On March 8, 2021, the Acting US Trade Representative announced the conclusion of negotiations with the European Union on adjustments to the EU’s WTO tariff rate quotas (TRQ) as a consequence of the United Kingdom’s withdrawal from the EU. The agreement, after two years of negotiations under WTO procedures, will determine how to split TRQ quantities between the EU-27 and the United Kingdom (UK). The agreement will be signed and implemented after formal approval procedures are completed by the EU.
On March 12, 2021, CBP issued CSMS #46590066 – GUIDANCE: Suspension of EU Duties in Section 301 Action: Enforcement of U.S. World Trade Organization (WTO) Rights in Large Civil Aircraft Dispute, reproduced below:
The purpose of this message is to provide notice of the United States Trade Representative’s (USTR) determination to temporarily suspend additional duties on products of the European Union (EU) under the Section 301 Large Civil Aircraft (LCA) Dispute. The suspension is effective for products of the EU entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on March 11, 2021 and before 12:01 a.m. eastern standard time on July 11, 2021.
On October 9, 2019, the USTR published 84 FR 54245, imposing additional duties on certain products of the EU and certain EU member States in the Section 301 investigation to enforce U.S. WTO rights in the Large Civil Aircraft Dispute.
On January 6, 2021, the USTR published FR Notice 86 FR 674, announcing additional 15 percent duties on certain parts of large civil aircraft of France and Germany, and 25 percent duties on other products of France and Germany.
On March 10, 2021, the USTR posted Notice of Modification of Section 301 Action: Enforcement of U.S. WTO Rights in the Large Civil Aircraft Dispute on USTR.gov, temporarily suspending additional duties on products of the EU entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on March 11, 2021 and before 12:01 a.m. eastern standard time on July 11, 2021.
The functionality for the acceptance of the imported merchandise covered by this suspension is available in the Automated Commercial Environment (ACE) as of 7 a.m. eastern daylight time, March 14, 2021. Importers may submit post summary corrections on entry summaries submitted on or after March 11 to request a refund of the suspended EU duties.
Duties on goods from the United Kingdom were suspended via separate notice on USTR.gov as of March 4, 2021. The United Kingdom was included in the list of EU countries originally subject to the Section 301 duties, and is now being treated separately because it is no longer part of the EU.
Instructions for importers, brokers, and filers on importing products of the EU for consumption during the four-month suspension period granted by the USTR from the Section 301 LCA measures are set out below:
- Per subparagraph 2 of the Annex to the notice, products of Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden falling under HTS subheadings 9903.89.05, 9903.89.07, 9903.89.10, 9903.89.13, 9903.89.16, 9903.89.19, 9903.89.22, 9903.89.25, 9903.89.28, 9903.89.31, 9903.89.34, 9903.89.37, 9903.89.40, 9903.89.43, 9903.89.46, 9903.89.52, 9903.89.55, 9903.89.57, 9903.89.59, 9903.89.61, 9903.89.63 will not be subject to additional Section 301 duties for goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on March 11, 2021 and before 12:01 a.m. eastern daylight time on July 11, 2021.
- Importers shall not submit the corresponding Chapter 99 HTS number for the Section 301 LCA duties for products of the EU during the four-month suspension period.
Any product of Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden, that were admitted into a U.S. foreign trade zone in ‘privileged foreign status’ as defined in 19 CFR 146.41, before 12:01 a.m. eastern standard time on March 11, 2021, will remain subject to the applicable duties in subheadings 9903.89.05, 9903.89.07, 9903.89.10, 9903.89.13, 9903.89.16, 9903.89.19, 9903.89.22, 9903.89.25, 9903.89.28, 9903.89.31, 9903.89.34, 9903.89.37, 9903.89.40, 9903.89.43, 9903.89.46, 9903.89.52, 9903.89.55, 9903.89.57, 9903.89.59, 9903.89.61, and 9903.89.63 upon entry for consumption.
Any product of Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden covered by subparagraph 2 of the Annex to the notice, that is admitted into a U.S. foreign trade zone on or after 12:01 a.m. eastern standard time on March 11, 2021, and before 12:01 a.m. eastern daylight time on July 11, 2021, may be admitted in any status, as applicable, as defined in 19 CFR 146, Subpart D.
Reminder: When importers, brokers, and/or filers are submitting an entry summary in which a heading or subheading in Chapter 99 is claimed on imported merchandise, refer them to CSMS 39587858 (Entry Summary Order of Reporting for Multiple HTS when 98 or 99 HTS are required).
