investments throughout the investment period.” Such a process could include a broad array of investments “consistent with the retail investor’s investment profile, and then narrowing to a smaller universe of potential investments or investment strategies.”

Further, the staff said the process should be tailored to the firm’s business model and incorporated into the firm’s policies and procedures. Staff considered an example, however, of a firm that uses an "open architecture framework" business model, with hundreds, or thousands, of product alternatives. In such cases, they said, “a financial professional does not have to evaluate every possible alternative available through the firm.” The staff used this example to describe how facts and circumstances might affect a review of a firm’s alternative available investment policy.

The staff also noted that recommending the "most appropriate" option from a limited menu of investments would not necessarily satisfy an investment professional’s care obligations. Similarly, investment products that are "not identical may still be comparable" as alternative investment options. These examples reinforce the staff’s view that “the scope of alternative investments and investment strategies that might be considered will depend on the facts and circumstances, including but not limited to the nature of the firm’s business, the retail investor’s investment profile, the scope of its relationships with its customers and clients, and the reasonable availability of alternative investments or investment strategies.”

Finally, while the staff acknowledged that documentation of the professional’s evaluation is not specifically required, it would be difficult for a firm or professional to demonstrate compliance of all its obligations without having some documentation of the basis for recommendations. They said that such documentation “can be particularly important where a recommendation may seem inconsistent with a retail investor’s investment objectives on its face and/or poses conflicts of interest for the firm or the financial professional.” 

Complex or Risky Products

Notwithstanding the above, the Bulletin advised that complex or risky products—usually subject to “heightened scrutiny”—may be consistent with a client’s investment profile, and trading objective, but that the broker-dealer or adviser “should consider whether less complex, less risky or lower cost alternatives can achieve the same objectives for their retail customers as part of their overall reasonable basis analysis.” They encouraged firms recommending complex or risky products to (i) establish policies and procedures “outlining the[ir] due diligence process” in order to “help ensure that these products are assessed by qualified and experienced firm personnel; (ii) establish training and supervision procedures “to help ensure financial professionals understand the features, risks, and costs of a complex financial product; and (iii) establish procedures for evaluating reasonably available alternatives with “lower risk or less complex options,” if it would achieve the same objectives.

Dual Registrants

Staff weighed in on whether the Reg BI or the fiduciary standard is applicable for dual registrants. First, they said that the answer depends on facts and circumstances including the account type, considerations of compensation, and “the extent to which the dually registered firm and financial professional made clear to the customer or client the capacity in which they were acting.” Second, they suggested that a dually registered firm should consider whether a recommendation is better suited for the investor’s brokerage account or advisory account. And finally, Staff remarked that, regarding duty of care, either result would be otherwise substantially similar “in terms of the ultimate responsibilities owed to retail investors.”

Conclusion

Many investment advisers have effectively tuned out at the mention of Reg BI, thinking it doesn’t apply to them. Based on the Staff Bulletin, both investment advisers and broker-dealers would be wise to take a strong look at how they evaluate and document the advice and recommendations they give to their clients.


[i] SEC Bulletin footnote 1 states: “This staff bulletin and other staff documents (including those cited herein) represent the views of the staff of the Securities and Exchange Commission (“Commission”) and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these documents and, like all staff statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person.”

How Bates Can Help

Bates Group’s Compliance team helps firms navigate and achieve compliance with Reg BI and Form CRS, including:

  • Disclosure obligations
  • Duty of care obligations
  • Conflicts of interest obligations
  • Additional compliance obligations

We can assist you with:

  • Developing and reviewing Reg BI Client Relationship Summary (“Form CRS”)
  • Conflicts of interest assessment
  • New product approval processes
  • Drafting new policies and procedures
  • Training for compliance and sales professionals on how to comply with Reg BI and Form CRS
  • Litigation support
  • Reg BI expert testimony

To speak with a Bates representative about your Reg BI needs, please contact us today.

Bates Research  |  05-04-23

MTMA Provides Uniform Framework for Licensing and Regulation of Money Transmitters

Image © [tang90246] /Adobe Stock

For those of you that read our article “Navigating the Money Transmitter Licensing Process,” you know that obtaining a license is a daunting task. State licensing requirements have been extremely difficult to navigate, with the details of the money transmitter license process varying from state to state. It is important to note that supervisory oversight also varies.

To alleviate significant pain points for applicants, state regulators have worked on initiatives to provide consistency and harmonization across the nonbanking industry through collaboration among state regulators, industry participants and the Conference of State Bank Supervisors (CSBS). The Money Transmission Modernization Act (MTMA) was created to modernize the money transmission industry by allowing for comprehensive standards and requirements that reduce regulatory burden and encourage innovation, and improved consumer protections that allow for less confusing rules across states. The MTMA was drafted in 2019 and was approved by CSBS in August 2021. It is intended to provide a uniform framework for states to regulate money transmitters.

Under the MTMA, all money transmitters must comply with licensing requirements and are subject to additional regulations intended to protect consumers. These requirements include providing adequate disclosures about fees, rates, and other important information; implementing anti-money laundering measures; creating customer complaint procedures; maintaining adequate capital reserves; and others, based on company size. Additionally, the MTMA contains an article addressing virtual currency, a regulatory topic not currently included in many states’ money transmission laws.

Three Key Benefits of MTMA

Consumer Protection

The MTMA would provide consumers with greater protection against fraudulent activities and enhance their confidence in the money transmission industry. The current regulatory framework often results in confusion for consumers and presents a barrier to entry for new money transmitters. By streamlining the licensing process, the MTMA would make it easier for legitimate money transmitters to enter the market, increasing competition and driving down costs for consumers.

Regulatory Oversight

Regulatory agencies would be armed with greater authority to oversee the money transmission industry, improving regulatory efficiency and reducing compliance costs for money transmitters. The law would encourage the use of a national licensing system for money transmitters, eliminating the need for state-by-state licensing, which is currently a heavy administrative burden for money transmitters. This would enable regulatory agencies to more effectively monitor the industry and take action against illicit activities, such as money laundering and terrorist financing.

Innovation

Innovation is the key to success for many financial institutions. The MTMA has the potential to drive innovation in the financial industry by creating a regulatory framework that encourages experimentation and new technologies. Certain provisions of the MTMA would provide a safe, controlled environment for various money transmitters to test new business models and innovations without being burdened by excessive regulation. This would pave the way for business models like faster payment systems and distributed ledger technologies to be tested and eventually implemented in the wider market, benefiting both consumers and money transmitters.

Legislative Landscape

State legislatures are generally responsible for drafting their own laws related to money transmission services. However, by following the MTMA as a template for their own individual laws, states can ensure that they provide better protection for their citizens who use these services.

The CSBS has already seen success in having many states adopt versions of the model MTMA into their own individual laws. Currently, twenty states have either enacted or proposed legislation to implement the MTMA version developed by the CSBS. The chart below provides a breakdown of the current landscape.

MTMA Provides Uniform Framework for Licensing and Regulation of Money Transmitters
Chart © 2023, Bates Group LLC

Conclusion

The MTMA is a testament to the power of collaboration between the government and industry leaders. Widespread adoption would bring about significant improvements in regulating money transmitters, thereby safeguarding consumers from potential financial risks while fostering innovation.

About Bates:

Bates Group has been a trusted partner to our non-banking financial institutions and financial services clients and their counsel for over 40 years, delivering superior quality and results on a cost-effective basis. With a full professional staff and a roster of over 175 financial industry and regulatory compliance experts, Bates offers services in AML and compliance, regulatory enforcement and internal investigations, litigation consultation and testimony, forensic accounting, damages, and big data consulting.

Bates Group's MSB, FinTech and Cryptocurrency team provides a full suite of Bank Secrecy Act, Anti-Money Laundering and Office of Foreign Assets Control (BSA/AML/OFAC) compliance consulting services, state money transmitter licensing acquisition and maintenance support, independent reviews, and corporate compliance training.

For more information about Bates Group’s Money Transmitter Licensing and Maintenance services, please contact Bates today.

About the Authors:

MTMA Provides Uniform Framework for Licensing and Regulation of Money Transmitters

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  05-03-23

Join Bates at SIFMA’s 2023 Private Client Conference - May 3-5

Meet Bates Group Board Vice-Chair/Senior Executive Advisor Jennifer Stout and Managing Director Paul Lambert at SIFMA’s Private Client Conference, which brings together executives from across private wealth management in a dynamic forum designed to explore the future of wealth management. The conference will feature perspectives on priorities for private wealth management from industry leaders, regulators and scholars.

Through keynote sessions, fireside chats and panel discussions, attendees will discuss topics including:

  • The Future of Capitalism with Penny Pennington
  • An Industry Disrupted – Insights into the Latest Data and Trends
  • Preparing for the Unexpected – The Ins, Outs and Value of Succession Planning
  • The Why and How of Great Teams with Andy Bernstein
  • John Spence on the Formula for Business Excellence
  • Reality vs. Perception in Retirement Planning
  • Building a Diverse Talent Pipeline
  • Transformation and Evolution – The Evolving Regulatory Landscape
  • New Strategies for Enhancing the Financial Advisor of the Future
  • On the Ground – Perspectives from Regional and Complex Offices

Register today to join us from May 3–5, 2023 at the Marriott Harbor Beach Resort & Spa. in Fort Lauderdale, Florida.

Conference Details and Registration

Events  |  05-02-23

Bates Sponsors SWIFS Spring Symposium May 2, 2023

Bates is proud to sponsor the Southwest Women in Financial Services (SWIFS) 2023 Spring Symposium, May 2, 2023 at Raymond James headquarters in St. Petersburg, FL.

Full schedule below - RSVP to Setfanie Wayco (swayco@maynardcooper.com).

Bates Sponsors SWIFS Spring Symposium May 2, 2023

Bates Research  |  04-27-23

Special Report - FINRA and SEC Increase Scrutiny of Market Manipulation: Old Concerns, New Priorities

Image © [leungchopan] /Adobe Stock

In FINRA’s 2023 Examinations and Risk Monitoring Report, the regulator highlighted a new category of regulatory obligations and related considerations over manipulative trading (see previous Bates coverage). Manipulative practices in various forms—pump and dump schemes, insider trading, wash sales, layering, front running, trading ahead, spoofing—have been longstanding violations of numerous SEC and FINRA prohibitions. The regulators are now paying extra attention to issues of market manipulation due in part to an increase in wash sales and front running (as pointed out by Greg Ruppert, Executive Vice President, Member Supervision, FINRA, at a recent SIFMA C&L Society luncheon in NYC), as well as to the regulators' use of more sophisticated data analytics to identify potential market abuse. In this article, we look at recent enforcement actions, examination findings, and guidance for firms on the issue.

Enforcement

In 2022, the SEC engaged in high-profile enforcement actions to address abusive market practices. These included prosecutions based on data analytics from the SEC’s Market Abuse Unit (MAU), a group created in 2010 to uncover and detect patterns of suspicious activity. Highlights from last year included (i) insider trading cases against a Chief Financial Officer of a pharmaceutical company (along with his former romantic partner) and a CEO and Chief Technology Officer of a mobile internet company; (ii) manipulative schemes concerning microcap stocks against multiple individuals and entities; (iii) “cherry-picking” trading abuse cases against investment advisers and associated representatives; and (iv) an insider trading and front running scheme wherein a trader at a major asset management firm advised an outside party on market moving trades prior to their execution, leading to $47 million in profits over a six-year period

This year, SEC enforcement cases charging market manipulation are picking up. The most watched cases concern crypto companies and their executives. They include a CFTC action against the Binance Exchange, which concerns, among other things, claims that the exchange participated in market manipulation and used its position to trade against its users. Another recent case includes charges by the SEC against crypto asset executives and their companies for “fraudulently manipulating the secondary market … through extensive wash trading.” (This case also concerns a scheme to pay celebrities to tout the crypto assets without disclosing their compensation.)

FINRA’s most recent enforcement actions are anchored in a host of relevant rules (see below), but often take the form of supervisory failings. One recent settlement imposed fines for not establishing and maintaining a supervisory system, including written procedures, regarding surveilling for potentially manipulative trading (in a case in which the firm had been alerted to a customer’s prior history involving trading and margin calls). Another case concerned a failure to conduct supervisory reviews on “electronic trading customers’ trading activity for any type of potentially manipulative trading, including layering, spoofing, wash sales, or marking the close or open,” relying instead on “third-party broker-dealers to conduct such reviews.” Yet another case concerned a supervisory system “not reasonably designed with respect to detecting potentially manipulative trading involving wash trades, prearranged trading, and marking-the-close.” These actions further the intent of the regulators to prioritize manipulative trading enforcement.

Requirements

Rules to prevent or deter market manipulation are extensive. The SEC prohibitions generally fall into two categories, (i) “pump and dump” schemes and (ii) trading manipulations. The former largely concerns insiders or promoters who obtain ownership or control of a significant block of a stock, then hype the stock, often using press releases, web sites, chat groups, and email. This generates artificial interest from the public, causing prices to rise until the manipulators “dump,” or sell, their own shares to the unsuspecting public and walk away with the profits, leaving investors holding largely worthless stock. 

Trading manipulations take numerous forms, including, for example: arbitrary quotes (where trading patterns do not follow expected patterns of supply and demand); wash sales and matched orders (where the trading does not change beneficial ownership, or expose the trader to market risk, but creates the impression of activity to move prices for a security higher); marking the close (a trading scheme to up a bid or to increase the closing price of the security, to signal to investors a trend in the market or to increase the value of held positions); “domination and control” (a market maker scheme leveraging control of trading in a particular security such that quotes can be set arbitrarily after luring in momentum traders); and layering (where a trader places non-bona fide orders at different price levels in the order book for the purpose of creating a false picture of market supply and demand for other traders).

FINRA rules covering potential market manipulation may implicate requirements against publishing communications about transactions and quotations unless they are “bona fide” (Rule 5210), offers at stated prices (Rule 5220), payments involving publications that can influence market prices (Rule 5230), anti-intimidation or coordination (Rule 5240), “front running” rules that prohibit trading in a security that is the subject of an imminent customer block transaction if you possess related material, non-public market information (Rule 5270), order entry (Rule 5290), and, generally, “other trading practices" Rule 6140). These requirements are all subject to supervisory responsibilities of a firm (Rule 3110) to ensure that associated persons’ trading activities conform. Violations of these rules tend to also implicate FINRA’s catch-all Rule 2010 (Standards of Commercial Honor and Principles of Trade) and/or, generally, Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices).

Examinations

In their summary of exam findings, FINRA identified compliance deficiencies regarding (i) written supervisory procedures (particularly as to monitoring and escalating potentially manipulative conduct); (ii) failures to design and establish appropriate surveillance controls and thresholds; and (iii) surveillance failures, including inadequate monitoring, review and documentation, and training.  

Given the extent of the compliance problem, FINRA recommended steps firms should take to address the above issues. These include boosting monitoring across multiple platforms and products and strengthening supervisory processes. As to surveillance, FINRA zoomed in on specific priorities. The first was to improve monitoring on algorithmic and high frequency trading. FINRA recommended firms focus on surveillance to improve general risk assessment and response; software/code development and implementation; software testing and system validation; and trading systems (see FINRA guidance).

Second, FINRA recommended strengthening surveillance to catch potential momentum ignition trading, including variations of layering/spoofing and marking the close.

Third, FINRA wants firms to enhance their monitoring to detect customers engaging in wash trading (a manipulation strategy whereby a trader buys and sells in a manner that creates the misleading impression of market activity to other investors). FINRA expects firms to monitor accounts—identified in surveillance reports or based on information in account opening documents—that receive liquidity rebates from exchanges.

As for recommendations to improve supervision, FINRA prioritized oversight on exchange-traded products. FINRA recommended ensuring compliance steps to (i) protect material, non-public information from being misused; (ii) review for strategies that may exploit exchange-traded product processes like formation or redemption; and (iii) ensure that the program is tailored to how the firm actually trades these products.

Conclusion

As a policy matter, it is clear that regulators have found trading manipulation rules useful as an enforcement tool in the ongoing market turmoil and regulatory uncertainty of the crypto industry. 2023 should prove to be a pivotal year in how this will evolve.

As a regulatory compliance matter, the elevation of market manipulation as a priority for the SEC and FINRA demands attention to firms’ policies and programs. In this, there is a familiar pattern of regulators setting new expectations, offering guidance and warnings, underscoring their intent in the examination process and ultimately in enforcement action. With more and more sophisticated analytics in use, trading abuse cases are easier to detect and to prosecute. That advantage, of course, is not one-sided.

Alex Russell, Bates Managing Director and Regulatory practice leader cautions that “It is extremely important for firms to understand what regulators may be looking to identify within the data. Understanding that helps firms determine the best way forward in anticipating and resolving any issue.”

How Bates Helps:

Bates has substantial experience with matters involving a variety of alleged market manipulation schemes, including: 

  • Wash trading 
  • Match trading  
  • Front running 
  • Painting the tape  
  • Banging the close  
  • Pump & dump schemes involving thinly traded securities 
  • High-frequency trading, such as spoofing and layering, as well as in the context of foreign exchange markets 
  • Insider trading

Bates frequently assists clients in internal investigations as well as in investigating allegations brought by U.S. authorities (SEC, CFTC, DOJ), self-regulatory organizations (including FINRA and exchanges), international agencies, and private parties. Our experts and staff bring high-level expertise when conducting detailed evaluations of the trading at issue, comparing the activity identified to (i) the pattern of trading for the security as a whole and (ii) the historical trading of the alleged manipulator(s).

Case Study:

In a representative matter, Bates used NASDAQ and TSX data to reconstruct the order book for a dually-registered security in order to evaluate the trading behavior and to determine the market impact caused by the behavior. Working with Counsel, Bates was able to create graphical representations of market activity that took place in microseconds, allowing the information to be presented to regulators in a digestible format. Bates analysis was used by Counsel to identify manipulative trading, and to highlight certain traders, based on short bursts of sell-initiated volume, pre-market selling with a position reversal at market open, volume of cancellations, order distance to best bid/offer of the cancelled order, and other indicators. Changes in market microstructure were evaluated on the basis of cancellation activity and trade-to-order volume, and (using SEC data) trading was contextualized against exchange norms and trading in peer companies. This allowed Counsel to narratively explain the activity in a way that clarified the intent (or lack of intent) of various actors, resulting in a change of direction in the focus of the investigation away from the client and towards other parties and entities.

We also work with firms to conduct testing and validation of alert systems to ensure supervision and control systems are working as intended.  

Learn more about how Bates Group can help your firm address manipulative trading investigations and controls.

Contact:

Special Report - FINRA and SEC Increase Scrutiny of Market Manipulation: Old Concerns, New Priorities

Alex Russell

Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com

971-250-4353

Events  |  04-26-23

Meet Bates AML & Compliance Crypto Leaders at Consensus 2023 - April 26-28 in Austin, TX

Join Bates Group at the Consensus 2023 conference, April 26-28, 2023 in Austin, TX. Sponsored by CoinDesk, Consensus is the world’s largest, longest-running and gathering of the many, differing elements that make up the crypto community, including developers, investors, founders, brands, policymakers and more.

