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The Policy Patty Toolkit Blog covers emerging issues on governance, risk and compliance controls.

This Blog is made available by the Policy Patty Toolkit for informational purposes only to cover emerging legal, governance, regulatory and compliance matters and issues. The postings are not intended to provide specific professional advice (legal, tax, or accounting) to an identified problem or issue. By using this Blog, you understand and acknowledge that there is no attorney-client relationship formed between us and should not use this site as a substitute for legal advice from your legal counsel regarding a particular matter or advice from another professional.

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SEC Charges Agria Corporation and Executive Chairman With Fraud

Posted on December 10, 2018 at 3:30 PM
SEC settled charges with Agria Corporation for concealing substantial losses from investors through fraudulent accounting in connection with its divestiture of its primary operating entity. In a related action, the company???s executive chairman Lai Guanglin (aka Alan Lai) settled charges that he manipulated the company???s share price. As described in the SEC???s order: 1) Agria Corporation sold its Chinese operating company in return for stock and land use rights to 13,500 acres of undeveloped land in a remote, mountainous area of China???s Shanxi Province. 2) Agria overstated the value of the stock it received by $17 million and assigned a value of nearly $60 million to the effectively worthless land use rights. 3) In March 2013, Lai used nominee brokerage accounts to engage in manipulative trading in Agria???s American Depository Shares in order to inflate their price above $1 and prevent the securities from being delisted by the New York Stock Exchange. 4) Agria violated antifraud, reporting, books and records and internal accounting control provisions of the federal securities laws. Without admitting or denying the findings, Agria agreed to pay a $3 million penalty and cooperate with the Commission???s staff in future investigations. The SEC???s order as to Lai found that he violated antifraud provisions of the federal securities laws. Without admitting or denying the findings, Lai agreed to pay a $400,000 penalty and be barred for a period of five years from acting as an officer or director of any public company. Read More: Release https://www.sec.gov/news/press-release/2018-276 Order https://www.sec.gov/litigation/admin/2018/34-84763.pdf

FINRA Issues Report on Examination Findings

Posted on December 8, 2018 at 10:05 AM
FINRA issued its annual report addressing certain aspects of the firm???s compliance with specific securities laws and regulations. The report is another resource for firms to strengthen their compliance programs and supervisory controls. Some firms have requested that FINRA make publicly available a summary of observations from the firm examination program so they can further improve their practices and processes based on the experiences of other firms, as well as better anticipate and address potential areas of concern in advance of their own examinations. The report focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets. The report also describes practices FINRA has observed to be effective in certain circumstances, which firms may use as a resource to improve their compliance and supervisory programs. There should be no inference, however, that FINRA requires firms to implement any specific practices described in this report or those that extend beyond the requirements of existing securities rules and regulations. In sum, it lists the areas in which industry players need to do better, based on what FINRA staff has been seeing and also discusses investor suitability, fixed income markup disclosure and due diligence for private placements, as well as findings from a targeted exam (or sweep) tied to with volatility-linked products. Read More: http://www.finra.org/industry/2018-report-exam-findings Report http://www.finra.org/sites/default/files/2018_exam_findings.pdf

DFS Takes Action Against National Integrity Life Insurance

Posted on December 6, 2018 at 11:50 AM
New York's Department of Financial Services announced that National Integrity Life Insurance Company will pay a $240,000 civil monetary penalty for violations of New York Insurance Regulations 187 and 60 that govern practices for replacing deferred annuity contracts with immediate annuity contracts. In addition, National Integrity has agreed to make restitution to individual consumers affected by its former replacement practices. The settlement is part of DFS???s on-going investigation into deferred-to-immediate annuity replacement practices in New York. DFS issued guidance in December 2016 to remind life insurers, producers and distributors of their obligations under New York Insurance Law and regulations to perform an adequate suitability review when recommending the sale or replacement of an annuity. DFS???s investigation found that, between 2011 and 2016, National Integrity did not obtain information to determine the suitability of replacing deferred with immediate annuities, including information about the amount of guaranteed income that would be available if a contract holder???s existing deferred annuity was annuitized. The company also failed to disclose adequate information to enable contract holders to compare the payout amounts available under the deferred annuity and the proposed immediate annuity, and make an informed decision as to whether to replace the deferred annuity. As a result, National Integrity issued immediate annuities without complete annuitization information for the replaced deferred annuity contract. National Integrity cooperated fully with the Department???s investigation and revised its Disclosure Statements after DFS identified the improper replacement practices. Under the terms of the Consent Order, National Integrity has agreed to provide restitution, including interest, to affected New York contract holders who were harmed by the suitability and disclosure failures during the deferred-to-immediate replacement transactions. DFS commends National Integrity???s responsiveness and its revision of its replacement practices, as well as the company???s commitment to providing restitution to contract holders. A copy of the Consent Order between DFS and National Integrity can be found below. Read More: Release https://www.dfs.ny.gov/about/press/pr1812051.htm Order https://www.dfs.ny.gov/about/ea/ea181205_national_integrity.pdf

