The Fiduciary Monitor

June | 2nd Quarter 2016 (Vol. 3)

The

FIDUCIARY MONITOR Quarterly Regulatory and Litigation Updates

Introducing a New Look! …connecting the Financial Services Industry

» PLUS, in this edition:  OCC and FINRA Address Fintech and Digital Investment Advice  CFPB Enters Data Security Enforcement  Fiduciary Forum: Family Offices v. Private Equity, Tom Benson, Forward-Looking Fiduciaries . . . and Prince CONNECT WITH US

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The information provided herein presents general information and should not be relied on as legal advice when analyzing or resolving a specific legal issue. If you have specific questions regarding a particular fact situation, please consult with competent legal counsel about the facts and laws that apply.

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THE

FIDUCIARY MONITOR https://www.hklaw.com/Kevin-Coventon/

Quarter 2, June 2016 Volume 3

Quarter 2, June 2016 Volume 3 Executive Editor ETHAN H. COHEN Managing Editors JONATHAN H. PARK KEISHA O. COLEMAN

Content Editors JOHN R. DE LA MERCED GRANT E. SCHNELL

In e-version, names are live links to web bios.

Holland & Knight Advisory Board CHRISTOPHER W. BOYETT Co-Practice Group Leader, National Private Wealth Services HOWARD J. CASTLEMAN KEVIN E. COVENTON CHRISTOPHER G. CWALINA Co-Chair, Data Security & Privacy JOHN D. DADAKIS Chair, New York Private Wealth Services TERRENCE O. DAVIS Co-Chair, Investment Management MITCHELL E. HERR FRANK A. KEATING Former Two-Term Governor of Oklahoma; Past President and CEO, Am. Bankers Association

EDWARD F. KOREN Chair, Private Wealth Services; Past-Regent, ACTEC; Past-Chair, ABA Section of Real Property, Trust and Estate Law

BRUCE S. ROSS Chair, Private Wealth Services Dispute Resolution; Past-President and Regent Emeritus, ACTEC

ROBERT “BOB” LANG

ALBAN “ALBY” SALAMAN Chair, Mid-Atlantic Region Private Wealth Services; President, Washington, D.C., Estate Planning Council

SHARI A. LEVITAN Chair, New England Private Wealth Services J. ALLEN “ALLEN” MAINES Executive Partner, Atlanta TRACY A. NICHOLS National Practice Group Leader, Securities Litigation LARRY PIKE STACIE POLASHUK NELSON

WILLIAM N. SHEPHERD Industry Sector Group CoTeam Leader, Finance & Financial Services DAVID SCOTT SLOAN Co-Practice Group Leader, National Private Wealth Services VIVIAN LEE THOREEN Chair, California Private Wealth Services ___________________

Senior Business Development Manager KATHLEEN ANN LARRISON © 2016 by Holland & Knight LLP

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TABLE OF CONTENTS 1. REGULATORY UPDATES...................................................................... 5 1.1 OCC Updates Civil Money Penalties Against Institutions and Individuals .......................................................................................5 1.2 OCC Fintech White Paper: "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective" .........................6 1.3 Excerpts from the FINRA Chair’s Opening Remarks at 2016 Annual Conference ......................................................................................8 1.4 FINRA’s New Report on Digital Investment Advice .......................11 1.5 FINRA Reminds Firms that Pension Income Stream Products May Be Securities ..................................................................................16 1.6 The Civil Action to Stop The DoL’s New Fiduciary Rule .................17 1.7 SEC Sets April 2017 Deadline for Proposing New Fiduciary Rule ..19 1.8 Key Takeaways from the SEC’s April 19, 2016 Compliance Outreach Program.........................................................................19 2. RECENT FIDUCIARY CASE LAW ......................................................... 20 2.1 In re Central States Capital Markets, LLC et al., Securities & Exchange Commission (Mar. 15, 2016) .........................................20 2.2 In re Estate of Opalinska, 45 N.E.3d 687 (Ill. App. 1st 2016) .........23 2.3 Babbitt v. Superior Court, 246 Cal. App. 4th 1135 (Apr. 25, 2016) 25 2.4 Merrill Lynch v. Manning, 136 S.Ct. 1562 (2016) ..........................27 2.5 State Bank of Bellingham v. BancInsure, Inc.,— F.3d —, 2016 WL 2943161 (8th Cir. 2016) ................................................................29 3. ELDER LAW CONSIDERATIONS ......................................................... 30 4. NEW/NOTEWORTHY ........................................................................ 32 4.1 CFPB Expands UDAAP Jurisdiction in its First Foray into Data Security Enforcement ....................................................................32 5. FIDUCIARY FORUM........................................................................... 35 5.1 Family Offices Making Investment Impact, Catching Attention of Private Equity ................................................................................35 5.2 Capacity Confirmed, Tom Benson Seeks to Cut Daughter and Grandchildren Out of Trust ...........................................................36 5.3 Excerpt From “Forward-Looking Fiduciaries: Strategies for Rising to the Challenges on the Highway Ahead” (full version appearing in FIRMA QUARTERLY MAGAZINE, 2016, Iss. 2, at 8-15) and Headlines… ....................................................................................37

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1. REGULATORY UPDATES 1.1 OCC Updates Civil Money Penalties Against Institutions and Individuals The Office of the Comptroller of the Currency (OCC) issued an update to its Policies and Procedures Manual for the assessment of civil monetary penalties (CMPs), on February 26, 2016. The OCC has authority to assess CMPs against any national bank or institution-affiliated party (IAP). The manual states: “A CMP may serve as a deterrent to future violations of law, regulation, orders, conditions imposed in writing, and written agreements, as well as certain unsafe or unsound practices and breaches of fiduciary duty, both by the IAP or institution against which the CMP is assessed and by other IAPs and institutions. A CMP can also encourage correction of violations, unsafe or unsound practices, and breaches of fiduciary duty. A CMP against an IAP emphasizes the accountability of individuals.”