Meet Bates AML & Compliance Managing Director Brandi Reynolds, CAMS-Audit and Managing Consultant John Ashley, CIPP/US, CCRS, CRCMP to learn about our consulting, program development, audits and reviews, training, and other AML compliance services for businesses handling cryptocurrency transactions.

Conference Details and Registration

Bates News  |  04-26-23

Bates Group Appoints Benjamin R. Pappas as CEO

Bates is proud to announce the appointment of Benjamin R. Pappas (pictured) as Chief Executive Officer, effective immediately. Previously, Pappas was Bates Group’s President, where he was responsible for driving the firm’s overall growth strategy. 

Pappas succeeds former CEO Jennifer Stout, who will be taking up new roles as Vice-Chair of the Board of Directors and Senior Executive Advisor to the firm. Client engagement will remain a key priority for Stout. She will continue to maintain close relationships with clients and will be actively involved in conducting outreach to Bates Group's portfolio of financial firms and counsel.  

Stout said, “It has been an honor serving as an executive leader of Bates Group and working alongside our outstanding staff and wonderful clients. As I proceed in my new roles, I look forward to supporting Ben in his new position, and I am confident in Bates’ continued success.”   

“I am excited to further lead and grow Bates with the goal of providing the best possible experience for our clients and staff," said Pappas, "and I am thrilled to continue to work with Jennifer for the benefit of our clients and firm. Our talented and dedicated team has a long history and reputation for delivering high-quality services to our clients while meeting the evolving needs of our industry. I am proud of all that we have accomplished and will continue to achieve going forward.”   

“Ben Pappas’ skilled and strategic leadership has helped expand Bates Group and our services to our industry and clients in many areas, including growing our compliance practices via acquisition of deep subject-matter expertise-led firms and new hires,” said Rob Lee, Bates Group Board Chair. “The Board and I look forward to our continued work with Ben and the many successes he will bring to the firm.” 

Pappas was appointed Chief Operating Officer (COO) of Bates Group in 2016 and President in 2019. Before joining Bates, he was Senior Vice President and COO of D.A. Davidson Companies’ Equity Capital Markets business. There, he was responsible for implementing strategic growth initiatives and developing an annual financial budgeting and forecasting process.  

Stout’s decades-long leadership at Bates Group includes successfully leading and diversifying Bates from a retail litigation-focused expert consulting firm to a nationwide consulting firm offering services and solutions for litigation, regulatory, AML, and compliance clients at broker-dealer, registered investment advisors (RIA), banks, insurance, money services business (MSB), and digital assets firms.  

“The Board and I deeply appreciate Jennifer Stout’s leadership,” Lee said. “Jennifer has helped transform Bates into the widely recognized consultancy firm we are today. We are grateful for her continued leadership on the Board, her involvement in our industry, and her support of our clients.”  

About Bates:

Bates Group is a trusted partner to financial services clients, counsel, and non-banking financial institutions, delivering leading industry expertise, knowledge, and data-driven solutions for legal, regulatory, and compliance matters. With a professional staff and a network of more than 175 independent financial industry experts and consultants, Bates offers services in litigation consultation and testimony, regulatory enforcement and internal investigations, AML and compliance, state licensing, forensic accounting, damages, and big data consulting.

Events  |  04-21-23

Bates Sponsors the 2023 FSDA Industry Outreach Program - April 21, 2023

Bates Sponsors the 2023 FSDA Industry Outreach Program - April 21, 2023

Bates is a proud Diamond Sponsor of the Florida Securities Dealers Association (FSDA) Industry Outreach Program "2023: Unmasking Market Opportunities." on April 21, 2023 at the Boca Raton Marriott at Boca Center. The event will begin at 7:45 a.m. with a networking breakfast and then an 8:30 a.m. to 12 p.m. keynote fireside chat with Florida and SEC regulators, commencing with a legal and compliance panel discussion on the new generation of investors, Fintech, ESG, cryptocurrency, market manipulation, and the gamification of the stock market.

This event was originally scheduled for September 2022 but was postponed due to Hurricane Ian.

Register today to join Bates CEO Jennifer Stout at this re-scheduled program. 

CLE, CPA & CFP continuing education credit pending.

Program Details and Registration

Events  |  04-19-23

Crypto Webinar April 19 - The Convergence of Crypto and TradFi Compliance & Regulation

Join Bates Group Managing Consultant John Ashley (pictured) along with experts from Alloy and Chainalysis on this new webinar as they discuss regulatory compliance and best practices impacting companies building crypto-enabled products.

Date: Wednesday, April 19, 2023

Time: 1:00 p.m. ET

Program Details and Registration

About:

As new regulatory frameworks and policies around crypto continue to surface around the globe, it’s crucial that crypto companies stay ahead of the curve. Given the current state of crypto, risk management and fraud prevention is top of mind for everyone involved. So how do you build crypto-enabled financial products without skimping on compliance?

This webinar will cover topics including:

  • Designing efficient, scalable risk programs to self-regulate and stay ahead of regulatory requirements

  • Leveraging compliance as a cost optimization and strategic business advantage

  • Understanding how U.S. regulation should be interpreted today

Not able to attend? Register anyway and Alloy will send you the recording.

Speakers:

John Ashley, CIPP/US, CCRS, CRCMP - Managing Consultant, Bates Group

Caitlin Barnett - Director of Regulation & Compliance, Chainalysis

Charley Ma - Head of Growth, Alloy

Bates Research  |  04-18-23

OFAC Modernizes Website, Making It Easier to Search Database and Remain Compliant

Images © [amperespy] /Adobe Stock, ofac.treas.gov

On April 3, 2023, The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) unveiled a new website to help individuals and entities access information related to sanctions and international trade compliance. The modernized website is designed to make it easier for users to find guidance on specific industries, use the reporting system, stay current on policy updates, and access OFAC's sanctions database quickly and efficiently.

It features an intuitive user interface, with a streamlined navigation menu which allows users to easily search and access hundreds of frequently asked questions (FAQs) through keywords or exact phrase within the FAQs. Additionally, industry-specific pages are available to help users understand how OFAC regulations apply to their area of expertise. For example, investigators can now easily search for guidance related specifically to conducting investigations under OFAC compliance regulations. The improved search engine also allows for more complex searches across all areas of OFAC’s online presence from one centralized location. Furthermore, the new website has been designed to be mobile-friendly, so users can access essential information from any device at any time.

Overall, this update will make it significantly easier for individuals and entities in all industries to navigate OFAC's sanctions database quickly and accurately in order to ensure compliance with applicable laws and regulations.  While the modernized site is user-friendly, users should be aware that OFAC’s legal requirements remain unchanged—and noncompliance could still result in fines or other penalties. Therefore, it is important for all users to familiarize themselves with all relevant regulations before engaging in any activities with foreign countries or entities subject to U.S. economic sanctions programs.

OFAC Modernizes Website, Making It Easier to Search Database and Remain Compliant
Screenshot: ofac.treasury.gov/

How Bates Helps:

All financial institutions and any business conducting financial transactions are required to meet the Office of Foreign Assets Control (OFAC) compliance obligations. It is essential to have a well-developed BSA/AML/OFAC compliance program in place that manages compliance risks and promotes best practices for your industry. At Bates, our specialists understand and identify all requirements for different types of financial businesses. Many of our consulting experts have CAMS, CAMS-Audit, CFRM, and CRCM certifications, and some are former AML regulators who understand exactly what government officials are looking for.

Learn More

Contact

OFAC Modernizes Website, Making It Easier to Search Database and Remain Compliant

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  04-18-23

Bates Compliance Managing Directors Kurt Wachholz and Hank Sanchez to Speak at NSCP Interactive Compliance Lab - April 18, 2023

Bates Compliance Managing Directors Kurt Waccholz, IACCP  and Hank Sanchez, Esq. (pictured above L-R) will be speaking on panels at the NSCP Interactive Compliance Lab on April 18, 2023, at the Fordham University School of Law in NYC. The Compliance Lab is a full day of in-person lab sessions designed to provide real life application through hands-on learning activities. The day will conclude with a networking reception. 

This event is not available for virtual attendance and is closed to regulators and press. Continuing Education (“CE”) credits available for attendees.

Event Details and Registration

Session Details:

Regulatory Change Management (Session 3a, 1-2:30 p.m.)

Featuring Managing Director Hank Sanchez, this session will help compliance professionals understand how to establish and maintain a regulatory change management program from communications plan and stakeholder buy-in to implementation of change. Attendees will be seated in working groups according to their firm’s size and will learn from knowledgeable facilitators, engage in small group discussions, share their thoughts and experiences through the use of case studies, group questions and hypothetical scenarios applicable to each session’s topic. Attendees will leave with practical and useful tools to apply in their workspace.

 
Influencing Change: Creating a Culture of Integrity and Ethical Leadership (Session 4b, 2:45-4:15 p.m.)

Featuring Managing Director and Compliance Practice Co-Lead Kurt Wachholz, this session looks at how compliance professionals can add value to their firm or organization by developing more than just the “nuts and bolts” of their Compliance & Ethics program. They must also be able to inspire leaders to model ethical decision-making in order to drive necessary culture changes. Compliance officers need to influence multiple stakeholders across the organization convincing them to accept accountability for managing the risks that can arise from their decisions and actions. To be effective, compliance officers need to continuously develop their ability—regardless of their level and authority—to drive these changes.

The following learning objectives will be met, using case studies, examples, group discussions, and other application activities:

  • Identify and explore leadership attributes and necessary skills to be an effective Compliance & Ethics leader
  • Discuss the fundamentals of behavioral ethics, including ethical fading and ethical framing 
  • Explore strategies for influencing colleagues’ decisions and behavior and overcoming resistance —whether they are peers, direct reports, or senior leaders—in order to drive culture change 
  • Facilitate strategic, cross-functional collaboration to support innovation, transformation, and value creation for the broader organization

Learn more about our comprehensive guidance and tailored compliance consulting.

Contact Bates Compliance today

Bates News  |  04-11-23

Meet the Newest Bates Testifying and Consulting Experts

Meet the Newest Bates Testifying and Consulting Experts

Nicholas Bowman, CFP®, CEP®, MSPFP

Premium Financing Life Insurance, Life Insurance and Annuities, Certified Financial Professional / Fiduciary Duties

Nicholas “Nick” Bowman is a Bates Testifying Expert with more than a decade of experience working in the financial services industry. Nick most recently served as a Senior Advanced Markets consultant for Lion Street, a national Producer Group organization with more than $515 million in annual insurance premium sales, $17 billion in assets under management, and in excess of 1,000 financial advisors. In that role, Nick was responsible for reviewing and managing various financial planning pieces, specifically consulting on High Net Worth and Ultra-High Net Worth Estate Planning, and Life Insurance techniques for more than 300 of Lion Street's advisors. His specialties are centered around Creative Life Insurance Planning and Funding, Premium Financed Life Insurance Planning, Jumbo Life Insurance Policy Staging, Inbound Foreign National Planning, Micro Captive Insurance Planning, and Charitable Planning. He also worked on national initiatives centered around Annuity marketing.  

Full Bio

Meet the Newest Bates Testifying and Consulting Experts

James A. Kamradt

Due Diligence, Sales and Marketing Practices, Suitability

James A. “Jim” Kamradt is a Bates Testifying Expert with 40 years of experience in the financial services industry, whose diverse and accomplished career focused on the alternative investment sector. Jim has held executive management positions in both capital formation and investments, giving him a deep and well-rounded understanding of the industry.

Jim’s years of experience provides him a deep understanding of the industry which allowed him to develop the skills and relationships necessary to navigate its challenges and capitalize on its opportunities. He has both raised and invested billions of dollars in funding for various investment sponsors and has developed deep relationships with broker-dealers and due diligence firms nationwide. In his years of experience in investments, Jim developed and managed portfolios for both domestic and international institutional investors. In addition, he has been involved in the underwriting of investments.

Full Bio

Meet the Newest Bates Testifying and Consulting Experts

Bridget McNamara-Fenesy, JD

BD/RIA Compliance, Corporate Governance

Bridget McNamara-Fenesy is a Bates Consulting Expert with more than 30 years of experience in the financial services industry. In addition to her deep expertise in legal and compliance regulatory matters, Bridget also has expertise in corporate governance—working directly with corporate boards to fulfill their fiduciary obligations to shareholders and stakeholders. 

Bridget served as President and CEO to M Holdings Securities, a dually registered broker-dealer and RIA.  She also served as President to M Financial’s Asset Management division and its four proprietary mutual funds. In those roles, Bridget was responsible for the successful implementation and execution of all aspects of running the business, from strategy development to operational efficiencies, to compliance and regulatory matters. Bridget also served on M Financial’s Executive Leadership Team and was responsible for the firm’s corporate governance processes.

Full Bio

Meet the Newest Bates Testifying and Consulting Experts

David M. Minnick

Senior Investors, Broker-Dealer, Registered Investment Adviser/RIA

David Minnick is a Bates Consulting and Testifying Expert based in St. Louis, Missouri. David uses his diverse experience as a Trial Lawyer, Prosecutor, Defense Counsel, Claimant’s Counsel, General Practitioner, General Counsel (of two NYSE Member Firms), Expert Witness, Arbitrator, Mediator, FINRA Senior Enforcement Counsel and as Missouri’s Securities Commissioner to serve financial services clients and their Counsel. He uses his expertise in Retail and Institutional Securities Litigation and Consulting, Regulatory and Internal Investigations, Compliance and Regulatory Reporting in other matters as well.

David has a deep background in fixed income and equity institutional sales, research, and underwriting in the United States and internationally. He has helped train new and experienced brokers, managers, and other supervisors in retail securities businesses, and led the defense of the firm and its people in Court and Arbitration, as well as in Regulatory Inquiries and Investigations. As General Counsel, he led legal and due diligence efforts for mergers and acquisitions as well as Public Company reporting. David has also been responsible for high-stakes litigation and regulatory matters and was an active advisor for employment-related matters, ranging from claims of discrimination, sexual harassment, wage and hour compliance, recruitment, retention and claims of raiding and unfair competition, as well as employment termination and related reporting (RE-3, U-4, U-5). He has tried dozens of arbitrations and jury trials and has advised on several appellate decisions.

Full Bio

Bates Research  |  04-06-23

Economic and Capital Markets Analysis: 2022 Year in Review U.S. Chartbook

Image © [Maximusdn] /Adobe Stock

In this illustrative and detailed chartbook featuring economic and capital markets analysis for 2022, we take an in-depth look at historical equity and credit market trends and investment fund flows, with special focus on inflation, employment, and fixed income returns. From Bates Group Director Greg Kyle and President Ben Pappas.

Download the Chartbook

Contact:

Economic and Capital Markets Analysis: 2022 Year in Review U.S. Chartbook

Greg Kyle

Director and Expert

gkyle@batesgroup.com

Compliance and Regulatory Alerts  |  04-06-23

SEC Exams Division Issues Risk Alert for Newly Registered Advisers on Compliance Deficiencies and Guidance to Address

On March 27, 2023, the SEC Division of Examinations (“the Division”) issued a Risk Alert focused on compliance deficiencies found in examinations of newly registered advisers. The Division said these advisers may face unique risks, particularly as to conflicts of interest, and cautioned them to review their policies and procedures, disclosures, and marketing practices. The Division also explained—perhaps as guidance for these new registrants—that their examinations were “an opportunity for early engagement between advisers and the staff.” Here’s a brief summary of what that means.

Observations

In pointing out compliance deficiencies observed during recent examinations of new adviser registrants, the Division highlighted deficiencies in three verticals: policies and procedures, disclosure, and marketing.

On Policy

The Division identified failings in procedures and controls, highlighting observed deficiencies in key risk areas, such as portfolio management and billing; the periodic testing and evaluation of compliance with firm policies (e.g., on best execution); and ensuring that advisory personnel were following firm policies. On personnel compliance, the Division underscored its observation that annual compliance reviews often failed to address the adequacy of compliance with procedure or the effectiveness of their implementation. The Division offered several examples, including (i) the use of off-the-shelf compliance manuals not tailored to the advisers’ operations and business lines; (ii) conflicts of interest that occur when advisory personal have multiple roles and responsibilities; (iii) failures to review the use of compliance outsourced to third parties; and (iv) failures to have adequate business or succession plans.

On Disclosure

The Division found many examples of required documents which omitted information, provided inaccurate information, or were untimely delivered. These included documents on required disclosure as to fees and compensation; business operations and scope of services, advisory services offered to clients, (i.e., investment strategy, aggregate trading, and account reviews); conflicts of interest; and disciplinary information.

On Marketing

The Division discovered misleading information in public materials on a host of issues, including on an adviser’s professional credentials, third party rankings, and business performance.

To support newly registered advisers, the Division included a resource chart (pp. 6-7) with links to relevant laws and rules, regulatory actions, guidance, speeches, no-action and interpretive letters, enforcement actions, and educational materials.

Conclusion

As with the SEC’s risk alerts generally, the Division recommends that newly registered advisory firms assess their supervisory, compliance, and/or other risk management systems and make changes to strengthen such systems. The Division emphasizes that the exam process is intended to help staff understand the adviser’s business, operations, investment activities, and compliance program. Equally as important, the Division said that its interviews and other examination procedures are intended “to assist the staff in assessing the adviser’s tone at the top and culture of compliance,” which are “important factors in the staff’s review of the effectiveness of the adviser’s compliance program.” The message for new registrants in the alert is about ensuring they are on the path of compliance the SEC wants to see going forward. Bates will keep you apprised.

How Bates helps:

Bates supports firms navigating compliance with SEC rules. Our compliance team includes senior compliance staff and former regulators with expertise in the development of policies, procedures, supervisory and compliance processes, and best practices to enhance compliance and supervisory systems.

Learn more about Bates Compliance and our services:

Registered Investment Adviser Services
Broker-Dealer Services
Private Funds
Compliance Program
Supervision
New Marketing Rule Training (IAR-CE approved course)
Advertising and New SEC Marketing Rule Implementation

Bates News, Bates Research  |  04-05-23

Are You Ready for a CFPB Examination? Bates Can Help

Image © [momius] /Adobe Stock

The Consumer Financial Protection Bureau (CFPB) is the federal agency charged with protecting consumers from unfair, deceptive, or abusive practices and ensuring that banks, lenders, and other financial companies put consumers’ interests first. The CFPB engages in rigorous examinations of financial institutions to ensure that they follow all applicable laws and regulations, have effective compliance management systems in place, and provide meaningful consumer protections.

Examinations help the CFPB assess whether a company complies with consumer financial protection laws and regulations. During an examination, CFPB examiners review company policies and procedures to ensure they meet legal requirements, evaluate the effectiveness of the company’s compliance management system, and assess how well the company is meeting its obligation to protect consumers. Examiners also communicate directly with consumers to understand how products and services are performing in the marketplace.

CFPB, Enforcement Actions and Local Prosecutions

Did you know the CFPB also works with state regulators on examinations and enforcement actions? The Bureau often coordinates examinations with other federal authorities as part of multi-agency reviews that focus on companies with operations across multiple states or jurisdictions. In addition, when appropriate, it shares information from its work with state attorneys general or local prosecutors who may investigate potential violations of state law involving consumer protection issues.

Protecting Your Business and Customer with a Consumer Compliance Review  

In today’s world, it is more important than ever to protect consumers from unfair practices in the market. A consumer protection review is an effective way to do this and ensure compliance with applicable laws and regulations.