Questions from the importing community concerning ACE entry rejections involving product exclusions should be referred to their CBP Client Representative. Questions related to Section 301 entry-filing requirements, please refer to CSMS message #42203908 (Information on Trade Remedy Questions and Resources) https://content.govdelivery.com/accounts/USDHSCBP/bulletins/283fb04. Related CSMS messages: 46561075, 45453497, 43784137, 43762405, 41898289, 40430843, 40281968, 46561075
On February 16, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) removed Ansarallah, a political movement and militia group in Yemen also known as the Houthis, from the Specially Designated Nationals and Blocked Persons List (“SDN List”). Ansarallah had been added to the SDN List on January 19, 2021, as a Foreign Terrorist Organization (“FTO”) and Specially Designated Global Terrorist (“SDGT”). As a result of the removal, US Persons no longer require authorization from OFAC to engage in transactions or activities with Ansarallah, which broadly controls the northern part of Yemen, provided such activities do not involve blocked persons or otherwise prohibited activities.
OFAC also revoked a series of general licenses that had been issued following Ansarallah’s designation on the SDN List on January 19, as they are no longer needed. Three Ansarallah leaders who were designated as SDGTs at the same time as Ansarallah also had their SDGT designations removed, but they remain designated on the SDN List under other sanctions programs.
Please see also our prior blog post on the Trump Administration’s designation of Ansarallah as an SDN, the prior general licenses and FAQs, and the Biden Administration’s issuance of a general license temporarily authorizing most transactions with Ansarallah.
On March 2, 2021, the US Government imposed a series of new measures against Russian Government officials and entities in response to the alleged poisoning and subsequent imprisonment of Russian opposition politician Aleksey Navalny. Specifically, the US State Department (State) imposed a number of financial sanctions and export restrictions on Russia; the Office of Foreign Assets Control (OFAC) within the US Treasury Department designated seven Russian officials to the List of Specially Designated Nationals and Blocked Persons (the “SDN List”); the Bureau of Industry and Security (BIS) within the US Commerce Department added 14 entities to the Entity List.
According to the Treasury Department’s press release, Navalny was found poisoned on August 24, 2020 with a substance that was later identified as a Novichok nerve agent. It is believed that Russia is the only known country to have used Novichok and the nerve agent is only available to Russian state authorities. Therefore, while Russia has denied any involvement, the US, EU, and UK governments attributed the poisoning attack to the Russian Federal Security Service (FSB), Russia’s internal intelligence service. In February 2021, Navalny was convicted and sentenced to more than two years in prison. In response to the poisoning and subsequent imprisonment of Navalny, the US Government has implemented the following sanctions.
State Department’s Sanctions
1. Expansion of Existing Sanctions Imposed in 2018
On March 1, 2021, State determined pursuant to the US Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (“CBW Act”) that the Russian Government had used a chemical weapon against its own nationals in violation of international law. As a result, State announced the expansion of existing sanctions targeting Russia under the CBW Act. The CBW Act sanctions were first imposed in August 2018 in response to the Russian Government’s alleged poisoning of Sergei Skripal, a former Russian military intelligence officer who acted as a double agent for the UK’s intelligence services. In August 2019, State imposed a second round of CBW Act sanctions following the determination that the Russian Government had failed to provide reliable assurances that it would not engage in future chemical weapons attacks. Please see here and here for our prior blog posts regarding the Skripal-related rounds of CBW Act sanctions. The expanded sanctions include the following:
- Termination of Foreign Assistance: State announced the termination of foreign assistance to Russia (except for urgent humanitarian assistance and food or other agricultural commodities).
- Termination of Arms Sales: State announced the termination of (a) sales to Russia of any defense articles or defense services and (b) authorizations for the export of items (goods, software, technology) on the US Munitions List to Russia. (See subsection 4 below).
- Termination of Arms Sales Financing: All foreign military financing for Russia is terminated.
- Denial of US Government Credit or Other Financial Assistance: Any credit, credit guarantees, or other financial assistance by the US Government is denied.
- Prohibition on Exports of National Security-Sensitive Goods and Technology: All exports and reexports to Russia of goods and technology subject to National Security (“NS”) controls on the Commerce Control List (CCL) in the Export Administration Regulations (EAR) are prohibited.
The CBW Act provides the President with limited authority to waive certain restrictions when determined to be in the national security interest of the United States. The President has used this waiver authority to allow continued authorization for the following transactions:
- Foreign assistance to Russia;
- Exports to Russia under the following EAR license exceptions: Temporary Imports, Exports, and Reexports (TMP); Governments, International Organizations, and International Inspections under the Chemical Weapons Convention (GOV); Baggage (BAG); Aircraft and Vessels (AVS); and Encryption Commodities and Software (ENC);
- Exports needed to ensure the safe operation of commercial passenger aviation;
- Exports to wholly owned subsidiaries of US and other foreign companies in Russia;
- Deemed export licenses for Russian nationals working in the United States; and
- Exports in support of government space cooperation.