One of the key changes is the separation of the CMP matrices for institutions and individuals. Individuals include directors, officers, and controlling shareholders, as well as certain thirdparty service providers. Like institutions, an individual’s actions will be weighted to “reflect progressive levels of severity,” including considerations such as intent, continuation after notification and concealment.

OCC, POLICIES AND PROCEDURES MANUAL 5000-7 (Revised), BANK SUPERVISION: CIVIL MONEY PENALTIES (Feb. 26, 2016), available at http://www.occ.gov/newsissuances/bulletins/2016/bulletin-2016-5a.pdf

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1.2 OCC Fintech White Paper: "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective" Confronting the presence and rapid development of financial technology, the OCC issued a white paper in March 2016 describing “the OCC’s vision for responsible innovation in the federal banking system and discuss[ing] the principles that will guide development of [the OCC’s] framework for evaluating new and innovative financial products and services.”

Comptroller of the Currency, Thomas J. Curry, in the preface to the white paper, explained: “While banks continue to innovate, rapid and dramatic advances in financial technology (fintech) are beginning to disrupt the way traditional banks do business. As the prudential regulator of the federal banking system, we want national banks and federal savings associations to thrive in this environment and to continue fulfilling their vital role of providing financial services to consumers, businesses, and their communities.”

Responsible Innovation Defined “While innovation has many meanings, the OCC defines responsible innovation to mean: The use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.”

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The OCC’s Eight Guiding Principles for Responsible Innovation The OCC lists the following principles of responsible innovation: 1.

support responsible innovation.

2.

foster an internal culture receptive to responsible innovation.

3.

leverage agency experience and expertise.

4.

encourage responsible innovation that provides fair access to financial services and fair treatment of consumers.

5.

further safe and sound operations through effective risk management.

6.

encourage banks of all sizes to integrate responsible innovation into their strategic planning.

7.

promote ongoing dialogue through formal outreach.

8.

collaborate with other regulators.

OCC, SUPPORTING RESPONSIBLE INNOVATION IN THE FEDERAL BANKING SYSTEM: AN OCC PERSPECTIVE (Mar. 2016), available at http://www.occ.treas.gov/publications/publications-by-type/otherpublications-reports/pub-responsible-innovation-banking-system-occperspective.pdf

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1.3 Excerpts from the FINRA Chair’s Opening Remarks at 2016 Annual Conference

On May 23, 2016, Richard G. Ketchum, FINRA’s Chair and chief executive officer, delivered the opening remarks at FINRA’s 2016 Annual Conference in Washington, DC. The following are excerpts from his remarks (quoted from his speech as prepared for delivery). The seven heading-titles used in this summary are from Mr. Ketchum’s speech.

Commerce and Compliance: It’s Not a Culture War Starting with a broad industry perspective, and acknowledging the DoL’s [Department of Labor’s] new fiduciary rule, Mr. Ketchum observed that “[o]ne of the most significant developments this year in our collective mission is the evolving fiduciary landscape and what it means for how firms deliver retirement-savings advice. Wherever you stand on the wisdom of DoL’s rule, the fiduciary evolution in many ways gets to the heart of how firms interact with clients— the delivery of products and services that defines the essential qualities of a firm—its motivations and priorities. In a word: culture.”

And here is one of several references Mr. Ketchum made to FINRA’s research addressing the science of decision-making: “Part of that work involves applying research from behavioral scientists to the financial services industry to understand how and why honest people do dishonest things.”

Accepted Behaviors “We need to recognize that rules alone cannot address the very real challenges that financial firms have in ensuring that ‘good people’ do not take actions that harm their clients and expose their firms. This idea suggests that institutional culture—and not just ‘a culture of compliance’—is really important at firms.”

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“In our reviews, FINRA will assess five indicators of a firm’s culture: whether control functions are valued within the organization; whether the organization proactively seeks to identify risk and compliance events; whether policy or control breaches are tolerated; whether supervisors are effective role models of firm culture; and whether subcultures—such as those at a branch office, a trading desk or an investment banking department—that may not conform to overall corporate culture are identified and addressed. We are also looking at the role that compensation practices play in reinforcing—or possibly undermining—cultural values.”

Hiring Practices “There remain firms that have substantial concentrations of employees with significant past disciplinary records or a number of settled sales practice complaints or arbitrations.

To say it bluntly, statistical analyses done by FINRA’s Office of the Chief Economist and independent studies demonstrate that these firms are meaningfully more likely to have repeat sales practice violations that harm clients.”

C-Suite Examples: Do, Not Just Say “The board, the CEO, business leaders and the CCO all play critical roles in setting the tone at the top and establishing an organization’s values and ethical climate. Moreover, when individual conduct deviates from the expected behaviors, quick and decisive action must follow. Similarly, firms should be transparent about rewarding those who live by and promote strong ethical values, and they should empower their staffs to speak out when cultural and ethical breaches are at issue.”

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Competitive Nature of the Securities Industry “Research tells us, however, that when it comes to ethical behaviors, our competitive culture, our winner-takes-allapproach, doesn’t always produce the best outcomes. So the challenge for any firm is to assess whether its compensation system promotes and rewards unethical behavior. Be mindful of the conflicts your firm’s compensation systems may create. And, align your compensation system with customers’ interests . . . Indeed, our follow-up review of conflicts in compensation practices launched in 2015 suggests that firms can do more to manage and mitigate conflicts related to compensation.”