By performing a consumer protection review, businesses can be assured they are compliant with all applicable laws and regulations. Additionally, it helps prevent companies from engaging in fraudulent activities, which could potentially lead to costly legal fines or trouble down the line.

About Bates

When it comes to safeguarding consumers, Bates Group is a leader in providing comprehensive consumer protection reviews. Our team of industry experts and former state and federal regulators helps companies understand the applicable laws and regulations and how to stay compliant in today’s complex environment.

Bates Group offers independent consumer compliance reviews to evaluate compliance processes and procedures, identify areas where there may be gaps or opportunities for improvement, and develop strategies for compliance. Bates has also helped many organizations comply with CFPB guidelines by providing “readiness” reviews before a CFPB examination.

To book your consumer compliance readiness review and independent consumer compliance review, contact Bates Managing Director Brandi Reynolds.

Are You Ready for a CFPB Examination? Bates Can Help

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Bates Consumer Compliance Protection Services

Bates Research  |  03-30-23

SEC, White House Announce New Cybersecurity Strategy and Rules; Over $10.2 Billion in Losses, says FBI Cyber Report

Image © [xyz+] /Adobe Stock

In response to the threat from cyber actors “who use constantly evolving and sophisticated tactics, techniques, and procedures to cause harmful cybersecurity incidents,” the SEC proposed a new set of comprehensive rules intended to mitigate that risk. The rule proposal imposes substantial new requirements on certain securities market entities and broker-dealers (“covered entities”) and is intended to protect securities markets and investors from cybersecurity threats. The proposal is consistent with the White House’s recent announcement of a new comprehensive National Cybersecurity Strategy and the annual FBI report on cybercrime trends based on 2022 data. Here’s what you need to know.

Policies and Procedures under Proposed Rule 10

On March 15, 2023, the SEC proposed new Rule 10, which would require financial institutions “to establish, maintain, and enforce written policies and procedures that are reasonably designed to address their cybersecurity risks.” Rule 10 would require that policies and procedures include (i) periodic assessments of risk to the firm’s information systems, and documentation of those assessments; (ii) controls to minimize user-related risks and to prevent unauthorized access to information systems; (iii) internal monitoring and oversight over the firm’s information systems, including as to service providers that interact with the information systems; (iv) methods to detect, mitigate and remediate cyber threats and vulnerabilities; and (v) methods to detect, respond to, and recover from a cybersecurity incident.  

All firms would have to review their cybersecurity policies and procedures to ensure they are addressing new and evolving risk.

Reporting under Proposed Rule 10

Under the proposed new rule, covered entities would have to give notice of a significant cybersecurity incident once they have a reasonable basis to think it occurred or is occurring. That written electronic notice must be reported to the SEC by filing new proposed Form SCIR which covers information about the incident and subsequent response and recovery efforts.

A second part of the new Form concerns summary descriptions to be publicly posted on the firm’s website. Broker dealers would be required to provide the form to customers annually, when they open an account, and when the forms are updated. 

New White House National Cyber Strategy

On March 3, 2023, the White House unveiled its National Cybersecurity Strategy, declaring “fundamental shifts in how the United States allocates roles, responsibilities, and resources in cyberspace.” Generally, the new strategy would (i) “shift[ ] the burden for cybersecurity away from individuals, small businesses, and local governments, and onto the organizations that are most capable and best-positioned to reduce risks;” and (ii) “realign incentives” to defend against urgent cyber threats while “investing in a resilient future.”

First, the strategy would expand regulatory requirements in “critical sectors” (i.e., the financial sector) and update federal networks and federal incident response policy. Second, the new strategy would require greater public-private engagement to disrupt malicious cyber activities “through scalable mechanisms,” and it proposes a comprehensive approach to address ransomware. Third, in relevant part, the new strategy would place the burden of mitigating cyber risks to the privacy and the security of personal data on market entities rather than on individuals, and would “shift liability for software products and services to promote secure development practices.” Fourth, to enhance market resiliency, the strategy would prioritize “cybersecurity R&D for next-generation technologies such as postquantum encryption, digital identity solutions, and clean energy infrastructure. Finally, the strategy calls for strengthening international collaboration to counter cyber threats.  Implementation of the strategy across the Federal system is under the authority of the Office of the National Cyber Director.

FBI 2022 Cyber Report

In its annual report on Internet Crime, published in March 2023, the FBI tabulated complaints filed in 2022 with its Internet Crime Complaint Center (“IC3”). The IC3 is the repository for individual complaints involving a host of cyber-crimes (e.g., hacking, trade secret theft, money laundering, extortion, identity theft, etc.). The IC3 correlates these complaints with data from other sources to support their fieldwork, but also to track trends and threats. The latest report on 2022 data reinforces the concerns expressed by the White House about the increase in number and type of risk cybercrimes pose. It also supports the rationale behind the SEC’s proposed rule.

In 2022, the IC3 reported over 800,000 complaints with over $10 billion in losses. In the report, the IC3 highlighted complaints on business email fraud, investment scams, ransomware, and call center fraud. The numbers are significant. The report cites 21,832 business email complaints (primarily related to compromised accounts and fund transfers) with losses in excess of $2.7 billion. Losses from investment fraud complaints more than doubled since last year, rising to $3.31 billion in 2022. Cryptocurrency investment fraud specifically, rose as well, with losses approaching $2.57 billion in 2022. Noted examples of crypto-investment schemes in 2022 include: “liquidity mining” (victims are induced to link their crypto-wallets to a fraudulent liquidity mining application); hacking into a victim’s social media to perpetrate investment fraud; celebrity endorsements and fraudulent inducements; online real estate scams; and online offers of employment that lead to investment fraud.

In addition, IC3 highlighted over 2000 filed ransomware complaints with adjusted losses totaling more than $34 million. In particular, IC3 noted the 870 complaints related to critical infrastructure sectors (notably, 88 directed at the financial services sector and 107 targeting information technologies.) The highest number of complaints in critical infrastructure concerned the health care sector at 210.

According to the report, the top five cyber-related crime types involved (i) tech support (posting a Year-Over-Year increase at over 32,000;) (ii) extortion (at a similar YOY pace at over 39,000;) (iii) non-payment/non-delivery (a significant reduction YOY at 51,000;) (iv) personal data breach (a substantial increase YOY at almost 59,000;) and phishing complaints (by far the most-reported complaints at over 300,000).

Conclusion

The SEC’s proposed new Rule 10 is consistent with the President’s newly announced national cyber strategy. The FBI report underscores the argument that cyber-crime poses a devastating threat to the economy, securities markets and retail investors thereby justifying the new rules and additional compliance requirements on cybersecurity. As acknowledged in the strategy, the administration recognizes how burdensome these new requirements may be. And that will, no doubt, be the subject of many comments on the SEC’s proposed rule. Those comments will be due 60 days after the proposed rule is published in the Federal Register. Bates will keep you apprised.

How Bates Helps:

For additional information on Bates Group's experts, practices and services, please follow the links below:

Cyber Experts

Bates Compliance

RIA Services

Broker-Dealer Services

Consulting and Expert Testimony

Regulatory and Internal Investigations

MSB, FinTech and Cryptocurrency

Retail Litigation and Consulting

Institutional and Complex Litigation

AML and Financial Crimes

Events  |  03-23-23

Hear Bates Director Matt Summers Speak at the NMLS 2023 Annual Conference, April 3-6, 2023

Join Bates at the NMLS 2023 Annual Conference, April 3-6, 2023 in Phoenix, Arizona. This virtual and in-person event attracts a growing number of State and federal regulators, state licensees and federal registrants across the broad spectrum of financial services industries, consultants, law firms, and NMLS education providers, who come together to exchange invaluable information on NMLS user and regulatory compliance issues.

Bates Group Director Matt Summers will be speaking on the Wednesday, April 5 panel "What’s Up with the CSBS Money Transmission Modernization Act?" (1:15-2:15 p.m. MST). Panelists will discuss how states are supporting implementation of the Money Transmitter Model Law, its major provisions, and how the law is a major building block towards building networked supervision.

Registration is now open.

Conference Details and Registration

Bates Research  |  03-22-23

On Our Radar: Crypto Legislative, Regulatory and Enforcement Roundup

Image © [thodonal] /Adobe Stock

Fast-moving events in the financial markets are underscoring the need for a workable digital asset legislative and regulatory framework. With the recent collapse of  Signature Bank and Silvergate Bank, two financial institutions synonymous with “innovation” lending, the broader digital asset investor community is in turmoil.

Ongoing volatility continues to reduce overall crypto market value (by over $2 trillion since 2021) and leaves crypto businesses exposed to additional risk. Federal and state regulators have ramped up enforcement efforts in response. Such volatility is the backdrop to this latest roundup on crypto developments.

Legislative Developments

U.S. federal legislators continue to engage in multiple efforts on crypto-assets. On the Senate side, Senators Cynthia Lummis (R-Wyo) and Kirsten Gillibrand (D-NY) will reportedly reintroduce a “slimmed-down” version of their 2022 Responsible Financial Innovation Act and the Digital Commodities Consumer Protection Act in April. The bill would bring digital assets within the regulatory “perimeter” and direct the CFTC to take the lead. Senator Elizabeth Warren is reportedly set to re-introduce the Digital Asset Anti-Money Laundering Act, a bill that would prohibit financial institutions from using digital asset mixers and other means to facilitate illegal and anonymous transactions. (An analytics firm determined that, in 2022, “total cryptocurrency value received by illicit addresses reached $20.1 billion.”) Also in play is the Stablecoin Trust Act, yet to be introduced this term, that would establish a comprehensive regulatory framework for stablecoins that would explicitly allow both “state-and federally chartered entities” to engage in the activity.

Under Republican leadership, the House Financial Services Committee has taken up a series of bills affecting crypto, including (i) the Keep Your Coins Act, which “preserve an individual’s right to privacy when transacting with digital assets,” (ii) the Financial Technology Protection Act, which would encourage new financial technologies to combat terrorism and other illicit activities; (iii) the Blockchain Regulatory Certainty Act, which would “exempt blockchain developers and providers of blockchain services that do not take control of consumer funds from certain financial reporting and licensing requirements;” and (iv) the Keep Innovation in America Act, which would “amend the digital asset reporting provisions in the Infrastructure Investment and Jobs Act.” The bill would modify the definition of “broker” to exclude those who provide facilities in which others effect sales, or who help operate an exchange but who maintain no records on the terms of the sales. The bill also “sets guardrails around the definition of digital asset,” and requires a study “on the treatment of digital assets as cash for purposes of reporting requirements.”

Regulatory Developments

Banking regulators have been highly visible over the past few months raising significant concerns about crypto risks spreading to other sectors of the financial markets and highlighting gaps in current regulation. On January 3, 2023, the Federal Reserve, the FDIC and the OCC issued a joint statement to banking organizations on the risks of engaging in crypto assets related services. These include risks on custody practices, redemptions, and ownership rights, and concentration risks within the crypto-asset sector. In a second joint statement issued on Feb. 23, 2023, the Fed, FDIC, and OCC alerted banking organizations of crypto asset liquidity risks resulting from unpredictable and potentially unstable crypto deposit inflows and outflows. The agencies cautioned banks to establish and maintain effective risk management and controls to cover these liquidity risks.

Additional notable regulatory actions by the Federal Reserve include two significant decisions (in January and February) in which a state-chartered crypto firm was denied applications to offer its customers financial services in both dollars and digital assets through the federal reserve system. The message is that the bank regulators are not yet ready to incorporate crypto into the traditional banking system.

Chairman Jerome Powell testified to that fact, in a March 7, 2023 Hearing before the Senate Banking Committee. He asserted that “there are real concerns about permissionless public blockchains, and the reason is that they've been so susceptible to fraud, to money laundering and all of those things.” He emphasized that stablecoins are not tools "consistent" with sound banking, stating “Like everyone else we’ve been watching what’s been happening in the crypto space and what we see is quite a lot of turmoil, we see fraud, we see a lack of transparency, we see run risk, we see lots of things like that… What we’ve been doing is making sure that the regulated financial institutions that we supervise and regulate are careful and taking great care in the ways they engage with the whole crypto space."

In another significant agency action affecting crypto, on Feb. 15, 2023, the SEC proposed significant amendments to the Custody Rule, which would require holders of crypto assets and crypto asset companies to register with the agency. The rule would expand the definition of "asset class" to include crypto-assets that are not categorized as funds or securities.

Enforcement Developments

Regulators have pursued aggressive enforcement actions consistent with this rhetoric in light of significant market implosions such as those of FTX exchange and the stablecoin TerraUSD. (The SEC filed over 30 significant cases and imposed $242 million in monetary penalties in 2022. See also, SEC 2022 Enforcement Report.) Recent cases include “staking” claims against a crypto exchange, false and misleading statements by celebrities on social media, insider trading (together with the DOJ), recordkeeping and disclosure failures, conflicts of interest and failures to register a securities offering.

The CFTC pursued cryptocurrency derivatives claims, failure to register and unlawful commodity transactions. The CFTC is poised to exceed the 18 actions it brought in 2022. The Treasury Department has also pursued crypto firms for anti-money laundering and sanctions violations, and the IRS has made clear that it will pursue tax evaders after determining that crypto-assets were capital assets for the purpose of imposing capital gains treatment upon sale.

The amped up activity has led crypto advocates to complain the agencies are regulating by enforcement and stifling innovation. SEC Chair Gary Gensler’s response is that “the cryptocurrency industry is playing a game with his agency,” and that crypto companies “are well aware of what they have to do to operate legally within the U.S. but they’ve decided not to do it.”  

Ongoing State Legislative Activity

The states are not waiting for federal legislators or regulators to craft a comprehensive framework on crypto. The National Conference of State Legislatures tracks these crypto-legislative initiatives and reports that thirty-seven states have now “addressed legislation regarding cryptocurrency, digital or virtual currencies and other digital assets in the 2022 legislative session.”

Two prominent approaches on the registration and regulation of crypto – New York (through the issuance of BitLicenses) and recent efforts by New Jersey (Bates has a comparison of the two here) – increasingly appear to be models for other state legislators who are looking for consistency across jurisdictions for crypto businesses based in their state. (See e.g. remarks from David DeCarlo, Illinois’ first regulatory innovation officer.)

Conclusion

The turmoil in the financial markets that cater to crypto and the continuing meltdowns in crypto exchanges and firms represent a defining moment in the evolution of blockchain products and services. Ongoing volatility, highlighted by legal and enforcement developments in the earlier failures of FTX Exchange, Genesis Global, BlockFi Inc. Celsius Network, Voyager Digital, TerraUSD and Three Arrows is affecting investor sentiment and enhancing risk. Federal and state leaders are pouncing on that volatility and are rushing to address the risk.

In testimony before the House Financial Services Subcommittee on Digital Assets and Financial Technology, Peter Grewel, Chief legal Officer at Coinbase, urged the legislators to pass comprehensive legislation that “will result in rules for the intermediaries that provide access to digital assets in order to enable responsible innovation, ensure consumer protection, and safeguard our national security interests.” He argued for a legislative path to (i) protect consumers, (ii) regulate trading and markets, (iii) list new security tokens and raise capital and (iv) ensure financial stability by embracing a faster and cheaper payments system in stablecoins. Whether a divided Congress and ambitious state representatives can make that happen is still uncertain. The need to make that happen is not. Bates will keep you apprised.

About Bates

Bates Group has been a trusted partner to our non-banking financial institutions and financial services clients and their counsel for over 40 years, delivering superior quality and results on a cost-effective basis. With a full professional staff and a roster of over 175 financial industry and regulatory compliance experts, Bates offers services in AML and compliance, regulatory enforcement and internal investigations, litigation consultation and testimony, forensic accounting, damages, and big data consulting.

Bates Group's MSB, FinTech and Cryptocurrency team provides a full suite of Bank Secrecy Act, Anti-Money Laundering and Office of Foreign Assets Control (BSA/AML/OFAC) compliance consulting services, state money transmitter licensing acquisition and maintenance support, independent reviews, and corporate compliance training.

To learn more about our services or to talk to one of our professionals, contact Bates today.

On Our Radar: Crypto Legislative, Regulatory and Enforcement Roundup

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Bates Research  |  03-21-23

Banking Update: Separating Fact from Speculation

Image © [Tada Images] /Adobe Stock

by Greg A. Kyle, Director and Expert

In the aftermath of the collapse of three banking firms, Silvergate, Silicon Valley Bank and Signature Bank earlier in March, tensions in the banking sector continued over the past week with the shares of a number of regional banks including First Republic, PacWest Bancorp and Zions Bancorp under pressure. During the turmoil-filled week, several questions were raised about the strength of U.S. banks, whether regulators moved quickly enough, the role of venture capitalists, and if the failures were foreseeable.

We’ll start with the last question first.

Were the Banking Failures Foreseeable?

For many, nothing depicts a bank run like the classic film It’s a Wonderful Life. In the film, a bank in small-town middle America was faced with rumours over the safety of depositors’ money. In the movie, the citizens of Bedford Falls worriedly gathered at the doors of the Building & Loan early one morning waiting for it to open. They hoped to withdraw all their cash as rumours were spreading about the health of the institution.

After the seizures of Silicon Valley Bank and Signature Bank by their respective state regulators, there were rumours, internet chatter, and numerous people in the news who—after the fact—stated that the collapse of those two banks were clearly seen months prior. But was the sudden collapse-by-bank-run of Silicon Valley Bank and Signature Bank foreseeable? Despite what some have stated or speculated, the short answer is no.

As students of history, we’ve studied financial crises and bank failures from the Great Depression to today, and one fact that stands out is that, although bank runs have occurred in the past, the two precipitous bank runs that Silicon Valley Bank and Signature Bank faced were as unexpected as they were unprecedented.

The early 1930s was a defining moment for the U.S. banking sector. In the wake of the stock market crash of 1929, the American public was nervous about any other potential financial disasters that could loom on the horizon. This made the period ripe for rumour and speculation and led to the 1930s being marked by a series of bank failures, with over 9,00 banks shuttering their doors between 1930 and 1933. In total, depositors lost over $7 billion in these failed banks—an estimated 20% of all bank deposits in the U.S. at that time. The dramatic impact these failures had on depositors led to the creation of the Federal Deposit Insurance Corporation (“FDIC”) in 1933.[i] Since then, bank failures and bank runs have been much less common.

Banking Update: Separating Fact from Speculation

During the savings and loan crisis of the 1980s to 1990s, nearly 3,000 financial institutions failed. There were sporadic runs during that period, but they were limited. The general view from the FDIC was that “deposit insurance virtually eliminate[d] the risk of bank runs,” with the only bank run of significance during this period being Continental Illinois National Bank and Trust Company in May 1984. At the time, Continental Illinois was the seventh largest bank in the U.S.

It wasn’t until the financial crisis in 2008 that bank failures rose sharply again. Between 2008 and 2010, over 300 banks failed, the majority due to lax credit requirements and significant losses on non-performing assets tied to the commercial and residential real estate markets. In 2008, several major institutions were hit with bank runs or large deposit outflows, the most notable being Washington Mutual at the height of the financial crisis. After the fall of Lehman Brothers in September 2008, WaMu experienced a bank run with $16.7 billion in deposit outflows over an eight day period. Following the collapse of Washington Mutual, Wachovia Bank also experienced significant deposit withdrawals on September 26, 2008, with outflows totaling $5.7 billion on that Tuesday.