License applications for transactions covered by these waivers will continue to be reviewed on a case-by-case basis. Several existing export-related waivers, however, will be removed. Specifically,
- The waivers for EAR license exceptions Service and Replacement of Parts and Equipment (RPL), Technology and Software Unrestricted (TSU), and Additional Permissive Reexports (APR) will be removed. Exporters can no longer export or reexport NS-controlled items subject to the EAR to Russia under these license exceptions.
- The waiver for exports and reexports of NS-controlled items subject to the EAR to commercial end-users in Russia for civil end-uses will be removed. Where an EAR license exception is not applicable, license applications for such exports will now be reviewed under a “presumption of denial” policy.
- The waivers for exports of US Munitions List items and NS-controlled items in support of commercial
space flight activities in Russia will be removed following a six-month wind-down period. After that, license applications for such exports will be subject to “a presumption of denial” policy.
The unwaived sanctions will take effect following a 15-day Congressional notification period and will remain in place for at least 12 months and until the Executive Branch determines and certifies to Congress that the Russian Government has met various conditions related to its obligations under the Chemical Weapons Convention. If the Russian Government fails to meet these conditions, the CBW Act requires the imposition of a second round of sanctions, which was the case with the Skripal incident.
2. EO 13382 Designations
State also sanctioned the following seven entities and individuals under Executive Order (“EO”) 13382 for contributing to the proliferation of weapons of mass destruction or their means of delivery. Below please find a chart summarizing these designations.
|Entity/Individual Name||Reason for Designation||Prior US Sanctions|
|Federal Security Service (aka FSB)||Designated for its role in the Navalny poisoning and for possessing a Novichok chemical weapon||On the SDN List under US sanctions targeting malicious cyber-enabled activities since December 29, 2016 (the Federal Register Notice (“FR Notice”)); On the Entity List since January 4, 2017 (FR Notice)|
|State Scientific Research Institute of Organic Chemistry and Technology (“GosNIIOKhT”)||Has a longstanding role in researching and developing chemical weapons; developed Russia’s Novichok chemical weapons||On the Entity List since August 27, 2020 (FR Notice)|
|The 33rd Scientific Research and Testing Institute (“33rd TsNIII”)||Subordinate to the Russian Federation Armed Forces Chemical, Biological, and Radiological Defense troops; stewards Russia’s Shikhany Chemical Proving Ground, where Russia conducts chemical weapons-related testing||On the Entity List since August 27, 2020 (FR Notice)|
|The 27th Scientific Center of the Russian Ministry of Defense (“27th Scientific Center”)||Subordinate to the Russian Federation Armed Forces Chemical, Biological, and Radiological Defense troops; has been involved with Russian chemical weapons research and testing activities||Concurrently added to the Entity List on March 3, 2021 (FR Notice)|
|The Main Intelligence Directorate ( GRU)||Has engaged in activities that materially contribute to the possession, transport, and use of Novichok by Russia||On the SDN List under US sanctions targeting malicious cyber-enabled activities since December 29, 2017 (FR Notice) On the Entity List since January 4, 2017 (FR Notice)|
|Alexander Yevgeniyevich Mishkin||GRU officer, conducted a poisoning using a Novichok nerve agent in the United Kingdom in 2018||On the SDN List under US sanctions targeting Russia since December 27, 2018 (FR Notice)|
|Anatoliy Vladimirovich Chepiga||GRU officer, conducted a poisoning using a Novichok nerve agent in the United Kingdom in 2018||On the SDN List under US sanctions targeting Russia since December 27, 2018 (FR Notice)|
For the parties that were not already SDNs, the result of these designations is that “US Persons” (i.e., (i) US citizens and permanent residents (i.e., Green Card holders), wherever located or employed; (ii) entities organized under the laws of the United States and their non-US branches; and (iii) any individual or entity physically located in the United States, even temporarily) are prohibited from directly or indirectly dealing with or facilitating virtually any transactions with these SDNs as well as any entities 50% or more owned by them. Any property and interests in property of such SDNs must also be blocked if they come within the jurisdiction of the United States or the possession or control of a US Person.
3. Addition to the Countering America’s Adversaries through Sanctions Act (CAATSA) Section 231 List
Furthermore, the State Department added the following six Russian research institutes to the Countering America’s Adversaries through Sanctions Act (CAATSA) Section 231 List of persons identified as part of, or operating for or on behalf of, the Russian defense or intelligence sectors.
- 27th Scientific Center;
- 48 Central Scientific Research Institute Sergiev Posad (aka 48 TsNII Sergiev Posad; 48th Central Research Institute, Sergiev Posad):
- 48 Central Scientific Research Institute Kirov (aka 48th Central Research Institute Kirov; aka 48th TsNII);
- 48 Central Scientific Research Institute Yekaterinburg (aka 48th TsNII Yekaterinburg);
- GoSNIIOKhT; and
- 33rd TsNIII.
