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Archive for the ‘Financial Services and Banking Litigation’ Category

The New CARES Act Allows Pandemic Victims to Borrow from Their 401(k)s and IRAs Without Penalty and Defer Required Minimum Distributions

Posted on: March 30th, 2020

By: Greg Fayard

The federal Coronavirus Aid Relief and Economic Security (CARES) Act signed into law March 27, 2020, includes retirement tax relief for victims of the pandemic—namely victims’ 401(k)s and IRAs.

Under section 2202 of the $2 Trillion law (which amends the IRS code), victims under 59 and a half may withdraw up to $100,000 (or the entire balance if less than that) from their retirement accounts (401(k)s and Individual Retirement Accounts (IRAs)) WITHOUT paying the normal 10% penalty as long as they pay back the withdrawn amount within three years.

But who qualifies as a Coronavirus victim and can take advantage of this provision? To qualify, individuals (or their spouse or dependent) needs to be diagnosed with the COVID-19 disease, or experienced adverse financial consequences from being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of child care stemming from the pandemic. Any early Coronavirus-triggered withdrawals, however, would be taxed depending on the individual’s income and tax bracket, which usually falls in the 20% to 25% range. Hence, while the Coronovirus-sanctioned withdrawals avoid the normal 10% penalty, it does not permit tax-free withdrawals (unless the withdrawal is from a Roth 401(k)). 

Borrowing from your 401(k), however, regardless of the penalty, should be a last resort—especially now, considering the steep decline in retirement account balances resulting from the pandemic. With a turbulent stock market likely in the near future given the extension of the federal “slow the spread” protocols to April 30, 2020, only the most desperate should consider an early 401(k) withdrawal, even if the 10% penalty is temporarily waived for 2020.

There is also tax relief for required minimum distributions under the CARES Act. The recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act (enacted December 20, 2019, taking effect January 1, 2020), provides retirees who turned 72 before April 1, 2020, who have traditional IRAs or a 401(k), must take minimum distributions, or RMDs, by the end of the year. If they don’t take their Required Minimum Distribution, they will be penalized 50% of the RMD amount. The RMD is subject to federal income tax. For those who turned 70 and a half in 2019, the RMDs would normally have to be taken by this April. 

Additional Information: 

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  On April 2, we will discuss the impact of Coronavirus on law enforcement.  Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the Coronavirus pandemic, including issues related to Labor & Employment, Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce educational content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.** 

Business Continuity Plans in the Age of Coronavirus

Posted on: March 23rd, 2020

By: Jennifer Weatherup

As the Coronavirus, or COVID-19, has caused unprecedented disruptions, including a precipitous decline in the stock market, it is increasingly important for broker-dealers to prepare plans which will allow them to fulfill their responsibilities to customers and continue operations under difficult circumstances. More specifically, broker-dealers should ensure that their business continuity plans allow their businesses to persist in the event of a pandemic such as the Coronavirus. To this end, the Financial Industry Regulatory Authority requires its members to plan ahead in order to meet customer needs in the event of an emergency.  Specifically, FINRA mandates that all broker-dealers “ must create and maintain a written business continuity plan identifying procedures relating to an emergency or significant business disruption… reasonably designed to enable the member to meet its existing obligations to customers [and] address the member’s existing relationships with other broker-dealers and counter-parties.” (FINRA Rule 4370(a).) FINRA further requires that members update their continuity plans in the event of material changes to their operation, and conduct an annual review to identify whether the plan must be modified. (FINRA Rule 4370(b).)

In response to the Coronavirus crisis, FINRA released Regulatory Notice 20-08, “Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief” on March 9, 2020. This Notice reiterates broker-dealers’ responsibilities under Rule 4370, and recommends that members include pandemic preparedness in their business continuity plans, and evaluate whether their current plans “are sufficiently flexible to address a wide range of possible effects in the event of a pandemic in the United States [including] staff absenteeism, use of remote offices or telework arrangements, travel or transportation limitations and technology interruptions or slowdowns.”  Notably, FINRA recommends that member firms’ business continuity plans include plans to employ remote offices or telework arrangements during a pandemic. In order to ensure that the use of remote work arrangements does not undermine firms’ abilities to satisfy their other professional duties, FINRA also recommends that firms which permit remote work arrangements consider strategies for exercising sufficient supervision over employees who are working remotely, and test the extensive use of telework arrangements by employees before remote work arrangements are broadly implemented at a member firm. FINRA identified other potential issues which could arise in the event of a pandemic, and which should be addressed in a business continuity plan, including the following: increased risk of cybersecurity breaches, emergency office relocations, increased customer call volumes, and challenges in making timely regulatory filings.

