Tuesday, September 2, 2014

ANALYSIS: U.S. SEC Settlement With Portuguese Bank Highlights Reach Of U.S. Securities Laws To Broker-Dealers And Advisers Outside The United States

By Mark S. Bergman and Patricia Vaz de Almeida, Paul, Weiss, Rifkind, Wharton & Garrison LLP, London.

On October 24, 2011, the U.S. Securities and Exchange Commission (“SEC”) announced it had charged Banco Espírito Santo S.A. (“BES”), a commercial bank headquartered in Portugal, with violating provisions of the U.S. federal securities laws that govern the activities of intermediaries acting as broker-dealers, the activities of investment advisers, and the offering of securities. The action was settled concurrently with the announcement.

We set forth below the key elements of the claims against BES and the context in which the claims arose. This enforcement action serves as a useful reminder of the applicability of U.S. regulatory requirements to securities intermediaries and advisers based outside the United States in respect of activities that target clients in the United States and the potential consequences of failing to comply with such requirements.

Claims against BES

According to the SEC’s order, BES maintained relationships with approximately 3,800 U.S. residents who held products deemed securities under U.S. law in their brokerage accounts (“U.S. Customers”) and advisory accounts (“U.S. Clients”) with BES. According to the order, BES provided brokerage services to U.S. Customers and provided investment advice to U.S. Clients. Among other activities, BES:

• used its Portugal-based department of marketing, communications and consumer research to mail marketing materials to BES customers, including U.S. Customers;

• offered financial products — including securities — to U.S. Customers over the telephone, through a customer service call center located in Portugal operated by a third party (which had employees dedicated to servicing U.S. Customers);

• offered brokerage services to U.S. Customers through its money transmitter business, which also served as a point of contact for U.S. Customers’ banking and investment activities; and

• serviced, through its U.S.-dedicated International Private Banking relationship managers, U.S. Clients by way of visits in person (twice a year) and communications via telephone, facsimile and e-mail. As part of these visits and communications, BES discussed U.S. Clients’ accounts and financial products, including securities; helped to effect transactions in financial products; and encouraged U.S. Clients to buy, sell or hold certain financial products…

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