US and non-US persons who knowingly engage in a significant transaction with these parties could face secondary sanctions risks under CAATSA Section 235.
4. Amending ITAR to Implement Arms Embargo Against Russia
Finally, on March 1, 2021, State’s Directorate of Defense Trade Controls (DDTC) published a notice announcing its intent to amend Section 126.1 of the International Traffic In Arms Regulations (“ITAR”) to include Russia in the list of countries subject to a policy of denial for exports of defense articles and defense services, with certain exceptions and subject to a Congressional notification requirement. The ITAR amendment would be a formalization of DDTC’s Russia policy announced in August 2014 that the DDTC would deny pending applications for export or re-export of any ITAR-controlled high technology defense articles or services to Russia or occupied Crimea that contribute to Russia’s military capabilities. Furthermore, Russia’s inclusion in Section 126.1 means that ITAR violations that involve Russia or Russian nationals could trigger a mandatory reporting requirement to DDTC.
Separately, pursuant to the note to Country Group D:5 in Supplement No. 1 to Part 740 of the EAR, the addition of Russia to ITAR Section 126.1 will render Russia a Country Group D:5 country under the EAR. Countries in Country Group D:5 are subject to additional restrictions on transactions involving 9×515 or “600 series” items. Russia’s addition to Country Group D:5, however, would likely have a limited impact under the EAR. This is because Russia is already subject to military end-use/user controls under Section 744.21 of the EAR which imposes additional license requirements on the export, reexport, or transfer (in-country) of, among other things, 9×515 or “600 series” items to military end-uses/users in Russia.
OFAC’s SDN Designations and Update of FSB General License
OFAC announced on March 2, 2021 the designation of seven Russian officials to the SDN List pursuant to EO 13661 for serving as officials of the Russian Government. In addition to the EO13661 designation, the FSB Director was designated pursuant to EO 13382 for acting on behalf of the FSB. The entries for the existing SDNs were updated to reflect the fact that they have been sanctioned under EO 13882.
To account for the additional authorities under which the FSB has now been sanctioned, OFAC updated General License (“GL”) 1B and replaced GL 1A (the reissued version of GL 1 that authorizes limited transactions with FSB). Please see our prior blog posts here and here for more information on GL 1 and GL 1A. The substantive scope of the authorization in GL 1A was not changed. OFAC also made corresponding changes to the related FAQs (501, 502, 503).
BIS Entity List Additions
BIS announced that it is adding 14 entities located in Russia, Germany, and Switzerland to the Entity List based on their association with Russia’s weapons of mass destruction programs and chemical weapons activities. As a result of the Entity List designation, a BIS export license is required for the export, reexport, or transfer (in-country) of any item subject to the EAR when a listed entity is a party (e.g., as a purchaser, intermediate consignee, ultimate consignee, or end-user) to the transaction.
When identifying and producing trade secrets in discovery, both in trade secret and other litigation cases, unique risks to confidentiality and competition arise. In this video chat, North America Trade Secrets Practice members Mark Goodman and Michael Brewer offer their expert perspectives on how parties can strategically approach trade secret discovery and adopt practical solutions to potential problems.
Welcome to Baker McKenzie’s new Labor and Employment video chat series for US employers. Our lawyers will provide quick, practical tips on today’s most pressing issues for US employers navigating the new normal. The videos complement our blog, The Employer Report, which provides written legal updates and practical insights about the latest labor and employment issues affecting US multinationals, at both the domestic and global level.
Please click below to watch the video chats and be sure to let us know if there are additional topics you’d like us to address.
Date: 18 March 2021
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On 1 February 2021, FINRA issued its 2021 Report on FINRA’s Examination and Risk Monitoring Program (“FINRA Report“) and a bit more than a month later, the SEC’s recently renamed Division of Examinations issued its own 2021 Examination Priorities (“Exam Priorities“). Each of these documents is quite long, with the FINRA report at 44 pages and the Exam Priorities document at 36 pages, and although there are some differences in focus and scope, we did find some common themes, which we have chosen to highlight in what we hope will be a helpful summary.
- Retail investor protection
- Standards of conduct
- Fintech and digital assets
- Cybersecurity and operational resiliency
- Anti-money laundering
- Best execution
The Exam Priorities document serves as a report on the Division of Examinations’ activities and accomplishments over the last fiscal year, as well as a look ahead at key risks, trends and examination priorities, and is similar to other SEC division or office published reports in its content and tone. In contrast, the new format FINRA Report combines a variety of prior FINRA materials and promises to be a “living document,” to be updated each year, considering perennial topics, as well as adding new risks and resources for members to consider. The FINRA Report offers, not only member obligations under the FINRA rule(s), but also what FINRA has seen in recent exams, and what the FINRA staff views as effective compliance practices in the area.
