As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly […]
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.
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:
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:
Jennifer Piorko Mitchell
Office of the Corporate Secretary
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., email@example.com. 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.
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.
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.
There were no interpretive released in September.
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:
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:
Carol A. Wooding
Secretary and General Counsel
300 South Riverside Plaza, Suite 1800
Chicago, Illinois 60606
Attn: Carol Wooding
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 firstname.lastname@example.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.
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 email@example.com).
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 the release on September 11th, 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.
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 | firstname.lastname@example.org
David Amster, p. (646) 661-6483 | email@example.com
Sources: FINRA 2019 Exam Findings Report, FINRA 2019 Exam Priorities Letter
FINRA 2020 Industry Notices
SEC 2019 Exam Priorities Letter, SEC Notices