FINRA

Regulatory Notices

Per Notice 21-31, FINRA has established a new Supplemental Liquidity Schedule (SLS). The new SLS, which members subject to the requirement will need to file as a supplement to the FOCUS Report, is designed to improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of the members with the largest customer and counterparty exposures. FINRA is issuing this Notice to provide further information on the new requirement, which will become effective on March 1, 2022. For members subject to the requirement, the first SLS must be completed as of the end of March 2022 and will be due by May 4, 2022.

The SLS, and instructions thereto, is available in Attachment A. FINRA will make the SLS available through FINRA Gateway. 

Per Notice 21-32, FINRA requests comment on a proposed change to its current policy relating to the assignment of OTC symbols to unlisted equity securities. Specifically, FINRA is considering whether it should begin assigning OTC symbols to unlisted equity securities that do not have a valid CUSIP identifier, in the limited circumstance where a member firm demonstrates its best efforts to obtain a CUSIP identifier and provides documentation to identify the security.

Per Notice 21-33, FINRA adopted amendments to Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11) in light of the Securities and Exchange Commission’s (SEC) amendments to SEC Rule 15c2-11 (SEC Rule 15c2-11). As amended, Rule 6432 will require a qualified inter-dealer quotation system (Qualified IDQS) to submit a modified Form 211 filing to FINRA in connection with each initial information review, and a daily security file to FINRA containing summary information for all securities quoted on its system on each day that it makes a publicly available determination permitted under SEC Rule 15c2-11, among other amendments. The amendments to Rule 6432 will take effect on September 28, 2021—in line with the compliance date for the amendments to SEC Rule 15c2-11.

The amended rule text is available in the online FINRA Manual.

Per Notice 21-34, FINRA has adopted new rules to address firms with a significant history of misconduct. New Rule 4111 (Restricted Firm Obligations) requires member firms that are identified as “Restricted Firms” to deposit cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations. New Rule 9561 (Procedures for Regulating Activities Under Rule 4111) and amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) establish a new expedited proceeding to implement Rule 4111.

The new rules and rule amendments become effective on January 1, 2022.

The rule text is available in Attachment A. A flow chart of the Rule 4111 process is available in Attachment B.

Special Notices

There were no Special Notices in September.

SEC

Final Rules

Per Release No. 33-10984, The Securities and Exchange Commission (“Commission”) is adopting amendments to Volumes I and II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“Filer Manual”) and related rules and forms.  The EDGAR system was upgraded on September 20, 2021.

Proposed Rules

Per Release No. 34-91603, The Securities and Exchange Commission (“Commission”) is proposing to amend Form N-PX under the Investment Company Act of 1940 (“Investment Company Act”) to enhance the information mutual funds, exchange-traded funds (“ETFs”), and certain other funds currently report annually about their proxy votes and to make that information easier to analyze. The Commission also is proposing rule and form amendments under the Securities Exchange Act of 1934 (“Exchange Act”) that would require an institutional investment manager subject to section 13(f) of the Exchange Act to report annually on Form N-PX how it voted proxies relating to executive compensation matters, as required by section 14A of the Exchange Act. The proposed reporting requirements for institutional investment managers, if adopted, would complete implementation of section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Interim Final Rules

There were no interim final rules in September.

Interpretive Releases

There were no interpretive releases in September.

Policy Statements

There were no policy statements in September.

NFA

Notices to Members

Per Notice I-21-28: 

Recognizing that Members may permanently adopt hybrid work environments and permit APs to work remotely, NFA recently amended its definition of branch office. The amended definition excludes any remote working location or flexible shared workspace where one or more APs from the same household live or rent/lease, provided:

• The AP(s) does not hold the location out publicly as the Member's office;
• The AP(s) does not meet with customers or physically handle customer funds at the location; and
• Any CFTC or NFA-required records created at the remote location are accessible at the firm's main or applicable branch office(s) as required under CFTC and NFA requirements.

Members may delist locations currently identified as branch offices if they fall outside of the amended definition.

These amendments will become effective on September 23, 2021, at which time the relief provided in Notice to Members I-20-12 will expire.

Per Notice I-21-29:

NFA has amended Financial Requirements Section 18 to specify that Swap Dealers (SD) Members subject to the filing requirements under CFTC Regulation 23.105(k) will satisfy NFA's requirement by filing the information specified by NFA in the form and manner provided by NFA. This amendment will become effective October 6, 2021.

NFA adopted the proposed amendments for two reasons. First, NFA has developed standardized tables available in WinJammer™ to collect the specific information from SD Members. The tables will facilitate NFA's collection and analysis of the information and will also provide SD Members with certainty on the format for filing the information. Second, NFA has identified certain information required by CFTC Regulation 23.105(k) that is similar in nature to information that NFA will collect under CFTC Regulation 23.105(l). NFA's standardized tables will not collect this similar information.

The information that will be required by the standardized tables includes:

• Product category and the amount of the deduction for market risk on each product for which the SD calculates a deduction for market risk other than in accordance with a model;
• Daily intra-month VaR;
• Product category and the deduction for market risk on each product for which the SD uses scenario analysis;
• 10 largest commitments listed by counterparty;
• Number of business days for which the actual daily net trading loss exceeded the corresponding daily VaR; and
• Backtesting results of all internal models used to compute allowable capital, including VaR, and credit risk models, indicating the number of backtesting exceptions.

Per Notice I-21-30:

NFA has amended Financial Requirements Section 10 to impose a $1,000 per business day late fee on each financial report or other filing required by Financial Requirements Section 17 submitted after its due date. This late fee is consistent with the late fee NFA imposes on futures commission merchant, introducing broker and forex dealer Members that submit late financial filings.

NFA also adopted a new Interpretive Notice to Financial Requirements Section 17 entitled Financial Requirements Section 17: Initial Margin Model Ongoing Monitoring Reports clarifying NFA's expectations regarding quarterly and annual initial margin (IM) model performance reporting. The Interpretive Notice specifies the information currently required to be submitted and clarifies due dates for these filings.

The amendment to Financial Requirements Section 10 and the new Interpretive Notice will become effective on October 6, 2021.

Per Notice I-21-31:

NFA utilizes an electronic voting process for contested Directors' elections, contested Nominating Committee member elections and Articles' amendments approval votes. If elections are necessary, NFA has engaged a third-party election service provider to administer the electronic voting process. To facilitate the electronic voting process, each Member shall designate an Executive Representative who will have the Member's sole authority to sign nominations made by petition, receive notices of Member meetings and proxy materials, complete proxy cards and provide voting instructions and cast votes on behalf of the Member. Members may designate an Executive Representative through NFA's website. Only firm personnel who are the Security Manager or are authorized to view, update and file information in ORS may complete the Executive Representative Contact form.

If a Member fails to complete this form and designate an Executive Representative, the Member's membership contact listed in ORS will be deemed to be the Executive Representative. If a Member has already designated an Executive Representative, it is not necessary to do so again unless the person designated as the Executive Representative has changed.

Board and Nominating Committee Members' Terms to Expire at 2022 Board of Directors' Regular Annual Meeting

The Notice provides a list of the FCM, IB, CPO/CTA and SD/MSP/RFED Board and Nominating Committee members whose terms shall expire at the Board of Directors' regular annual meeting on February 17, 2022.

The Nominating Committee relies heavily on the recommendations of the membership in making its nominating decisions. Please give this matter serious consideration and return your submission(s) to NFA by mail, email or fax for receipt no later than October 13, 2021.

Per Notice I-21-32:

NFA has amended Compliance Rule 2-49 to provide that any swap dealer (SD) Member that violates CFTC Regulation 37.12 or the Part 50 Regulations will be deemed to have also violated an NFA requirement. This amendment will become effective on September 30, 2021.

News Releases

September 16, 2021

NFA orders London, U.K. swap dealer ED&F Man Capital Markets Limited to pay a $150,000 fine

September 16, Chicago—NFA has ordered London, U.K. swap dealer ED&F Man Capital Markets Limited (ED&F Man) to pay a $150,000 fine.

The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by ED&F Man, in which it neither admitted nor denied the allegations. The Committee found that ED&F Man failed to comply with the qualification testing requirement as to certain associated persons by the compliance date.

The complete text of the Complaint and Decision can be viewed on NFA's website.

Hot Issues

CyberCrime

Cybercrime is constantly developing. With attacks becoming more prevalent and sophisticated. Now is the time to perform a cybersecurity check for your firm to ensure not only compliance with industry standards, but confirm the firm’s ability to prevent, detect, and respond to evolving cyber threats. Prevention begins with training; make certain that in addition to proper security measures, applicable personnel has been rigorously trained with respect to information and technology security measures. 

Regulatory Exam Preparedness

Regulators have been out in force throughout the pandemic and continue to do so. We have observed trends toward lengthy, deeper dive exams, conducted remotely. Firms should consider initiatives aimed at identifying and remediating regulatory gaps in their programs, particularly with respect to current exam focus area trends. 

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats. 

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

• FINRA September 2021 Industry Notices
• SEC Regulatory Actions
• NFA Notices
• NFA Press Releases

The post Monthly Regulatory Summary (September 2021) appeared first on Compliance Risk Concepts.