Retail investor protection
Not surprisingly, both the SEC and FINRA focused on retail investors in their documents. In its Exam Priorities, retail investor protection was addressed by the Division of Examinations in connection with the standards of conduct for broker-dealers and investment advisers, disclosure of conflicts of interest, and disclosure of fees and expenses, as discussed below. In addition to these priorities, the Division of Examinations also noted its specific focus on recommendations to senior citizens, and on registered persons who target retirement communities, as well as teachers and military personnel. Moreover, the retail investor protection theme comes through loudly in the Exam Priorities discussion of retail account conversions and rollovers, as well as the staff’s consideration of certain investment strategies and product types, like complex strategies or products, high-risk products, or more opaque, non-traded or illiquid products, or products that come with high commissions. The Division will be reviewing to ensure that sales practices meet obligations under the appropriate standards of conduct, and that firms’ disclosures of risks, fees, and sales incentives and other compensation are similarly compliant.
The FINRA Report does not include a separate section on retail investor protection. Rather, protecting retail investors is addressed through the prism of the FINRA rule set and many of the key areas that FINRA highlights directly affect retail investors. These areas include: compliance with Reg BI and Form CRS, best execution and the focus on “zero commission” trading, and variable annuity sales practices such as exchanges and buyout offers. Retail investor concepts are also embedded in the continued focus on communications with the public, including risks relating to new digital communication channels, the increasing use of interactive and “game-like” features in online apps, and the promotion of cash management accounts. FINRA also emphasized that it remains “highly focused on” protecting senior and vulnerable investors, particularly as it relates to reviews of communications, recommendations of certain products, and sales practice conduct.
Standards of conduct
As expected in light of the SEC’s continued focus on retail investors, the Exam Priorities led with Regulation Best Interest, Form CRS and fiduciary duty under the Advisers Act. With regard to Reg BI and Form CRS, the Exam Priorities and the FINRA Report align, highlighting compliance, as opposed to focusing solely on implementation and readiness, which was central in 2020 for both the SEC and FINRA. The Exam Priorities also address the fiduciary obligations of investment advisers, with a focus on the 2019 Commission Interpretation Regarding the Standard of Conduct for Investment Advisers (IA Interpretation).
The Exam Priorities reiterate Reg BI’s best interest obligation― including the four component obligations of Disclosure, Care, Conflicts of Interest and Compliance―as they apply to broker-dealers and their associated persons when making a recommendation to retail customers of any securities transaction or investment strategy involving securities. Unlike prior examinations, which focused on preparation and implementation of Reg BI, the examination priorities for 2021 center on compliance with the rule. Examinations will focus on transaction testing, assessing whether broker-dealers’ recommendations are based on their reasonable belief that the recommendations are in clients’ best interest, existing processes for compliance, and alterations made to product offerings. The Exam Priorities also highlight rollovers, complex product recommendations, reasonably available alternatives, and how sales-based fees impact recommendations, and policies and procedures to identify and address conflicts of interest.
Investment advisers – fiduciary duty
The Exam Priorities highlights the IA Interpretation, noting that examinations will focus on whether advisers are fulfilling their duty of care and duty of loyalty, including with respect to the elimination or disclosure of conflicts of interest. The Exam Priorities highlights the staff’s continued focus on fees and expenses, complex products, best execution and undisclosed, or inadequately disclosed, compensation arrangements. Although the Interpretation did not purport to replace or expand existing interpretations of fiduciary duty, an examiner could, and likely will, ask questions beyond the four corners of the IA Interpretation, including with regard to financial conflicts of interest.
Both broker-dealers and SEC-registered investment advisers are subject to a Form CRS requirement. Despite extensive SEC messaging, leading up to and since the June 30 implementation deadline, apparently, based on the Exam Priorities, a significant number of firms have not yet begun to use Form CRS, or have not completed a Form CRS accurately, particularly with regard to disciplinary information. While the number of firms with incomplete or missing information on their Form CRS should decrease based on greater regulatory outreach, we note the importance of regular review and update of Form CRS to ensure accuracy and timely delivery to clients. For investment advisers, changes to an adviser’s Form ADV may result in changes in its Form CRS. For both broker-dealers and investment advisers, changes to certain elements of a firm’s business model (including conflicts of interest or revenue sharing relationships) may also require updates and redelivery of Form CRS. The Exam Priorities expressly notes that the “Division will prioritize examinations of broker-dealers and RIAs to assess compliance with Form CRS,” indicating that both investment advisers and broker-dealers can expect Form CRS examinations in this year.
Fintech and digital assets
Financial and regulatory technology are broad categories, which include financial institution offerings, as well as new technologies offered by service providers to the firms. Technology has altered how firms relate to their customers and clients, and what resources are available to the firm, both to provide more and better services, as well as to ease compliance burdens.
