Compliance Risk Concepts: Senior Compliance Consultants & Executives.

Monthly Regulatory Review and Outlook (December 2020)

Monthly Regulatory Review and Outlook (December 2020)

Amir Lahoud
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December 24, 2020

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:

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

By Email:
election2021@nfa.futures.org

By Fax:
Attn: Carol A. Wooding
(312) 781-1672

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 5th, 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:

Mitch Avnet, p. (646) 346-2468  

David Amster, p. (917) 568-6470

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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