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Notice 21-19, FINRA is requesting comment on potential enhancements to its short sale reporting program. FINRA is considering whether amendments to its short interest reporting and dissemination program would be appropriate to improve the regulatory and public utility of the information. FINRA also is considering whether any changes to other aspects of its short sale regulatory program would be beneficial. FINRA is considering: (1) modifications to its short interest reporting requirements (Rule 4560); (2) a new rule to require that participants of a registered clearing agency report to FINRA information on allocations to correspondent firms of fail-to-deliver positions; and (3) other potential enhancements related to short sale activity. FINRA believes that these potential changes could improve the usefulness of short sale-related information to FINRA, other regulators, investors and other market participants. FINRA encourages all interested parties to comment on this request for comment. Comments must be received by August 4, 2021.

Per Notice 21-20, FINRA warns member firms of an ongoing phishing campaign that involves fraudulent emails (see sample in Appendix) purporting to be from FINRA and using the domain name “@gateway-finra.org.” The email asks the recipient to click a link to “view request” and provide information to “complete” that request, noting that “late submission may attract penalties.” FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident. The domain of “gateway-finra.org” is not connected to FINRA and firms should delete all emails originating from this domain name. FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links. FINRA notes that it has requested that the Internet domain registrar suspend services for "gateway-finra.org." For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of our Report on Cybersecurity Practices - 2018.

Per Notice 21-21, effective September 1, 2021, FINRA is amending its rulebook to eliminate the Order Audit Trail System (OATS) rules in the FINRA Rule 7400 Series and FINRA Rule 4554 (Alternative Trading Systems — Recording and Reporting Requirements of Order and Execution Information for NMS Stocks) (collectively referred to as the “OATS Rules”). FINRA has determined that the accuracy and reliability of the Consolidated Audit Trail (CAT) meet the standards approved by the SEC and has determined to retire OATS as of September 1, 2021. As of September 1, 2021, the updated rule text will be available in the FINRA Manual.

Per Notice 21-22, FINRA warns member firms of an ongoing phishing campaign that involves fraudulent emails (see sample in Appendix) purporting to be from “FINRA SUPPORT” with the email address “support@westour.org”. The email asks the recipient to pay attention “to the report attached below that requires your immediate response” and states that “[t]he attachment contains our updated Public Policy information.” The emails may not include an attachment.

FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident. The domain of “westour.org” is not connected to FINRA and firms should delete all emails originating from this domain name. FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links. FINRA has requested that the Internet domain registrar suspend services for "westour.org".

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of our Report on Cybersecurity Practices - 2018.

Per Notice 21-23, FINRA reminds member firms of longstanding Securities and Exchange Commission (SEC) and FINRA rules and guidance concerning best execution and payment for order flow, which the SEC has defined very broadly to refer to a wide range of practices including monetary payments and discounts, rebates, or other fee reductions or credits. Under these rules and guidance, member firms may not let payment for order flow interfere with their duty of best execution.

Special Notices

Per the Notice dated 6/30/21, FINRA requests comment of effective methods of educating new investors. FINRA seeks comments that will help inform and guide the investor education initiatives FINRA and the FINRA Investor Education Foundation (the FINRA Foundation) undertake. They seek input from firms, investors, investor advocates, academics and other stakeholders who are knowledgeable about investor behavior regarding the most effective methods for educating newer investors. This Notice is not focused on existing regulatory requirements applicable to member firms and their interactions with investors. FINRA encourages all interested parties to comment on the Special Notice. The comment period ends August 30, 2021. 

Questions concerning this Special Notice should be directed to:

• Gerri Walsh, Senior Vice President, Office of Investor Education, at (202) 728-6964 or by email.

SEC

Final Rule

Per Release No. 33-10948, the SEC is adopting amendments to Volumes I and II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“EDGAR Filer Manual” or “Filer Manual”) and related rules. The EDGAR system was upgraded on June 18, 2021. The rule is upon publication to the federal register.

Proposed Rules

There were no proposed rules in June.

Interim Final Rules

There were no interim final rules in June.

Interpretive Releases

There were no interpretive releases in June.

NFA

Notices to Members

Per Notice I-21-17: NFA has learned of an ongoing phishing campaign that involves fraudulent emails purporting to be from NFA staff, including Kathleen Clapper and Joe Hawrysz (see Sample Phishing Email below). Other staff member names may be used as well. These emails have a source domain name "@nfa-futures.com" and may include an attachment.

The domain of "@nfa-futures.com" is not connected to NFA. Firms should not open any attachments from this domain and should delete all emails originating from this domain.

NFA reminds all Members to be vigilant when it comes to email requests. All legitimate emails from NFA will come from an address ending in @nfa.futures.org, nfanotifications@mailer.nfa.org or @nfa-swaps-proficiency-requirements.moonami.com in the case of NFA's Swaps Proficiency Requirements. Always be sure to scrutinize the sender's address.

In general, Members should not trust unsolicited emails, especially emails that ask for personal or financial information. With any email, Members should verify the sender prior to responding and ensure the validity of links or attachments prior to clicking on them.

If you have any questions on this Notice, please contact NFA's Information Center (312-781-1410 or 800-621-3570 or information@nfa.futures.org).

Sample Phishing Email

Subject: [FIRM NAME] - NFA

Dear [INDIVIDUAL NAME],

I hope you're doing well. Following regulatory requirements, the National Futures Association (NFA) has released new information to its members.

Please see the letter above and update your files using the information in section 1 & 2A.

Let me know if you have any questions.

Thank you,
Joseph

Respectfully,

Joseph Hawrysz
Managing Director, Compliance
National Futures Association
One New York Plaza, #4300
New York, NY 10004
Cell: [(XXX) XXX-XXXX]

Per Notice I-21-18: Given the recent volatility in the virtual currency market, NFA reminds Members engaging in virtual currency activities that they must fulfill certain ongoing disclosure and reporting requirements.

Disclosure Requirements

NFA requires futures commission merchants (FCM), introducing brokers (IB), commodity pool operators (CPO) and commodity trading advisors (CTA) that engage in activities related to virtual currencies or virtual currency derivatives to comply with the customer disclosure requirements established in NFA's Interpretive Notice entitled Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities.

Reporting Requirements

NFA requires FCMs and IBs that solicit or accept orders in virtual currency derivatives and CPOs and CTAs that execute transactions involving virtual currencies or virtual currency derivatives to immediately notify NFA by amending the Annual Questionnaire.

Per Notice I-21-19:  NFA is seeking committee members and arbitrators. For additional information about committees, duties of members, or duties of arbitrators, review the Notice.

Per Notice I-21-20:  Reminder: Effective date for NFA rules establishing CPO notice filing requirements

In April 2021, NFA issued Notice to Members I-21-15 announcing the adoption of Compliance Rule 2-50 and a related Interpretive Notice entitled Compliance Rule 2-50: CPO Notice Filing Requirements, which require commodity pool operator (CPO) Members to file notice with NFA when a market or other event affects a commodity pool's ability to fulfill its participant obligations. Compliance Rule 2-50 specifies four events that require NFA notification. The related Interpretive Notice further defines each of the notification events and provides guidance on events that do not trigger the requirement.

This rule and Interpretive Notice became effective on June 30, 2021.

To file notice with NFA, CPOs will use EasyFile Extensions and Notice Filings, which is currently utilized to file notices for pool extension requests and fiscal year-end changes. When filing notice pursuant to Compliance Rule 2-50, firms must upload a summary of the event, as well as specify all relevant subsection(s) of Compliance Rule 2-50 and the impacted pool(s). NFA covered the CPO notice filing requirements at its recent virtual Member Regulatory Workshop. Further, step-by-step instructions for filing any type of notice are available in NFA's EasyFile Extension and Notice Filing Help guide.

News Releases

Per the release on June 29^th, NFA has ordered Chicago, Ill. swap dealer (SD) The Northern Trust Company (Northern Trust) to pay a $999,000 fine.

The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by Northern Trust, in which it neither admitted nor denied the allegations. The Complaint alleged that Northern Trust failed to establish adequate written procedures reasonably designed to ensure the firm executed written swap trading relationship documentation with counterparties prior to or contemporaneously with entering into a swap transaction. The Complaint also alleged that Northern Trust failed to provide swap counterparties with certain material disclosures prior to entering into a swap transaction and failed to provide required pre-trade mid-market marks and daily marks to some counterparties. The Complaint also alleged that Northern Trust failed to sufficiently implement procedures designed to ensure compliance with CFTC business conduct standards and failed to establish and implement procedures reasonably designed for the handling, management response, remediation, retesting and resolution of non-compliance issues. Finally, the Complaint alleged that Northern Trust failed to establish and implement an adequate system to diligently supervise its SD activities.

In its Decision, the BCC found that Northern Trust committed the alleged rule violations and considered Northern Trust's recent remediation efforts in accepting the settlement offer.

The complete text of the Complaint and Decision can be viewed on NFA's website.

Hot Issues

Cybercrime is constantly developing. With attacks becoming more prevalent and sophisticated. Now is the time to perform a cybersecurity check for your firm to ensure not only compliance with industry standards, but confirm the firm’s ability to prevent, detect, and respond to evolving cyber threats. Prevention begins with training; make certain that in addition to proper security measures, applicable personnel has been rigorously trained with respect to information and technology security measures.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

• FINRA 2020 Exam Findings Report, FINRA 2021 Exam Priorities Letter
• FINRA 2020 Industry Notices
• SEC 2021 Exam Priorities Letter, SEC Notices
• NFA Notices

The post Monthly Regulatory Summary (June 2021) appeared first on Compliance Risk Concepts.

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Notice 20-40, FINRA warns member firms of an ongoing phishing campaign that involves fraudulent emails that include the domain “@invest-finra.org”. FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident. The domain of “invest-finra.org” is not connected to FINRA and firms should delete all emails originating from this domain name. FINRA has requested that the Internet domain registrar suspend services for “invest-finra.org”. FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links.