FTC Seeks Comment on Identity Theft Detection Rules

Posted on December 5, 2018 at 5:25 PM
The Federal Trade Commission ("FTC") is seeking comment on whether the agency should make changes to rules requiring that financial institutions and creditors take certain steps to detect signs of identity theft affecting their customers. As part of the Commission's periodic review of all its rules and guides, the FTC is seeking comment on whether any modifications should be made to the Red Flags Rule and the Card Issuers Rule. The Red Flags Rule requires financial institutions and some creditors to implement a written identity theft prevention program designed to detect the "red flags" of identity theft in their day-to-day operations, take steps to prevent it, and mitigate its damage. The Card Issuers Rule requires that debit or credit card issuers implement policies and procedures to assess the validity of a change of address request if, within a short period of time after receiving the request, the issuer receives a request for an additional or replacement card for the same account. The Card Issuers Rule bars a card issuer from issuing an additional or replacement card until it has notified the cardholder about the request or otherwise assessed the validity of the address change. Identity theft was the second biggest category of consumer complaints made to the FTC in 2017 and the third biggest topic of complaints through the first three quarters of 2018. The questions on which the FTC is seeking comment include: Is there a continuing need for the specific provisions of the Rules? What benefits have the Rules provided to consumers? What significant costs, if any, have the Rules imposed on consumers? What significant costs, if any, have the Rules imposed on businesses, including small businesses? Are there any types of creditors that are not currently covered by the Red Flags Rule but should be, because they offer or maintain accounts that could be at risk of identity theft? The request for comment on the two Rules will be published in the Federal Register shortly, along with instructions on how to submit comments. The deadline for submitting comments is February 11, 2019. Read More: Release https://www.ftc.gov/news-events/press-releases/2018/12/ftc-seeks-comment-identity-theft-detection-rules?utm_source=govdelivery Rulemaking Proposal https://www.ftc.gov/policy/federal-register-notices/16-cfr-part-681-identity-theft-rules-request-public-comment

DOJ Enforcement Actions - Week of December 3, 2018

Posted on December 4, 2018 at 10:35 AM
The following is a listing of recent actions by the US Department of Justice with more items accessible via the Read More link below: Press Release Political Operative Convicted of Federal Campaign Finance Crimes in Two Congressional Campaigns and of Obstructing Investigation by Federal Election Commission Press Release Former CEO of Detroit-Based Technology Company Sentenced to One Year in Prison for Bribery Press Release Florida Man Sentenced to Three Years in Prison for Surreptitiously Producing and Distributing Pornographic Audio and Video Recordings of Himself Engaged in Sexual Activity with at Least 80 Others Press Release District Court Issues Order to Prevent Michigan Company and its Owners From Distributing Adulterated Ready-To-Eat Foods Read More: https://www.justice.gov/news

