The scope of NYDFS jurisdiction is an oft-debated issue for regulated and non-regulated entities alike.
To better understand how NYDFS views its jurisdiction and mission, its worth re-reading these findings from its Consent Order against Robinhood Crypto.
“[I]t is worth beginning with the Department’s observation that RHC’s overall approach to its compliance obligations substantially contributed to such deficiencies. Starting on May 23, 2019, when RHC commenced operations of its regulated business activity in New York and at least throughout 2020 (the time period relevant to this Consent Order), RHC was not fully compliant with New York State regulations, and failed to address some of the particular risks associated with operating a cryptocurrency trading platform. RHC was reliant on its parent and affiliates for substantial aspects of its compliance program.
Although such reliance is not inherently violative of DFS requirements, in this case, such reliance proved to be a weakness because the programs 10 of the parent (RHM) and affiliate (RHF) were not compliant with New York State regulations, and they failed to address all the particular risks applicable to licensed virtual currency businesses. These problems were exacerbated by a lack of prominence for RHC compliance within RHM’s organizational structure. Despite RHC’s reliance on its parent and affiliate for its compliance program, RHC’s Chief Compliance Officer reported to RHC’s Director of Product Operations, rather than reporting directly to a legal or compliance executive at the parent or affiliate. The CCO also did not participate in any formal reporting to the Board of Directors or independent audit or risk committees at the parent or affiliate.
Thus, RHC played no meaningful role in compliance efforts at the entity level, resulting in a lack of an ability to influence staffing and resources, or to timely and adequately adopt measures that would assure full compliance with the Department’s Regulations. RHC’s compliance approach manifested not only in substantive failures, but also contributed to a level of cooperation with the Department that, at least initially, was less than what is expected of a licensee that enjoys the privilege of conducting business in the State of New York. For example, information provided by RHC was either delayed, insufficient, or both. In several instances, RHC failed to disclose investigations by federal and state regulators of an RHC affiliated entity, in violation of reporting obligations governed by RHC’s Supervisory Agreement with the Department.
RHC also initially claimed during the Examination, erroneously, that the Department did not have authority to examine policies or practices of RHC’s parent and affiliates. RHC further claimed that any weaknesses in its programs were overstated because RHC relied on more robust programs of its parent and affiliate, when in reality such programs were not compliant with various aspects of the Department’s laws and regulations.
The Consent Order may be found here: https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202208021