Wachovia’s bank run on September 26 amounted to roughly 1.3% of total deposits that day. Washington Mutual’s bank run, while substantial, was spread over an eight-day period and averaged 1.1% of total deposits per day. There were a number of other bank runs in 2008, and the deposit outflows of those banks averaged between 0.2% and 0.8% of total deposits per day.

Fast forward to today. In contrast to the bank runs during the financial crisis, the bank runs on Silicon Valley Bank and Signature Bank were of a magnitude never previously experienced in U.S. history. According to California regulators, SVB experience $42 billion in deposit withdrawals on Thursday, March 9. With a deposit base of $169 billion, the bank experienced a precipitous bank run of 25% of its total deposits in a single day!

Similarly, Signature Bank also appears to have experienced a precipitous bank run. According to a CNBC article, in the wake of SVB’s sudden collapse, Signature Bank experienced $10 billion in deposit withdrawals in just a few hours late on Friday afternoon. With $89 billion in deposits, the late Friday bank run on March 10 amounted to 11% of total deposits. As can be seen in the chart below, the two bank runs experienced by SVB and Signature Bank that Thursday and Friday were, by far, the largest and swiftest runs in U.S. history.

Banking Update: Separating Fact from Speculation

Given the history of bank runs, it simply was not reasonable to believe, both in terms of magnitude and velocity, that the sudden precipitous bank runs on SVB and Signature Bank were foreseeable.

Did Venture Capitalists Play a Role?

What could explain the magnitude of the concentrated withdrawals? Rumours abounded that venture capital firms accelerated the collapse of Silicon Valley Bank by allegedly advising their portfolio companies to withdraw funds from SVB, while simultaneously withdrawing their own cash. Due to the concentrated nature of SVB’s depositor base (i.e., heavily concentrated in technology, health care and life sciences companies, with an early-stage focus), it’s plausible that a text or email blast, or other mass digital communication from a credible source (like venture capital firms) could produce an outsized reaction like the rapid and massive withdrawals that SVB experienced on March 9. Even without VC firms recommending to their portfolio companies to move money out of SVB, the concentrated focus on early-stage technology companies could also have impacted the deposit run-off rate (withdrawals). As discussed in our previous Banking Alert, in a rapidly rising interest rate environment, technology companies were experiencing a large-scale decrease in funding opportunities, causing them to burn through capital more quickly than in prior periods.

Quality of Assets – What is the Strength of the U.S. Banking Sector?

It’s worth remembering that plummeting share prices (often panic-driven) are one thing, but fundamentals are another. And, in terms of fundamentals, the banking sector is stronger today than in the past. As we wrote in our last Banking Alert, capital requirements have been strengthened, liquidity is stronger than in the past, and the quality of capital is better today than during the financial crisis.

During the financial crisis, in aggregate only 10% of a bank’s assets were in government fixed income securities (U.S. Treasuries and Government Agency). Today, in contrast, banks have a much stronger asset base with nearly 20% of commercial banking assets in U.S. government securities. When cash is included, the share of high credit quality assets is at 33%, nearly three times what it was in early 2008.

Banking Update: Separating Fact from Speculation

And, when it comes to liquidity coverage using a strict measure such as cash held by banks as a percentage of total deposits, the banking sector is also much stronger today than during the financial crisis. In 2008 at the beginning of the financial crisis, cash held by commercial banks was less than 5% of total deposits. Today, in aggregate commercial bank cash holdings are 18% of total deposits. This does not include high quality liquid assets (“HQLA”) included in available-for-sale securities that banks hold today.

With the rapid rise in interest rates, those banks that did not adequately manage duration or asset-liability matching are seeing higher interest rate risk (and the associated price risk) exposure and unrealized losses. If those high credit quality securities do need to be sold, then unrealized losses can turn into realized losses. However, it’s worth bearing in mind that there is virtually zero credit risk associated with U.S. Treasury and Agency bonds, and these securities, despite changes in interest rates, will mature at par, thus reversing and eliminating the unrealized losses.

Did Regulators Move Quickly Enough, or Were Regulators Asleep at the Wheel?

Although it is too early to draw definitive conclusions, it appears that state regulators moved quickly and decisively to seize the two banks before further damage could be done. With Silicon Valley Bank, the California Department of Financial Protection took immediate possession and closed the bank after seeing the massive, unprecedented deposit outflows on Thursday. In Signature Bank’s case, New York Department of Financial Services seized the bank over the weekend. Although the specific reason was not given, it appears (at least from the CNBC article mentioned earlier) that it was due to significant deposit outflows late Friday, March 10. Each respective regulator acted within one business day to stem losses and minimize damage. In contrast, during the financial crisis, regulators waited days or even weeks as banks were experiencing runs on their deposits before acting.

There has also been some discussion that the roll-back of certain sections of the Dodd-Frank Act led to the collapse of SVB. At this point, that does not appear to be the case. The Dodd-Frank Act was passed in the aftermath of the financial crisis to protect consumers and taxpayers by tightening regulations for banks that were considered systemically important. Originally, the threshold of a systemically important institution was defined as one with total consolidated assets of $50 billion or greater. Banks above that threshold were required to conduct regular stress testing which, among other factors, take into account various economic scenarios and the impact of changing interest rates on a firm’s capital levels, asset prices and earnings. In 2018, the definition of a systemically important bank was changed to only include institutions with assets totaling over $250 billion. Silicon Valley Bank, with total assets of roughly $210 billion, fell under that threshold.

Would maintaining the threshold at $50 billion and requiring regular stress testing have prevented the failure of Silicon Valley Bank and Signature Bank? It appears unlikely. The sudden failure of these two banks were ultimately the result of precipitous one-day bank runs, and the stress tests detailed in the Dodd-Frank Act—and provided by the Office of the Comptroller of the Currency (“OCC”)—do not include bank run scenarios let alone single-day deposit outflows of the magnitude experienced by Silicon Valley Bank and Signature Bank. It should be noted that the Liquidity Coverage Ratio (“LCR”) implemented with Basel III is a requirement of Section 165 of the Dodd-Frank Act. However, in calculating LCR, deposit run-off rates ranging between 3% to 10% over a 30-day period are used. These deposit run-off rates would not be considered a bank run.

Going forward, protecting bank customers against massive bank runs will be an interesting policy debate. Gone are the days of depositors lining up around the block with deposit slips in hand waiting to withdraw their money. In the modern digital era when cash can flow quickly between institutions in a matter of minutes if not seconds, the question becomes how can banks protect themselves from sudden and extreme deposit outflows? What level of liquid assets (i.e., HQLA) relative to the deposit base should banks have on hand in order to meet potential large, single-day outflows? Should the definition of HQLA as detailed in Basel III and adopted by the Dodd-Frank Act be changed? Should the FDIC raise the level of deposit insurance from $250,000 to a higher level? Should regulators, or banks, be able to declare a banking holiday until concerns abate? What other measures can regulators enact to protect consumers and taxpayers from precipitous, massive bank runs in the future?

These are interesting policy and regulatory questions that are unlikely to be decided soon.

Other Thoughts

Did Silicon Valley Bank grow its assets too quickly? There has been some discussion that the rapid growth in SVB’s assets was a red flag of growing problems. However, it would be hard to argue that the rapid growth in assets was abnormal considering the massive increase in deposits that originated in early 2020 with the onset of COVID. Even today, deposit levels have remained very high (see chart below).

Banking Update: Separating Fact from Speculation

According to a report by the Federal Reserve, the ratio of deposits to GDP has remained above 75% since early 2020. That same report identified four trends impacting the sustained high ratio: (i) rapid draw down of commercial and industrial lines of credit; (ii) the Fed’s asset purchases; (iii) fiscal stimulus related to COVID; and (iv) a higher personal savings rate due to COVID. An interesting area for further investigation would be the extent to which the lack of loan demand (i.e., an absence of high demand for bank credit) during the pandemic period may have led to increased purchases of longer duration assets in order to earn a positive spread against a growing deposit base.

In terms of Silicon Valley Bank’s rapid asset growth, although total assets did grow from $71 billion at the end of 2019 to $211 billion at the end of 2022, U.S. government bonds as a percentage of total assets went from 36% in 2019 to over 50% in 2022. At the end of last year, 91% of the bank’s available-for-sale and held-to-maturity securities were in U.S. Treasuries and Agency bonds. It appears that the rapid growth in assets did not translate into a rapid growth in credit-riskier assets, rather a rapid growth in high-quality assets. Further, the bank was considered financially sound by California regulators prior to the precipitous bank run on March 9.

In an effort to restore investor and depositor confidence in First Republic Bank, a consortium of banking entities extended $30 billion in deposits in a major cash infusion to the bank. These included major financial institutions such as JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley and others. The importance of regional and small banks within the overall financial ecosystem was flagged explicitly as a rationale for the move. Larger financial institutions, those dubbed “too big to fail” after the crisis in 2008, experienced a spike in deposits amidst the bank turmoil, perhaps reflecting a belief that they would not be allowed to fail regardless of FDIC protection limits. A further $121 billion poured into money market funds, reflecting additional uncertainty around the banking sector, with nearly $100 billion coming from institutional sources and the remainder from retail investors. These inflows and outflows may have prompted the “vote of confidence” in First Republic by the larger entities.

And Credit Suisse? Internationally, Credit Suisse was offered 50 billion Swiss francs (approximately $54 billion) in liquidity facilities by the Swiss National Bank in an effort to improve its liquidity last Wednesday. The bank had experienced extensive challenges, including the withdrawal by depositors of 123 billion Swiss francs ($133 billion) in the fourth quarter of 2022. In February, the global bank also reported an annual net loss of $7.3 billion, the largest net loss since the global financial crisis. Its shares had declined by about 23% already this year.

Ultimately, UBS announced on Sunday that it would be acquiring Credit Suisse for around three billion Swiss francs, with Credit Suisse shareholders receiving one share in UBS for every 22.48 shares held in Credit Suisse. This value equates to approximately 0.76 Swiss francs per share, or about three billion Swiss francs in total. The Swiss National Bank participated by pledging up to 100 billion Swiss francs in loans to support the transaction, and the absorption of losses on certain assets above a preset threshold meant to reduce the risk to UBS from the acquisition. The move was generally applauded as a step towards additional stability in a rattled global banking system.


[i] The FDIC is a government agency that provides deposit insurance for depositors in FDIC insured banks. Originally the FDIC insured deposits up to $2,500, although that has increased over the years and today stands at $250,000.

About the Author:

Greg Kyle is a Bates Group director and expert based in New York. He uses his extensive background in the securities industry to consult and provide expert witness testimony on matters involving fixed income and credit market performance and analysis including mortgage- and asset-backed securities, equity market and security valuations, sector and asset allocation analysis, and fund risk disclosures. Mr. Kyle still actively analyzes the financial markets and publishes analyses of the economy and the capital markets.

Contact:

Banking Update: Separating Fact from Speculation

Greg Kyle

Director and Expert

gkyle@batesgroup.com

Banking Update: Separating Fact from Speculation

Alex Russell

Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com

971-250-4353

Bates Research  |  03-13-23

Banking Alert: Silvergate Capital, Silicon Valley Bank, and Signature Bank

Image © [MichaelVi] /Adobe Stock

by Greg A. Kyle, Director and Expert

It’s been a chaotic and whirlwind week in the banking sector. On Sunday, March 12, U.S. regulators seized Signature Bank, and on Friday, U.S. regulators seized the assets of Silicon Valley Bank (“SVB”). The seizure of SVB led to one of the largest bank failures in U.S. history and the largest failure of a financial institution since the 2008 financial crisis. SVB, with approximately $209 billion in assets, is the second largest failure, the largest was the collapse of Washington Mutual with approximately $300 billion in assets in 2008. The failure of SVB comes on the heels of Silvergate Capital announcing on Wednesday that it would voluntarily wind down operations and liquidate its bank.

These back-to-back bank collapses in one week spooked the financial markets on Thursday and Friday, leading to a sharp sell-off in a number of banking stocks. Shares of PacWest Bancorp (PACW) fell 37.9% on Friday, Signature Bank (SBNY) shares were down 22.9%, First Republic (FRC) fell 14.8% and Western Alliance Bancorp (WAL) shares were down 13%. Larger banks were also impacted, losing $52 billion in market value during the course of Thursday’s trading.[i]

Adding to market concerns was U.S. Treasury Secretary Janet Yellen’s comments before the House Ways & Means Committee Friday morning in which she stated, “There are recent developments that concern a few banks that I'm monitoring very carefully. And when banks experience financial losses, it is and should be a matter of concern.”[ii]

This has raised questions regarding the stability of the banking system and whether we could be facing a replay of 2008’s financial crisis. Although we cannot predict the future, the banking system is stronger today than during the 2008 financial crisis. For one, capital requirements have been strengthened. In 2008 the average Tier 1 common capital ratio dropped close to 5%[iii], while today, in contrast, Tier 1 capital ratios are on average around 12% as depicted in the chart below from the Federal Reserve. Another factor is that the quality of capital is better today than during the financial crisis. And third, liquidity positions are much stronger. In aggregate, the banking industry’s holdings of liquid assets (liquid assets as a share of total assets) are at 24%, nearly four times higher than in 2008.

 
Banking Alert: Silvergate Capital, Silicon Valley Bank, and Signature Bank

So what did happen with SVB and Silvergate Capital that led to their collapse last week? We believe that very different driving factors precipitated the collapse of each bank.

While it’s still too early to draw definitive conclusions, it appears that Silicon Valley Bank’s collapse started with a traditional failure of managing interest rate risk due to a mismatch between its assets and liabilities. This led to a historical issue highlighted in the film It’s a Wonderful Life, as opposed to some new technology-related risks. As subsequent information showed, duration (or cash flow) mismatching increased the bank’s exposure to interest rate risk and led to losses when it sold securities. In addition, the bank was also hit with a classic, if unwarranted, historical run on a bank.

A Primer

First, a primer: In effectively managing interest rate risk, financial institutions use a duration matching strategy to match the duration (maturity) of a pool of assets with the duration (maturity) of a pool of liabilities.[iv] In other words, short-term liabilities should ideally be matched or offset by short-term assets. However, if deposits (liabilities) are all short-term in nature and securities (assets) are all long-term in nature, then to pay back liabilities or deposit withdrawals, an institution may need to sell long-term assets if not enough cash on hand is available to meet liabilities. This may be fine in a period of stable interest rates when there is unlikely to be a significant change in the value of long-term bonds for instance, but if interest rates begin to rise those bonds will begin to lose value as a result.

During periods of very low interest rates, firms may be tempted to purchase longer-term assets despite holding short-term liabilities in order to try and increase the spread being earned (the difference between the rate paid by the bank to depositors and the rate earned on the bonds, for instance). The risk in this strategy is that when interest rates rise and those longer-term securities need to be sold, those securities would be sold at lower prices than when purchased, resulting in sometimes large losses. The longer the duration of a bond, the more sensitive the price is to changes in interest rates.

This is because there is an inverse relationship between interest rates and bond prices. When interest rates rise, bond prices fall, which is in fact what occurred with fixed income securities recently. As the Fed rapidly increased interest rates in 2022 and early this year, bond prices experienced one of their worst declines in prices in nearly a hundred years.

Silicon Valley Bank

Now back to Silicon Valley Bank. On Wednesday, March 8th SVB filed a current report with the SEC providing a mid-quarter update. In the update, the company announced that it sold $21 billion in securities resulting in an estimated $1.8 billion realized loss.[v] On Thursday, March 9th Standard and Poor’s downgraded SVB Financial Group to BBB- citing among other things, a higher than expected “pace of deposit outflows”[vi] in the first two months of 2023. The reason for the higher-than-expected deposit outflows was because of the concentrated nature of its deposit base (customers), about 40% of which were from early-stage technology and life science/health care companies. With a slowdown in venture funding in late 2022 and early this year, those early-stage companies were burning through their cash stockpiles (deposits) at an accelerated rate. In order to meet those withdrawals, SVB sold the $21 billion in available-for-sale fixed income securities which resulted in a $1.8 billion loss.[vii]

The $1.8 billion loss appears to be due to an issue known as duration mismatching and forced selling. The bank’s deposits were virtually all short-term in nature (could be withdrawn at any time). However, the available-for-sale securities were primarily intermediate and longer-term in nature. According to SVB Financial Group’s annual filing with the SEC, at the end of 2022 the firm had $13.8 billion in cash and cash equivalents, and $26.1 billion in available-for-sale securities, primarily in U.S. Treasuries and Agency MBS securities. Of the $26.1 billion, only 4% were in securities with a maturity of one year or less. Roughly 56% were in securities with a maturity between one and five years and approximately 40% were in securities of five years or greater. Remember, the longer the duration (maturity) of a bond, the greater the sensitivity of that bond’s price is to changes in interest rates.

Adding to the bank’s woes, it turned out that there was a precipitous run on the bank on Thursday, March 9th. According to a filing by California regulators on Friday, March 10th, despite the bank “being in sound financial condition prior to March 9, 2023, investors and depositors reacted [to the bank’s prior day’s financial update] by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank.”[viii] This forced California regulators to take possession of the bank and name the Federal Deposit Insurance Corp. (“FDIC") as the receiver.

Silvergate Capital

Unlike Silicon Valley Bank, which had “minimal exposure to cryptocurrency and digital assets”[ix] Silvergate Capital and its subsidiary, Silvergate Bank, was an institution that was heavily concentrated in the cryptocurrency and digital asset sector and made the decision to voluntarily wind down its operations. As a result of the dramatic downturn/meltdown in the crypto sector, Silvergate experienced a 68% fall in customer deposits in the last quarter of 2022 and posted a $1 billion net loss.[x] The heavy concentration in the crypto sector, in addition to governance concerns,[xi] severely weakened its financial position and led to low Tier 1 capital levels.

There were additional issues with Silvergate. On March 1st, the company announced in a regulatory filing with the SEC that it was unable to timely file its annual report for 2022 and that the large losses would “negatively impact the regulatory capital ratios” with the result that the bank could be “less than well-capitalized.”[xii] Silvergate also stated in its SEC filing that it was evaluating its ability to continue as a going concern.

Different circumstances, different fundamentals for Silvergate compared to Silicon Valley Bank.

Signature Bank

On Sunday evening, March 12th, just as this banking update was going to press, New York State Department of Financial Services announced that it was taking possession of Signature Bank and appointing the FDIC as receiver "in order to protect depositors."[xiii] The New York based financial institution had deposits totaling $89 billion as December 31, 2022 and total assets of $110 billion. Although the bank had been considered one of the major banks in the cryptocurrency space, it disclosed in its annual 10-K filing with the SEC that it was focused on reducing exposure to the digital asset sector, and as of December 31, 2022, the bank’s digital asset exposure was 20% of total deposits.

Is Contagion a Risk?