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of the Report on Cybersecurity Practices -2018.

Questions regarding this Notice should be directed to:

• Dave Kelley, Director, Member Supervision Specialist Programs, at (816) 802-4729 or by email; or
• Greg Markovich, Senior Principal Risk Specialist, Member Supervision Specialist Programs, at (312) 899 4604 or by email.

*REMINDER* Per Notice 20-39, the 2021 Renewal Program began on November 16, 2020, when FINRA makes the Preliminary Statements available to all firms in E-Bill. Preliminary Statements are not mailed to firms.

Firms should note the following key dates in the renewal process:

October 19, 2020         Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings via CRD/IARD.

November 1, 2020       Firms may begin submitting post-dated Form BDW and ADV-W filings via CRD/IARD.

Please Note: Registrations terminated by post-dated filings submitted by 11 p.m., Eastern Time (ET), November 13, 2020, do not appear on the firm’s Preliminary Statement. The only allowed date for post-dated filings is December 31, 2020.

November 16, 2020     Preliminary Statements are available in E-Bill.

December 14, 2020     Full payment of Preliminary Statements is due.

December 26, 2020     Final day to make payment to FINRA before firms, its branches and representatives fail to renew for nonpayment.

January 2, 2021           Final Statements are available in E-Bill.

January 22, 2021         Full payment of Final Statements is due.

FINRA advises FINRA-registered firms that failure to remit full payment of their Preliminary Statements to FINRA by December 14, 2020, will be subject to a late fee. In addition, any firm that does not submit payment to FINRA by 6 p.m. ET on December 26, 2020, will cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2021.

In addition to this Notice, firms should review the renewal instructions, the IARD website (if applicable), and any information mailed to ensure continued eligibility to do business in 2021.

SEC

Final Rule

Per Release No. 33-10844, the SEC is adopting amendments to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses and entrepreneurs across the United States. Specifically, the amendments simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections. The amendments also seek to close gaps and reduce complexities in the exempt offering framework that may impede access to investment opportunities for investors and access to capital for businesses and entrepreneurs. The rule is effective 60 days following publication to the federal register.

Per Release No. IC-34084, the Securities and Exchange Commission (the “Commission”) is adopting a new exemptive rule under the Investment Company Act of 1940 (the “Investment Company Act”) designed to address the investor protection purposes and concerns underlying section 18 of the Act and to provide an updated and more comprehensive approach to the regulation of funds’ use of derivatives and the other transactions addressed in 17 CFR 270.18f-4 (“rule 18f-4”). In addition, the Commission is adopting new reporting requirements designed to enhance the Commission’s ability to effectively oversee funds’ use of and compliance with rule 18f-4, and to provide the Commission and the public additional information regarding funds’ use of derivatives. Finally, the Commission is adopting amendments to 17 CFR 270.6c-11 (“rule 6c11”) under the Investment Company Act to allow leveraged/inverse ETFs that satisfy the rule’s conditions to operate without the expense and delay of obtaining an exemptive order. The Commission, accordingly, is rescinding certain exemptive relief that has been granted to these funds and their sponsors. The Rule is effective 60 days following publication to the federal register.

Per Release No. 33-10889, the SEC is adopting amendments to Regulation S-T and the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“EDGAR Filer Manual” or “Filer Manual”) to permit the use of electronic signatures in signature authentication documents required under Regulation S-T in connection with electronic filings on EDGAR that are required to be signed. We are also adopting corresponding revisions to several rules and forms under the Securities Act of 1933 (“Securities Act”), Securities Exchange Act of 1934 (“Exchange Act”), and Investment Company Act of 1940 (“Investment Company Act”) to permit the use of electronic signatures in signature authentication documents in connection with certain other filings. The rule is effective upon publication to the federal register.

Per Release No. 34-90442, the Securities and Exchange Commission (“Commission”) is adopting amendments to its Rules of Practice to require persons involved in Commission administrative proceedings to file and serve documents electronically. The rule is effective 30 days following publication to the federal register, except Instruction 8, which is effective July 12, 2021.

Per Release No. 33-10890, the Securities and Exchange Commission (the “Commission”) is  adopting amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the Commission is eliminating the requirement for Selected Financial Data, streamlining the requirement to disclose Supplementary Financial Information, and amending Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”). These amendments are intended to eliminate duplicative disclosures and modernize and enhance MD&A disclosures for the benefit of investors, while simplifying compliance efforts for registrants. The Rule is effective 30 days following publication to the federal register.

Interim Final Rules

There were no interim final rules in November.

Interpretive Releases

There were no interpretive released in November.

NFA

Notices to Members

Per Notice I-20-39: On November 6, 2020, the Financial Crimes Enforcement Network (FinCEN) issued an Advisory announcing that the Financial Action Task Force (FATF) reissued its list of jurisdictions with strategic AML/CFT deficiencies, with updates to two jurisdictions. NFA Member FCMs and IBs should review this Advisory to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT deficiencies and revise their AML programs accordingly. A copy of the Advisory is available on FinCEN’s website.

Per Notice I-20-40: Part 3 of NFA’s Compliance Rules sets forth the compliance procedures that control NFA’s disciplinary processes. NFA recently amended these rules to specify that an NFA Hearing Panel has the authority to order a virtual hearing in extraordinary circumstances where an in-person hearing is not feasible, such as the ongoing COVID-19 pandemic. These amendments will become effective on November 15, 2020. More information regarding these amendments can be found in NFA’s September 22, 2020 submission letter to the CFTC. If you have any questions regarding these amendments, please contact Julia Wood, Senior Attorney (jwood@nfa.futures.org or 312-781-7459).

Per Notice I-20-41:  CFTC Regulation 4.13(b) requires a person seeking an exemption from registration under Regulation 4.13 to file electronically a notice of the exemption with NFA through its Exemptions System.

In June 2020, the CFTC amended this regulation to require that this notice include a representation that neither the person nor any of its principals has in its background a statutory disqualification that would require disclosure under section 8a(2) of the Commodity Exchange Act, if such person sought registration.

Beginning today, November 19, 2020, a person seeking relief from CPO registration pursuant to CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) or 4.13(a)(5) must complete, in NFA’s Exemptions System, a statutory disqualification attestation including this mandated representation. A person that currently has a 4.13 exemption is not required to complete the statutory disqualification attestation until it completes the annual exemption affirmation process in 2021. Any person not completing this attestation will not qualify for the exemption or renewal of the exemption. More information on the annual affirmation process will be distributed in December 2020.

If you have any questions regarding these filing requirements, please contact Mary McHenry, Director, Compliance (mmchenry@nfa.futures.org or 312-781-1420).

Per Notice I-20-42:  The terms of five of NFA’s current Public Representatives—Douglas E. Harris, Charles P. Nastro, Ronald S. Oppenheimer, Todd E. Petzel, and Michael R. Schaefer—will expire at the Board of Directors’ (Board) regular Annual Meeting on February 18, 2021. NFA is seeking nominations to fill the five Public Representative vacancies. NFA’s Articles of Incorporation (Articles) permit Public Representatives to be nominated by either NFA Members or non-Members.

Over the years, NFA has consistently had Public Representatives with outstanding credentials and their contributions to NFA have been enormous. Public Representatives bring the perspective of non-Members to the Board. A Public Representative candidate must be knowledgeable of the markets and the Members regulated by NFA and have no material relationship with NFA so that he/she can provide an impartial, objective analysis of the issues that come before the Board.

At its regular Annual Meeting, on February 18, 2021, the Board will elect, by majority vote, from among the nominees five Public Representatives to serve on the Board for two-year terms.

Under Article XVIII, a “Public Representative” on NFA’s Board is a public director as that term is defined in Section (b)(2) of Core Principle 16 in Appendix B to Part 38 of the Commodity Futures Trading Commission’s Rules, read in the context as applied to NFA. Therefore, although Core Principle 16 specifically applies to contract markets, the same disqualifying circumstances regarding “material relationships” set forth therein apply to NFA’s Public Representatives and their relationship with NFA. The applicable text of Section (b)(2) of Core Principle 16 in Appendix B to Part 38—Guidance On, and Acceptable Practices In, Compliance With Core Principles is included in this Notice for your information. In the applicable text, please substitute “NFA” for “Contract Market”.

Public representation on NFA’s Board of Directors is an important matter, and we ask that you give serious consideration to submitting a nomination to fill these vacancies. NFA requests that Public Representative nominations be submitted by January 8, 2021 so that NFA’s Executive Committee can review the potential nominees at its meeting on January 21, 2021.

Nominations may be submitted by mail, email, or fax by January 8, 2021 to:

If you have any questions, please contact Carol Wooding at (312) 781-1409 or cwooding@nfa.futures.org.

News Releases

Per the release on November 5^th, NFA has ordered Infinity Futures LLC (Infinity Futures), an NFA Member introducing broker located in Chicago, Ill., to pay a $120,000 fine. Infinity Futures is a wholly-owned subsidiary of York Business Associates LLC (York), an NFA Member futures commission merchant located in Deer Park, Ill., and introduces substantially all of its business to York. NFA also ordered Infinity Futures’ associated person (AP) Patrick Zielbauer to pay a $20,000 fine. Finally, NFA ordered Infinity Futures to continue to record all of Zielbauer’s communications for three years.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA’s Business Conduct Committee and a settlement offer submitted by, among others, Infinity Futures, York, Zielbauer, James Paul Mooney and James Cagnina. Both Mooney and Cagnina are APs of Infinity Futures and York and principals of Infinity Futures. Mooney is also a principal of York. The Panel found that, among other things, Infinity Futures, York and Zielbauer failed to uphold high standards of commercial honor and just and equitable principles of trade. The Panel also found that Infinity and York did business with an entity that should have been registered with the CFTC as a commodity pool operator and an NFA Member but was not. Furthermore, the Panel found that Infinity Futures, York, Mooney and Cagnina failed to diligently supervise Infinity’s and York’s operations and employees.