The FINRA Report identifies concerns about regulatory technology providers and third party vendors, including “Cloud Vendors,” in the context of books and records requirements. The FINRA Report also poses specific questions for its members to consider about how they use digital communications channels and whether those communications are compliant, not only with Rule 2210, but also with policies and procedures that have been updated to contemplate these new forms of communication, and all recordkeeping mandates. The FINRA Report expends significant effort on issues related to the so-called “gamification” of investments and expresses concerns about the risks of such platforms and whether these new technologies meet compliance requirements for customer communications. Along the same lines, the inquiries included in the FINRA Report on digital assets seek to ensure that information about these products, particularly provided to retail investors, is not misleading and addresses all of the relevant risks.
Similarly, the SEC’s Exam Priorities also discusses how financial technology has altered the engagement between firms and their clients, including through automated investment platforms, fractional share purchase opportunities, mobile applications for trading and other interactions. The Exam Priorities specifically identifies these issues as priorities for review, to ensure that firms are meeting their compliance obligations and conforming to whatever representations they have made to clients and customers. Further, the Division of Examinations warns about the opacity of some regulatory technology (RegTech) offerings and confirms that this is both an area of focus for examination and a potential area where firms may have inadvertent compliance deficiencies for example in the case of misused or improperly configured RegTech. This focus on RegTech is a reminder to firms that relying on automated tools from third-party vendors does not fully replace existing compliance processes. Finally, the Exam Priorities also identifies digital assets as an area for exam focus, with the staff looking not only at disclosures and compliance programs related to investments in digital assets, but also at valuation and safety of client assets.
Cybersecurity and operational resiliency
Registrants should continue to monitor their operational cybersecurity compliance and business continuity plans in light of the effects of the ongoing pandemic. They also should take into account the effects of climate change on their business continuity plans.
The effects of the pandemic and the resulting risks from remote work and operations environment
As described in each of their recent examinations documents, both the SEC and FINRA expect registrants to calibrate their cybersecurity compliance and business continuity plans to take into account the greater risks from a remote work and operations environment.
For instance, according to the SEC Exam Priorities, the pandemic has heightened the SEC’s concern with endpoint security, data loss, remote access, use of third-party communication systems, and vendor management. Similarly, the FINRA Report disclosed greater concerns with cybersecurity risks associated with the remote work environment combined with what FINRA observed to be an increase in cyber-related crimes. In particular, FINRA observed higher numbers of cybersecurity incidents including system-wide outages, email and account takeovers, fraudulent wire requests, imposter websites and ransomware.
With these concerns in mind, in the upcoming year, the SEC Examination Staff will review whether firms have taken appropriate steps to:
- safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access;
- oversee vendors and service providers;
- address malicious email activities, such as phishing or account intrusions;
- respond to incidents, including those related to ransomware attacks; and
- manage operational risk as a result of dispersed employees in a work-from-home environment.
FINRA will similarly review cybersecurity programs for compliance with business continuity plan requirements, as well as the SEC’s Regulation S-P Rule 30, which requires maintenance of policies and procedures for the protection of customer records and information.
Climate change and business continuity plans
Consistent with its multiple recent statements on ESG issues, according to the Exam Priorities, the SEC will examine whether registrants are reasonably prepared for the effects of climate change on their businesses and operations. The SEC will build on its efforts in gathering information regarding business continuity plan in relationship to the pandemic. In particular, the SEC Examination Staff will evaluate whether such plans, particularly those of systemically important registrants, take into account the growing physical and other relevant risks associated with climate change. Similar to its post-Hurricane Sandy work, the SEC Examination Staff will look for appropriate improvement to these plans in response to the effects of climate change over the years. The Division’s interest in systematically important registrants’ operational resilience shows that it is not just interested in individual firms’ compliance practices, but also financial markets’ overall ability to adapt to the increasing risks of climate change.
Although it was not addressed in the FINRA Report, it is worth noting that the SEC Exam Priorities also emphasized that registrants should be vigilant with compliance surrounding ESG investing. Specifically, the Division of Examination will be reviewing the consistency and adequacy of disclosures regarding ESG strategies and investments that asset managers and funds provide to their clients and investors, advertising that may contain false or misleading statements relating to ESG claims, and the degree to which proxy voting policies and procedures and actual voting align with stated ESG strategies.
Although the Exam Priorities devotes only two paragraphs to anti-money laundering priorities – indicating that the Division of Examinations will continue to prioritize assessments of broker-dealers and registered investment companies for compliance with anti-money laundering requirements – the FINRA Report provides a more fulsome discussion of exam observations during 2020 and best practices for compliance with FINRA Rule 3310.