What is Next for FINRA and Firms “FINRA has supported a ‘best interests of the customer’ standard for a number of years, and I continue to believe that a best interest standard for broker-dealers—under the securities laws—is the direction we must go. And we must get it right.”

Regulatory Culture “I so strongly believe in the importance of being responsive in providing guidance regarding the correct interpretation of FINRA rules and also expanding the number of areas where FINRA provides firms ‘report cards’ of how they rank with their comparators in meeting their compliance obligations.

We have steadily expanded the areas where we provide these report cards on the market side, but look to us to strive to more and more provide this type of information through our examinations of firms as we have recently done in our conflicts and cyber reports. There is no higher goal for a regulator than for it to be a positive force in helping firms build their ‘compliance culture.’”

Richard G. Ketchum, Chairman & CEO, Financial Industry Regulatory Authority, Remarks from the 2016 FINRA Annual Conference (May 23, 2016), available at https://www.finra.org/newsroom/speeches/052316remarks-2016-finra-annual-conference.

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1.4 FINRA’s New Report on Digital Investment Advice This March 2016, FINRA published its Report on Digital Investment Advice, reviewing both (1) client-facing digital investment tools (online investment management services that use automated portfolio-management advice in lieu of financial planners, frequently referred to as “robo-advisers”); and (2) financial professional-facing tools (including advance analytic tools and presentation interfaces traditional financial professionals use in connection with advising clients).

Recognizing digital investment advice as a rapidly growing area, FINRA identifies best practices that firms should consider in several areas, including investor profiling, guarding against conflicts of interests, training, governance and supervision of algorithms, and account rebalancing.

Investor Profiling The FINRA report emphasizes FINRA’s position that, regardless of whether investment advice is generated digitally or comes from a traditional financial professional, the following six effective practices for customer profiling still apply: 1.

2.

3.

4.

5.

6.

identifying the key elements of information necessary to profile a customer accurately; assessing both a customers’ risk capacity and risk willingness; resolving contradictory or inconsistent responses in a customer profiling questionnaire; assessing whether investing (as opposed to saving or paying off debt) is appropriate for an individual; contacting customers periodically to determine if their profile has changed; and establishing appropriate governance and supervisory mechanisms for the customer profiling tool.

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Although the financial professional-facing tools FINRA observed could be used to glean a broad range of information about customers, FINRA expressed concern over the limited amount of information it observed being collected by client-facing digital advice tools. For example, FINRA questioned whether these tools are designed to sufficiently assess suitability and resolve conflicting customer responses. FINRA listed the following six questions that may help assess whether the tool meets the customer-specific suitability obligation: 1.

2.

3.

4.

5.

6.

Does the tool seek to obtain all of the required investment profile factors?

If not, has the firm established a reasonable basis to believe that the particular factor is not necessary?

How does the tool handle conflicting responses to customer profile questions?

What are the criteria, assumptions and limitations for determining that a security or investment strategy is suitable for a customer?

Does the tool favor any particular securities and, if yes, what is the basis for such treatment?

Does the tool consider concentration levels and, if so, at what levels (e.g., particular securities, class of securities, industry sector)?

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Guarding Against Conflicts of Interest FINRA noted that digital construction of portfolios can raise concerns about conflicts of interest, specifically employeeclient and firm-client conflicts. Although employee-versusclient conflicts are not a concern with purely client-facing tools (since no financial professional is involved), hybrid platforms that involve financial professionals may raise potential conflicts. Accordingly, FINRA encourages firms to establish governance and supervisory mechanisms that would do the following five things: 1.

2.

3.

4.

5.

determine the characteristics—e.g., return, diversification, credit risk and liquidity risk—of a portfolio for a given investor profile; establish criteria for including securities in the firm’s portfolios (these can include, for example, fees, index tracking error, liquidity risk and credit risk); select the securities that are appropriate for each portfolio (or if this is done by an algorithm, oversee the development and implementation of that algorithm as discussed above); monitor pre-packaged portfolios to assess whether their performance and risk characteristics, such as volatility, are appropriate for the type of investors to which they are offered; and identify and mitigate conflicts of interest that may result from including particular securities in a portfolio.

FINRA also noted that the supervisory mechanism should include staff who are independent of the business and that firms should disclose if the digital advice tool favors certain securities.

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Training Regarding financial professional-facing tools, FINRA stated that financial professionals should be trained on (1) the permitted use of digital investment advice tools; (2) the key assumptions and limitations of individual tools; and (3) when use of a tool may not be appropriate for a client. FINRA also suggested assessing the adequacy of any training by thirdparty vendors.

Governance and Supervision of Algorithms FINRA emphasizes that firms should understand the methodological approaches embedded in the algorithms they use and assess whether those approaches reflect the firm’s desired approach. FINRA recommended the following framework for ensuring advice stemming from algorithms is consistent with securities laws and FINRA rules: (1) conducting initial reviews, which includes assessing whether the tool’s methodology is well-suited to the task, understanding the data inputs, and testing the output; and (2) conducting ongoing reviews, which includes assessing whether the tool’s models remain appropriate in light of market and other changes, testing the output on a regular basis, and identifying individuals responsible for supervising the tool.

FINRA further stressed that a registered representative cannot use the tool as a substitute for acquiring knowledge about the securities and the customer necessary to make a suitable recommendation.

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Account Rebalancing For automatic rebalancing—when rebalancing becomes necessary because the portfolio has drifted away from its intended target or because the target has changed—FINRA identifies the following five effective practices: 1.

2.

3.

4.