Where does that leave the banking sector as a whole? While high-profile, these three bank collapses do not appear to hint at a larger malaise in the financial sector. It’s worthwhile to remember that bank failures are a relatively common occurrence. Since the financial crisis, the U.S. banking system has experienced over 215 bank failures (although in the last six years, only 18 banks have failed).[xiv]

 
Banking Alert: Silvergate Capital, Silicon Valley Bank, and Signature Bank

Andas we pointed out earlier in this updatecapital ratios, the quality of assets, and liquidity positions are much stronger today than during the lead-up to the financial crisis. The continued adoption of Basel III capital requirements is also strengthening financial institutions in the U.S.

While there may be risks for individual banks, the risk of contagion and systemic banking failures appears unlikely. Rising interest rates could continue to negatively impact bank profit margins as some banks may not have effectively matched the duration of assets to liabilities leading to interest rate risk. However, unlike 2008, credit risk appears to be minimal as much of the securities being held by banks today consist largely of U.S. Treasuries and other government (Agency) bonds. Also, the majority of banks have a diversified deposit base and solid liquidity position.

To calm fears of a contagion and strengthen public confidence in the U.S. banking system, the U.S. Treasury, the Federal Reserve and FDIC released a joint statement on Sunday evening announcing that depositors in both Silicon Valley Bank and Signature Bank would be fully protected and “will have access to all of their money starting Monday, March 13.”[xv] The terms provided in the joint statement indicated that senior management at both entities had been removed, and that “shareholders and certain unsecured debtholders will not be protected.” The statement also indicated that “no losses will be borne by the taxpayer” and that any such losses will be recovered by a special assessment on banks as in a typical takeover.

The one thing that cannot be foreseeably predicted is the risk of a widespread crisis in confidence in the banking system and a wholesale run on deposits. Then again, panic runs are rarely supported by underlying fundamentals. Bates will continue to keep you apprised.

About the Author:

Greg Kyle is a Bates Group director and expert based in New York. He uses his extensive background in the securities industry to consult and provide expert witness testimony on matters involving fixed income and credit market performance and analysis including mortgage- and asset-backed securities, equity market and security valuations, sector and asset allocation analysis, and fund risk disclosures. Mr. Kyle still actively analyzes the financial markets and publishes analyses of the economy and the capital markets.

Banking Alert: Silvergate Capital, Silicon Valley Bank, and Signature Bank

Greg Kyle

Director and Expert

gkyle@batesgroup.com


[i] The WSJ, Banks Lose Billions in Value After Tech Lender SVB Stumbles, March 9, 2023.

[iii] See Federal Reserve Bank of Boston, Bank Capital: Lessons from the Financial Crisis, February 5, 2013. (https://www.bostonfed.org/news-and-events/speeches/bank-capital-lessons-from-the-us-financial-crisis.aspx)

[iv] See Federal Deposit of Insurance, RMS Manual of Examination Policies, Sensitivity to Market Risk, p. 7.1-17, July 2018. (https://www.fdic.gov/regulations/safety/manual/section7-1.pdf)

[vi] Standard & Poors’, SVB Financial Group Long-Term Rating Lowered to 'BBB-' From 'BBB' On Weaker Funding Profile; Outlook Negative. March 9, 2023. (https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/2958379)

[xi] See Moody’s, Moody’s downgrades Silvergate Bank’s deposit ratings to Caa1 from Ba3; ratings on review for downgrade, March 3, 2023. (https://www.moodys.com/research/Moodys-downgrades-Silvergate-Banks-deposit-ratings-to-Caa1-from-Ba3--PR_474469).

Bates Research  |  03-10-23

What is the Purpose of Consumer Protection Laws?

Image © [Iren Moroz] /Adobe Stock

Consumer protection laws are designed to protect consumers from deceptive practices and products. These laws help to keep sellers honest and to protect purchases of goods from fraudulent or deceptive marketing. Consumer protection laws are enforced by the Federal Trade Commission, and businesses that fail to maintain compliance with federal consumer protection laws could face severe consequences. At Bates Group, our team of experienced consultants can provide consumer protection law compliance assistance. Call us today to learn more. 

What are Consumer Protection Laws?

The Bureau of Consumer Protection with the Federal Trade Commission (FTC) is responsible for stopping unfair, fraudulent, and deceptive business practices that negatively impact consumers. Consumer protection laws are varied and multiple, ranging from laws about robocalls, scams, fraud, deceptive advertising, credit reporting, environmental claims, and much, much more. 

Key Consumer Protection Laws

While there are dozens of laws that are designed to protect consumers, there are three that stand out as especially important: 

  • Federal Securities Act. The Federal Securities Act was the first piece of legislation passed that was designed to regulate the stock market. There are two primary goals of the legislation: First, to ensure that businesses cannot engage in misrepresentation and fraudulent activities in the securities market, and second, to improve transparency and informed decision-making around investments. Today, investors are entitled to receive financial information regarding securities that are offered for public sale. A breach of the securities act can lead to large fines and even prison time. 
  • Fair Credit Reporting Act. The Fair Credit Reporting Act, or FCRA, regulates the way in which credit reporting agencies can collect, share, and use consumer report data. The FCRA gives consumers the right to know when their data is used to deny a loan or line of credit, provides access to one’s own credit report, restricts others’ access to one’s credit report, and more. 
  • Dodd-Frank Act. Officially called the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Dodd-Frank Act arose out of the 2008 financial crisis. The act reorganized the financial regulatory system, created new agencies, restricted the emergency lending power of the Federal Reserve, and put in place regulations to prohibit lending companies from taking advantage of consumers. 

Why a Compliance and Risk Management Program is Essential For Your Firm

Compliance with consumer protection laws and regulations is essential to every bank, lender, or MSB. Your company must have a comprehensive and effective compliance program in place to avoid penalties, fraud, losses to customers, and other types of liability.

Every financial company should have a compliance risk-management program that is specifically designed for the company based on size, relative risk, and operational details. There are different components to these programs, such as:

  • Policies and procedures for each role in the organization that ensure consumer protection compliance
  • Monitoring, internal controls, and audits to test the effectiveness of the program
  • Regular risk assessment
  • Having proper management information systems
  • Oversight from senior management or board of directors
  • Training for employees subject to the compliance program

Consumer Compliance Protection from Bates Group

Consumer compliance protection is an essential part of how your business is managed and operated. If a business fails to comply with consumer protection laws, it could face severe consequences. At Bates Group, our consumer protection compliance consultants can help. Reach out to our team today for services and expertise you can count on. 

CONTACT BATES

Events  |  03-10-23

Bates is a Proud Sponsor of the SIFMA C&L 2023 Annual Seminar - Booth #516

Bates is proud to be back in person as a returning sponsor of the SIFMA C&L 2023 Annual Seminar, March 12-15 at the Marriott Marquis San Diego Marina. Hosted by the SIFMA C&L Society, hear industry leaders’ perspectives on the current regulatory and enforcement environments, lessons learned thus far, and what they're seeing on the horizon.

Visit us at booth #516 to reconnect with Bates colleagues and to learn about our latest products and services. Speak with our representatives to find out what they are seeing and hearing and how our team of experts can help you with your litigation, regulatory, and compliance matters, including support to address 2023 regulatory priorities, such as:

  • Reg BI & Form CRS
  • SEC New Marketing Rule (Compliance, Individual and Company Training)
  • Supervision, Policies & Procedures, including Replication/ Validation of Alert Systems
  • Big Data analysis of specific products (mutual funds), actors (FA theft), or activities (market manipulation)
  • BD, RIA, Hybrid, Digital Assets & Cryptocurrency AML, Compliance and Litigation, and more.

While you're there, don't forget to pick up helpful materials (including articles, white papers, and other resources), and take home some fun giveaways.

We look forward to connecting with you at the show!

Conference Details and Registration

We are Here to Help You Succeed:

Bates Group is a trusted partner to financial services clients, counsel, and non-banking financial institutions, delivering leading industry expertise, knowledge, and data-driven solutions for legal, regulatory, and compliance matters. With a full professional staff and a network of over 175 independent financial industry and regulatory compliance experts, Bates offers services in litigation consultation and testimony, regulatory enforcement and internal investigations, AML and compliance, state licensing, forensic accounting, damages, and big data consulting. Contact us today to learn more.

Contact Bates

Bates News  |  03-09-23

Ira D. Hammerman Interviewed in ThinkAdvisor, Law360 on His Move to Bates

Bates Managing Director Ira D. Hammerman was recently featured in ThinkAdvisor (Melanie Waddell) and Law360 (Aaron West) on joining Bates Group. Ira’s move was also mentioned in Politico’s Influencer and SIFMA’s Smart Brief newsletters. Please read more at the links below:

Former SIFMA General Counsel Hammerman Joins Bates Group - ThinkAdvisor

Financial Services Consultant Bates Group Adds Former SIFMA GC - Law360

POLITICO Influence Newsletter - Caitlin Oprysko | 03/06/2023

Read the Bates Announcement

Ira D. Hammerman - Managing Director

Bates Research  |  03-08-23

The New Jersey Digital Asset and Blockchain Technology Act:  A Better Licensing Alternative than New York?

Image © [boscorelli] /Adobe Stock

In the coming months, the New Jersey legislature is expected to pass the Digital Asset and Blockchain Technology Act A2371/S1756 (“the Act”), a bill that would establish one of the broadest licensing and regulatory frameworks on digital assets in the country. On January 19th 2023, the bill was adopted by the New Jersey Senate Appropriations Committee by a wide margin, virtually guaranteeing its passage. The legislation is being closely watched as it offers companies a more comprehensive alternative to the current standard for the regulation of digital assets prescribed under New York law (see Comparison Chart below). Here’s a short summary.  

The New Jersey Framework 

The Act aims to create an enabling environment for businesses to transact in digital assets and use blockchain technology under rules that protect consumers. The proposed regulatory framework would allow entities to register as "Digital Asset Service Providers" (DASPs) 

in order to engage in transactions involving digital assets, secure their data on blockchain networks, and make use of smart contracts. The new framework would reduce legal uncertainty and enable businesses to reap the benefits of using digital assets and blockchain technology. Consumers would be assured that their transactions will be legally valid, thereby making digital asset usage even more attractive. The new framework is intended to foster an environment that would promote innovation while ensuring proper legal safeguards. If enacted, it will be a significant change to the regulatory framework for organizations providing cryptocurrency services to residents of New Jersey.   

Requirements for Certain Activities  

Under the Act, businesses would require licensure by the bureau if they engage in the following activities: 

  • Receiving a digital asset for transmission or transmitting a digital asset, except where the transaction is undertaken for nonfinancial purposes and does not involve the transfer of more than a nominal amount of a digital asset 

  • Storing, holding, or maintaining custody of a digital asset on behalf of others, exempting all custodians otherwise regulated as a bank, trust, broker-dealer, or credit union in any state or by the United States or as a money transmitter licensed in New Jersey 

  • Buying and selling digital assets as a customer business 

  • Performing exchange services of digital assets as a customer business

  • Issuing a digital asset

  • Borrowing or lending or facilitating the borrowing or lending of customer asset 

The Act shifts regulatory oversight to the New Jersey Bureau of Securities (“the Bureau”), which has been active in enforcing cryptocurrency and blockchain-related matters. Key regulatory provisions of the Act include:  

  • Regulation by the New Jersey Department of Banking and Insurance, which is responsible for supervision and enforcement of the Act 

  • Clarification that digital assets are not to be considered securities or money transmission instruments 

  • Licensing requirements for businesses engaging in virtual currency business activity, including registration fees and other conditions  

  • Standards of conduct for virtual currency businesses, such as providing consumer disclosures, maintaining records and safeguarding assets  

  • A framework for the use of smart contracts

  • Immunity from civil and criminal liability for depositors who are not engaged in virtual currency business activity

  • Establishing a digital asset owner’s right to control their own digital assets, including freedom from seizure or confiscation.  

Licensing, Fees, Minimum Capital, Reporting Considerations 

The Act requires all businesses to obtain a license from the State of New Jersey Department of Banking and Insurance before engaging in any activities that involve digital assets or blockchain technology. This includes companies providing retail and custodial services, digital asset trading platforms, digital asset clearing and settlement services, and digital asset storage companies.  

The Act also sets out a number of requirements for licensees, including minimum capital levels that must be held by the company as well as compliance procedures for anti-money laundering and consumer protection programs. In addition to licensing requirements, the Act outlines the obligations of licensees to supervise their operations, report suspicious activity, and maintain records of all transactions.  

Finally, the Act imposes a series of sanctions on businesses who fail to comply with the licensing requirements or associated regulations which includes a penalty of $500 per day, from the first day the department issues a notice of failure to apply a license until a license application is filed with the department. 

Once enacted, the Bureau will issue a form document that all digital asset businesses that conduct business with the people of New Jersey will need to complete and submit along with a $1,000 nonrefundable fee. In addition, the Bureau will require new disclosure and compliance regimes as far as it decides are appropriate, and within the confines of the law. The proposed penalties for failing to abide by the provisions of the license could be as much as $10,000 for a first offense and $20,000 for a second offense, as well as $500 a day for conducting a digital asset business without a license. The Act follows the trend for more aggressive and robust enforcement abilities and compliance regimes for digital assets as governments look to protect consumers and punish bad actors in the space.  

The bureau has said that they will grant or deny any license application within 120 days of receipt of a completed application. 

How Does New Jersey’s Proposed Act Compare to New York's?

The New Jersey Digital Asset and Blockchain Technology Act:    A Better Licensing Alternative than New York?

Chart compiled by Matt Summers, Director, MSB and State Licensing, Bates Group

Conclusion 

The New Jersey Digital Asset and Blockchain Technology Act is more comprehensive than the New York BitLicense framework. It follows a trend of aggressive and robust compliance enforcement as regulators demonstrate their efforts to protect consumers and punish bad actors.  

It takes into account the custody and control concerns that have led to cryptocurrency frauds and bankruptcies. By creating comprehensive regulations, the New Jersey Act may offer better protection for licensees than the NY framework. Bates will keep your apprised of developments.

How We Can Help Your Firm

Bates can help businesses understand the licensing requirements of the New Jersey Digital Asset and Blockchain Technology Act. Our experienced team of AML, compliance and state licensing professionals, is well-versed in understanding the nuances of this Act and how it applies to distinct types of business operations. We provide a comprehensive assessment, addressing all areas of licensing acquisition and maintenance throughout the United States, including within hard to obtain license states, such as New York.

Contact us today to discuss this article and your licensing needs: 

Contact Bates

The New Jersey Digital Asset and Blockchain Technology Act:    A Better Licensing Alternative than New York?

Brandi Reynolds

Managing Director, BSA/AML Compliance, FinTech & Virtual Assets

breynolds@batesgroup.com

864.809.7718

Events  |  03-06-23

Bates Experts and Consultants to Speak at NASAA 2023 Enforcement Training

 Hear Bates Group's Managing Consultant Lindsey Dean and Alison Jimenez, Independent Expert (pictured above, L-R), speak at the NASAA 2023 Enforcement Training, March 7-9, 2023. Their panel is “Attorneys’ Guide to Identifying Red Flags in Financial Disclosures” on Wednesday, March 8 at 2:10 p.m. CT.

This in-person and online training is a two-and-a-half-day program designed to educate learners on current enforcement-focused hot topics and to help build skills to assist participants to advance along their career paths. This year's Enforcement Training agenda was developed by the NASAA Enforcement Section’s Training Project Group and features speakers from state and provincial securities regulatory agencies and from a variety of industry-related organizations. Attendees are encouraged to select either Track 1 (Investigator) or Track 2 (Attorney) to best fit with their goals and areas of specialty.

In-person registration is closed; Online seats still open.

Program Details and Registration

Bates News  |  03-06-23

Former SIFMA Executive VP & General Counsel Ira D. Hammerman Joins Bates Group as Managing Director

We are proud to announce that Ira D. Hammerman has joined Bates Group as Managing Director. Mr. Hammerman was Executive Vice President, General Counsel, and Secretary of SIFMA for nearly 19 years before retiring in 2022. Beginning in 2004, he oversaw SIFMA’s legal and compliance-related advocacy, including comment letters, litigation, and regulatory relationships. His tenure covered a wide range of strategic issues impacting the industry, from its response to the Credit Crisis of 2008 to the Dodd-Frank Act of 2010 and from SIFMA’s advocacy on SRO Reform to its pursuit of the best-interest standard of care for broker-dealers, the preservation of the commission brokerage model of financial advice for retail clients, and the industry response to the effects of the COVID-19 pandemic.

Mr. Hammerman was also a member of the Executive Committee of SIFMA’s Compliance & Legal Society where he routinely collaborated with the senior most business, legal, and compliance leaders in the financial services industry and became known for his thought-provoking interviews of high-profile industry regulators and leaders at conferences and events.

“We are extremely honored to welcome Ira Hammerman to Bates Group,” says Bates Group CEO Jennifer L. Stout. “Ira is an icon in the financial services industry — a thought leader and spokesperson with four decades of unrivaled experience navigating legal, compliance, litigation, and regulatory issues and relationships, including nearly two decades as SIFMA’s General Counsel.” 

“I am delighted to be joining the Bates team, where I have known some of the principals for decades, and look forward to serving our client firms and their counsel,” said Mr. Hammerman.

Previously, Mr. Hammerman was a partner of Clifford Chance, where, for 19 years, he represented the financial services industry on securities regulatory and enforcement matters before the SEC, FINRA, and state regulatory authorities. Mr. Hammerman is based in Park City, Utah where he serves as a board member and active volunteer with the National Ability Center, a charitable organization whose mission is to empower individuals of all abilities by building self-esteem, confidence and lifetime skills through sport, recreation, and educational programs.

Full Bio
 

About Bates

Bates Group is a trusted partner to financial services clients, counsel, and non-banking financial institutions, delivering leading industry expertise, knowledge, and data-driven solutions for legal, regulatory, and compliance matters. With a full professional staff and a network of over 175 independent financial industry and regulatory compliance experts, Bates Group offers services in litigation consultation and testimony, regulatory enforcement and internal investigations, AML and compliance, state licensing, forensic accounting, damages, and big data consulting. Contact us today to learn more.

Contact Us

Compliance and Regulatory Alerts  |  03-02-23

FINRA Arbitration Update - February 2023

FINRA proposed amendments to the Codes of Arbitration Procedures for Customer Disputes and Industry Disputes that would affect the arbitrator list selection process. The proposed amendments would also make clarifying changes on administrative practices. The amendments stem from a report published in June, 2022, that was commissioned by FINRA’s Audit Committee of the Board of Governors (“the Lowenstein Report”). Based on an analysis of a recent case involving the arbitrator list selection process, the report made recommendations to better “reflect the neutrality of the DRS [dispute resolution services] forum and to further promote uniformity and consistency among the different DRS regions.” (See prior Bates coverage.)

Arbitrator Selection Process

Substantive aspects of the proposed amendments address potential conflicts of interest in the arbitrator selection process. The proposed amendments would:

  • Specifically state that prior to sending to the parties an arbitrator list generated randomly from the DRS roster of arbitrators, the DRS’s Neutral Management Department “shall conduct a manual review for conflicts of interest”;
  • Clarify that the Director will exclude arbitrators from the lists after a review of current conflicts of interest not identified within the list selection algorithm;
  • Codify that the Director provide a written explanation to the parties of a decision to grant or deny a party’s request to remove an arbitrator; and
  • Clarify that the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director’s own initiative, any time after the arbitrator ranking lists are sent but before the first hearing session begins.

