40-APP: TD Bank and Affiliates Seek Exemption from Investment Company Act Following AML Failures

TD Bank and its affiliates are seeking an exemption from certain provisions of the Investment Company Act of 1940 due to recent anti-money laundering (AML) compliance failures.

Summary

• The Toronto-Dominion Bank, along with its subsidiaries TD Bank US Holding Company, TD Bank, N.A., and Epoch Investment Partners, Inc., have jointly filed an application for temporary and permanent exemptions from Section 9(a) of the Investment Company Act of 1940.
• This application is a result of recent legal proceedings where TD Bank, N.A. and TD Bank US Holding Company pleaded guilty to charges related to failures in their anti-money laundering (AML) programs.
• These failures allowed over $600 million in criminal proceeds to be laundered through TD Bank, N.A. between 2019 and 2023.
• The penalties and forfeitures associated with these failures total approximately $1.9 billion.
• The application seeks to ensure that Epoch Investment Partners, Inc., which provides sub-advisory services to several investment funds, can continue to operate without being penalized for the AML failures of its parent companies.
• Epoch's AML compliance team has been restructured and is now overseen entirely from the United States.
• Epoch has its own AML policies and procedures, which are separate from the transaction monitoring system used by TD Bank, N.A.

Sentiment

Score: 3

Explanation: The document details significant compliance failures and regulatory penalties, resulting in a negative sentiment. While there are efforts to remediate the issues, the overall tone is concerning from an investment perspective.

Positives

• Epoch Investment Partners, Inc. has its own AML policies and procedures, separate from the problematic systems of TD Bank, N.A.
• Epoch's AML compliance team is now entirely overseen from the United States, enhancing its independence.
• Epoch has engaged a third-party firm to perform annual quality assurance reviews of its AML program.
• TD Bank is investing heavily in its AML program, spending approximately $350 million in fiscal year 2024.
• TD Bank has increased its U.S. AML program headcount to 760 employees and contractors.
• The senior leadership of the U.S. AML function has been completely overhauled after the conduct underlying the Plea Agreements was discovered.
• Epoch has offered to reimburse the Funds for all reasonable out of pocket expenses that the Funds have incurred as a result of the impact of the Plea Agreements on Epoch.

Negatives

• TD Bank, N.A. and TD Bank US Holding Company failed to maintain an adequate AML program, leading to significant money laundering.
• The Pleading Entities failed to remediate deficiencies in the AML program, including failing to update the transaction monitoring system and adequately train employees.
• TD Bank, N.A. did not monitor approximately $18.3 trillion in activity between January 1, 2018, through April 12, 2024.
• Five former TDBNA employees were involved in facilitating money laundering schemes.
• The monetary penalties and forfeiture under the Plea Agreements total approximately $1.9 billion.
• The Federal Reserve, FinCEN, and OCC have issued orders against TD Bank and its subsidiaries related to AML violations.
• The FRB Order includes a civil money penalty of $123.5 million, the FinCEN Order includes a civil money penalty of $1.3 billion, and the OCC Order includes a civil money penalty of $450 million.

Risks

• The disqualification of Epoch could disrupt investment strategies and lead to significant redemptions of shares in the affected funds.
• Replacing Epoch as a sub-adviser could result in inefficiencies, potential investment losses, and increased costs for the funds.
• The ongoing remediation efforts and compliance program enhancements may not be fully effective in preventing future violations.
• The independent monitor will oversee the Pleading Entities compliance remediation and enhancement for a period of three years.
• There is a risk that the Pleading Entities may not fully comply with the terms of the Plea Agreements and other regulatory orders.

Future Outlook

The document outlines the steps TD Bank is taking to remediate its AML program and ensure future compliance, including the implementation of new transaction monitoring systems, enhanced policies and procedures, and increased investment in technology and AML systems. The application seeks to ensure that Epoch can continue to provide sub-advisory services without disruption.

Management Comments

• TD Bank is committed to promoting a culture of compliance and is committed to continuing to implement enhancements to its policies and procedures.
• TD Bank recognizes that effective AML compliance begins by setting the tone from the top and continues to take steps to ensure that employees are hearing about compliance expectations from the firms executive management.
• Executive Mandates for all executive positions state that senior leaders must [c]onduct all activities and operations in compliance with internal and external governance, legal and regulatory requirements, and TDs Code of Conduct and Ethics, and [s]et the tone at the top in support of a strong risk culture across the business/function.

Industry Context

This announcement highlights the increasing scrutiny and enforcement actions related to AML compliance in the financial industry. The significant penalties and remediation efforts underscore the importance of robust AML programs for financial institutions. The case also demonstrates the potential for regulatory actions to impact various parts of a financial organization, even those not directly involved in the misconduct.

Comparison to Industry Standards

• The failures at TD Bank are significant when compared to industry standards for AML compliance, particularly given the scale of the money laundering activity and the lack of monitoring of $18.3 trillion in transactions.
• Other major banks, such as HSBC and Deutsche Bank, have faced similar AML issues in the past, resulting in large fines and regulatory scrutiny. However, the scale of the failures at TD Bank, particularly the lack of transaction monitoring, appears to be more severe than many recent cases.
• The remediation efforts outlined in the document, including the overhaul of the AML leadership and the engagement of an independent monitor, are consistent with actions taken by other financial institutions under similar regulatory pressure.
• The fact that Epoch, a sub-adviser, is seeking an exemption due to the parent company's AML failures highlights the interconnectedness of financial institutions and the potential for regulatory issues to have a broad impact.

Management Changes

Legal Proceedings

• TD Bank, N.A. and TD Bank US Holding Company have pleaded guilty to charges related to failures in their anti-money laundering (AML) programs.
• The U.S. Department of Justice, Criminal Division, Money Laundering and Asset Recovery Section (MLARS) and the United States Attorneys Office for the District of New Jersey (the USAO-DNJ) filed criminal informations against TDBNA and TDBUSH.
• The Federal Reserve, FinCEN, and OCC have issued orders against TD Bank and its subsidiaries related to AML violations.

Stakeholder Impact

• Shareholders of the affected funds could face potential hardship due to the disruption of sub-advisory services.
• Employees of Epoch could be affected if the company is unable to continue providing sub-advisory services.
• Customers of TD Bank may experience increased scrutiny and compliance measures.
• The significant penalties and remediation efforts could impact the financial performance of TD Bank.

Next Steps

• The Commission will review the application for temporary and permanent exemptions.
• TD Bank will continue to implement remedial measures to enhance its AML program.
• An independent monitor will oversee the Pleading Entities compliance remediation and enhancement for a period of three years.
• Epoch will continue to operate under its own AML policies and procedures, with enhanced oversight from the U.S. Financial Crimes Risk Management unit.

Key Dates

Keywords

AML, Anti-Money Laundering, Investment Company Act, Section 9(c), TD Bank, Epoch Investment Partners, Money Laundering, Compliance, Sub-adviser, Financial Regulation