5.

explicitly establishing customer intent that the automatic rebalancing should occur; apprising the customer of the potential cost and tax implications of the rebalancing; disclosing to customers how the rebalancing works (including, if the firm uses drift thresholds, disclosing what the thresholds are and whether the thresholds vary by asset class, and, if rebalancing is scheduled, disclosing whether rebalancing occurs monthly, quarterly or annually); developing policies and procedures that define how the tool will act in the event of a major market movement; and developing methods that minimize the tax impact of rebalancing.

Although the report states that it does not create any new legal requirements or regulatory obligations—but is intended to remind broker-dealers of their obligations under FINRA rules and to identify best practices—the report indicates that digital investment advice is a topic likely to garner increased attention and scrutiny from regulators.

FINRA, Report on Digital Investment Advice (Mar. 2016), available at https://www.finra.org/sites/default/files/digital-investment-advice-report.pdf

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1.5 FINRA Reminds Firms that Pension Income Stream Products May Be Securities FINRA released new guidance on April 19, 2016 (Notice to Members 16-12) pointing to recent U.S. Supreme Court case law and U.S. Securities and Exchange Commission (SEC) administrative proceedings to remind firms that pension income stream products may qualify as “securities.”

A “pension stream income product” involves an investor paying a lump sum in exchange for the rights to a pensioner’s future income payments. The purchase is facilitated by pension purchase companies (a/k/a factoring or pension advance companies), which, according to FINRA, often assert that the product is not a security for the purpose of circumventing federal and state laws and disclosure requirements.

The FINRA guidance emphasizes that pension stream income products are complex and present a number of investorprotection issues. The view is that even a fixed-income stream can be an “investment contract”—and, therefore, a “security”—citing SEC v. Edwards, 540 U.S. 389 (2004). FINRA reminds firms that, regardless of how a pension purchase company treats this product, firms have an independent obligation to assess whether any given product is a security.

Treating a pension income stream product as a non-security, FINRA warns, “risks violating FINRA rules” and could result in “significant consequences” that impose “specific obligations on securities activities.”

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1.6 The Civil Action to Stop The DoL’s New Fiduciary Rule

The landscape is awash with information and reaction to the DoL’s new fiduciary rule, not to mention the 1,000 pages of text setting up and explaining the rule itself. We have been watching Congress’ efforts, including its presentation of a bill-to-block-the-rule, only to have the President ultimately veto the effort. And without a supermajority back on the floors, all immediate Congressional efforts will end.

With the November election on the horizon, on June 2, 2016, the Chamber of Commerce, its affiliates and a number of financial trade associations initiated a lawsuit against Secretary of Labor, Thomas Perez, and the DoL to stop the rule.

Within the eight-count, 74-page complaint, there are more than 200+ allegations supporting positions that the DoL has improperly exceeded its authority in violation of ERISA, the Internal Revenue Code and the Administrative Procedures Act (Count One) (excerpt: “The Department bootstrapped its way into regulating matters outside its jurisdiction by first defining the term ‘fiduciary’ in an impermissibly broad manner, and then exploiting its exemptive authority to obligate financial services professionals to accept special duties and liabilities that have no basis in ERISA and the Code." Para. 154).

Further, the complaint alleges that the rule violates the Administrative Procedure Act because it is arbitrary, capricious, and irreconcilable with the language of ERISA and the IRC (Count Two) (excerpt: “The Rule sweeps so broadly that it encompasses activity that has long been understood to be sales-related and not fiduciary, not to mention relationships that even the Department admits are ’not appropriately regarded as fiduciary in nature’ and require exclusion from the Rule.” Para. 162).

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The remaining counts: •

“The Department Unlawfully Created a Private Right of Action” (Count Three);

•

“The Department Failed to Provide Adequate Notice and to Sufficiently Consider and Respond to Comments” (Count Four);

•

“The Federal Arbitration Act Prohibits the BIC and Principal Transactions Exemptions’ Regulation of Class Action Waivers in Arbitration Agreements” (Count Five);

•

“The Department’s Regulation of Fixed-Indexed Annuities and Group Variable Annuities Through the BIC Exemption is Arbitrary, Capricious, Barred by the Dodd-Frank Act, and Was Not Subject to Proper Notice and Comment” (Count Six);

•

“The Department Arbitrarily and Capriciously Assessed the Rule’s Benefits, Consequences, and Costs” (Count Seven); and

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“The Department’s Best Interest Contract Exemption Impermissibly Burdens Speech in Violation of the First Amendment” (Count Eight).

The case is Chamber of Commerce v. Perez, Case. No. 3:16-cv-1476 (N.D. Tex. June 1, 2016).

This is a Case to Keep an Eye On 18

1.7 SEC Sets April 2017 Deadline for Proposing New Fiduciary Rule The SEC posted its agenda setting forth an April 2017 deadline for proposing its new fiduciary rule. The SEC’s rule would set forth a fiduciary standard applicable to both investment advisers and brokers when providing advice to retail customers. But how will it compare to the DoL’s new fiduciary rule? SEC Chair Mary Jo White stated that the agency is not planning to simply copy the DoL’s new rule. Even if it is not identical, the SEC will seek to make its rule compatible, at least, with the DoL’s rule. Open issue: Will the two different sets of rules create an even more complex compliance environment?

See http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201604& RIN=3235-AL27

1.8 Key Takeaways from the SEC’s April 19, 2016 Compliance Outreach Program At its Compliance Outreach Program in April 2016, the SEC staff emphasized that chief compliance officers (CCOs) are partners not targets of SEC enforcement. This is true despite several recent cases brought against CCOs. Jane Jarcho, the national director of the Office of Compliance Inspections and Examinations (OCIE), reiterated that just because an advisory firm has been selected for examination by OCIE, it does not mean that firm has done something wrong. The staff did note, however, that it had concerns about firms outsourcing their compliance duties (based on a 2015 study that showed many outsourced compliance officers had not properly instituted a compliance program). The staff also stressed the importance of cybersecurity and urged advisory firms to shore up weaknesses, as exams showed them lagging behind other counterparts in the industry.