For more information, read the Complaint and Decision.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats. CRC is keeping abreast of the unique challenges posed to the financial industry by the current COVID-19 pandemic conditions and will summarize material updates and guidance herein.

The best approach to regulatory compliance is a proactive one, particularly under the current circumstances. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Sources:

• FINRA 2019 Exam Findings Report, FINRA 2019 Exam Priorities Letter
• FINRA 2020 Industry Notices
• SEC 2019 Exam Priorities Letter, SEC Notices
• NFA Notices

The post Monthly Regulatory Review and Outlook (December 2020) appeared first on Compliance Risk Concepts.

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Notice 20-34, the protection of senior investors is a top priority for FINRA. In August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation. The review indicated that FINRA’s steps to protect seniors have provided helpful and effective tools in the fight against financial exploitation, but it also suggested some additional tools, guidance, and rule changes.

Based on feedback received during the review, FINRA is proposing amendments to Rule 2165 (Financial Exploitation of Specified Adults) to extend the hold period and to allow temporary holds on securities transactions to further address suspected financial exploitation of senior investors. This Notice seeks comment on the proposed amendments to Rule 2165.

FINRA encourages all interested parties to comment. Comments must be received by December 4, 2020.

Comments must be submitted through one of the following methods:

• Online using FINRA’s comment form for this Notice;
• Emailing comments to pubcom@finra.org; or
• Mailing comments in hard copy to:

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

Per Notice 20-35, FINRA warns member firms of a widespread, ongoing phishing campaign that involves fraudulent emails purporting to be from FINRA asking member firms to complete a survey (see sample below). The email was sent from the domain “@regulation-finra.org” and was preceded by “info” followed by a number, e.g., info5@regulation-finra.org. FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident. The domain of “regulation-finra.org” is not connected to FINRA and firms should delete all emails originating from this domain name. FINRA has requested that the Internet domain registrar suspend services for "regulation-finra.org". FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments, or clicking on any embedded links.

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of our Report on Cybersecurity Practices -2018.

Per Notice 20-36, FINRA requests comment on a concept proposal regarding the application of FINRA rules to security-based swaps (SBS) following the Securities and Exchange Commission’s (SEC) completion of its rulemaking regarding SBS dealers and major SBS participants. Current FINRA Rule 0180, which will expire in September 2021, provides a temporary exception from the application of FINRA rules to SBS, with certain limited exceptions. FINRA is considering revising Rule 0180 to replace the general exception from FINRA rules for members engaging in SBS activities with limited, targeted exceptions from certain FINRA rules where FINRA believes application of the rules to SBS activity is infeasible or inappropriate, particularly where members’ activities are subject to parallel SEC requirements. FINRA is also considering proposing certain modifications to its financial responsibility and operational rules to conform to the SEC’s amended net capital rule and take into account members’ SBS activities, as well as a new margin rule specifically applicable to SBS.

Per Notice 20-37, a key element in any firm’s cybersecurity program is a robust authentication process, i.e., the method that confirms that an authorized user seeking access to a firm’s information technology systems is who they say they are.1 This process typically relies on one or more “factors,” such as a password or personal identification number (PIN) code, to provide the authentication. The importance of sound authentication techniques to protect investors’ and firms’ confidential information has increased in light of 1) escalating threats to the most commonly used form of authentication (single factor or password-based authentication) and 2) firms responding to the COVID-19 pandemic with work arrangements that typically require registered representatives to log in to their networks from a remote location. Review the full Information Notice for detailed information about authentication factors, etc.

Per Notice 20-38, FINRA adopted a new rule to limit any associated person of a member firm who is registered with FINRA (each a “registered person”) from being named a beneficiary, executor or trustee, or to have a power of attorney or similar position of trust for or on behalf of a customer.1 New FINRA Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer) protects investors by requiring all member firms to affirmatively address registered persons being named beneficiaries or holding positions of trusts for customers. The rule requires the member firm with which the registered person is associated, upon receiving required written notice from the registered person, to review and approve or disapprove the registered person assuming such status or acting in such capacity.  The rule does not apply where the customer is a member of the registered person’s “immediate family.”2 Rule 3241 becomes effective February 15, 2021.

Per Notice 20-39, the 2021 Renewal Program begins on November 16, 2020, when FINRA makes the Preliminary Statements available to all firms in E-Bill. Preliminary Statements are not mailed to firms.

Firms should note the following key dates in the renewal process:

October 19, 2020         Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings via CRD/IARD.

November 1, 2020       Firms may begin submitting post-dated Form BDW and ADV-W filings via CRD/IARD.

Please Note: Registrations terminated by post-dated filings submitted by 11 p.m., Eastern Time (ET), November 13, 2020, do not appear on the firm’s Preliminary Statement. The only allowed date for post-dated filings is December 31, 2020.

November 16, 2020     Preliminary Statements are available in E-Bill.

December 14, 2020     Full payment of Preliminary Statements is due.

December 26, 2020     Final day to make payment to FINRA before firms, its branches and representatives fail to renew for nonpayment.

January 2, 2021           Final Statements are available in E-Bill.

January 22, 2021         Full payment of Final Statements is due.

FINRA advises FINRA-registered firms that failure to remit full payment of their Preliminary Statements to FINRA by December 14, 2020, will be subject to a late fee. In addition, any firm that does not submit payment to FINRA by 6 p.m. ET on December 26, 2020, will cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2021.

In addition to this Notice, firms should review the renewal instructions, the IARD website (if applicable), and any information mailed to ensure continued eligibility to do business in 2021.

SEC

Final Rule

Per Release No. 33-10871, the SEC is adopting a new rule under the Investment Company Act of 1940 (“Investment Company Act” or “Act”) to streamline and enhance the regulatory framework applicable to funds that invest in other funds (“fund of funds” arrangements). In connection with the new rule, the Commission is rescinding rule 12d1-2 under the Act and certain exemptive relief that has been granted from sections 12(d)(1)(A), (B), (C), and (G) of the Act permitting certain fund of funds arrangements. Finally, the Commission is adopting related amendments to rule 12d1-1 under the Act and to Form NCEN. The rule is effective 60 days following publication to the federal register.

Per Release No. 33-10876, the Securities and Exchange Commission is adopting amendments to update certain auditor independence requirements. These amendments are intended to more effectively focus the independent analysis on those relationships or services that are more likely to pose threats to an auditor’s objectivity and impartiality. Rule is effective 180 days following publication to the federal register.

Per Release No. 34-90244, the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) (collectively, the “Commissions”) are adopting rule amendments to lower the margin requirement for an unhedged security futures position from 20% to 15% and adopting certain conforming revisions to the security futures margin offset table. The rule is effective 30 days following publication to the federal register.

Interim Final Rules

There were no interim final rules in October.

Interpretive Releases

There were no interpretive released in October.

NFA

Notices to Members

Per Notice I-20-35: Coronavirus Update, NFA's Interpretive Notice 9019 — Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs and Interpretive Notice 9053 — Forex Transactions require Members with branch offices and/or guaranteed introducing brokers (IB) to conduct an annual on-site inspection of each branch office and guaranteed IB. The Interpretive Notices provide some flexibility on the on-site requirement by permitting Members to use a risk-based approach to identify branch offices or guaranteed IBs for which the Member determines it would be appropriate to conduct an on-site inspection every other year (with the off year's inspection conducted remotely).

Due to COVID-19, NFA understands that it may be difficult for Members to conduct on-site inspections at branch offices and guaranteed IBs this year. Therefore, although Members must conduct the required annual inspection of each branch office and guaranteed IB by December 31, 2020, firms may conduct these inspections remotely. For the next calendar year, Members that conduct a remote inspection this calendar year based on this relief will not be required to conduct an on-site inspection to comply with the Interpretive Notices' every-other-year restriction on remote inspections. Specifically, a Member will be permitted to conduct a remote inspection again next year if its risk assessment¹ (which factors in that the Member did not conduct an on-site inspection this year) indicates that it is appropriate to do so.

If you have any questions on this relief, please contact Valerie O'Malley, Director, Futures Compliance (312-781-1290 or vomalley@nfa.futures.org).

Timely information and guidance for Members and the investing public related to COVID-19 continues to be posted to NFA's dedicated COVID-19 webpage as it becomes available.

Per Notice I-20-36, NFA recently amended its Code of Arbitration (Code) and Member Arbitration Rules (Member Rules). The rule changes and their effective dates are summarized below.

Increased filing and hearing fees and restructured claim tiers

The Code and the Member Rules require each party filing an arbitration claim to pay filing and hearing fees. These fees increase as the claim amount increases. NFA made adjustments to the fees and amended the fee structure to reflect increased claim amounts in recent years. Though NFA will continue to subsidize its Customer Arbitration Program, the fee increases will allow NFA to offset more of the costs associated with administering arbitration claims. These fee increases will also allow NFA to increase the honorarium paid to arbitrators in order to continue to attract high quality arbitrators.

The fee increases and the restructured claim tiers are effective for any case filed on or after October 6, 2020.

