Articles Tagged with Securities Exchange Act of 1934

Earlier this month, the Securities and Exchange Commission announced that it had reached a settlement with Ross Shapiro, a former managing director of Nomura Securities International, Inc. (“Nomura”).  The SEC filed a complaint against Shapiro and two other defendants, Michael A. Gramins and Tyler G. Peters, in September of 2015.  The complaint alleged that between January 2010 and November 2013, Shapiro, Gramins, and Peters made misrepresentations to customers about the prices of residential mortgage-backed securities (“RMBS”) and manufactured housing asset-backed securities (“MHABS”), thereby violating the Securities Act of 1933 and the Securities Exchange Act of 1934.

An RMBS is a security whose underlying assets comprise residential loans.  Customers who invest in an RMBS typically obtain payments derived from the interest and principal payments on these loans.  Shapiro, Gramins, and Peters provided market information and sold RMBS and MHABS on behalf of Nomura, a FINRA-registered broker-dealer.  The customers in question were funds that invested in RMBS.

The SEC’s complaint alleged that Shapiro, Gramins, and Peters made various misrepresentations to customers regarding the prices at which Nomura bought and sold RMBS and MHABS and that they misrepresented the amount of compensation that Nomura would receive for arranging any trades.  For example, Shapiro, Gramins, and Peters allegedly deceived customers on numerous occasions regarding how much Nomura paid for RMBS and MHABS.  Shapiro, Gramins, and Peters also gave clients the impression that Nomura had paid a higher price for RMBS and MHABS than it actually had.  These misrepresentations were usually made via electronic communications such as instant messaging, emails, and online chats.

On April 3, 2018, the Financial Crimes Enforcement Network (“FinCEN”) published Frequently Asked Questions (“FAQs”) to help “covered financial institutions,” including broker-dealers and dually registered SEC investment advisers, better understand its new Customer Due Diligence Requirements (“CDD Rule”), which will become effective on May 11, 2018.  Other “covered financial institutions” include insured banks, commercial banks, federally insured credit unions, savings associations, trust banks or trust companies that are federally registered, and mutual funds.

The CDD Rule will require covered financial institutions to adopt written policies and procedures that are sufficiently tailored to “identify and verify beneficial owners of legal entity customers and to include such procedures in their anti-money laundering compliance program.”  A beneficial owner is defined as an individual who directly or indirectly owns 25 percent or more of a legal entity customer’s equity and a person who exercises significant control over a legal entity customer.  However, according to the FAQs, should covered financial institutions desire to gather information on individuals owning less than 25 percent of a legal entity customer, they are welcome to do so.  The FAQs also provide that covered financial institutions are required to verify beneficial owners’ identities using risk-based procedures that feature the same factors financial institutions are required to use to verify customer identities under the Customer Identification Program rules. Continue reading