The proposed amendments would also make procedural and clarifying changes on administrative practices, as to prehearing conferences or special hearings (by video,) and hearing sessions (in person), protection of personal confidential information (redactions); responding to claims (including amendments and third-party claims), motions practice (to ensure all parties have timely filings and notifications), dismissals (insufficient service and awards), and hearing recordkeeping (on distributing copies and executive sessions). If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice.

Conclusion

Efforts at ensuring fairness and transparency in processes can only strengthen FINRA’s dispute resolution system as a trusted venue to resolve claims. For practitioners, these detailed changes in practice and procedure must be reviewed thoroughly. Bates will keep you apprised.


About Bates

Bates stands ready to support clients with their FINRA arbitration matters. Our Securities and Financial Services Litigation practice provides retail and institutional litigation consulting and data-driven analytic support and solutions for broker-dealers, RIAs, banks and insurance companies. Our quantitative analysis and qualitative case strategy, advice, and expert testimony cover the full spectrum of investment activity. We work closely with our clients to examine the issues, markets, industry, regulatory context, historical analogy, and other experts’ work product to develop thoughtful, precise, and dispassionate analysis and testimony based on experience and judgment.

Bates also offers Arbitrator Evaluator™ – your source for FINRA arbitrator selection. It summarizes disclosure reports into one easy-to-read document, helping to streamline your arbitrator ranking and selection process. Powered by 30 years of SAC awards data and FINRA arbitration decisions, Arbitrator Evaluator saves you research time and provides essential information and links to awards for better decision making.

For more information about our services, please visit:
Securities Arbitration and Litigation Services 
Damages Analyses and Data Analytics
Arbitrator Evaluator™ - Arbitrator Ranking and Selection Tool
Expert Consulting and Testimony
Find a Senior Investor Expert
Complimentary "ABCs of Financial Schedules" CLE training for your team - Contact us to schedule.

Events  |  02-28-23

Join Bates at the 2023 IAA Compliance Conference, March 12-14, 2023 in Washington, D.C.

Join Bates at the 2023 IAA Compliance Conference, March 12-14, 2023 in Washington, D.C.

Bates Compliance is a proud sponsor of the 2023 IAA Compliance Conference, March 12-14, 2023, in Washington, D.C. This year's in-person conference will provide investment advisers with the most current information available on the changing regulatory landscape.

Join Bates at the 2023 IAA Compliance Conference, March 12-14, 2023 in Washington, D.C.

Hear Bates Compliance Managing Director Kurt Wachholz (pictured, L) speak on the panel "Ethics for Advisers: Compliance with Fiduciary Standards - Part 1" on Tuesday, March 14 from 8-9 a.m. The panel will discuss codes of ethics requirements and best practices for monitoring, testing, administering, and enforcing these policies. (CE credit available)

Join Bates at the 2023 IAA Compliance Conference, March 12-14, 2023 in Washington, D.C.

Visit our booth in the exhibit hall and connect with Bates Compliance Director Rory O'Connor (pictured, L) to learn about practical insights and best practices that can help you maintain a successful compliance program, including:

  • Annual Updating Amendment
  • Annual Compliance Meeting
  • Policies & Procedures
  • Annual Review
  • Compliance Calendar

While you're there,  pick up materials on compliance solutions for your firm, including individual and firm-wide training on the new Marketing Rule, SEC 2023 Exam Priorities, and more to help you achieve regulatory and compliance success. 

CONFERENCE DETAILS AND REGISTRATION

We are Here to Help You Succeed:

The Bates Compliance team of experienced compliance professionals offers comprehensive guidance and tailored compliance consulting solutions to our investment adviser, broker-dealer, and hybrid firm clients on an as-needed or ongoing basis, assisting them with compliance, risk mitigation, AML, supervision, and internal control functions. Contact us today to learn more.

Bates Research  |  02-20-23

SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List

Image © [Kristina Blokhin] /Adobe Stock

In late March, 2022, the SEC Division of Examinations (“Exams Division”) set forth strategic priorities for the year to restore “trust necessary for our markets to thrive," during a “time of heightened market volatility.” According to leadership, last year’s emphasis was on “emerging issues, such as crypto-assets and expanding information security threats, as well as core compliance gaps affecting retail investors.” (See Bates 2022 exam priorities summary and chart.)

Ten months later, on February 7, 2023, the Exams Division announced a new focus, reflecting a shift in priorities for 2023 based on the need to adapt to “growing markets, evolving technologies, and new forms of risk.” The emphasis in this year’s SEC priorities announcement remains on protecting retail investors. However, the new priorities reflect the agency’s latest rulemakings, compliance expectations around earlier rulemakings and further adjustments toward “a risk-based approach to examination selection that balances our resources across a diverse registrant base.” In the report, the Exams Division is emphasizing compliance with the new marketing rule, new investment company regulations on derivatives and fair valuation, expectations around Regulation Best Interest (“Reg BI”), and registered investment advisers’ duties as to private funds.

While there is overlap concerning subject matter between last year and this year (see Bates annual priorities comparison chart below), the priority shift toward ensuring compliance with the new rules has important implications for all regulated market participants. Here is our summary of the announced priorities for 2023.

SEC Leadership Messages

In the report, the SEC Exams Division leadership team reported on their efforts over the past year to: (i) respond to continued “market volatility, cyber-events, and market disruptions caused by recent bankruptcies and financial distress among crypto asset market participants;” (ii) promote compliance through risk alerts, exam deficiency communications and the instant priorities report; (iii) communicate about focused exams and enforcement sweep initiatives; (iv) engage in national and regional office proactive outreach; and (v) convey useful observations and information to the policy divisions working on rules and amendments. The leadership team also described internal organizational efforts made possible through the use of specialized working groups (in, e.g., technology, trading practices, complex products and marketing, and others,) to prevent fraud, monitor risk and better inform policy.

The SEC Division leaders also reported that, in fiscal year 2022, it examined approximately 15% of a growing registered investment adviser (“RIA”) population with more than $125 trillion in assets under management, and completed over 360 examinations of broker-dealers. Together with FINRA, the SEC said it examined nearly half of the approximately 3,500 registered broker-dealers during the course of the year.


Top Areas of SEC Focus for 2023

SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List
SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List
SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List
SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List
© 2023, Bates Group LLC

Highlighted Priorities for 2023

As can be seen in Bates’ 2023 priorities chart above (which maps out the changes in examination priorities since 2015), beyond the announced highlights, the Division expects registered entities to up their compliance efforts, particularly as to risk-based supervision, on all existing priorities. The Division highlighted the following priorities:

Marketing Rule

The Exams Division will examine for written policies and procedures covering the new rule and firms’ practices to ensure those rules are being followed. As described in a previous Bates post, advisers must lock down their documentation and reporting processes, and claims related to performance and services must be able to be substantiated. Advisers will need to be able to back up those claims. The SEC previously noted that they were concerned with, among other things: communications of hypothetical performance; reliability of performance communications; offers to expand a financial relationship; communications related to cross sales; information on investment strategies; and, in general, any adviser/intermediary/third-party distributed material conveyed to the investor.

Regulation Best Interest

The Exams Division stated that it will keep up its scrutiny of broker-dealers and advisers on compliance with their obligations under Reg BI, particularly by reviewing firm practices on management of conflicts of interest of all kinds, practices regarding considerations of investment alternatives vis-a-vis investment goals and account characteristics. The Division emphasized that it will zoom in on recommendations made on complex products, like derivatives and leveraged exchange-traded funds; “high cost and illiquid products, such as variable annuities and non-traded REITs;” and unconventional strategies, among others.  (See also, recent Bates’ post on latest insights into FINRA and SEC Reg BI and Form CRS compliance.) In addition, the Division stated that it will review “agreements that purport to inappropriately waive or limit their standard of conduct, such as through the use of hedge clauses.”

Derivatives and Fair Valuation Rules

The Exams Division said it will test whether funds, including investment companies, mutual funds, exchange traded funds and business development companies, have policies and procedures and appropriate management programs, board oversight, and adequate disclosures to address derivative risk. The report noted that more than 35% of all RIAs (more than 5500) manage nearly 50,000 private funds with more than $21 trillion in gross assets.

The Exams Division will examine funds’ compliance with the new fair value rule, including reviewing board oversight, recordkeeping, and “permitting the funds’ board to designate valuation designees to perform fair value determinations.” The Division also said it will review funds’ valuation methodologies, compliance policies and procedures, governance practices, service provider oversight, and/or reporting and recordkeeping and any adjustments that have been made pursuant to the new rule requirements.

Private Funds

Consistent with the above priorities, the Exams Division will review RIA compliance under their fiduciary obligations. The Division said it will look at compliance and risk management programs, fees and expenses, conflicts of interest, marketing and performance advertising, and the “use of alternative data.” This is in addition to reviewing compliance on custody, portfolio strategies, and investment recommendations with a particular emphasis on (i) funds that are highly leveraged; (ii) private funds managed in tandem with business development companies; (iii) those that hold hard to value investments like crypto assets and real estate; and (iv) Special Purpose Acquisition Companies (“SPACs”).

Ongoing Priorities

Carried over from last year, the Exams Division said it continues to prioritize compliance requirements on crypto assets, environment, social and governance considerations, on information security and operational resilience and on anti-money laundering compliance. 

Crypto Assets

The Exams Division will continue to focus “on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets.” The exams will focus on practices that utilize “technological and on-line solutions to meet the demands of compliance and marketing and to service investor accounts,” from online trading to robo-advisers to automated tools and platforms. The Division cautioned that its exams may reach into an “entity’s history, operations, services, products offered, and other risk factors.”

ESG

The Division will continue to prioritize exams on ESG-related advisory services and fund offerings, particularly as to whether fund disclosures are adequate and accurate, and whether recommendations on ESG products are in the best interest of the retail investor.

Information Security

The Division warned that the risk level is elevated with respect to cybersecurity threats to RIAs, broker-dealers, investment companies, municipal advisers, transfer agents, exchanges and clearing agencies. The Division said it will review recommendations, governance, disclosure and risk management policies and procedures, as well as practices to protect investor information, records, and assets.

The Division highlighted that it will review cybersecurity issues concerning the use of third-party vendors. This includes “the security and integrity of third-party products and services and whether there has been an unauthorized use of third-party providers.” That also means that the Exams Division will look at firms’ practices to prevent account intrusions and to safeguard customer records and information.

Anti-Money Laundering

Among the perennial compliance concerns the Exams Division prioritized is advisers and broker dealers’ obligations under the Bank Secrecy Act. The Division reported that due to the “current geopolitical environment and the increased imposition of international sanctions,” the risk level is elevated. As a result, the Division will be reviewing firm compliance to ensure that AML programs are tailored to firm risks based on, among other things, location, size, activities, customers, and products and services. The Division also will continue to examine the firm’s programs, policies and procedures to test whether they are “reasonably designed to identify and verify the identity of customers and beneficial owners of legal entity customers, perform customer due diligence, monitor for suspicious activity, and, file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network."

General Compliance Considerations

In the report, the Exams Division reminds registered firms of their general compliance obligations. Though not highlighted by subject matter in this year’s report, they reinforce the message that there will be no let-up in general compliance oversight while underscoring the specific areas of focus identified above. The report contains chapters for RIAs (on compliance with “core functions” as to how RIAs’ operations and practices incorporate current market factors that might impact valuation and reporting accuracy); Registered Investment Companies (on the fiduciary obligations RIAs have toward registered investment companies – particularly, with respect to compensation); and broker-dealers (on supervisory programs over, for example, electronic communications related to firm business.)

Conclusion

A good companion piece to this year’s Exams Division report would be the SEC Enforcement report issued in November 2022 (see, Bates post) which highlighted enforcement actions concerning Reg BI, complex products and strategies, conflicts of interest, and also included descriptions of important cases concerning private funds, cryptocurrency, cybersecurity and ESG. Taken together, firm leadership can get a good sense for how many ways and how quickly compliance failures could blossom into enforcement actions.

On subject matter, this year’s Exams report offers few surprises, as the top priorities relate to recent rulemakings (i.e., marketing rule, fair valuation and derivatives) and not-so-recent prior rulemakings that the SEC expects firms to have absorbed into their compliance programs and culture (i.e., Reg BI). As to expectations around adviser and broker-dealer standards post-enactment of Reg BI, it seems clear that similar considerations now permeate private funds practice as well. This is consistent with observations made last year that the Division’s priorities reflect new rules. As this year’s Bates chart shows, compliance regulation continues to expand to cover more products, more services, and more perceived risk. Bates will continue keep you apprised.

To discuss support for these regulatory and compliance priorities, please contact Bates today:

Contact

SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List

Alex Russell

Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com

971-250-4353

SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List

Hank Sanchez

Managing Director, Bates Compliance

hsanchez@batesgroup.com

504-450-9632 

SEC 2023 Exam Priorities Comparison Chart and Summary: New Marketing Rule, Reg BI and Private Funds Top this Year’s List

Rhonda Davis

Managing Director, Bates Compliance

rdavis@batesgroup.com

For more information concerning Bates Group's practices and services, please visit:

Bates Compliance 

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Events  |  02-14-23

SIFMA C&L Future Leaders CLE Program: “Lessons Learned from Crisis in the Financial Markets”

Bates Group and the Future Leaders of SIFMA's Compliance & Legal Society invite you to participate in an insightful discussion on lessons learned from crises in the financial markets followed by a networking reception.

Register today to join rising talent from across the compliance and legal profession on Wednesday, February 15 from 3:30 - 6:30 p.m. ET at Debevoise & Plimpton's offices in New York City. Bates Director and Expert Greg Kyle (pictured above) will be speaking on the panel.

CLE credit will be available for this program.

Program Details and Registration

Speakers:

Barbara Armeli, Managing Director & Chief Compliance Officer, Charles Schwab & Co.

Andrew Ceresney, Partner, Debevoise & Plimpton

Greg A. Kyle, Director, Consulting & Testifying Expert, Bates Group

Matthew Morningstar, EVP & Head of Litigation and Regulatory Affairs - Compliance, Legal and Risk, LPL Financial

Moderator:

Matt Colongeli, Executive Director, Head of the Consumer Office, Morgan Stanley

Bates Research  |  02-13-23

Spotting and Reporting Romance Scams

Image © [Artur] /Adobe Stock

Romance scams are a growing concern, as evidenced by The Federal Trade Commission’s report that romance fraud is one of the most costly forms of consumer fraud in the United States.

As AML and compliance professionals, we all know how the scam works, including these typical warning signs:

  • The other person is very quick to profess their love to the targeted individual.
  • They are constantly asking for financial help, such as wiring money or providing gifts.
  • They make excuses about why they cannot meet in person.
  • They will not video chat with you.

However, how do you as a compliance professional spot romance scams?

The goal is to identify any unusual or suspicious transactions that could indicate romance scams. These could include:

  • Large deposits, withdrawals, and transfers in the victim's accounts.
  • Payments made to third parties with no apparent connection to the account holder, such as online payment services or overseas entities.
  • Wire transfers that appear to be out of character or done without the account holder's knowledge.

Elderly people are particularly vulnerable to romance scams. Senior  romance scam victims may be less likely to report being scammed out of fear of embarrassment, or they may not even realize they have been taken advantage of until it is too late. Therefore, it is increasingly important to monitor accounts of elders and vulnerable persons more closely for any activity that is not considered normal transaction activity.

Elder Exploitation Red Flags and Bank Secrecy Act Obligations

In an advisory alerting financial institutions of “rampant fraud and abuse targeting older adults,” the Financial Crimes Enforcement Network (FinCEN) highlighted new behavioral and financial red flags last year to help in the identification, prevention, and reporting of suspected elder financial exploitation (“EFE”). 

As detailed in our reporting last year,  FinCEN at that time reminded financial institutions that it is critical for “customer-facing staff to identify and consider [ ] behavioral red flags when conducting transactions involving their older customers,” and that the details should be incorporated in SARs filings. They listed twelve behavioral red flags in all, among them sudden and unusual changes in contact information, an unusual degree of fear or submissiveness by a client toward a caregiver, and unexplainable or unusual account activity. FinCEN listed an additional twelve financial red flags, including sudden or frequent non-sufficient fund activity, customer purchases of large numbers of gift cards or prepaid access cards, and uncharacteristic attempts to wire large sums of money, among others.

The FinCEN advisory also reminds financial institutions of their Bank Secrecy Act obligations, including SARs reporting, currency transaction reporting, reports of cash payments over $10,000 received in a trade or business, foreign bank and financial accounts reporting, and registration of money services business, among others. As FinCEN Acting Director Himamauli Das then stated: “Financial institutions serve on the frontlines in protecting their older customers’ finances, and can play a critical role in helping to identify, prevent, and report suspected elder financial exploitation. Financial institutions’ vigilance matters. Their reporting matters.”

Conclusion

Money laundering investigators should always be aware of romance scams, their indicators, and potential victims. AML and compliance officers have an obligation to monitor and report suspicious activities. Taking the time to investigate any suspicious activities or transactions can help stop romance scammers in their tracks and prevent individuals from falling victim to fraud.  Awareness is key to stopping romance scammers in their tracks and keeping vulnerable individuals safe.

 

How Does Bates Help?

Bates Group is committed to working with your firm to develop strong AML and compliance programs for banks, broker-dealers, money services business and digital asset firms, including virtual and cryptocurrency firms. Learn more about how we can help strengthen your AML and compliance program at the following links below:

Compliance & AML Solutions

MSB, FinTech and Cryptocurrency – Home

Bates Compliance – Home

Compliance & AML by Entity/Industry

For Litigation support, including elder and senior investor expert consultation and testimony, please visit:

Litigation

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Bates Research  |  02-10-23

FINRA and SEC Increase Focus on Reg BI Compliance – What You Need to Know

Images © [Kristina Blokhin, Andriy Blokhin] /Adobe Stock

In its latest annual report on examinations and risk monitoring, FINRA offered the regulator’s perspective on strengthening compliance programs on Regulation Best Interest (“Reg BI”) and the corresponding Form CRS. FINRA included observations from its compliance reviews on each of the core duties under the two-plus-year-old rule, including addressing the care in handling recommendations, conflicts of interest, required disclosure of material facts to retail clients, establishment of supervisory policies and procedures, and all aspects related to preparing a Form CRS. These areas were also the focus of an SEC Division of Examination Alert on broker-dealer compliance with Reg BI and in the SEC’s 2023 Priorities list released earlier this month.

A few weeks prior to the issuance of the FINRA annual report, Bates held a webinar on the same subject, joining colleagues from the legal and compliance community to delve deeper into how broker-dealer firms—including small- and mid-size firms—are adapting their compliance programs in light of repeated communications[1] by the SEC and FINRA that Reg BI will be a focus of their examinations. The insights offered from both the regulatory officials and private consulting community offer perspective on what lies ahead. Here are the takeaways.

 

FINRA 2023 Report: Highlights on Reg BI and Form CRS

On Reg BI, the FINRA report references the four-duty standard (duties on care, conflicts of interest, disclosure, and compliance) under the regulation. Under the categorical heading “Communications and Sales,” FINRA poses questions, based on examinations to date, prompting broker dealers to consider whether they are covering their obligations under each of these duties.