As the Coronavirus pandemic has already affected operations, member firms should make it a priority to carefully review their business continuity plans to ensure that they adequately address the potential effects of the Coronavirus; without adequate plans in place, member firms may not only find themselves unable to satisfy obligations to customers, but may face regulatory scrutiny once this crisis is behind us.

Additional information: 

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues every day for the next week. We will discuss the impact of Coronavirus for companies in general, but also for business in insurance, healthcare, California specific issues, cybersecurity, and tort. Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the Coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.** 

Beware of FINRA’s Increased Focus on Non-Registered, Associated Persons

Posted on: August 9th, 2019

By: Elizabeth Lowery

On July 29, 2019, FINRA announced that Citigroup Global Markets, Inc. was fined $1.25 million for failing to conduct timely or adequate background checks on approximately 10,400 non-registered associated persons spanning a seven-year period from 2010 to 2017.  This large fine issued even though  Citigroup had completed screening and fingerprinting which was fully compliant with federal banking law for some of those employees.  Citigroup’s failure to screen all such employees as required by the more stringent federal securities laws allowed three individuals to associate with, or remain associated with Citigroup, even though they were subject to statutory disqualification from associating with a brokerage firm because of previous criminal convictions.  FINRA found that Citigroup had failed to maintain a reasonable supervisory system which had procedures to identify and screen non-registered associated persons.  In settling this matter, Citigroup consented to the entry of FINRA’s findings and to the corresponding $1.25 million fine, without admitting or denying FINRA’s charges.  FINRA’s Executive Vice President of its Department of Enforcement, Susan Schroeder, explained “FINRA member firms must live up to their responsibility as a gatekeeper protecting investors from bad actions.  It is important that firms appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”

This is yet one of several recent examples of FINRA’s focus on non-registered, associated persons.  Pursuant to FINRA Rule 8310, FINRA may impose sanctions, such as a censure, fine, suspension or bar, upon a person associated with a brokerage firm for violations not only of FINRA rules, but also for violations of certain federal securities laws and MSRB rules.  Such sanctions typically stem from FINRA enforcement actions.  FINRA enforcement actions often begin with a request for documents, information and/or sworn testimony, commonly called an “8210 Requests” because they are made pursuant to FINRA Rule 8210.  While registered associated persons, such as those holding a stockbroker’s license, are generally aware that they are subject to FINRA’s jurisdiction, scrutiny and sanctions; non-registered associated persons often lack such awareness.  It is important for brokerage firms and their employees to be mindful that FINRA’s jurisdiction, and its rules and enforcement actions, are not limited to registered associated persons.  This is especially since FINRA’s trend of increased focus on non-registered associated persons is expected to continue.

If you have any questions or would like assistance with a FINRA or SEC enforcement action, or with FINRA 8210 Requests, please contact Elizabeth Lowery at [email protected].

Next Up Libra: Regulating Cryptocurrency

Posted on: July 23rd, 2019

By: David Molinari

Reluctance to accept cryptocurrency as a medium of exchange continues to focus, in substantial part, on the inability to regulate a virtual form of currency.

Cryptocurrencies were originally meant to be stateless entities, not beholden to legal frameworks of any state or country.  Such intent was/is short-sighted if the goal is to function as an alternative currency.  Regulation is the doorway through which cryptocurrency must pass to be considered a viable system of currency for everyday transactions.  The word “regulation” has taken on a negative meaning.  “Regulation is bad for (fill in the blank)” is a familiar refrain.  However, regulation, at least concerning currency markets and exchanges, establishes rules and order.  When the currency alternatives are defined by the term “virtual,” proponents of cryptocurrency will face skepticism.  In the absence of federal directives on the cryptocurrencies, some states have tried to take matters into their own hands.  The result is a patchwork approach trying to meld old currency regulations to control the new frontier of cryptocurrencies.  Perhaps as a nod to the inevitable choice of government regulation or irrevocable stamp of “outlaw,” Facebook’s executive, David Marcus, in recent statements before the Senate Banking Committee noted that Libra will get “appropriate approvals” from regulatory agencies and be subject to regulatory oversight and review.

