Monthly Regulatory Review and Outlook (November 2020)

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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 20th, 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 28th, 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

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