Bridging the Week by Gary DeWaal: August 3 - 7 and 10, 2015 (Consulting Firms; Compliance Officers; SEC Forum Choice; AML; Swap Entities Registration)

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Published Date: August 14, 2015

Compliance officers and anti-money laundering played a prominent role in material matters impacting financial services firms last week. Two chief compliance officers were suspended and fined by FINRA for supervisory and AML violations. Meanwhile, in SEC administrative tribunals, a chief compliance officer was only required to take additional training for his alleged law violation and another compliance officer was not sanctioned at all despite altering documents provided to the Commission. Separately, Promontory Financial Group was penalized by a New York regulator for its role in assessing AML violations by a client. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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The New York State Department of Financial Services claimed that Promontory Financial Group “exhibited a lack of independent judgment” in connection with its review of Standard Chartered Bank’s compliance with anti-money laundering requirements. The NYSDFS also claimed that certain testimony by Promontory witnesses during the course of the department’s investigation into the firm’s conduct “lacked credibility.”

Promontory was retained by SCB in 2010 after the bank reported to various regulators, including the New York State Banking Department, that, from at least 2001 through 2007, it had engaged in conduct related to the evasion of sanctions against certain foreign nationals designated by the Office of Foreign Asset Control of the US Department of Treasury.

Subsequently, in 2012, SCB agreed to pay US $340 million to the NYSDFS for providing US dollar clearing services to prohibited Iranian customers with respect to approximately 59,000 transactions through the bank’s New York branch. Later, SCB agreed to pay an additional US $300 million penalty to NYSDFS for certain failures in its anti-money laundering monitoring system that the bank did not disclose prior to its 2012 settlement.

The NYSDFS claimed it relied on Promontory’s review of SCB at least in part to evaluate the bank’s conduct for the purpose of assessing the 2012 penalty. Because of Promontory’s alleged wrongful conduct, the NYSDFS said it would deny all requests to provide the firm with confidential supervisory information “until further notice.” No monetary penalty was assessed. (Click here for further information on the prior NYSDFS actions against SCB in the article, “Standard Chartered Bank Agrees to Pay NYS Department of Financial Services US $300 Million for Failing to Fix AML Problems” in the September 1, 2014 edition of Bridging the Week.)

In its Report of Investigation related to this matter, the NYSDFS cited multiple occasions “where Promontory, at the direction of the Bank or its counsel, or at its own initiative, made changes to ‘soften’ and ‘tone down’ the language used in its reports, avoid additional questions from regulators, omit red flag terms or otherwise make the reports more favorable to the Bank.” The NYSDFS also provided examples of answers that Promontory employees provided to questions posed by NYSDFS staff that “were directly contradicted by the plain language of the documents they were shown in [depositions] – in many cases emails that they had themselves written.”

Promontory said it will seek a court stay of the NYSDFS action against it, “and defend [itself] against this regulatory overreach.”

Last year, the NYSDFS fined PricewaterhouseCoopers LLP US $25 million and required it to implement certain practice reforms for allegedly failing to “demonstrate the necessary objectivity, integrity, and autonomy that is now required of consultants performing regulatory compliance work for entities supervised by the Department.” (Click here for details.) In 2013, Deloitte Financial Advisory Services LLP was likewise fined US $10 million and required it to implement certain practice reforms by the NYSDFS for allegedly similar problematic conduct. (Click here for details.) Both firms agreed to the payment of their fine as part of a settlement with NYSDFS.

One chief compliance officer was required to take training in connection with an enforcement action before the Securities and Exchange Commission, while in a separate, unrelated action, another compliance officer was let off with no sanction despite being found to have altered a document submitted to the SEC and subsequently being less than candid regarding her actions.

F. Robert Falkenberg

In the first case, involving Parallax Investments, LLC, an SEC-registered investment adviser, the SEC found that, from at least January 2009 through November 2o11, contrary to applicable rules, the firm engaged in at least 2,000 securities transactions with advisory clients on a principal basis through an affiliated broker-dealer without prior written disclosure or obtaining consent from such clients. The SEC also found that Parallax, contrary to rules, failed to provide pooled investment vehicle investors with audited financial statements on a timely basis; failed to adopt, implement and annually review written policies and procedures reasonably designed to prevent violations of applicable law; and failed to establish, maintain and enforce a written code of ethics.

For these offenses, Parallax and John Bott II, the firm’s owner and manager were jointly ordered to reimburse certain advisory clients an aggregate amount of US $450,000 and to implement certain undertakings.

In addition, F. Robert Falkenberg, the firm’s CCO, was held to have aided and abetted each of the firm’s violations, except those related to Parallax’s principal trading. Among other evidence of Mr. Falkenberg’s wrongful conduct, the SEC found that he backdated evidence of an alleged review of the firm’s compliance policies and procedures for 2010 that he, in fact, prepared untimely, only after requested to provide evidence of such review by SEC staff in connection with a routine examination of Parallax in 2011.

As a penalty, Mr. Falkenberg was ordered to take 30 hours of relevant compliance training. He was subject to no other penalty. Mr. Falkenberg worked for the Financial Industry Regulatory Authority prior to serving as CCO of Parallax.

Judy Wolf

Separately, Judy Wolf was a compliance consultant to Wells Fargo Advisors LLC and in 2010 reviewed the trading of Waldyr Da Silva Prado Neto, a registered salesperson for the firm. The SEC later sued Mr. Prado for insider trading.