FINRA Actions - December 3, 2018

Posted on December 3, 2018 at 6:05 PM
Technical Notice TRACE for Securitized Products API Specification Update FINRA has updated the TRACE for Securitized Products Web API technical specification. A new code of "U", representing UMBS, has been added to the Issuing Agency Values in Appendix 8. Read More: http://www.finra.org/industry/trace/trace-securitized-products-api-specification-update Notice Regulatory Notice 18-39 Unexpected Close of Securities Markets This Notice provides guidance to members regarding SEA Rules 15c3-1, 15c3-3, 17a-5(a) through (d), Rule 204 under Regulation SHO, FINRA Rules 4210, 4230(b), 4521 and 4524, and Federal Reserve Board Regulation T in the event of such an unexpected close. The Notice addresses, among other things, the circumstances under which the day of the unexpected close should be considered a regular business day versus a non-business day for purposes of these rules. Read More: http://www.finra.org/industry/notices/18-39 Technical Notice FINRA System Closures for National Day of Mourning In observance of the National Day of Mourning in honor of former President George H.W. Bush, FINRA will be closed on Wednesday, December 5, 2018. Firms should refer to Regulatory Notice 18-39 for information relating to an unexpected close of the securities markets. This closure includes the following systems: TRACE ??? Trade Reporting and Compliance Engine ADF ??? the FINRA Alternative Display Facility TRFs ??? the FINRA/Exchange Trade Reporting Facilities ORF ??? the OTC Reporting Facility. Note: Member firms are advised that any OTC equity securities that normally would have had an ex-dividend date of Wednesday, December 5, 2018, have been adjusted to Thursday, December 6, 2018. OTCBB ??? OTC Bulletin Board Read More: http://www.finra.org/industry/trace/finra-system-closures-national-day-mourning

FINRA Investor Alert - Storing and Securing Cryptocurrencies

Posted on December 1, 2018 at 11:30 AM
FINRA issued an Investor Alert on a few things to keep in mind when it comes to crypto storage and security. Two Types of Keys First, it is important to remember that your cryptocurrency is represented by a public key and a private key. Think of a public key like you would an email address???this identifies cryptocurrencies you receive and you can use it to send or transfer cryptocurrencies to another individual. A private key is the secret key???an alphanumeric code???that represents your personal way, such as a password, to access your cryptocurrency. Managing your private key is an essential component of storing your cryptocurrencies. New Security Challenges To store and transfer cryptocurrency, and its associated private keys, you can use a number of different methods including mobile applications, third-party online services, specialized hardware???even printing your keys (i.e. the alphanumeric code) on a piece of paper. However, because cryptocurrency is, in essence, a piece of computer code, it is vulnerable to hackers, destruction or accidental loss. Keeping cryptocurrencies safe involves a different set of challenges than keeping your cash assets, stocks or bonds secure. And crucially, because many cryptocurrencies are not recognized legally in the same way that cash assets are recognized by governments, the same safety nets, such as FDIC coverage for bank assets and legal remedies for damages and restitution, may not be available if your cryptocurrencies are stolen, lost or destroyed. Therefore, it is important to learn about the different ways to store cryptocurrencies. Cold Storage Versus Hot Storage There are two general methods for storing cryptocurrencies, often referred to as "cold" storage and "hot" storage. Cold Storage refers to holding your private keys in an environment that is not connected to the Internet. Examples include storing keys on disconnected hard drives, printing or writing them on a piece of paper or storing them on USB drives. You can also use a "hardware wallet," a type of device similar to a USB drive that lets you store your private keys. While these storage methods tend to prevent your cryptocurrencies from being hacked by a malicious actor, they are vulnerable in other ways. Hardware, such as hard drives and USB devices, can break down, be lost or suffer functionality defects. Paper can be destroyed or burned, and hardware wallets are not immune from hacking. Finally, thieves can steal hardware, paper and other physical means of storage. Hot storage uses services connected to the Internet to store cryptocurrency keys. While there are a number of hot storage options available, most are described as a cryptocurrency "wallets." Cryptocurrency wallets (different from the hardware wallet discussed above) refer to types of software that can be installed on any Internet-connected device that store your public and private crypto keys. Cryptocurrency wallets include: Desktop wallets: Desktop wallets are software that can be downloaded to your PC or laptop that allow you to store your private keys on that computer. Mobile app wallets: Mobile app wallets are apps that let you store your keys on your mobile device. Many mobile app wallets allow you to use your cryptocurrencies for small retail transactions with certain businesses. Online wallets: Online wallets are a type of software that lets you store and access your keys from any Internet-connected device. In this case, your private keys are stored remotely on third-party servers owned by the provider of the online wallet. You create a username and password just as you would for a traditional online bank account and then you are able to use the software easily. Online wallets are commonly associated with cryptocurrency exchanges, which are entities that facilitate the trading of fiat currency for cryptocurrencies. Cryptocurrency wallets are convenient because you don't have to memorize your private key, write it down or store it elsewhere. However, a downside of wallets is that they, like any service connected to the Internet, are vulnerable to hackers and malicious code. Desktop and mobile app wallets that store keys locally on a device are susceptible to loss, destruction and theft. For example, if you lose your phone that has a mobile app wallet that stores your cryptocurrency keys, you may permanently lose your investment. Online wallets that are associated with cryptocurrency exchanges are vulnerable to a number of different risks. Cryptocurrency exchanges that provide online wallets are common targets of cyberattacks. In addition, these exchanges do not work the same way as a registered securities exchange???meaning that your investment might be trading on an exchange that is not subject to regulatory oversight and could be more susceptible to fraud and theft. Moreover, there are many scammers and bad actors looking to lure unsuspecting investors into storing their public and private keys with fake exchanges. Many scammers also pose as fake tech support staff for legitimate cryptocurrency exchanges. Therefore, it is important to scrutinize an institution before using its online wallet service. Use Caution Cryptocurrencies present a new set of challenges when it comes to keeping your assets safe and secure. Do your research into the type of technology, platform, or service you use to store your cryptocurrencies. Know the pluses and minuses of each storage option???and remember that if measures aren't taken to properly secure and store your assets, you may lose some or all of your investment. Subscribe to FINRA's The Alert Investor newsletter for more information about saving and investing. Read More: Investor Alert https://www.finra.org/investors/highlights/storing-and-securing-cryptocurrencies