See https://www.sec.gov/info/complianceoutreach/compliance-outreachprogram-national-seminar-2016.htm

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2. RECENT FIDUCIARY CASE LAW 2.1 In re Central States Capital Markets, LLC et al., Securities & Exchange Commission (Mar. 15, 2016) Municipal Advisor Enforcement Action Conduct and Claims SEC staff alleged breach of fiduciary duty against Central States Capital Markets, LLC (“Central States”)—and three of its associated persons (two employees and the CEO)—who served as municipal advisor to a city regarding municipal bond offerings in 2011. Central States provided advice to the city on three separate municipal debt offerings totaling $14.68 million. The city relied on Central States to advise it on the offerings’ terms, including interest rates, the selection of underwriters and related fees. The two employees, in consultation with the CEO, arranged to have the city’s offerings underwritten by a broker-dealer where all three individuals were still working as registered-representatives.

Throughout the city’s 2011 municipal debt offerings, employees of Central States provided both underwriting services and municipal advisor services for the offerings.

Central States collected $130,120 in municipal advisor fees and the broker-dealer collected $121,530 in underwriting fees (90% of which was paid to Central States). Central States paid commissions to the two employees based on both the municipal advisor and underwriting services. Respondents failed to disclose to the city the following: (1) that Central States’ employees also worked for the broker-dealer; (2) that certain employees were performing both municipal advisor services and underwriting services for the offerings; and (3) that certain employees had a conflict of interest because they were receiving a direct financial benefit from the underwriting services. The parties failed to disclose their dual role in the official statements and offering circulars, at various city council meetings and, in at least one instance, upon direct inquiry from a city representative.

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Reasoning and Result Congress included various provisions in the 2010 Dodd-Frank Act for the regulation of municipal advisors. These regulatory standards were intended to mitigate some of the problems observed with the conduct of some municipal advisors, including undisclosed conflicts of interest and failure to place the duty of loyalty to their municipal entity clients ahead of their own interests.

The order reports that the two employees were aware of the conflict posed by performing both municipal advisor and underwriting services for the offerings. An April 2011 email between the employees provided: “if we are going to charge an [advisory] fee and [the city’s administrator] keeps calling us [municipal advisors], should we not resign as [municipal advisors] to [underwrite] this issue? Out of an abundance of caution I believe we should resign . . . .” The employees also drafted documents advising the city that they were resigning as municipal advisors, discussing the conflict of interest issue, and requesting the city’s consent to their change of role from municipal advisor to underwriter. However, neither employee ever sent the documents to the city.

Without admitting or denying the findings, Central States, the two employees, and the CEO consented to the SEC’s order that they cease and desist from similar future securities-law violations and violations of MSRB Rule G-17 (requiring advisors to deal fairly with their clients). The individuals also agreed to cease and desist from future violations of MSRB Rule G-23, which bars those acting as municipal advisors on a bond offering from underwriting that offering.

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Central States agreed to pay $289,827.80 in disgorgement and interest in addition to an $85,000 civil penalty. The twoemployees were fined $25,000 (with a two-year bar) and $20,000 (with a one-year bar), respectively, and the CEO agreed to pay a $17,500 penalty (with a six-month suspension).

Why this Case is Notable This case represents one of the first enforcement proceeding for breach of the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act.

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2.2 In re Estate of Opalinska, 45 N.E.3d 687 (Ill. App. 1st 2016) Application of “Slayer Statute” Conduct and Claims The Illinois Supreme Court denied a petition to hear an appeal from In re Estate of Opalinska, 45 N.E.3d 687 (Ill. App. Ct. 2015), on March 20, 2016. Darota Opalinska Chaban (Darota), the daughter of Irene Opalinska, and the wife of William Chaban (William), was convicted of perjury and obstruction of justice in connection with her statements during the investigation of her mother’s murder. William, Darota’s husband, was eventually convicted of the murder.

Darota and William were married in Las Vegas, Nevada, on June 9, 2007. The couple then returned home to Chicago, Illinois, when, on June 13, they informed Darota’s mother (Irene Opalinska) of their marriage. Irene was initially upset, but eventually calmed down. Nine days later, Irene was found dead in her condominium by Darota and William.

Darota told the police, and later a grand jury, that she had not been at her mother’s condominium on the Friday and weekend preceding the discovery of her mother’s death; that she was never in the condominium on June 15; and that she was with William most of that day. After Darota was confronted with phone records that placed her in the condominium on June 15, she admitted that she had lied and claimed that she was following William’s instruction. Darota was convicted of perjury and obstruction of justice. William was eventually charged and convicted of first-degree murder of Irene and was sentenced to 45 years in prison.

The administrator of Irene’s probate estate argued that Darota could not benefit from the estate for the following two reasons: (1) the State’s “Slayer Statute” prohibited her from inheriting her mother’s estate due to the indirect benefit to her husband, and (2) Darota should not inherit her mother’s estate due to her “unclean hands” in the investigation of the murder.

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Reasoning and Result The trial court rejected the administrator’s arguments, finding that Darota was eligible to inherit her mother’s estate. The Illinois appellate court affirmed. The courts held that Darota could inherit even if she lied to police about her husbands’ involvement with the killing because she had no part in arranging the murder and any benefit arising for the killer would come indirectly from his wife which the statute does not specifically disallow (i.e., the statute only bars the murderer(s) from inheriting). Or, as the appellate court further explained: “[F]or the court to determine whether the murderer might receive an indirect benefit from the innocent beneficiary requires an inherently speculative judgment about the future and an investigation of family relations quite likely to be of Faulknerian opacity.”