Additional flexibility for parties that filed claims involving Member respondents that withdraw their membership

NFA amended the Code and Member Rules to make it easier for a party to withdraw or amend its claim or ask for a hearing or summary postponement if the Member respondent withdraws its membership during the course of the proceeding. NFA also amended its Member Rules to make claims against a former Member voluntary, rather than mandatory. These amendments become effective for all cases pending on or after October 6, 2020.

Additional flexibility governing service of process and the time and place of hearings

NFA amended its Code and Member Rules to permit service by e-mail without the need for express consent. NFA also amended the Code and Member Rules to make clear that, in extraordinary circumstances, an Arbitration Panel may order the parties to conduct hearing sessions on a virtual basis when an in-person hearing is not feasible. The changes to NFA's rules regarding service by e-mail and a Panel's ability to order a virtual hearing become effective for all cases pending on or after October 6, 2020.

NFA's FCM, IB and CPO/CTA Advisory Committees fully supported the proposed amendments. In particular, the Advisory Committees expressed overwhelming support for the increase to the arbitration fees and viewed them as reasonable in light of the fact that the filing fees have remained virtually unchanged since each program's inception.

Per Notice I-20-37: Coronavirus Update, In April 2020, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter granting temporary relief to registrants and applicants for registration listing a principal, and for applicants for associate person (AP) registration, from the fingerprinting requirements in CFTC Regulations 3.10(a)(2) (for natural person principals) and 3.12(c)(3) (for APs). NFA issued similar relief from the fingerprinting requirements in NFA Registration Rules 204(a)(2)(A) and 206(a)(1)(A). In July 2020, DSIO and NFA extended this relief until September 30, 2020.

On September 29, 2020, DSIO issued an email alert stating that this no-action relief would not be extended beyond September 30, 2020. Therefore, beginning on October 1, 2020, all applicants for AP registration and all natural persons being listed as a principal of an applicant or registrant must submit the applicant's or natural person principal's fingerprints on an applicant fingerprint card, which are available at facilities offering fingerprinting services.

Additionally, all persons currently relying on DSIO's no-action letter and NFA relief from the fingerprinting requirements and APs that have been granted a temporary license must submit a fingerprint card to NFA by November 2, 2020.

Any person finding it impossible or inordinately difficult to obtain fingerprints should contact NFA's Information Center (1-800-621-3570 or 312-781-1410 or information@nfa.futures.org).

Timely information and guidance for Members and the investing public related to COVID-19 continues to be posted to NFA's dedicated COVID-19 webpage as it becomes available.

News Releases

Per the release on October 20^th, NFA has ordered Highland Quantitative Driven Investments LLC (Highland), an NFA Member commodity pool operator located in Colorado, to withdraw from and not reapply for NFA membership.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee and a settlement offer submitted by Highland. The Complaint alleged that Highland engaged in a course of conduct that furthered its interests over the interests of participants in the Highland Quantitative Investment Fund, LP (Fund), a commodity pool operated by Highland. Specifically, Highland permitted the Fund to make improper advances and a prohibited loan to an affiliated non-Member company. The Complaint also alleged that, among other things, Highland failed to diligently supervise the firm's operations.

For more information, read the Complaint and Decision.

Per the release on October 28^th, NFA has permanently barred Dafex Global Ltd. (Dafex), a former NFA Member and current CFTC registered commodity pool operator and commodity trading advisor located in Malaysia from membership and from acting as a principal of an NFA Member.

The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC. The BCC found that Dafex engaged in deceitful conduct to obtain NFA membership and CFTC registration by falsely listing an individual as a principal and by sponsoring this individual as an associated person (AP), despite knowing the individual would not be engaging in any activities that would require AP registration. The BCC also found that Dafex willfully submitted misleading information to NFA.

For more information, read the Complaint and Decision.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats. CRC is keeping abreast of the unique challenges posed to the financial industry by the current COVID-19 pandemic conditions and will summarize material updates and guidance herein.

The best approach to regulatory compliance is a proactive one, particularly under the current circumstances. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

 Mitch Avnet, p. (646) 346-2468: mavnet@compliance-risk.com

David Amster, p. (917) 568-6470: damster@compliance-risk.com

Sources:

FINRA 2019 Exam Findings Report, FINRA 2019 Exam Priorities Letter

FINRA 2020 Industry Notices

SEC 2019 Exam Priorities Letter, SEC Notices

NFA Notices

The post Monthly Regulatory Review and Outlook (November 2020) appeared first on Compliance Risk Concepts.

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Notice 20-32, FINRA has recently observed an increase in fraudulent options trading being facilitated by (1) account takeover schemes (sometimes referred to as account intrusions), through which a bad actor gains unauthorized entry to a customer’s brokerage account; and (2) the use of new account fraud by a bad actor who fraudulently establishes a brokerage account through identity theft.

The protection of customers’ non-public information is a key responsibility and obligation of FINRA member firms. FINRA has published Notices and guidance to assist firms in addressing cybersecurity risks.³ These resources include a checklist of steps a member firm should consider if it learns that an unauthorized person may have gained entry to a customer’s brokerage account,⁴ as well as other steps firms may take to enhance their security practices, such as implementing multi-factor authentication to supplement password logins.

FINRA also reminds firms to be vigilant regarding customer accounts that are established to profit from options trading facilitated by account takeover schemes and the use of new account fraud.⁵ The customer accounts profiting from this type of conduct may be in the names of non-U.S. persons, with fund transfers through non-U.S. banks. However, accounts may also be in the names of U.S. individuals, particularly those who had their identities stolen. When potential activity related to the above noted schemes has been identified, member firms should immediately commence reviews to determine whether action is appropriate, such as placing trading and fund restrictions on the relevant profiting accounts.

Account takeover schemes and new account fraud may trigger legal or regulatory obligations for firms housing either the victim or profiting accounts, such as filing a suspicious activity report (SAR) or, potentially, reporting to FINRA and relevant governmental authorities. Member firms should also proactively review their written supervisory procedures in light of the recent increase in the above noted schemes (e.g., to consider whether they address the risk of compromised customer records and information).

Per Notice 20-33, FINRA is proposing formal procedures for bringing actions against non-associated persons who cheat or misbehave during a FINRA qualification examination. Although there are few instances of cheating because persons who are not yet associated with a member firm may take the Securities Industry Essentials (SIE) examination or other FINRA qualification examinations, formal procedures are needed to address misconduct by non-associated persons when it occurs.

The proposed formal procedures—a new expedited proceeding rule—would also strengthen the existing processes for responding to cheating and misbehavior by associated persons during a FINRA qualification examination. FINRA also is proposing related amendments to FINRA’s registration requirements rule and eligibility proceedings rules.

FINRA encourages all interested parties to comment. Comments must be received by November 23, 2020.

Comments must be submitted through one of the following methods:

• Online using FINRA’s comment form for this Notice;
• Emailing comments to pubcom@finra.org; or
• Mailing comments in hard copy to:
  Jennifer Piorko Mitchell
  Office of the Corporate Secretary
  FINRA
  1735 K Street, NW
  Washington, DC 20006-1506

Per Notice 20-34, the protection of senior investors is a top priority for FINRA. In August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation. The review indicated that FINRA’s steps to protect seniors have provided helpful and effective tools in the fight against financial exploitation, but it also suggested some additional tools, guidance, and rule changes.

Based on feedback received during the review, FINRA is proposing amendments to Rule 2165 (Financial Exploitation of Specified Adults) to extend the hold period and to allow temporary holds on securities transactions to further address suspected financial exploitation of senior investors. This Notice seeks comment on the proposed amendments to Rule 2165.

FINRA encourages all interested parties to comment. Comments must be received by December 4, 2020.

Comments must be submitted through one of the following methods:

• Online using FINRA’s comment form for this Notice;
• Emailing comments to pubcom@finra.org; or
• Mailing comments in hard copy to:

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

Per Notice 20-35, FINRA warns member firms of a widespread, ongoing phishing campaign that involves fraudulent emails purporting to be from FINRA asking member firms to complete a survey (see sample below). The email was sent from the domain “@regulation-finra.org” and was preceded by “info” followed by a number, e.g., info5@regulation-finra.org. FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident.

The domain of “regulation-finra.org” is not connected to FINRA and firms should delete all emails originating from this domain name.

FINRA has requested that the Internet domain registrar suspend services for "regulation-finra.org".

FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments, or clicking on any embedded links.

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of our Report on Cybersecurity Practices -2018.

SEC

Final Rule

Per Release No. 34-89835, the SEC is adopting rules to update our statistical disclosure requirements for banking registrants. These registrants currently provide many disclosures in response to the items set forth in Industry Guide 3 (“Guide 3”), Statistical Disclosure by Bank Holding Companies, which are not Commission rules. The amendments update and expand the disclosures that registrants are required to provide, codify certain Guide 3 disclosure items, and eliminate other Guide 3 disclosure items that overlap with Commission rules, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or International Financial Reporting Standards (“IFRS”). In addition, we are relocating the codified disclosure requirements to a new subpart of Regulation S-K and rescinding Guide 3. DATES: Effective date: These final rules are effective [insert date 30 days after publication in Federal Register], except for the rescission to 17 CFR 229.801(c) and 229.802(c), which will be effective on January 1, 2023.