SEC Charges Self-Described Promoter With Microcap Market Manipulation Scheme

Posted on November 29, 2018 at 4:10 PM

The SEC charged a self-described penny stock promoter and an entity he controlled with orchestrating a scheme to manipulate trading in at least 97 microcap stocks.

According to the SEC’s complaint:

  • Eric Landis of Charlottesville, Virginia, falsely claimed to third-party media buyers for microcap companies that he would distribute promotional materials for the stocks via email lists with tens of thousands of subscribers.
  • In reality, his distribution lists were a sham. To generate trading volume and create the false impression that he was drumming up investor interest, the SEC alleged that Landis traded thousands of microcap shares himself using brokerage accounts in his own name, in the name of an entity he controlled, Ridgeview Capital Partners LLC, and in the names of several third parties. 
  • Altogether, the SEC alleged that Landis placed thousands of manipulative trades over three years, including approximately 1,300 “matched trades,” which involved simultaneously selling and buying stocks in the microcap companies he was paid to promote.

The SEC’s complaint, filed in the U.S. District Court for the District of Massachusetts, chargedLandis and Ridgeview with violating the antifraud and market manipulation provisions of the federal securities laws. The SEC is seeking a permanent injunction against future violations, disgorgement of ill-gotten gains plus prejudgment interest, monetary penalties, and a penny stock bar.

Landis was previously found liable in a lawsuit brought by the SEC and convicted of related criminal charges based on his role in a prior market manipulation scheme. Before investing, microcap investors should review the investor-education materials available at Investor.gov.

Read More:
https://www.sec.gov/news/press-release/2018-266" target="_blank">https/www.sec.gov/news/press-release/2018-266

https://www.sec.gov/litigation/complaints/2018/comp-pr2018-266.pdf" target="_blank">https/www.sec.gov/litigation/complaints/2018/comp-pr2018-266.pdf

Investor Alert
https://www.investor.gov/news-alerts/investor-alerts/investor-alert-fraudulent-stock-promotions" target="_blank">https/www.investor.gov/news-alerts/investor-alerts/investor-alert-fraudulent-stock-promotions