But what does regulatory oversight look like in a virtual currency world? How can any state or the Federal Government regulate a system where any major corporation with international reach can create their own form of cryptocurrency.  Cryptocurrencies raise concerns of national security because virtual currencies have the potential for illicit activities such as money laundering or facilitating other unlawful behavior.  The virtual currency market was created so digital asset service providers can operate in the shadows of no regulation.  Also, cryptocurrencies are highly volatile because exactly what backs the currency?  What is the value of any cryptocurrency at any time?  How can the system be protected from fraud?

There are three aspects that should be covered when attempting to establish a system of regulation for virtual currency: The use of cryptocurrencies as legal tender in business transactions, imposing authority on operation of cryptocurrency exchanges as money transmitters; and the status of smart contracts and Ethereum Tokens.

The first two factors seem amendable to the type of regulatory framework of establishing a commissioner or government arm that is responsible to evaluate whether the crypto/digital currency has capital enough to ensure safety and soundness of the currency for consumer protection.  A minimum amount of capital should be maintained by the cryptocurrency provider measured by total assets, total liabilities, the expected value of the virtual business activity, the amount of leverage employed and liquidity.

A difficult factor is determining a definition of “digital unit” to be used as a form of stored value.  Further, should there be carve-outs for online gaming platforms, digital units used exclusively as part of a consumer affinity or rewards program; or, digital units redeemable for goods, services or purchases exclusively with the issuer or designated merchant.

Libra is the latest threat to an old guard established financial system.  Where Facebook’s Libra allegedly differs is it is not intended to compete with the US or other countries’ sovereign currency; and therefore, won’t interfere with central banks on monetary policy. Yet by the very nature of being an alternative currency, Libra like other cryptocurrencies are competitors and disruptors of established currency markets.  A competitor is seen as a threat in most environments; when the environment is a financial system, competitors are a threat that raise serious concerns.  Libra, like other cryptocurrencies were designed to be independent of legal frameworks.  Regulation is the opposite to cryptocurrency’s design.  While such opposites in another environment or market would cripple any new product or service, cryptocurrency as a technology, is an idea whose development isn’t tied to or halted by government oversight.  While it is quaint to conclude cryptocurrency will be forced to adjust to government’s brand of regulation, that may not be accurate in this situation.  Cryptocurrencies are operating and will go on and continue to be unregulated. It is the regulating bodies that are playing catch-up.

If you have questions or would like more information, please contact David Molinari at [email protected].

Duties of Care and Loyalty Coming to Investments Near You

Posted on: June 28th, 2019

By: Matthew Jones

The approval of Regulation Best Interest by the Securities and Exchange Commission last month continues to spark debate and controversy, and the future of the Rule remains uncertain.  The Rule’s implementation was set for June 30, 2020. However, on June 27, 2019, the United States House of Representatives passed a bill that would strip the SEC of its ability to implement the Regulation Best Interest package. The bill would prohibit the SEC from spending funds for Regulation Best Interest and the other items included in the Regulation. It is unclear whether the bill will pass both the Senate and White House, but the initial reaction is that the President will likely be advised to veto the bill.

Perhaps anticipating this potential obstacle, last week, Massachusetts released its own proposed fiduciary rule and is accepting comments until July 26, 2019. Its proposed rule requires that advice must be provided in the best interest of the customers without regard to the interests of the broker-dealer, advisory firm, or its personnel. The proposed standard permits the payment of transaction-based fees if the fee is reasonable, is the best of the reasonably available fee options, and the “care” obligation is complied with. This proposal applies to recommendations, advice, and the selection of account types. The stated goal of this standard is to protect the public interest and investors alike. This idea is nothing new, as the SEC’s Regulation Best Interest was designed to address and prevent similar issues. However, Massachusetts points out that the SEC Regulation fails to establish a strong and uniform fiduciary standard and fails to define the term “best interest.”

If you have questions or would like more information, please contact Matthew Jones at [email protected].