Per Release No. 34-89891, the Securities and Exchange Commission is adopting new rules which governs the publication of quotations for securities in a quotation medium other than a national securities exchange, i.e., over-the-counter (“OTC”) securities. The amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by, among other things: requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market; narrowing reliance on certain exceptions from the Rule’s requirements, including the piggyback exception; adding new exceptions for the quotations of securities that may be less susceptible to fraud and manipulation; removing obsolete provisions; adding new definitions; and making technical amendments. The amendments are effective 60 days following publication to the federal register.

Per Release No. 34-89920, the Securities and Exchange Commission (the “Commission”) is adopting revisions to Volume II of the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual (“EDGAR Filer Manual” or “Filer Manual”) and related rules. The EDGAR system was upgraded on September 21, 2020.

Per Release No. 34-89963, the Securities and Exchange Commission (“Commission”) is adopting several amendments to the Commission’s rules implementing its congressionally mandated whistleblower program. Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) provides, among other things, that the Commission shall pay—under regulations prescribed by the Commission and subject to certain limitations—to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action, an aggregate amount, determined in the Commission’s discretion, that is equal to not less than 10 percent, and not more than 30 percent, of monetary sanctions that have been collected in the covered or related actions. On May 25, 2011, the Commission adopted a set of rules to implement the whistleblower program. After ten years of experience administering the program, the Commission is adopting various amendments that are intended to provide greater transparency, efficiency and clarity to whistleblowers, to ensure whistleblowers are properly incentivized, and to continue to properly award whistleblowers to the maximum extent appropriate and with maximum efficiency. The Commission is also making several technical amendments, and adopting interpretive guidance concerning the term “independent analysis.” The final rules are effective 30 days following publication to the federal register.

Per Release No. 34-89964, We are adopting amendments to certain procedural requirements and the provision relating to resubmitted proposals under the shareholder-proposal rule in order to modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders. The amendments to the procedural rules: amend the current ownership requirements to incorporate a tiered approach that provides three options for demonstrating a sufficient ownership stake in a company—through a combination of amount of securities owned and length of time held—to be eligible to submit a proposal; require certain documentation to be provided when a proposal is submitted on behalf of a shareholder proponent; require shareholder-proponents to identify specific dates and times they can meet with the company in person or via teleconference to engage with the company with respect to the proposal; and provide that a person may submit no more than one proposal, directly or indirectly, for the same shareholders’ meeting. The amendments to the resubmission thresholds revise the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholders’ meetings from 3, 6, and 10 percent to 5, 15, and 25 percent, respectively. The final rules are effective 60 days following publication to the federal register.

Proposed Rules

Per Release No. 34-90019, the Securities and Exchange Commission is proposing amendments to Regulation ATS under the Securities Exchange Act of 1934 (“Exchange Act”) for alternative trading systems (“ATSs”). The Commission is proposing to amend Regulation ATS for ATSs that trade government securities as defined under Section 3(a)(42) of the Exchange Act (“government securities”) or repurchase and reverse repurchase agreements on government securities (“Government Securities ATSs”) to: eliminate the exemption from compliance with Regulation ATS for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities, and registers as a broker-dealer or is a bank; require the filing of public Form ATS-G, which would require a Government Securities ATS to disclose information about its manner of operations and the ATS-related activities of the registered broker-dealer or government securities broker or government securities dealer that operates the ATS and its affiliates; require, among other things, public posting of certain Form ATS-G filings and to provide a process for the Commission to review Form ATS-G filings and, after notice and opportunity for hearing, declare Form ATS-G filings ineffective; and apply the fair access rule under Rule 301(b)(5) of Regulation ATS to Government Securities ATSs that meet certain volume thresholds in U.S. Treasury Securities or 2 in a debt security issued or guaranteed by a U.S. executive agency, as defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined in 2 U.S.C. 622(8) (“Agency Securities”). The Commission is also proposing changes to correct and modernize Regulation ATS, Form ATS, Form ATS-N, and Form ATS-R. In addition, the Commission is proposing to amend Regulation Systems Compliance and Integrity to apply it to ATSs that meet certain volume thresholds in U.S. Treasury Securities or Agency Securities. Finally, the Commission is issuing a concept release on the regulatory framework for electronic platforms that trade corporate debt and municipal securities. Comments should be received within 60 days of publication to the federal register.

Interim Final Rules

There were no interim final rules in September.

Interpretive Releases

There were no interpretive released in September.

xNFA

Notices to Members

Per Notice I-20-32: Coronavirus (COVID-19) Update, The CFTC recently issued no-action letter 20-26 extending through January 15, 2021, certain no-action relief issued in response to the COVID-19 pandemic. The relief, previously set to expire on September 30, 2020, applies exclusively to certain regulatory obligations of FCMs, RFEDs (i.e., FDMs), IBs and SDs. NFA is also extending through January 15, 2021 similar relief for Members that are in compliance with the terms of the CFTC's no-action relief. Specific relief subject to this extension is detailed in NFA's Notice to Members I-20-13.

Per Notice I-20-34, NFA utilizes an electronic voting process for contested Directors' elections, contested Nominating Committee member elections and Articles' amendments approval votes. If elections are necessary, NFA has engaged a third-party election service provider to administer the electronic voting process. To facilitate the electronic voting process, each Member shall designate an Executive Representative who will have the Member's sole authority to sign nominations made by petition, receive notices of Member meetings and proxy materials, complete proxy cards and provide voting instructions and cast votes on behalf of the Member. Members may designate an Executive Representative through NFA's website. Only firm personnel who are the Security Manager or are authorized to view, update and file information in ORS may complete the Executive Representative Contact form.

If a Member fails to complete this form and designate an Executive Representative, the Member's membership contact listed in ORS will be deemed to be the Executive Representative. If a Member has already designated an Executive Representative, it is not necessary to do so again unless the person designated as the Executive Representative has changed.

Board and Nominating Committee Members' Terms to Expire at 2021 Board of Directors' Regular Annual Meeting

Before October 15th of each year, NFA's Secretary shall notify all Members in the Futures Commission Merchant (FCM), Introducing Broker (IB), Commodity Pool Operator and Commodity Trading Advisor (CPO/CTA) and Swap Dealer, Major Swap Participant and Retail Foreign Exchange Dealer (SD/MSP/RFED) categories of the elected Directors and the members of the Nominating Committee whose terms shall expire at the Board of Directors' regular annual meeting and shall request that the names of eligible persons to fill those positions be submitted to the Nominating Committee.

Provided is a list of the FCM, IB, CPO/CTA and SD/MSP/RFED Board and Nominating Committee members whose terms shall expire at the Board of Directors' regular annual meeting on February 18, 2021. Please use the form provided to submit names of persons eligible to fill the vacancies on the Board of Directors and the Nominating Committee. For your reference, an explanation of the composition of the Board of Directors and the Nominating Committee is provided. The Nominating Committee shall consider names that are submitted, and the membership will be notified of the Committee's nominations. Thereafter, additional nominations may be made by petition pursuant to NFA's Articles. The procedure for filing a nomination by petition will be contained in a subsequent Notice to Members announcing the Nominating Committee's nominations to fill the Board and Nominating Committee vacancies.

FCM and IB Open Board Positions

Two (2) open positions for FCM Representatives of which at least one (1) must be affiliated with an FCM ranked as a top ten FCM based on the total amount of segregated funds and secured amounts as of June 30 preceding the election.

One (1) open position for an Independent IB Representative.

CPO/CTA Open Board Positions

Two (2) open positions for CPO/CTA Representatives of which at least one (1) must rank within the top five (5) percent of CPOs and CTAs reporting any funds under management allocated to futures and swaps on NFA Form PQR and NFA Form PR as of June 30, 2020; and one (1) representative is an at-large position with no conditions placed on this position as far as its ranking.

SD/MSP/RFED Open Board Positions

Two (2) open positions for SD/MSP/RFED Representatives of which one (1) representative must be affiliated with an SD, MSP or RFED that is not a Large Financial Institution as of June 30 preceding the election; and one (1) representative is an at-large position with no conditions placed on this position as far as its ranking.

Nominating Committee Open Positions

In addition to the Board of Director vacancies, there are the following open positions on the Nominating Committee in the 2021 Member election:

• One (1) open position for an FCM Representative who may be affiliated with either a top ten FCM or a non-top ten FCM based on the total amount of segregated funds and secured amounts held as of June 30 preceding the election;
• One (1) open position for an IB Representative who must be affiliated with a Guaranteed IB;
• One (1) open position for a CPO/CTA Representative who must be acting primarily as a CTA; and
• One (1) open position for an SD/MSP/RFED Representative who must be affiliated with an SD/MSP/RFED that is a Non-Large Financial Institution as of June 30 preceding the election.

How to Submit Recommendations

NFA is a membership organization. NFA Members have a voice in NFA's governance through the exercise of the right to recommend candidates and to nominate and elect individuals to serve on NFA's Nominating Committee and Board of Directors. The Nominating Committee relies heavily on the recommendations of the membership in making its nominating decisions. Please give this matter serious consideration and return your submission(s) to NFA by mail, email, or fax for receipt no later than October 15, 2020 to:

By Mail:
Carol A. Wooding
Secretary and General Counsel
NFA
300 South Riverside Plaza, Suite 1800
Chicago, Illinois 60606

By Email:
election2021@nfa.futures.org

By Fax:
Attn: Carol Wooding
312-781-1672

Per Notice I-20-35: Coronavirus Update, NFA's Interpretive Notice 9019 — Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs and Interpretive Notice 9053 — Forex Transactions require Members with branch offices and/or guaranteed introducing brokers (IB) to conduct an annual on-site inspection of each branch office and guaranteed IB. The Interpretive Notices provide some flexibility on the on-site requirement by permitting Members to use a risk-based approach to identify branch offices or guaranteed IBs for which the Member determines it would be appropriate to conduct an on-site inspection every other year (with the off year's inspection conducted remotely).