Reg BI Duty of Care

Under the Reg BI duty of care, FINRA asks broker dealers to consider whether the firm is exercising an appropriate level of diligence, care and skill before making recommendations to retail investors.

  • Observations: FINRA observed that firms made recommendations that failed the duty of care standard that were based on inadequate consideration of product risks, costs, account types, the investor’s profile (particularly with respect to retirement accounts,) and alternative products, among others. In a list of “effective practices,”
  • Recommendations: FINRA suggested that firms include in their procedures and processes (i) the costs and reasonably available alternatives to recommended products; (ii) outlines of documentation practices; (iii) limitations on complex or higher-risk products; (iv) supervisory steps for reviewing recommendations; (v) heightened scrutiny of investments for retail customers (including mitigation and review processes to identify and categorize product risk and complexity).

Reg BI Conflicts of Interest

Under the Reg BI duty on conflicts of interest, FINRA asked broker dealers to consider whether the firm’s policies and procedures are adequate to identify, monitor for, disclose, mitigate or eliminate any conflicts.

  • Observations: FINRA cited firm failings around conflicts arising from compensation incentives, investment strategies (such as only making recommendations of the firm’s proprietary products,) and material limitations on those strategies, that caused “an associated person or the firm to place their interests ahead of the retail customer’s interest.” (The agency provided a “non-exhaustive” list of examples of these practices.)
  • Recommendations: FINRA also asked firms to ensure their supervisory procedures (including monitoring for, and imposing penalties on, associated persons who fail to manage for conflicts) are adequate to the task. Among highlighted practices, FINRA suggested that firms use conflicts committees or create “matrices” that “address conflicts across business lines and how to eliminate, mitigate or disclose those conflicts;” and “broadly prohibit” all sales contests.

Reg BI Duty to Disclose

Under the Reg BI duty to disclose, FINRA asked firms to consider whether their disclosures fully and fairly contain all material facts as to the firm’s relationship with their retail clients.

  • Observations:  Examples of representative’s failures to adequately disclose transaction fees and costs, investment strategies and other material information) at the time of the transaction. FINRA also prompted firms to consider the adequacy of their controls on electronic disclosure and updates to disclosures around changed circumstances concerning products and recommendations.
  • Recommendations: FINRA suggested that firms implement systems for tracking delivery of Form CRS and Reg BI-related documents to retail investors and retail customers in a timely manner and a process to memorialize delivery of required disclosures “at the earliest triggering event.”

Reg BI Duty of Compliance

Under the Reg BI duty of compliance, FINRA questioned firms on whether their policies and procedures (including written supervisory procedures and the provision of staff training) were tailored to address the firm’s retail customers and product and service offerings.

  • Observations: FINRA underscored that policies and procedures must be kept updated (particularly for supervision) and tested to ensure adequacy. FINRA emphasized that firms should consider how they will demonstrate (i.e. document) compliance with these requirements.
  • Recommendations: FINRA suggested that firms (i) monitor associated persons’ compliance on a monthly basis (at least), and (ii) create systemic alerts for conflicts, high risk products and “account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest.”

FINRA also prompted firms to periodically update their Form CRS to ensure that it is consistent with changes to its business of product offering and ensure that procedures adequately “track and memorialize” the delivery of disclosure documents to retail customers.

SEC Risk Alert

On January 30, 2023, the SEC Division of Examinations issued a Risk Alert on broker dealer compliance deficiencies with Reg BI which mirror many concerns raised in the FINRA Annual Report, including failures to have tailored written policies and procedures, continued use of pre-Reg BI surveillance and training programs, insufficient compliance programs on identifying and mitigating conflicts of interest, and disclosure failures. The SEC reiterated their focus on Reg BI in their 2023 Priorities Report released this week.

Find a Reg BI Expert

Bates Webinar on Reg BI Compliance

Bates and NICE Actimize shared recent experiences with broker-dealer firms navigating compliance with Reg BI.

Rhonda Davis, Managing Director of the BD/RIA Compliance Practice at Bates Group, offered practical advice for responding to regulator expectations and highlighted the “process gaps” that exist for many firms, particularly small- and medium-sized firms. First, she recommended establishing a conflicts committee (or, depending on size, a conflicts officer) to look across all the business lines and consolidate a list of all potential conflicts into an inventory of identified conflicts and how the firm intends to mitigate or eliminate them. This is what regulators are looking to see, she said.

Second, Ms. Davis recommended a more robust effort on disclosure, beyond reliance solely on Form CRS (or, for dual registrants, in combination with Form ADV). She sharedthat the limitations on these forms (page length, required scripts) does not provide enough room to disclose all identified conflicts or to adequately describe products. She noted, “We’ve helped firms write an additional disclosure document such as a ‘Broker Dealer Services Disclosure Summary’ in which we evaluate identified conflicts, identify sources of revenue (e.g., trading execution, mark-up or -down costs, clearing firm costs), and disclose conflicts that may not be disclosed on Form CRS or ADV.”

Third, she recommended customized training relevant to the firm. She cautioned that training by a third-party service provider will usually include some standard elements but may lack the specificity of what is required for a particular firm or for the products they sell. She said, “It is clear that the SEC and FINRA are now looking for very specific training, particularly in the alternative space.” This is echoed in issues that come up in reviewing policy and procedure. She went on to note that “some firms tend to buy off-the-shelf manuals, so what they get is largely templated language that describes the regulation, but fails to specify the who, what, when, where and how the policy is actually implemented and how the activity is supervised.”

Jan Folena (Partner, Stradley Ronon) honed in on the latest lessons from recent enforcement actions, sharing insights on the four Reg BI standards.

  • On duty of care, she noted that a recent enforcement action looked at whether the registered representatives fully understood the product they were selling—the benefits, risks, costs and whether the firm offered alternative products. “Unlike the fiduciary requirement for advisers,” she said, “Reg BI looks at the circumstances around the recommendations you are making at the point of sale.”
  • On conflicts, she urged firms to (i) identify the areas that create a real or potential conflict, and (ii) understand that the requirement to mitigate any conflict is risky for firms because the term “mitigate” is not defined in the broker-dealer context. She recommended that firms consider avoiding compensation thresholds, minimizing compensation incentives, potentially capping credit to avoid favoring one product over another, but to be careful about limiting investor choices.
  • On disclosure, she emphasized that representatives have a duty to disclose material facts about the scope and terms of the relationship with the client, conflicts of interest and any material information about the security being offering including material changes in circumstance—all at the time of sale.
  • On the Reg BI duty of compliance, she observed that “compliance violations go hand-in-hand with substantive violations of a rule.” She pointed to the one enforcement case brought to date to emphasize that regulators are looking to see whether a representative understands the product they are recommending. If the SEC concludes that they didn’t understand the product, she said, the representative is out of compliance with the duty of care and SEC will look to flag the firm for a compliance violation. She urged representatives to be able to demonstrate document that they “understand the product, why it was appropriate for the client, and what the alternatives are.”

Anand Maheshwari, Senior Product Manager, NICE Actimize, concentrated his remarks on how automation can help firms comply with Reg BI requirements. In particular, he asserted that automation can help with creating an evidentiary trail to back up a recommendation and show that the representative did what they had to do at point of sale. He said that “automated measures can help compliance officers answer whether advisers recommended x, understanding their customers’ risk tolerances and other circumstances.” He stated that these processes can help to “produce written supervisory procedures, inform audit reports, provide access to product alternatives when recommendations are being made, and create alerts to stop a suspect transaction.” He also suggested that automated processes can help supervisors to better understand training needs.

Conclusion

The FINRA report and the SEC Examinations Division observations and report are must-reads for compliance officers looking to address the full scope of their responsibilities. As to Reg BI, the FINRA and SEC guidance reflects the continuing complexity of complying with the rule more than two years after implementation. That complexity shows up in the Bates-NICE discussion which highlighted that there remains significant uncertainty about how to satisfy the requirements and how to demonstrate that compliance. Shoring up process gaps, making greater disclosures beyond Form CRS, conduct product training , and using technology to evidence that the firm offered alternatives are some recommended steps for firms to consider.  Bates will keep you appraised.


[1] The SEC issued two bulletins since Reg BI went into effect: one in March, 2022 on broker dealer account recommendations to retail investors, and one in August, 2022 on conflicts of interest. That interpretive guidance was described recently by Aaron Ellias, Senior counsel, SEC Division of Investment Management in an SEC Compliance Outreach National Seminar held in December. He highlighted the following: the “first bulletin reflects staff understanding that selection of account type is an extremely consequential decision for retail investors, particularly given the extent to which characteristics of a particular account type can impact its appropriateness for a given investor and their objectives; we also understand that this decision can be associated with potentially significant conflicts of interest.” The first bulletin’s key takeaway was that “the firm or financial professional have a reasonable basis for their account recommendation based on a reasonable understanding of the retail investor’s profile, as well as the account characteristics.”

Mr. Ellias stated: “the second bulletin addresses the fact that all broker dealers and investment advisers and their financial professionals have at least some conflicts of interest with their retail investors … economic or other incentives to recommend products or services or account types that provide more revenue or benefits for the firm, their financial professionals even where those recommendations may not be in the best interest of their retail investors.” 

How Bates Compliance Can Help

Bates Group’s Compliance team helps firms navigate and achieve compliance with Reg BI and Form CRS, including:

  • Disclosure obligations
  • Duty of care obligations
  • Conflicts of interest obligations
  • Additional compliance obligations

We can assist you with:

  • Developing and reviewing Reg BI Client Relationship Summary (“Form CRS”)
  • Conflicts of interest assessment
  • New product approval processes
  • Drafting new policies and procedures
  • Training for compliance and sales professionals on how to comply with Reg BI and Form CRS

To speak with a Bates representative about your Reg BI needs, please contact us today.

Contact Bates

Compliance and Regulatory Alerts  |  02-07-23

SEC Division of Examinations Announces 2023 Examination Priorities

The Securities and Exchange Commission’s Division of Examinations has just released its 2023 examination priorities report, focusing on New Investment Adviser and Investment Company Rules; RIAs to Private Funds; protections for Retail Investors and Working Families; Environmental, Social, and Governance (ESG); Information Security and Operational Resiliency; and Emerging Technologies and Crypto-Assets. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. You can read the press release here

Stay tuned for our annual commentary and chart, coming soon, on the SEC's 2023 exam priorities and how they may impact your legal, regulatory and compliance matters.

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary

SEC 2022 Exam Priorities with Bates Chart and Summary

Bates News, Events  |  02-07-23

Bates Managing Director Brandi Reynolds to speak at SWIFS Lunch and Learn February 14, 2023

Bates Group AML Compliance and Virtual Assets Managing Director Brandi Reynolds, CAMS-Audit, will appear at the upcoming SWIFS Lunch and Learn "Fireside Chat: Crypto in the News" - Tuesday, February 14, 2023, presented by Southeastern Women in Financial Services.

This 90-minute virutal program will be moderated by Stefanie Wayco (Shareholder, Maynard, Cooper & Gale), and joining Brandi on the panel will be Shannon Eng (Head of Financial Crimes Compliance, Coinbase).

Bates Research  |  02-06-23

Understanding NY DFS Rule 504

Image © [Alena Yakusheva] /Adobe Stock

by Brandi Reynolds, Managing Director

Are you a regulated financial institution that operates in New York? If so, it is important to familiarize yourself with the New York State's Department of Financial Services (DFS) Rule 504. The rule was put into place in 2017 and requires companies to establish anti-money laundering (AML) programs that meet the DFS’s specific and strict requirements, and to certify compliance with the regulation annually to the DFS.

What Is NY DFS Rule 504?

The purpose of DFS Rule 504 is to prevent money-laundering activities from occurring within the state of New York. It requires businesses that operate in the state to have AML policies and procedures in place. This includes having designated personnel responsible for implementing these policies, as well as training employees on how to identify suspicious activities and report them accordingly. Additionally, businesses must have systems in place to monitor transactions and track customer information.

The rule also requires businesses to perform customer due diligence (CDD) when onboarding new customers or clients. This involves collecting certain pieces of information about the customer, such as name, address, date of birth, and other identifying information. The purpose of CDD is to verify that the customer is who they say they are, as well as ensure that they are not engaging in any illegal activities or being used by another party for criminal purposes. Businesses must also perform ongoing monitoring of their customers' accounts to ensure that nothing suspicious is taking place. This monitoring must be continuously tested, tuned, and refined to meet the business’s risks. Finally, businesses must maintain records of all transactions so that they can be reviewed periodically for compliance with DFS Rule 504 regulations.

Why Is It Important To Comply With DFS Rule 504?

It is important for businesses operating in New York State to comply with DFS Rule 504 because failure to do so could result in serious penalties or even revocation of their license. Non-compliance could lead to fines or other disciplinary action taken against the business by the regulator responsible for overseeing their operations.  Regulated Institutions should submit the required certification covering the prior calendar year by April 15 of each year via the DFS Portal.

Conclusion

NY DFS Rule 504 is an important set of regulations designed to protect consumers from money laundering activities. It requires businesses operating within the state to have anti-money laundering programs in place and mandates certain procedures such as customer due diligence and ongoing account monitoring be performed regularly by these businesses. Failing to comply with these regulations could result in serious penalties or even revocation of a business’s license or permit which could damage its reputation and put it at risk for civil litigation if customers believe their data was not properly secured or protected from misuse or theft due to lack of compliance with these regulations. For this reason, it is essential that businesses operating within New York understand and comply with NY DFS Rule 504 requirements annually if they want to remain compliant and protect themselves from potential legal action or financial penalties down the road.

How Bates Helps:

Bates Group's consultants have had proven success in helping regulated financial institutions comply with NY DFS 504 requirements. We have decades of experience, making us uniquely qualified to help your institution meet these requirements quickly and efficiently. Our team will work closely with you to understand your business needs and create an audit plan that is tailored specifically for you. We will then conduct a comprehensive review and assess the effectiveness of your compliance program. Contact us today to learn more!

Contact Bates

Bates News  |  02-03-23

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Erin Baskett, CPA, CGMA

Erin Baskett is a Bates Testifying and Consulting Expert and the founder and CEO of Sine Qua Non Global. She is a financial, compliance, and operational executive with significant experience in accounting, auditing, crypto, business consulting, advisory, private placements, investment banking, traditional brokerage, capital markets, fintech and financial services, with a solid knowledge of U.S. GAAP, tax, IFRS, FINRA, NFA and SEC rules in companies with both domestic and international presence serving both retail and institutional.

Over the past 10+ years, Erin has served as CEO, CCO, COO and/ or CFO across nearly a dozen firms congruently covering traditional brokerage, advisory, fintech and crypto/ NFT. She holds multiple certifications, including Certified Public Accountant (CPA), Chartered Global Management Accountant (CGMA), and Certified Human Resources Specialist (CHRS), and regulatory licenses. 

Full Bio

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Patrick Cox

Patrick Cox is a Bates Testifying and Consulting Expert based in San Diego, California, with extensive experience in Retail Securities, Investigations, Cybersecurity, Privacy, and Compliance. He also advises on product due diligence matters, including cryptocurrencies, for regulated entities. Prior to joining Bates, Patrick was Executive Vice President and General Counsel for Advice, Litigation and Regulatory Strategy with LPL Financial, where he was responsible for all litigation, regulatory, and legal advice matters for the firm’s business units. He and his team also conducted internal investigations for the firm’s integrity hotline and other matters. Patrick was an ex-officio member of the firm’s Risk Oversight Committee for many years and provided ongoing advice to members of the Management Committee with reports to the Board of Directors on special issues. 

Patrick spent 20 years representing Morgan Stanley, Ameriprise Financial, and LPL Financial and their employees, and he handled hundreds of matters ranging from wrongful termination, raiding and recruiting, retail arbitrations, class actions, shareholder actions and internal investigations. He also worked on many due diligence and acquisition issues, both at LPL and Ameriprise. Prior to working in-house at Morgan Stanley, Patrick served as a civil litigator, an Adjunct Associate Professor at Fordham University School of Law, a law clerk at the U.S. Court of International Trade, and an Assistant District Attorney in Manhattan. An experienced executive and advocate, he received his Juris Doctor from Fordham and his Bachelor of Arts in English from Loyola Marymount University.

Full Bio

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Connie Fenchel, CAMS

Connie Fenchel is a Bates Strategic Advisor and Expert with more than 45 years of government and private sector experience in law enforcement, financial crimes, regulatory compliance, anti-money laundering (AML), and sanctions. Her expertise includes independent reviews and investigations, risk assessments, domestic and international training, expert testimony, and AML program development and remediation.

A former Deputy Director in the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury, Connie led the FinCEN effort to administer the recordkeeping, reporting, and AML provisions of the BSA and USA PATRIOT Act. Before working at FinCEN, Connie has a lengthy career with the U.S. Customs Service in several senior-level positions. Upon retirement from the government, Connie established AML Experts, Inc., an independent consulting firm assisting banks and non-banks in complying with AML laws and regulations. She has worked with hundreds of banks, credit unions, cryptocurrency companies, payment processors, money transmitters, precious metal dealers and others providing consultation and training.

Full Bio

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Alison Jimenez, CAMS

Alison K. Jimenez is a Bates Testifying Expert who utilizes her extensive background in the securities industry to consult and provide expert witness testimony on complex financial matters involving Compliance and Anti-Money Laundering. Based in Tampa, Florida, Alison has experience providing quantitative witness testimony in retail securities litigation matters, having testified at FINRA arbitration, private arbitration and federal court proceedings regarding securities analysis and account activity.

She has been retained as an expert on AML issues in federal and state courts, arbitrations, Investor-State Dispute Settlement, and regulatory enforcement actions on a variety of financial crime issues including market manipulation, corruption, Ponzi schemes, and high frequency trading. Alison has also served as an independent auditor to plan and conduct AML audits of financial institutions, verify compliance with PATRIOT Act, Suspicious Activity Report filing requirements and other rules/laws. She holds a master’s degree in economics and is a Certified Anti-Money Laundering Specialist and a Cryptocurrency Tracing Certified Examiner.

Full Bio

Meet Bates Testifying Experts in Blockchain and Digital Assets, including Crypto and Virtual Currencies

Annemarie McAvoy

Annemarie McAvoy is a Bates Testifying and Consulting Expert in financial crimes, including Anti-Money Laundering (AML), Sanctions, Cryptocurrency, Anti-Bribery and Corruption compliance, internal investigations, fraud detection and prevention and crisis management. She has held in-house legal and compliance positions at Citigroup and Morgan Stanley and was a Senior Manager in Ernst & Young’s Financial Crimes Compliance Unit. Early in her career, Annemarie was an Assistant U.S. Attorney for the Eastern District of New York and, later, specialized in large financial crime cases at the Kings County (NY) District Attorney’s Office Rackets/Investigations Unit. She teaches classes on financial crime at Columbia’s Graduate School of International and Public Affairs and has also taught as an adjunct professor at Fordham Law School.

Annemarie has appeared for years as an on-air legal expert for major television and radio networks, is sometimes quoted by media outlets such as the Associated Press and moneylaundering.com, and authored articles published in forbes.com, foxnews.com and Family Security Matters. She is a member of the Association of Anti-Money Laundering Specialists (“ACAMS”) and the NYC Bar Association’s Compliance Committee and its Financial Crimes Subcommittee, as well as its Small Law Firm Committee. She is also a member of the Global Digital and Cryptocurrency Association (“Global DCA”) and its Public Policy and Regulation Committee. Annemarie has successfully completed the Global DCA’s Digital Asset Professional Certification Program, and she is a member of the NJ Digital Assets Working Group.