DFS Approves CVS Health's Acquisition of Aetna Insurance

Posted on November 27, 2018 at 1:35 PM
New York's Department of Financial Services announced that it has approved CVS Health Corp. and CVS Pharmacy Inc.???s application to acquire Aetna Health Insurance Company of New York, a New York domestic stock accident and health insurance company, following a public hearing and extensive public comment period. DFS approved the acquisition subject to a number of conditions to which CVS and Aetna have agreed including enhanced consumer and health insurance rate protections, privacy controls, cybersecurity compliance, and a $40 million commitment to support health insurance education and enrollment and other consumer health protections. As part of DFS???s approval, CVS has agreed to specific conditions that the Department demanded to protect New York consumers, including: - No funds from any Aetna company or affiliate covering New Yorkers can be used to pay for CVS???s acquisition - Costs derived from the acquisition, including executive compensation, cannot be passed on to any domestic or foreign Aetna New York insurer - Increased health insurance rates cannot be sought in New York to pay for the cost of the acquisition and premiums and cost-sharing owed by policyholders cannot increase - Dividends cannot be paid by Aetna without the express prior approval of the Superintendent for a period of three years - Annual reports for three years documenting details of the progress toward achieving promised synergies must be provided to DFS - Current products throughout the Aetna New York service area must be maintained for three years following the approval - One or more new products must be made available by Aetna to the small and large group markets within two years from the approval through an existing or new New York-domiciled insurer - Roll-out of health care measures must be done fairly and equitably in New York, including in underserved communities $40 million to New York State, over a three-year period, to support health insurance education and enrollment activities and strengthen New York health care transformation activities, which may include payments to the New York State Health Care Transformation Fund - An independent third-party audit assessing whether Aetna employees have accessed Confidential Information in violation of firewall policies submitted to DFS within one year of the approval - Adherence to DFS???s nation-leading Cybersecurity Regulation, including filing the required annual certificates of compliance to DFS - No preferential pricing to any Aetna-affiliated health insurer licensed in New York, including any managed care organization certified in New York, that considers the fact that the health insurer is Aetna-affiliated - Ensuring that participating provider networks for insured products maintain access to non-chain New York pharmacies for three years from the approval DFS will continue to exercise its broad authority to conduct examinations of Aetna and any entity within its holding company structure, including CVS and CVS Caremark, its pharmacy benefit manager where DFS has cause to believe such entity can affect the operations, management or financial condition of any insurer licensed in New York. DFS will use all regulatory tools, including special reports, to review the past and future conduct of CVS Health, CVS Pharmacy, and CVS Caremark, as well as Aetna Inc. and its affiliates, and take every action necessary to ensure that the representations made in the course of this approval were fully accurate and that the parties keep all commitments made. Read More: Release https://www.dfs.ny.gov/about/press/pr1811261.htm A copy of the decision and order approving the acquisition, as well as the conditions required, is available below: https://www.dfs.ny.gov/about/press/CVS_final_signed_decision_and_condition.pdf

Citigroup Global Markets to Pay $409K for Overcharging Customers

Posted on November 27, 2018 at 8:55 AM

As reported in Financialish.com (https/www.financialish.com/):

Citigroup Global Markets agreed to pay a $100K fine plus $309K in restitution to eligible customers, to settle FINRA charges that it disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge.

CGMI, a New York, NY-based broker-dealer since 1936, is a full-service firm providing investment banking, asset management, brokerage, securities trading, and advisory services. The Firm trades securities for institutional and individual customers as well as proprietary accounts. CGMI has approximately 7,600 registered reps in over 700 branches.

FINRA FINDINGS. From January 2011 to September 2016 (the "Relevant Period"), CGMI disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge ("Eligible Customers"). These Eligible Customers were instead sold Class A shares with a front-end sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses.

Following FINRA’s examination of CGMI, the firm conducted a review of its mutual fund sales for the Relevant Period and found that: (i) 274 Eligible Customer accounts had purchased mutual fund shares for which an available sales charge waiver was not applied; (ii) such Eligible Customers were overcharged around $264,844 on mutual fund purchases; and, (iii) as part of this settlement, CGMI agrees to compensation these Eligible Customers $309,000 in restitution, inclusive of interest.


Class A shares … typically are subject to a front-end sales charge when originally purchased, and have annual fund expenses, including ongoing distribution and service fees ("fees") that are typically 0.25 percent. The majority of the front-end charge is paid to the selling broker-dealer as a concession. Investors purchase Class A shares at the applicable ‘NAV’, plus the initial sales charge. Most funds, however, will waive the sales charge on Class A shares for certain investors, under certain circumstances.

Class B and C shares … typically do not carry a front-end sales charge but have significantly higher distribution and service fees (typically 1.00%) and may be subject to a contingent deferred sales charge ("CDSC"). Some mutual funds offer Class R shares for purchase by certain retirement plans.

Class R shares … typically are sold without a front-end sales charge. However, Class R shares typically have higher fees than Class A shares.

This case was reported in FINRA Disciplinary Actions for November 2018.

Read More:
For details on the case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2016049977601.