Due to COVID-19, NFA understands that it may be difficult for Members to conduct on-site inspections at branch offices and guaranteed IBs this year. Therefore, although Members must conduct the required annual inspection of each branch office and guaranteed IB by December 31, 2020, firms may conduct these inspections remotely. For the next calendar year, Members that conduct a remote inspection this calendar year based on this relief will not be required to conduct an on-site inspection to comply with the Interpretive Notices' every-other-year restriction on remote inspections. Specifically, a Member will be permitted to conduct a remote inspection again next year if its risk assessment¹ (which factors in that the Member did not conduct an on-site inspection this year) indicates that it is appropriate to do so.

If you have any questions on this relief, please contact Valerie O'Malley, Director, Futures Compliance (312-781-1290 or vomalley@nfa.futures.org).

Timely information and guidance for Members and the investing public related to COVID-19 continues to be posted to NFA's dedicated COVID-19 webpage as it becomes available.

Per Notice I-20-36, NFA recently amended its Code of Arbitration (Code) and Member Arbitration Rules (Member Rules). The rule changes and their effective dates are summarized below.

Increased filing and hearing fees and restructured claim tiers

The Code and the Member Rules require each party filing an arbitration claim to pay filing and hearing fees. These fees increase as the claim amount increases. NFA made adjustments to the fees and amended the fee structure to reflect increased claim amounts in recent years. Though NFA will continue to subsidize its Customer Arbitration Program, the fee increases will allow NFA to offset more of the costs associated with administering arbitration claims. These fee increases will also allow NFA to increase the honorarium paid to arbitrators in order to continue to attract high quality arbitrators.

The fee increases and the restructured claim tiers are effective for any case filed on or after October 6, 2020.

Additional flexibility for parties that filed claims involving Member respondents that withdraw their membership

NFA amended the Code and Member Rules to make it easier for a party to withdraw or amend its claim or ask for a hearing or summary postponement if the Member respondent withdraws its membership during the course of the proceeding. NFA also amended its Member Rules to make claims against a former Member voluntary, rather than mandatory. These amendments become effective for all cases pending on or after October 6, 2020.

Additional flexibility governing service of process and the time and place of hearings

NFA amended its Code and Member Rules to permit service by e-mail without the need for express consent. NFA also amended the Code and Member Rules to make clear that, in extraordinary circumstances, an Arbitration Panel may order the parties to conduct hearing sessions on a virtual basis when an in-person hearing is not feasible. The changes to NFA's rules regarding service by e-mail and a Panel's ability to order a virtual hearing become effective for all cases pending on or after October 6, 2020.

NFA's FCM, IB and CPO/CTA Advisory Committees fully supported the proposed amendments. In particular, the Advisory Committees expressed overwhelming support for the increase to the arbitration fees and viewed them as reasonable in light of the fact that the filing fees have remained virtually unchanged since each program's inception.

Per Notice I-20-37: Coronavirus Update, In April 2020, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter granting temporary relief to registrants and applicants for registration listing a principal, and for applicants for associate person (AP) registration, from the fingerprinting requirements in CFTC Regulations 3.10(a)(2) (for natural person principals) and 3.12(c)(3) (for APs). NFA issued similar relief from the fingerprinting requirements in NFA Registration Rules 204(a)(2)(A) and 206(a)(1)(A). In July 2020, DSIO and NFA extended this relief until September 30, 2020.

On September 29, 2020, DSIO issued an email alert stating that this no-action relief would not be extended beyond September 30, 2020. Therefore, beginning on October 1, 2020, all applicants for AP registration and all natural persons being listed as a principal of an applicant or registrant must submit the applicant's or natural person principal's fingerprints on an applicant fingerprint card, which are available at facilities offering fingerprinting services.

Additionally, all persons currently relying on DSIO's no-action letter and NFA relief from the fingerprinting requirements and APs that have been granted a temporary license must submit a fingerprint card to NFA by November 2, 2020.

Any person finding it impossible or inordinately difficult to obtain fingerprints should contact NFA's Information Center (1-800-621-3570 or 312-781-1410 or information@nfa.futures.org).

Timely information and guidance for Members and the investing public related to COVID-19 continues to be posted to NFA's dedicated COVID-19 webpage as it becomes available.

News Releases

Per the release on September 11^th, NFA has taken an emergency enforcement action against JDN Capital, LLC, an NFA Member commodity trading advisor located in Stuart, Fla., and its sole principal and associated person Joshua David Nicholas.

This action was taken to protect customers, the derivatives industry and other NFA Members due to JDN Capital and Nicholas' failure to cooperate with NFA. Due to their failure to produce requested documents and information, NFA, among other things, is unable to determine what JDN Capital and Nicholas did with loan proceeds received, including whether Nicholas misappropriated the money to fund his personal trading account. NFA is also unable to determine whether JDN Capital and Nicholas entered into other loans and, if so, the loan amounts and what JDN Capital and Nicholas did with the proceeds.

Effective immediately, JDN Capital and Nicholas are suspended from NFA membership and are prohibited from soliciting or accepting any funds from customers or investors for any managed accounts or from lenders, other than financial institutions, without NFA's prior approval. JDN Capital and Nicholas are further prohibited from disbursing or transferring any funds from any accounts that are in the name of JDN Capital or Nicholas or from any other investments operated or controlled by JDN Capital or Nicholas, without NFA's prior approval. JDN Capital and Nicholas are also prohibited from placing any trades except to liquidate positions.

This action will remain in effect until JDN Capital and Nicholas demonstrate to NFA's satisfaction that they are in complete compliance with all NFA requirements.

JDN Capital and Nicholas may request a hearing before NFA's Hearing Committee.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats. CRC is keeping abreast of the unique challenges posed to the financial industry by the current COVID-19 pandemic conditions and will summarize material updates and guidance herein.

The best approach to regulatory compliance is a proactive one, particularly under the current circumstances. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

 Mitch Avnet, p. (646) 346-2468 | mavnet@compliance-risk.com

David Amster, p. (646) 661-6483 | damster@compliance-risk.com

Sources: FINRA 2019 Exam Findings Report, FINRA 2019 Exam Priorities Letter

       FINRA 2020 Industry Notices

       SEC 2019 Exam Priorities Letter, SEC Notices

       NFA Notices

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Background & Summary

The Securities and Exchange Commission (“SEC”) entered an order (“Order”) against a broker-dealer for failing to retain text messages relating to the firm’s business with the firm’s required business records. The firm was subsequently fined $100,000. The firm’s policies reportedly prohibited employees from conducting business via text message or utilizing personal devices for business-related communication. In addition, employees certified their compliance with such policies on an annual basis.

However, according to the Order, when the SEC issued a subpoena to the broker-dealer, it was discovered that the broker-dealer’s employees had not only conducted firm-related business using text messages, but that that staff within the firm’s compliance department and management were aware that text messages were sometimes used for discussing firm business, and had even done so themselves. Additionally, all such text messages were not maintained with the firm’s regulatory records and therefore could not be produced in response to the subpoena.

Our Take

It is our position at CRC that recognizing the evolving nature of cybersecurity, privacy, electronic communications, and record maintenance in the financial services industry is key to regulatory compliance. Regulators have continued to display heightened focus cybersecurity and electronic communication. As such, firms should ensure that electronic communications (use of personal email, messaging via social media platforms, text messaging, etc.) are thoroughly addressed in the Compliance Manual. In addition, firms should consider quarterly certifications of comprehension of and compliance with such policies and support such efforts with independent testing and confirmation. If you have concerns regarding your firm’s electronic communications policies, please contact your Compliance Professional, or contact CRC at the information listed below so that we can connect you with a member of our team.

Contact Mitch Avnet at mavnet@compliance-risk.com  or (646)346-2468 for more information.

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The Silicon Review 

"Compliance demands in the financial services sector are surging and the operational costs associated with hiring and retaining capable in-house assistance is rising in step with those demands. The increasing number and complexity of regulations, constant pressure from shareholders to reduce operating costs, and a continuing shortage of talent are compelling businesses to consider alternative sourcing strategies. Outsourcing compliance functions to a third-party provider or vendor helps organizations address their compliance burdens in a cost-effective manner. CRC is a business-focused team of senior compliance consultants and executives providing top-tier compliance consulting services to clients on an as-needed, project, or part-time basis. The company offers its clients the critical skills and expertise required to establish, maintain, and enhance a balanced and effective compliance operational risk management program. It helps organizations demonstrate a commitment to a robust risk management culture. CRC compliance consultants bring a unique tailored approach to help their clients succeed in today's challenging regulatory and economic environment by enabling and empowering them to manage the "cost of compliance" without sacrificing the necessary infrastructure and control environment.

In a conversation with the CEO, Mitch Avnet

Why was the company set up? Read the full article on The Silicon Review...

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On June 5, 2019 the Securities and Exchange Commission (“SEC”) voted to enhance the regulatory framework standard of conduct for broker-dealers (or “firms”) and provide an interpretation of the fiduciary duty for investment advisers by issuing Regulation Best Interest (“Reg BI”). The SEC is giving firms a transition period until June 30, 2020. 