Full Bio

To make an appointment with one of our 175+ testifying experts covering over 250 unique areas of expertise, please contact Bates today.

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Bates Research  |  02-02-23

NYDFS Guidance on Digital Asset Custody – What It Is and How to Comply

Image © [vlad_g] /Adobe Stock

By John Ashley (CIPP/US, CCRS, CRCMP), Senior Consultant

Background

On January 23, 2023, the New York Department of Financial Services (NYDFS) issued new guidance on regulated entities which custody digital assets. The guidance sets forth wide-ranging requirements for these entities, as well as strict limitations on how these entities can use custodied digital assets. This guidance comes at a time of uncertainty for digital assets and cryptocurrencies. 2022 saw the failure of multiple firms dealing in these assets, such as Voyager Digital, Celsius, BlockFi, and (most notoriously) FTX. The guidance issued by NYDFS is likely the first step in a move across regulators to tighten the regulation and supervision of digital asset firms and presents new compliance challenges for these firms.

To Whom Does the Guidance Apply?

The guidance applies to all entities which are regulated by NYDFS, either under its BitLicense regime or as limited purpose trust companies, and which take custody of their customer’s digital assets. The guidance refers to these entities as Virtual Currency Entities that act as custodians, or VCE Custodians.

The guidance does not apply to regulated entities which do not take custody of customer digital assets.

What Does the Guidance Require?

The guidance is intended to offer clarity in regard to NYDFS’s expectations for regulated entities—their custody procedures, processes, practices, and controls over customer digital assets. These expectations can be broken down into four areas:

1. Accounting Controls

The guidance requires that customer digital assets are separately accounted for and segregated from corporate assets. Notably, this applies to both on-chain (e.g. keeping customer assets in a separate wallet from corporate assets) and off-chain (e.g. separated on a VCE Custodian’s internal ledgers). This requirement effectively means that NYDFS requires that customer assets not be commingled with other assets, like commingling prohibitions found in Massachusetts and Nevada regulations. NYDFS notes that it will only accept two methods by which customer assets are separated from corporate assets. VCE Custodians can opt to keep each customer’s assets in a separate wallet/ledger account under that customer’s name. Alternatively, VCE Custodians may keep assets in an omnibus wallet/ledger account which contains only custodied customer assets; however, if a VCE Custodian opts to use this method, it must have controls which can establish an audit trail to identify individual customer assets and transactions. VCE Custodians must establish written policies and procedures regarding these controls and be prepared to reconcile on-chain activity with internal ledger accounts at any time, upon the request of NYDFS.

2. Use of Custodied Digital Assets

The guidance requires that when a VCE Custodian takes custody of a customer’s digital assets, it will do so only for the purpose of custody, and not for any other purpose. The guidance explicitly bans the use of customer funds as collateral for corporate loans, or their use as extension of credit (a major focus of the allegations against FTX). Finally, the guidance expressly requires VCE custodians to act on customer instructions—by extension, this requires VCE Custodians to honor a customer’s withdrawal request at any time. (Blocking customer withdrawals has been a characteristic of all the major cryptocurrency bankruptcies of 2022 and may have lost hundreds of thousands of customers access to billions of dollars in assets).

3. Sub-Custodial Arrangements

NYDFS views the use of sub-custody agreements by VCE Custodians as a material change in the VCE Custodian’s business model. As such, the VCE Custodian is required to go through the NYDFS’s approval process prior to using a sub-custody arrangement. As with other material business model changes, NYDFS expects to receive and review the VCE Custodian’s updated risk assessment and policies and procedures relative to this change before considering approval. In addition, NYDFS will require the VCE Custodian to submit the proposed service agreements governing the arrangement. This is by no means an exhaustive list, and VCE Custodians can expect that NYDFS will require additional documentation and information during the approval process.

4. Disclosures

Disclosures provided by VCE Custodians to their customers must (i) contain the terms and conditions associated with the VCE’s products and services; (ii) must be provided in writing; and (iii) must be accepted prior to entering into an initial transaction with a customer. The disclosures must make clear that the relationship is purely custodial, and it should include details regarding the VCE Custodian’s controls for the segregation and accounting of customer assets, how the VCE Custodian will use the custodied assets, and the limitations on such use. Disclosures should also note, as applicable, the use of sub-custody arrangements and any associated risk.

How Companies Can Comply with the Guidance

Firms operating as VCE Custodians in New York should assess their policies, procedures, and controls surrounding the custody of customer assets to ensure they are compliant. This assessment should include a review of procedural documentation, documentation of any unwritten or poorly described controls, and an assessment of the firm’s operational model. Firms should ensure that their custodial model meets one of the two forms acceptable to NYDFS and that their disclosures are appropriately up to date and compliant. In addition, firms should assess their compliance resources and their ability to comply with and manage an examination by NYDFS, and they should include in this assessment the possibility of ad hoc visitation or requests by NYDFS to demonstrate compliance, including the production of asset tracing and audit trails.

About the Author:

NYDFS Guidance on Digital Asset Custody – What It Is and How to Comply

John Ashley (CIPP/US, CCRS, CRCMP) is a Senior Consultant in Bates Group's Money Services, Fintech and Digital Assets Compliance and AML Practice. He can be reached at jashley@batesgroup.com.

About Bates:

Bates Group’s MSB, FinTech, and Virtual Assets practice offers guidance and services for Money Services Businesses and financial institutions, fintech, digital asset, including virtual and cryptocurrency firms. Our subject matter experts work directly with firms and counsel to design and implement policies and programs and to ensure they are AML-compliant.

Our MSB and AML Teams help obtain and maintain Money Transmitter Licenses nationwide, including BitLicense and engage with firms to development and support BSA/AML/OFAC Program Development, Risk Management, Training, Advisory Services, and Independent Reviews.

Contact Us Today to Learn More

Bates Research  |  01-24-23

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

Image © [hqrloveq] /Adobe Stock

In its 2023 annual report on examinations and risk monitoring, FINRA provides its latest overview of firm compliance obligations. Divided into five discrete topical categories—financial crimes (a new breakout category this year), firm operations, communications and sales, market integrity, and financial management—FINRA’s priorities are further delineated into numerous subcategories. The Annual Report includes findings and observations from the recent oversight activities of FINRA’s Member Supervision, Market Regulation, and Enforcement programs, and:

  • Identifies the relevant rule(s);
  • Highlights key considerations for member firms’ compliance programs;[1]
  • Summarizes noteworthy findings or observations from recent oversight activities;
  • Outlines effective practices that FINRA observed through its oversight activities; and
  • Provides additional resources that may be helpful to member firms in reviewing their supervisory procedures and controls, and fulfilling their compliance obligations.

As always, FINRA encourages member firms to use the Annual Report (and its other published resources) to, among other things, (i) assess the applicability of the provided information to a firm’s business model; (ii) incorporate relevant topics into firm risk assessments; (iii) identify gaps in existing compliance programs; and (iv) improve training. The 24 substantive subcategories offer up important guidance. In this article, Bates summarizes FINRA’s 2023 Annual Report priorities. Our annual chart offers insight into how newly observed risks have added to and affected those priorities year over year.

The Annual Report identifies FINRA’s top examination priorities for member firms:

  • Adherence to their obligations pursuant to Regulation Best Interest and Form CRS[2]

  • Compliance with best execution obligations and disclosure regulations on order handling in certain stocks and listed options
  • Current regulatory obligations regarding complex products and options communications, and disclosure (including on crypto asset products) and supervisory controls related to the opening of options accounts;
  • Cybersecurity risk management (FINRA stated that it has specialized teams devoted to reviewing firm controls, conducting investigations of cyber-related fraud, and examining crypto-asset activity.) At the recent New York SIFMA C&L Society luncheon on the FINRA 2023 Priorities—featuring Robert Cook (President & CEO) and Greg Ruppert (EVP, Member Supervision)—it was relayed that firms should consider where they are using technology that it did not use before, including services offered via Application Programming Interface (APIs) and outside of the firm. Members should also review the Division of Examination’s alert on identity theft and FINRA’s Regulatory Notice 22-29 on ransomware. FINRA also emphasized that cybersecurity is not just the C.I.S.O.’s responsibility.
  • Obligations as to mobile apps, specifically whether firms adequately disclose or distinguish “between products and services of the broker-dealer and those of affiliates or other third parties”
  • Compliance with Consolidated Audit Trail reporting requirements including “timely submission of reportable events and corrections, reporting complete and accurate CAT records, and effectively supervising third-party vendors.”
 

[1] FINRA’s considerations are intended to serve as a possible starting point in considering a firm’s compliance program related to a topic. Firms should review relevant rules to understand the full scope of their obligations.

[2] In an upcoming article, Bates will take a deeper look at FINRA’s observations from its compliance reviews on each of the core duties under the two-year-old rule, including addressing the care in handling recommendations, conflicts of interest, required disclosure of material facts to retail clients, establishment of supervisory policies and procedures, and matters regarding Form CRS preparation.


Top Areas of FINRA Focus for 2023

See highlights of FINRA’s continuing and emerging concerns on our annual comparison chart below, which keeps track of articulated priorities from year to year. (Items highlighted in gold are new for 2023; summary continues after chart.)

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities
FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities
FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities
FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities
FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

© 2023 Bates Group LLC
Source: 2023 Report on FINRA’s Examination and Risk Monitoring Program
(Compiled by Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations)

New Format and New Topics

The Annual Report lists member firm compliance obligations by topic now under five categories. Financial crimes, the newest category, incorporates previous sub-topics (e.g., cybersecurity and technology governance under SEC Regulation S-P) concerning compliance policies and procedures to safeguard customer records and information, as well as FINRA rules on business continuity planning and supervision.

This new category also incorporates “anti-money laundering, fraud and sanctions” obligations concerning policies and procedures required under FINRA rules (e.g., detection, suspicious activity reporting, testing, training, and customer due diligence) for compliance under the Bank Secrecy Act (BSA) and its implementing regulations (e.g., maintaining a Customer Identification Program (CIP); verifying the identity of legal entity customers; etc.). The Report notes that member firms should stay apprised of progress being made to implement the Anti-Money Laundering Act of 2020.

A new sub-topic for FINRA, under the category financial crimes, focuses on manipulative trading, which implicates rules on impermissible trading practices (e.g., use of deceptive devices, publication of transactions and quotations, order entry and execution practices.) The new sub-topic also emphasizes supervisory obligations to ensure a process for the review of securities transactions “reasonably designed to identify trades that may violate the Exchange Act, SEC rules or FINRA rules prohibiting insider trading and manipulative and deceptive devices.”

At the SIFMA luncheon, FINRA’s Ruppert discussed manipulative trading and what prompted the change. He shared that there is an increase in wash sales and front running activity. He suggested that member firms look at manipulative trading from the perspective of behavioral analytics, starting with alerts and complaints and looking for commonalities in the data, including, for example, common phone numbers, IP addresses, and branches used. He emphasized the importance of "stepping up controls, investigative work, SARs, risk monitoring, and reach-outs to FINRA.”

The remaining new sub-topics fall under the general category of market integrity and include FINRA rules on (i) fixed income and fair pricing that apply to transactions (including fixed income and municipals) generally requiring that a dealer charging a mark-up or mark-down do so based on the prevailing market price; (ii) reporting and order handling of fractional shares; and (iii) short sale and closeout requirement exceptions for bona fide market making activity.

Conclusion

FINRA’s Annual Report provides important guidance for compliance officers. This latest Annual Report reinforces the reach and depth of FINRA’s rules and brings to light practices member firms can consider for maintaining effective compliance programs.

Last year, Bates recommended that member firm compliance reviews shift from an annual review to ongoing reviews.  In that light, this year’s Annual Report illustrates FINRA’s continuing efforts to guide compliance officers in navigating the expanding set of rules. As new developments arise, Bates will keep you apprised.

Contact us to discuss how we can assist with your FINRA Compliance and Regulatory Investigations and Enforcement Matters

Staff Contacts:

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

David Birnbaum

Managing Director, Business Development and Strategy

dbirnbaum@batesgroup.com

917-273-2682

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

Hank Sanchez

Managing Director, Bates Compliance

hsanchez@batesgroup.com

504-450-9632 

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

Alex Russell

Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com

971-250-4353

FINRA 2023 Exam and Risk Monitoring Report with Bates Chart and Summary – Prioritizing the Priorities

Rhonda Davis

Managing Director, Bates Compliance

rdavis@batesgroup.com

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Bates News  |  01-24-23

New Cryptoasset Certification from ACAMS and Bates Group

We’re excited to share that Brandi Reynolds (Managing Director, Practice Lead) and John Ashley (Senior Consultant) of Bates' MSB, FinTech and Crypto team (pictured below) have combined their expertise with other AML, cryptoasset and law enforcement professionals to create an innovative new certification for financial crimes in the crypto space. Introducing the “Certified Cryptoasset Anti-Financial Crime (AFC) Specialist" Certification (CCAS) from ACAMS.

New Cryptoasset Certification from ACAMS and Bates Group

With the CCAS certification, individuals and entire cryptoasset compliance functions can step up their game in financial crime prevention and demonstrate their abilities to manage risk and comply with regulations surrounding financial crime in the rapidly evolving crypto space.

CCAS is made up of three interactive ACAMS certification courses covering AML foundations, cryptoasset and blockchain, and risk management in the crypto space, and includes e-learning courses, an electronic study guide, flash cards, review questions, and a practice exam. There are even optional Live Online classes to help professionals prepare for the exam.

 

Interested in getting CCAS certified? Check out the course and sign up here:

New Cryptoasset Certification from ACAMS and Bates Group

Learn more about how we can help strengthen your cryptoasset AML and compliance program:

Bates assists firms and counsel throughout their legal, regulatory, compliance and AML matters. Our experienced staff and consultants offer a suite of AML and Compliance consulting services to established and start-up companies in banking, broker-dealer, RIA, Fintech, virtual assets/cryptocurrency, Money Services Businesses (MSBs), and Non-Banking Financial Institutions (NBFIs). Our MSB and AML Team supports clients with their BSA/AML/OFAC Program Development, Risk Management, Training, Advisory Services, and Independent Reviews. We also provide practical guidance for obtaining and maintaining money transmitter licenses, identifying state requirements, coordinating with state regulators, submitting state reports, identifying risk, detecting suspicious or unusual activity, and preventing exposure associated with money laundering and terrorist financing.

Services for MSBs, FinTech & Virtual Asset Firms

Compliance & AML Solutions

Compliance & AML by Industry

Events  |  01-23-23

Brandi Reynolds Speaking on Cryptocurrency Webinar - Jan. 24, 2023

TODAY: Join Bates Managing Director Brandi Reynolds (Practice Leader-MSB, FinTech & Crypto), speaking on the "State of Cryptocurrency As We Head Into The New Year" webinar at the ACAMS Colorado Chapter January 2023 Virtual Event.

Brandi Reynolds Speaking on Cryptocurrency Webinar - Jan. 24, 2023

Tuesday, January 24, 2023

Online, 12 p.m. MST, 2 p.m. EST

One ACAMS Credit

Program Details and Registration

Compliance and Regulatory Alerts  |  01-19-23

Louisiana Puts in Place New Virtual Currency Business Activity License

Louisiana Puts in Place New Virtual Currency Business Activity License
Image © [Виталий Сова] /Adobe Stock

Businesses that are interested in engaging in virtual currency activities in Louisiana must now take steps to file for a license from the state. The new Virtual Currency Business Activity License is designed to protect consumers, investors, and other stakeholders from fraudulent and deceptive business practices related to cryptocurrency activities by requiring licensees to meet certain qualifications and maintain specific records of their activities.

To obtain a license, applicants must demonstrate they have sufficient financial resources and management capabilities to properly and lawfully conduct the business activities; provide proof of a bond or other form of security; ensure the company abides by all applicable laws regarding data protection, consumer protection, anti-money laundering (AML) and countering terrorism financing (CTF); and provide ongoing reports of all transactions, including those conducted with external parties. Furthermore, businesses must also have an actively functioning website with help desk services available as well as a mailing address where customers can send any customer inquiries or complaints.

With the July 2023 deadline fast approaching, businesses should file for their Virtual Currency Business Activity License as soon as possible in order to remain compliant with Louisiana regulations.

How Bates Helps:

Bates assists clients in obtaining state virtual currency and money transmitter licenses, as well as with compliance following licensure and the start of operations. Contact us today to discuss your needs with a Bates Compliance licensing specialist.

View the New License Checklist

Learn More:

State Licensing Acquisition and Maintenance

Virtual Assets & Cryptocurrency

Bates News  |  01-18-23

Human Trafficking Prevention Month - January 2023

Image © [Elena] /Adobe Stock

January is National Human Trafficking Prevention Month, dedicated since 2010 to raising awareness about human trafficking and educating the public about how to identify and prevent it. This crime is facilitated by human smugglers, who victimize vulnerable individuals, often by making false promises related to immigration or employment.

The Financial Crimes Enforcement Network (FinCEN) issued a recent alert reminding financial institutions of the critical role they play in helping to fight human smuggling and human trafficking by identifying suspicious behavior and sharing crucial intelligence with law enforcement officials. The alert provides red flag indicators to help financial institutions better identify transactions potentially related to human smuggling and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations.

Read the FinCEN Alert

About Bates:

Bates cares about this issue. We are committed to working with your firm to develop strong AML and compliance programs for banks, broker-dealers, money services business and digital asset firms, including virtual and cryptocurrency firms. Learn more about how we can help strengthen your AML and compliance program at the following links below:

 

Compliance & AML Solutions

Compliance & AML by Entity/Industry

Bates Compliance - Home

MSB, FinTech and Cryptocurrency - Home

Events  |  01-17-23

Bates Sponsors the NYSBA Annual Meeting 2023 and WILS Symposium, Jan 18-24, 2023

Bates Group is a proud Bronze sponsor of the New York State Bar Association Women In Law Section (WILS) 19th Annual Edith I. Spivack Symposium and Kay Crawford Murray Memorial Award Luncheon. This two-day event will be held Thursday, January 19 and Friday, January 20, 2023, during the NYSBA Annual Meeting.

Agenda

Thursday, January 19, 2023

9:00 AM – 4:15 PM — 19th Annual Edith I. Spivack Symposium - "The Perpetual Geder Pay Gap: How Unequal Pay Negatively Impacts Women, Society, and the Profession"

  • This program is elegible for 6.0 MCLE Credits (3.5 Credits Areas of Professional Practice; 2.0 Credits Ethics and Professionalism; 0.5 Credit Diversity Inclusion and Elimination of Bias)

1:00 PM – 2:15 PM — Luncheon and presentation of Kay Crawford Murray Memorial Award - honoring an outstanding attorney who recognizes the value of diversity and mentoring in the legal profession

4:15 PM – 5:30 PM — Networking and cocktail reception

Friday, January 20, 2023

10:30 AM – 11:45 AM — Reception

NYSBA Annual Meeting Info & Registration