The court further rejected the administrator’s “unclean hands” argument, noting that it did not apply in the case because Darota did not seek relief in equity (where the equitable “relief” of unclean hands would apply) but rather sought relief under Illinois’ Probate Act.

Why this Case is Notable Probate law can vary widely from state to state; however, most states have some form of the so-called “Slayer Statute.” The strict application of the statute is notable, along with the courts’ denial of the administrator’s “equitable” use of the doctrine of unclean hands (when considering an equitable defense against a legal or statutory right of recovery).

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2.3 Babbitt v. Superior Court, 246 Cal. App. 4th 1135 (Apr. 25, 2016) Accountings During Period of Trust Revocability Conduct and Claims Mary and her husband Leland established the Leland C. Babbitt and Mary Lynne Babbitt Family Trust, designating themselves as co-trustees. The trust’s assets included real property in Los Angeles County and Riverside County, and various bank and investment accounts. Leland died in 2014, and the trust was divided into two subtrusts: (1) the survivor’s trust; and (2) the decedent’s trust. The survivor’s trust was revocable and the decedent’s trust was irrevocable. Both trusts distributed income to Mary, but Carol—Leland’s daughter from a prior marriage—had a 50 percent remainder interest in both subtrusts. Concerned over what happened to approximately $800,000 in cash accounts held in her father’s name, Carol filed a petition under California Probate Code § 17200 to compel an accounting of both of the subtrusts. Mary objected to Carol’s petition to the extent that it sought an accounting of assets in the survivor’s trust.

Result and Reasoning The lower court granted Carol’s petition to compel an accounting of both subtrusts. The appellate court held that while Carol—as a remainder beneficiary of both subtrusts— was entitled to information and an accounting for the decedent’s trust (i.e., the irrevocable trust), she was not entitled to an accounting of the survivor’s trust (i.e., the revocable trust). The appellate court reasoned: “Because assets held in a revocable trust essentially belong to the settlor, the settlor may dispose of the trust’s assets and effectively eliminate the beneficiaries’ interest altogether with no need to justify or explain her actions.”

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Why this Case is Notable: A prior California Supreme Court case, Estate of Giraldin 55 Cal. 4th 1058 (2012), held that when the settlor of a revocable trust appoints someone other than him or herself as trustee, the remainder beneficiaries have standing to sue the trustee for breaches of fiduciary duty committed during the period of revocability. This gives the remainder beneficiaries the right to demand an accounting and information from the trustee regarding trust assets and transactions during the time before the trust became irrevocable. In this case, however, the settlor appointed herself as co-trustee, and there are no allegations that the deceased settlor was incapacitated or subject to undue influence during the time the trust was revocable. Thus, the remainder beneficiary in this instance is not entitled to information and an accounting of the revocable trust.

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2.4 Merrill Lynch v. Manning, 136 S.Ct. 1562 (2016) State Versus Federal Juridisdiction for Securities-Type Claims Conduct and Claims Manning and other former shareholders of Escala Group, Inc. (Escala) filed a lawsuit in New Jersey state court alleging that Merrill Lynch’s actions—devaluing Escala’s stock through “naked short sales” (an alleged form of market manipulation)—violated New Jersey law. The claims were cast as violations of the New Jersey RICO statute, New Jersey’s criminal code, New Jersey uniform securities law, as well violations of New Jersey common law of negligence, unjust enrichment, and interference with contractual relations. Though Manning did not allege any claims under the federal securities laws or rules, the complaint referred explicitly to the SEC’s Regulation SHO, cataloguing past accusations against Merrill Lynch for flouting the regulation’s requirements and suggesting that the transactions at issue had again violated the regulation.

Reasoning and Result Merrill Lynch removed the case to federal district court, asserting federal jurisdiction on two grounds: (1) under the general federal question statute (28 U.S.C. § 1331), which grants federal court jurisdiction of “all civil actions arising under” federal law; and (2) under Section 27 of the Securities Exchange Act of 1934, which grants federal court exclusive jurisdiction “of all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules or regulations thereunder” (15 U.S.C. § 78aa(a)).

Manning moved to remand the case back to state court. The federal district court denied Manning’s motion, but the Third Circuit reversed.

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The U.S. Supreme Court took the case and held that the jurisdictional test established under Section 27 is the same as Section 1331’s test for deciding if a case “arises under” federal law. The Supreme Court also found that its precedents interpreting the term “brought to enforce” have likewise interpreted Section 27’s jurisdictional grant as coextensive with the Court’s construction of Section 1331’s “arising under” standard.

Why this Case is Notable Many observers believed that because this case turned on issues related to actions addressed by a federal regulation (i.e., the SEC’s Regulation SHO) it should have been heard in federal court. So, instead of alleging fraud-based violations of the federal securities laws—which are subject to strict and uniform pleading standards under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and the Securities Litigation Uniform Standcards Act of 1998 (“SLUSA”)— plaintiffs may be able to avoid the strict pleading standards encountered in federal court by couching their claims under state law causes of action, such as RICO, for example, where treble damages and attorneys’ fees also can be awarded.