In December 2012, Ms. Wolf altered a document she previously prepared evidencing her review of Mr. Prado’s trading. She changed the document, in anticipation of an SEC inquiry, to make it appear her review was more thorough; failed to disclose this alteration when the document was produced to the SEC; and later, initially denied making the alteration when asked by SEC staff. The SEC filed charges against Ms. Wolf, claiming that she aided and abetted Wells Fargo’s violation of securities laws, namely the firm’s failure to produce accurate records to an SEC representative, and the firm’s production of altered records. (Click here for details regarding the SEC’s charges in the article “Investment Advisor Compliance Officer Charged by SEC for Altering Document Related to Insider Trading Probe” in the October 19, 2014 edition of Bridging the Week.)

The ALJ hearing this matter concluded that the SEC’s Division of Enforcement “satisfied its burden of showing that Wolf acted with scienter and rendered substantial assistance in the commission of [Wells Fargo’s] primary violation.” However, the ALJ refused to impose sanctions on Ms. Wolf, claiming that “[t]here is real risk that excessive focus on violations by compliance personnel will discourage competent persons from going into compliance, and thereby undermine the purpose of compliance programs in general.”

In determining to assess no sanctions against Ms. Wolf, the ALJ cited a warning recently made by departing SEC Commission Daniel Gallagher that “we should strive to avoid the perverse incentives that will naturally flow from targeting compliance personnel who are willing to run into the fires that so often occur at regulated entities.” (Click here for additional information on Commissioner Gallagher’s views on CCOs in the article “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally” in the June 21, 2015 edition of Bridging the Week.)

My View: It almost borders on insulting to suggest that “competent persons” would refrain from becoming compliance personnel because a compliance officer might be penalized for amending a previously written compliance report after the initiation of a review by the Securities and Exchange Commission, and then being less than forthcoming about the changes. That being said, compliance personnel should not be penalized for borderline interpretations that impose obligations on them that seem not to exist in the plain language of a relevant law or rule – as happened a few weeks ago when the SEC fined the chief compliance officer of SFX Financial Advisory Management Enterprises because the firm’s compliance policies allegedly were not “reasonably designed …to prevent the misappropriation of client funds” after the firm’s former president stole customer money. (Click here for more details regarding the SFX matter in the article, “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs Generally” in the June 21, 2015 edition of Bridging the Week.)


Compliance Weeds: Futures Commission Merchant and Introducing Broker members of the National Futures have been required to have an anti-money laundering program in place since April 2002. Among the elements of such program include adoption of a policy statement that clearly outlines the registrant’s policy against money laundering, and specifies the consequences of employees not following the firm’s written anti-money laundering policies procedures and controls. An FCM's and IB's procedures and controls should enable appropriate personnel to form a reasonable belief that they know the true identity of each customer; recognize suspicious customers and transactions; and require personnel to report suspicious or unusual activity to appropriate supervisory personnel, including senior management, and to the Financial Crimes Enforcement Network of the US Department of Treasury. A specified person or persons must be designated to oversee the firm’s AML program, and ongoing education and training for appropriate persons must be conducted at least once every 12 months. Written records must be maintained to evidence compliance with the training requirement. Finally, there must be independent testing of the adequacy of each FCM’s and IB’s compliance program at least once every 12 months. (Click here for a complete discussion of the NFA’s requirements related to FCMs’ and IB’s AML program.)

My View: It is too late to bemoan the failure of Congress to create a single financial services regulator in the US to oversee both the futures and securities markets and industry. This was an opportunity most recently lost during the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, as much as possible, the Securities and Exchange Commission and the Commodity Futures Trading Commission should work together to maximize efficiency for industry participants. The SEC devising an entirely different registration regime and process from the CFTC for swap entities required to be registered is not consistent with this objective.  It would have been far more desirable for the SEC to have leveraged off of the registration process that the CFTC already has instituted for swap dealers and major swap participants than to create a new regime from scratch.

And more briefly:

For more information, see:

BNP Paribas Securities (Asia) Fined Almost US $2 Million by Hong Kong Regulator for Dark Pool-Related Failures:

CFTC Commissioner Giancarolo Says Little Progress Made in Sensibly Revising Swaps Trading Rules:

Commodity Pool Operator Sued by CFTC for Making False Statements to NFA and Other Violations:

European Commission Mandates IRS Central Clearing:

Federal Judges in NY and Georgia Rule Against SEC for Enforcement Action Forum Choice Because of ALJ Selection Process:

Gray Financial Group:


FINRA Fines and Suspends Two CCOs for Supervisory and AML Violations:

First LIBOR Defendant, Tom Hayes, Found Guilty of Conspiracy to Defraud and Sentenced to 14 Years in Prison:

IB Fined by NFA for Late Independent Testing of AML Program and Training:


Individual Securities Registrants Soon Able to Complete Periodic Regulator Element Training at Home:

New York Regulator Penalizes Promontory Financial for Alleged Lack of Independent Judgment in Handling Standard Chartered Bank Review:

See also Promontory Press Release:

One CCO Sanctioned, Another Not, in SEC Enforcement Actions:

Parallax Investments (Falkenberg):

SEC Finalizes Registration Procedures for Security-Based Swap Entities and Proposes Rule to Permit Statutorily Disqualified Associated Persons:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of August 9, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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