Reg BI framework is more expansive than the vacated Department of Labor (“DOL”) fiduciary rule as it covers all securities investment recommendations to retail customers rather than just those for retirement accounts.  By setting out specific obligations of broker-dealers and investment advisers, the SEC is seeking to tailor requirements to the different types of products and services each provide in order to preserve customer choice in the industry. Reg BI sets out new rules which will increase compliance efforts for firms but provides a more uniform standard and does not include many of the onerous aspects of the DOL rule such as a private right of action.

The framework includes: 

• A “best interest” standard comprising four obligations for broker-dealers when providing recommendations to retail customers (Regulation Best Interest or Reg BI); 
• A required client relationship summary disclosure (Form CRS) for both broker-dealers and investment advisers; 
• An interpretation of the federal fiduciary standard for investment advisers that would reaffirm their fiduciary obligations; and 
• An interpretation clarifying that broker-dealers that provide advisory services are not considered to be investment advisors when such services are “solely incidental” to the conduct of their business. 
• Reg BI and Form CRS have a compliance date of June 30, 2020 while the interpretations will become effective upon publication in the Federal Register.

Reg BI consist of four obligations for broker-dealers when providing recommendations to retail customers. Reg BI does not expressly define “best interest,” instead stating that broker-dealers must act “without placing the financial or other interest of the broker ahead of the interest of the retail customer.” However, the SEC makes clear that the term does not create a fiduciary obligation and explains that it will determine whether a broker-dealer has acted in their customers’ best interest based on the four obligations: (1) disclosure, (2) care, (3) conflict of interest and (4) compliance. 

Disclosure – Reg BI imposes an obligation on to provide a 2-page relationship summary (Form CRS) to clients in a question and answer format. Disclosures must contain a summary of fees, costs, conflicts, and standards of conduct along with alink to the SEC’s Investor.gov site.

The timing of the disclosure varies as following:

• Broker-dealer: before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities, (ii) placing an order for the retail investor, or (iii) the opening of a brokerage account for the retail investor
• Investment adviser: before or at the time of entering into an advisory contract 
• Dual registrant: at earlier of investment adviser or broker-dealer delivery requirement

In addition, firms must provide additional disclosures when they: 

• Open a new account that is different from the retail investor’s existing account(s)
• Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment
• Recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account (e.g., securities sold through a “check and application” process)

So what does this mean: CRC recommends firms review their current customer agreements and disclosures to determine what changes will need to be made and involve technology teams to consider potential digital solutions. CRC also recommends a cross-functional team of business, compliance and operational employees work together to confirm disclosure of all material facts pertinent to a conflict of interest associated with the recommendation that are “full and fair”.

Care – Firms will have an obligation to provide reasonable “diligence, care, and skill” to satisfy three obligations: reasonable-basis, customer-specific and quantitative. Additionally, firms must evaluate reasonably available alternatives, however broker-dealers will not have to evidence review of all alternatives. Similar to the DOL fiduciary rule, Reg BI's care obligation covers recommendations concerning rollovers and account choice (e.g., brokerage or advisory), as well as those to take a retirement plan distribution for purposes of opening a securities trading account. 

So what does this mean: We recommend firms dust off work done during their DoL fiduciary rule prep. Because the rule is not prescriptive, there is no “one size fits all” model for compliance.  The compliance obligation requires firms to maintain policies and procedures to ensure compliance with Reg BI. Notably, this obligation provides an opportunity for the SEC and FINRA to bring enforcement actions for compliance failures without the existence of underlying violations of Reg BI. Therefore, firms should carefully develop Reg BI policies and procedures with a view towards how they will demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients.

Conflict – Reg BI does not explicitly define material conflicts of interest. In contrast to the DOL rule, Reg BI allows firms to sell proprietary products, including initial public offerings, and continue to receive payments from third parties for shelf space – as long as they disclose conflicts of interest. For example, in instances where a registered representative holds a limited license (e.g., only to sell mutual funds), but the firm offers a full suite of products, the representative may need to disclose this to their customers. However, the final rule makes clear that there are certain conflicts of interest that cannot be cured through disclosure, specifically prohibiting certain types of sales contests and quotas within defined parameters (e.g., for specific security types in short time periods). 

So what does this mean: CRC recommends firms review their range of products and services they offer along with their payout grid in order to identify potential conflicts and determine whether they will need to be mitigated, eliminated or disclosed^[1]. The final rule also instructs firms to develop a penalty system for any representatives that do not adequately manage or disclose their conflicts of interest. Firms will need to establish, maintain, and enforce written policies and procedures reasonably designed to:

• Identify and at a minimum disclose (in accordance with the Disclosure Obligation) or eliminate all conflicts of interest associated with the recommendation
• Identify and mitigate conflicts of interest that create an incentive for a broker-dealer’s financial professionals to place either their interests or the broker-dealer’s interest ahead of the retail customer’s interest
• Identify and disclose any material limitations on offerings (e.g., proprietary or other limited range of products) and any conflicts associated with the limitations, and prevent the limitations and associated conflicts from causing the broker-dealer or its financial professionals to place their interests ahead of the retail customer’s interests
• Eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities or specific types of securities within a limited period of time

Compliance – Reg BI requires firms to develop policies and procedures in order to demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients. The SEC has made changes to Rules 17a-3 and 17a-4, which require broker-dealers to maintain records of all information collected and provided to retail customers pursuant to Reg BI for six years, including the identity of each natural person who is an associated person of the broker-dealer responsible for the customer accounts. Firms that fail to maintain adequate policies and procedures may face enforcement actions from the SEC and FINRA for compliance failures.

So what does this mean: CRC advises firms to review and enhance their policies and procedures that address: Product and Pricing; Operations; Technology; and Communications. Additionally, firms should put in place processes to capture and retain disclosures, provide training on the new requirements and ensure that there is a supervisory structure to oversee compliance.

Investment Advisers – While investment advisers have an existing fiduciary obligation, the SEC’s investment adviser interpretation of Reg BI makes these obligations explicit:

• Provide advice in the best interest of the client
• A duty of loyalty
• Best execution for client transactions
• Disclosure of conflicts of interest 

Because the final rule did not include enhancements contained in the proposal, investment advisor are not likely to require significant analysis or operational changes as those for broker-dealers, e.g. - licensing and continuing education requirements, provision of account statements to clients and similar financial responsibility requirements. 

Determining whether broker-dealers’ advice provided to retail clients is “solely incidental” will be determined by 2 criteria:

1. Level of investment discretion
2. Unlimited investment discretion is not solely incidental advice and the broker-dealer would be subject to the Act
3. If investment discretion is limited in time, scope, or some other way the advice provided may be deemed solely incidental
4. Account monitoring
5. Continuous, previously agreed-upon account monitoring would likely not be considered solely incidental
6. Periodic account monitoring or voluntary account monitoring would likely be considered solely incidental

So what does this mean: Investment advisers should be aware that the SEC is continuing to evaluate these enhancements and may add them in the future. The SEC also clarified the solely incidental exception under the Advisers Act: broker-dealers do not have a fiduciary duty to a retail investor unless that broker-dealer is exercising unlimited investment discretion with respect to the account, or the broker-dealer has agreed to continuous monitoring of the account

To qualify for an exemption from the Advisers Act (“the Act”), broker-dealers must satisfy 2 conditions:

1. Receive no special compensation (i.e., only commissions and not asset-based fees)
2. Provide only “solely incidental” advice

DoL and States – After the DOL rule was vacated, a number of states began to introduce their own fiduciary or best interest standards. These rules vary across states – some states like Nevada, are contemplating a private right of action and a largely ongoing obligation. Others states like New York would only apply a best interest standard to the sale of life insurance annuities. These differences will make it challenging operationally for firms to adhere to each state’s specific requirements. The SEC declined to provide any opinion on whether its rules would preempt state standards and left the question to “future judicial proceedings.” 

So what does this mean: The industry can likely expect litigation on this issue as states continue to move forward with their rulemakings and attempt to retain control over standards in their jurisdictions. Meanwhile, the DOL has stated that it will issue an updated version of its fiduciary rule later this year. While there have not been any explicit assurances, it is likely that the concepts and requirements from the DOL will align with Reg BI.

Not applicable – Equally as important, Reg BI will not: 

1. Extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor^[2];
2. Require the broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation; or 
3. Apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not the customer also receives separate recommendations from the broker-dealer.

^[1]          Firms can use the FINRA Report on Conflicts of Interest as guidance in managing, mitigating and eliminating conflicts of interest in their businesses.

^[2]      It is the SEC’s position that when a broker-dealer agrees with a retail customer to provide account monitoring services: (1) the broker-dealer would be required to disclose the material facts, scope and frequency of those services pursuant to the Disclosure Obligation, and (2) such agreed-upon account monitoring services involve an implicit recommendation to hold (i.e., an implicit recommendation not to buy, sell, or exchange assets pursuant to that securities account review) at the time agreed-upon monitoring occurs, which is a recommendation “of any securities transaction or investment strategy involving securities” covered by Reg BI.

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As Chairman of the U.S. Securities and Exchange Commission, Mary L. Schapiro helped strengthen and revitalize the agency; oversaw a more rigorous enforcement program; and, shaped new rules by which Wall Street must play.

Chairman Schapiro’s priorities at the SEC included reinvigorating a financial regulatory system that must protect investors and vigorously enforce the rules; and working to deepen the SEC’s commitment to transparency, accountability, and disclosure while always keeping the needs and concerns of investors front and center. During her tenure, the agency’s dedicated work force brought a record number of Enforcement actions, swiftly reacted to the May 6, 2010 Flash Crash, and achieved significant regulatory reform to protect investors.

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