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2.5 State Bank of Bellingham v. BancInsure, Inc.,— F.3d —, 2016 WL 2943161 (8th Cir. 2016) Fraudulent Transfer by Criminal Third-Party Covered Under Bank Financial Institution Bond The State Bank of Bellingham, Minnesota state bank, received the approval of the 8th Circuit on summary judgment granted in its favor on a breach of contract claim for loss under its Financial Institution Bond (providing coverage for losses caused by employee dishonesty and forgery as well as computer system fraud), following losses resulting from a bank computer being infected with malware, allowing an unidentified criminal third-party to gain access to the bank’s computer system and transfer $485,000 from the bank to a foreign bank account. Coverage under the bond was denied.

A bank employee made wire transfers during the day using her computer token, password, and passphrase, as well as the token and credentials of a second employee; and, at the end of the day, she left the two tokens in the running computer. The 8th Circuit “agree[d] with the district court’s conclusion that ‘the efficient and proximate cause’ of the loss in this situation was the illegal transfer of the money and not the employee’s violations of policies and procedures . . . an illegal wire transfer is not a ‘foreseeable and natural consequence’ of the bank employee’s failure to follow proper computer securities policies, procedures, and protocols.” The “’overriding cause’ remains the criminal activity of a third-party.”

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3. ELDER LAW CONSIDERATIONS On May 16, 2016, the National Adjudicatory Council affirmed a FINRA Enforcement Extended Hearing Panel’s findings and increased sanctions against a general securities representative who was found to have altered his software notes to backdate his recommendations for a 78-year-old client to invest $2 million in a variable annuity. The representative was fined $50,000 and his initial three-month suspension was increased to one-year. Dep’t of Enforcment v. David B. Tysk, National Adjudicatory Council, FINRA Complaint No. 2011122977801 (May 16, 2016), available at http://www.israelsneuman.com/wp-content/uploads/2016/05/Tysk-FINRADecision-5.16.16.pdf

Issues of elder law and abuse—at least on the regulatory rule making front—have not garnered as much attention in recent months (as the DoL fiduciary rule has taken the fore).

But many institutions continue to wrestle with the best way to anticipate and react to the difficult issues that confront senior investors. Experience tells us that many times a “team” approach, involving the appropriate client-facing contacts (from the business side) as well as compliance personnel and counsel, when necessary, is the best way to address concerns over issues such as capacity and competency.

But the question of what we should look for still persists. In this instance, maybe looking backwards a bit can help clarify and anticipate future issues.

In 2013, Federal Regulatory Agencies issued “Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults.”* For full text of the guidance, see

https://www.fdic.gov/news/news/press/2013/Interagency-Guidance-onPrivacy-Laws-and-Reporting-Financial-Abuse-of-OlderAdults.pdf?source=govdelivery

* The Board of Governors of the Federal Reserve System (Federal Reserve), Commodity Futures Trading Commission (CFTC), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Federal Trade Commission (FTC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC) issued the guidance.

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The guidance provided the following considerations, as among the possible signs of financial abuse of older adults, such as: • erratic or unusual banking transactions, or changes in banking patterns including: o frequent large withdrawals, including daily maximum currently withdrawals from an ATM; o sudden non-sufficient fund activity; o uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds; o debit transactions that are inconsistent for the older adult; o uncharacteristic attempts to wire large sums of money; o closing of CDs or accounts without regard to penalties; • interactions with older adults or caregivers, such as: o A caregiver or other individual shows excessive interest in the older adult’s finances or assets, does not allow the older adult to speak for himself, or is reluctant to leave the older adult’s side during conversations. o The older adult shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker. o The financial institution is unable to speak directly with the older adult, despite repeated attempts to contact him or her. o A new caretakers, relative, or friend suddenly begins conducting financial transactions on behalf of the older adult without proper documentation. o The older adult moves away from existing relationships and toward new associations with other “friends” or strangers. o The older adult’s financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual. o The older adult lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.

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4. NEW/NOTEWORTHY 4.1 CFPB Expands UDAAP Jurisdiction in its First Foray into Data Security Enforcement By: Christopher G. Cwalina, Anthony E. DiResta, Kaylee A. Cox, and Brian J. Goodrich On March 2, 2016, the Consumer Financial Protection Bureau (“CFPB”) announced that it had entered into a consent order with online payment platform, Dwolla, Inc. (“Dwolla”), alleging that Dwolla made false representations to consumers relating to its data-security practices. This action is the first time the CFPB has engaged in an enforcement action relating to data-security practices, and presents a significant expansion of the CFPB's (ever-growing) regulatory focus. Cybersecurity and privacy law enforcement has traditionally been policed by the Federal Trade Commission (“FTC”), when, last August, a federal appeals court affirmed the FTC’s authority to regulate cybersecurity in a landmark case involving Wyndham Hotels and Resorts.

Background and Representations Made to Consumers Dwolla, Inc., based in Des Moines, Iowa, operates an online payment system. Since December 2009, Dwolla has collected and stored consumers’ sensitive personal information in connection with its services as a platform for financial transactions. As of May 2015, Dwolla had over 650,000 users and transferred as much as $5 million per day. For each consumer account, Dwolla collected the consumer's personal information, including the consumer's name, address, date of birth, telephone number, Social Security number, bank account and routing numbers, password, and 4-digit PIN.

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CFPB Expands Jurisdiction The Dodd-Frank Act excludes from the definition of enumerated consumer laws placed under the CFPB's jurisdiction the key provisions of the Gramm-Leach-Bliley Act, the primary federal law regulating data security. The CFPB's consent order with Dwolla demonstrates that the CFPB has gotten around this limitation by self-defining its UDAAP authority as encompassing data-security matters. For entities subject to the CFPB's jurisdiction, this could indicate that their data-security practices and compliance policies are now within the scope of the CFPB's review.