Several of the exam observations are worthy of note:
- Inadequate AML framework for cash management accounts – FINRA has identified cash management accounts as a product area where firms have not adequately adapted their AML programs to address the unique money laundering risk associated with these accounts as compared to brokerage or other types of accounts, and to implement a tailored, risk-based approach.
- Data integrity gaps – FINRA noted that firms had excluded certain types of data and accounts from monitoring programs due to issues with ingesting certain data, and observed inaccuracies and missing information in transaction monitoring data feeds. FINRA’s focus on data integrity follows the 2018 implementation of the New York State Department of Financial Services’ Part 504, which requires regulated financial institutions in New York to validate the integrity and accuracy of data feeds used in transaction monitoring activities.
- Concerns about high-risk trading by foreign legal entity accounts – FINRA observed a failure of firms to identify or investigate increased trading by foreign legal entity accounts in low-float and low-priced securities. Firms already are required under the Bank Secrecy Act (and its implementing FinCEN regulations) to develop a special due diligence program for certain foreign financial institution account holders, which includes a periodic review of account activity. FINRA’s observation with respect to foreign legal entity accounts makes clear the regulatory focus on all types of foreign accountholders.
- Improper reliance on clearing firms – FINRA also observed reliance by introducing firms on their clearing firms for transaction monitoring and suspicious activity reporting, notwithstanding introducing firms’ independent obligation under the Bank Secrecy Act (and FINRA Rule 3310) to detect and report suspicious activity to FinCEN.
The FINRA Report also highlighted the following emerging AML and other financial crime risks: (i) microcap and other fraud, (ii) issuers based in restricted markets, and (iii) risks related to special purpose acquisition companies (SPACs). In regards to microcap fraud, FINRA directs firms to the SEC Staff Bulletin on Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities, which highlights a number of financial crime risks associated with trading in low-priced securities. In addition, FINRA flagged the prevalence of account openings by foreign nationals and entities for participating in initial public offerings in jurisdictions like China and related aftermarket trading. FINRA has identified red flags in connection with these accounts, specifically instances where multiple accounts were opened by or on behalf of the same beneficial owners and engaged in trading indicative of market manipulation of the relevant securities issued in high-risk jurisdictions.
Finally, FINRA highlighted that a number of firms are engaged in the formation and offering of SPACs without having adequate procedures in place to address the financial crime risk associated with SPACs, which include potential misrepresentations and omissions in offering documents, fees associated with SPAC transactions, control of funds raised in SPAC offerings, and insider trading.
Although only briefly mentioned in its Exam Priorities, the SEC specifically noted that examinations will focus on compliance with best execution, given the low and zero cost commission environment, and stated further that the staff will continue to examine payment for order flow and compliance with Regulation SHO. This masterful understatement, in the face of Congressional hearings on the recent GameStop stock volatility and the publicity that has surrounded these issues, as well as the outcries in favor of and opposed to additional regulation related to the same, is perhaps the best and only response that a Division of the SEC could offer. We do expect more to come on all of these topics. We anticipate the SEC to take a closer look at the impact on retail investors of zero-commission trading, and how platforms offering that service manage and disclose any payment for their order flow, while also achieving best execution for their customers. To the extent these issues, as well as Reg SHO compliance, are relevant to their business operations, firms should prepare for significant evaluations in these areas during exams.
Because of the very nature of the FINRA Report, FINRA offers specific considerations and inquiries on the topic of best execution, which offer a helpful framework to analyze Rule 5310, as well as to prepare for an examination in this area or really just consider compliance readiness. Helpfully, the FINRA Report also identifies what examiners have seen in recent examinations, in way of best execution findings, and what FINRA is evaluating through its “zero commissions” targeted examination letter, the results of which, the staff promises to share when the review is completed.
The Securities and Exchange Commission (“SEC”) has taken a major step towards exercising its significant power to require companies to disclose greater information relating to ESG and climate impacts.
On March 4, 2021, the SEC announced that it has formed a Task Force focusing on climate and ESG disclosure issues. The Task Force is a part of SEC’s Division of Enforcement and will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement.
According to SEC’s press release, the initial focus of the Task Force is two-fold and includes the following:
- identifying material omissions and misstatements in climate risk disclosures filed by issuers, and
- analyzing disclosures and compliance issues related to investment advisers’ and funds’ ESG strategies.
Acting Deputy Director Gibson stated that “[p]roactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC’s mission,” and this task force will allow the SEC to better police the market, pursue misconduct, and protect investors. In addition, the Climate and ESG Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the SEC Enforcement Division.