Guidance for Companies Regulated by the CFPB Going forward, companies subject to the CFPB's jurisdiction should ensure that the representations they make about the strength of their data-security practices are accurate and substantiated. Additionally, the terms of the consent order show that the CFPB expects management at the highest level to be involved in, and accountable for, companies' datasecurity practices and compliance.

It is important to note that the CFPB frequently initiates new law enforcement initiatives by announcing an initial consent decree with a smaller company that does not have the resources to defend itself fully, thereby creating precedent to move forward.

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What's Next for the CFPB? The CFPB's inaugural foray into the realm of data privacy leaves two questions open that companies subject to the CFPB's jurisdiction should consider.

First, the CFPB's enforcement action against Dwolla was preemptive in nature; the CFPB did not record any tangible harm to consumers. Accordingly, CFPB observers may be justified in wondering if Director Cordray will instruct his enforcement staff to apply the same preemptive approach to other areas of federal consumer protection law enforced by the CFPB. As such, companies should be sure to proactively assess sensitive areas of operations for compliance with federal consumer protection law, and ensure that they have robust and up-to-date compliance procedures and policies.

Second, the CFPB has entered an already crowded regulatory area. The Federal Trade Commission, Federal Communications Commission, and state attorneys general are active in the data-security arena. Future CFPB enforcement actions may shed on light on whether or not the CFPB intends to go it alone, or collaborate with the other active regulators in this field.

Holland & Knight's Cybersecurity and Privacy and Consumer Protection Defense and Compliance Teams assist clients in risk management counseling as well as in defense of CFPB and other governmental investigations.

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5. FIDUCIARY FORUM 5.1 Family Offices Making Investment Impact, Catching Attention of Private Equity Several of the richest families in the United States are choosing to invest directly in companies through their family offices, a recent Chicago Tribune article reports. The article mentions the likes of Michael Dell and Bill Gates buying significant stakes in companies or buying them outright. In the process, according to the article, these family offices are making it more challenging for private equity firms who are not necessarily playing on a level field. Unlike private equity firms, family offices are not bound to hold investments for a certain period of time. Also, the sole aim of family offices is not simply return on investment but also impact investing for the purpose of promoting or advancing social causes.

A separate article in Family Capital raised a similar point, noting that McNally Capital, a Chicago-based investment firm, conducted research that showed 84 percent of the family offices polled intend to invest directly in a private company within two years.

See Margaret Collins & Devin Banerjee, World's Rich Families are Putting Private Equity Firms on Notice, CHICAGO TRIBUNE, May 9, 2016, http://www.chicagotribune.com/business/ct-wealthy-families-privateequity-20160509-story.html; Family Offices are Squeezing Private Equity Firms on Deals and Funds, FAMILY CAPITAL, Feb. 1, 2016, http://www.famcap.com/articles/2016/2/ 1/family-offices-are-squeezing-private-equity-firms-on-deals-and-funds

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5.2 Capacity Confirmed, Tom Benson Seeks to Cut Daughter and Grandchildren Out of Trust (An update to the article previously reported in the Q1 2016 edition of The Fiduciary Monitor under the title “Tom Benson and Donald Sterling—A Tale of Two Capacities”) Tom Benson, owner of the New Orleans Saints (NFL) and Pelicans (NBA), has been mired in a legal battle with his daughter, Renee Benson, and his grandchildren, Rita LeBlanc and Ryan LeBlanc (collectively, the “Three R’s”) over his estate. The Three R’s recently challenged Mr. Benson’s capacity in court and lost. The Louisiana Supreme Court denied their request for further appeal. The new issue pending before the court is Mr. Benson’s plan to swap team stock held in his trust for promissory notes due in 2039. Are the promissory notes with interest and security property of equivalent value that can be substituted for trust assets? The Three R’s argue that the notes are not of equivalent value, especially as Mr. Benson has “alienated” his wealth over the years, and they are concerned that he might impair the collateral securing the notes. The trial on this issue is set for June 20, 2016.

See Mike Triplett, Saints/Pelicans owner Tom Benson Wants 'Zero' Left in Trust to Daughter, Grandchildren, ESPN.COM, May 20, 2016, http://espn.go.com/nfl/story/_/id/15630272/new-orleans-saints-owner-tom-bensonwants-leave-zero-daughter-grandchildren; Katherine Sayre, S Tom Benson family feud: Ownership dispute focus of Wednesday hearing, The Times-Picayune, May 24, 2016, http://www.nola.com/ business/index.ssf/2016/05/tom_benson_saints_pelicans_own.html

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5.3 Excerpt From “Forward-Looking Fiduciaries: Strategies for Rising to the Challenges on the Highway Ahead” (full version appearing in FIRMA QUARTERLY MAGAZINE, 2016, Iss. 2, at 8-15) and Headlines…

Excerpt: Following three key strategies can help fiduciaries—plus those who aren’t (yet) a fiduciary—rise to the challenges on the ever-changing highway ahead for the financial services industry. Process.

Collaboration. Culture. They drive sound risk-management techniques and can provide a dispositive defense when things don’t work out as planned or a slight detour is required (but, please keep reading: this is designed to extol shared-affirmations, not to march out a parade-ofhorribles). Here, Ethan H. Cohen, Esq., Executive Editor of Holland & Knight LLP’s quarterly The Fiduciary Monitor, maintains that discipline in these strategies can provide credibility when you may need it most.

“Prince’s death sets off estate planning quagmire” http://www.investmentnews.com/article/2016 0422/FREE/160429971/princes-death-sets-offestate-planning-quagmire

“Snoop Dogg told us why he doesn’t have a will” http://www.businessinsider.com/snoop-dogghasnt-left-a-will-butterfly-reincarnate-estate2016-5

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