The Task Force, along with the recent appointment of Satyam Khanna as the SEC’s first-ever Senior Policy Advisor for Climate and ESG, appears to further the Biden Administration’s commitment to developing a new set of mandatory disclosures focusing on the climate impact of both public companies and their supply chains. In August 2020, then SEC Commissioner and now Acting SEC Chair Allison Herren Lee criticized the final rule amending Regulation S-K, which outlines financial disclosure requirements for public companies, for being “silent on the topic of climate risk” when “we are long past the point at which it can be credibly asserted that the climate risk is not material.” She also noted that it is clear that investors are not getting material information on climate risk as evidenced by investors who represent in excess of $29 trillion in assets calling on the SEC directly to issue rules requiring corporate climate risk disclosure. In conclusion, Acting Chair Lee stated that “the time for silence has passed,” and “[i]t’s time for the SEC to lead a discussion — to bring all interested parties to the table and begin to work through how to get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy.”
The prospect of greater SEC disclosure requirements regarding corporate ESG impacts – coupled with a renewed SEC commitment to pursue tips and encourage whistleblower complaints on ESG matters – further increases the risk to companies who have not yet developed risk-based responsible sourcing and ESG compliance programs. Companies are well-advised to consider the efficacy of current policies, procedures, and other program elements to cover the risk of climate, social, and governance failures both in supply chains and in broader enterprise operations.
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On March 5, 2021, US Customs and Border Protection (“CBP”) issued a new factsheet regarding how Withhold Release Orders (“WROs”) might be modified or revoked by CBP (“WRO Modification and Revocation Guidance”), which builds upon previous guidance by CBP on similar issues, including the factsheet issued on August 6, 2020. As a reminder, a WRO can be issued when CBP reasonably (but not conclusively) believes that certain goods are mined, produced, or manufactured, wholly or in part, by forced or indentured labor, including forced child labor, and CBP officials are directed to detain shipments that are within the scope of a WRO.
In the WRO Modification and Revocation Guidance, CBP outlines how the agency might (i) modify the scope of a current WRO or (ii) revoke a current WRO.
To modify the scope of a current WRO, a foreign party subject to the WRO has to demonstrate to CBP that it has remediated all of the 11 International Labour Organization (“ILO”) indicators of forced labor (available here), in which case CBP may suspend enforcement of the WRO against the particular foreign party. The 11 indicators of forced labor, which according to the ILO represent the most common signs or “clues” that point to the possible existence of a forced labor case, are as follows:
- Abuse of vulnerability
- Restriction of movement
- Physical and sexual violence
- Intimidation and threats
- Retention of identity documents
- Withholding of wages
- Debt bondage
- Abusive working and living conditions
- Excessive overtime
To revoke a WRO, a foreign party subject to the WRO has to demonstrate to CBP that it was not engaged in forced labor practices, in which case CBP may remove the foreign party from the scope of the WRO (or revoke the entire WRO, as appropriate).
The WRO Modification and Revocation Guidance also outlines information that “CBP generally considers beneficial” in reviewing a request to modify or revoke a WRO:
- Evidence refuting each of the 11 ILO indicators of forced labor;
- Evidence that policies, procedures, and controls are in place to ensure that forced labor conditions are remediated (NOTE: CBP has advised that it is not helpful to provide policies, procedures, and controls without explaining how they are implemented in practice);
- Evidence of implementation and subsequent verification by an unannounced and independent third-party auditor; and
- Supply chain maps that specify locations and identifications of the manufacturers, factories, farms, processing centers, and other key parties in the supply chain.
A party that is currently subject to a WRO, or a US importer whose strategic supplier is subject to a WRO, may consider submitting a request to CBP consistent with the WRO Modification and Revocation Guidance to either modify or revoke the WRO against the party. Further, companies should consider whether their responsible sourcing programs are currently structured in a way that could readily assist with a WRO modification or revocation process as required by CBP. Lastly, this development further highlights the importance of proactive commitment to responsible sourcing programs as CBP tightens enforcement around forced labor compliance.
[The first paragraph has been updated from an earlier blog to reflect the publication of this notice in the Federal Register.]
On March 10, 2021, the Office of the United States Trade Representative (USTR) published in the Federal Register a notice (that was previously posted on the USTR website) that announces the USTR’s determination to further extend exclusions from the sec. 301 tariffs for 99 medical-care and similar products needed to address the COVID-19 pandemic. Those extensions were published in the Federal Register on December 29, 2020 (See 85 FR 85831) The new extensions will extend the product exclusions through September 30, 2021. US Customs and Border Protection (CBP) will issue instructions on entry guidance and implementation. As provided in the December 29 notice, the exclusions are available for any product that meets the description in the product exclusion. The U.S. Trade Representative may continue to consider further extensions and/or additional modifications as appropriate.
Effective with respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on April 1, 2021, and before 11:59 p.m. eastern daylight time on September 30, 2021, each of the article descriptions of headings 9903.88.62, 9903.88.63, 9903.88.64 and 9903.88.65 of the Harmonized Tariff Schedule of the United States are modified by deleting “March 31, 2021,” and by inserting “September 30, 2021,” in lieu thereof.
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