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 22-17, FINRA is soliciting comment on a proposal to amend Rule 6730 to reduce the Trade Reporting and Compliance Engine (TRACE) trade reporting timeframe for transactions in all TRACE-Eligible Securities that currently are subject to a 15-minute reporting timeframe. Specifically, members would be required to submit a report to TRACE as soon as practicable (as is currently the case), but no later than one minute from the time of execution, for transactions in corporate bonds, agency debt securities, asset-backed securities and agency pass-through mortgage-backed securities traded to-be-announced for good delivery. As is the case today, FINRA would make information on the reported transactions publicly available immediately upon receipt of the trade report.
Per Notice 22-18, FINRA has received an increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. Firms have, for example, identified signature issues involving a wide range of forms, including account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions.
These types of incidents underscore the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification.
To help firms address the risks these signature forgeries and falsifications present, FINRA is sharing information in this Notice about:
Per Notice 22-19, the NSCC administers ACATS, a system that automates and imposes specified duties and performance timeframes to facilitate the transfer of accounts, in whole or in part, from one firm to another. The NSCC recently announced a change to ACATS that will allow a receiving member (the firm slated to receive the customer’s account) to use the “receiver delete” function to remove alternative investments from an ACATS transfer.
This Notice reminds members of their obligations under FINRA Rule 11870 (Customer Account Transfer Contracts), including that:
Special Notices
There were no special notices in August.
SEC
Final Rules
Per Release No. 34-95607, the SEC is adopting amendments to implement Section 14(i) (“Section 14(i)”) of the Securities Exchange Act of 1934 (“Exchange Act”), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 14(i) directs the SEC to adopt rules requiring registrants to provide disclosure of pay versus performance. The disclosure is required in proxy or information statements in which executive compensation disclosure is required. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers.
Per Release No. 34-95620, the SEC is adopting amendments to the SEC’s rules implementing its whistleblower program. Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) and the SEC’s implementing rules provide that the SEC shall pay an award to eligible whistleblowers who voluntarily provide the SEC 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 non-SEC related action. The amendments: expand the scope of related actions eligible for an award under the SEC’s whistleblower program; clarify that the SEC may use its statutory authority under Section 21F to consider the dollar amount of a potential award to increase an award but provide that the SEC will not use any statutory authority it might have to decrease the amount of an award; and make several conforming changes and technical corrections.
Proposed Rules
Per Release No. 34-95431, the SEC is proposing rules under the Securities Exchange Act of 1934 (“Exchange Act”) to help improve the governance of clearing agencies registered with the Commission (“registered clearing agencies”) by reducing the likelihood that conflicts of interest may influence the board of directors or equivalent governing body (“board”) of a registered clearing agency. The proposed rules would identify certain responsibilities of the board, increase transparency into board governance, and, more
generally, improve the alignment of incentives among owners and participants of a registered clearing agency. In support of these objectives, the proposed rules would establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.
Per Release No. IA-6083, the CFTC and the SEC are proposing to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the CFTC as a commodity pool operator (“CPO”) or commodity trading adviser (“CTA”). The amendments are designed to enhance the Financial Stability Oversight Council’s (“FSOC’s”) ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts. In connection with the amendments to Form PF, the SEC proposes to amend a rule under the Investment Advisers Act of 1940 (the “Advisers Act”) to revise instructions for requesting a temporary hardship exemption. The Commissions also are soliciting comment on the proposed rules and a number of alternatives, including whether certain possible changes to the proposal should apply to Form ADV.
Interim Final Rules
There were no interim final rules in August.
Interpretive Releases
There were no interpretive releases in August.
There were no policy statements in August.
NFA
Notices to Members
Notice I-22-18
August 30, 2022
SD notice filing requirements under CFTC Regulation 23.154
CFTC Regulation 23.154 requires swap dealer (SD) Members that are subject to the CFTC Margin Rules and approved by NFA to use initial margin (IM) models to notify the CFTC and NFA of certain events related to an NFA-approved IM model. Starting September 1, 2022, SD Members must file these notices through NFA's WinJammer filing system and not via email.
The specific notices required are detailed below.
Modifications to an Approved Model
SD Members are required to notify the CFTC and NFA in writing 60 days prior to:
This notification requirement does not apply to new releases of ISDA SIMM made by ISDA.
Material Issues with an Approved Model
SD Members must promptly notify the CFTC and NFA if the IM model validation process reveals any material problems with the model. The SD also must describe any remedial actions taken and adjust the model to ensure an appropriately conservative amount of required IM is being calculated. This requirement extends to material issues identified during ongoing monitoring and the validation activities of each new version of SIMM, in light of its application to the SD Member's specific portfolio. At a minimum, an SD Member must notify NFA and the CFTC when it identifies problems with its IM model exceeding internal remediation thresholds. The notice filing must include:
An SD Member should not delay filing the required notice due to incomplete information related to the remediation plan and timeline. The SD Member must amend its initial notice to provide updated information on remediation, if necessary.
Step-by-step notice filing instructions are available in the Margin Model WinJammer Notice User Guide.
News Releases
August 18, 2022
NFA orders London, U.K. firm Makor Securities London Ltd. to pay a $375,000 fine
August 18, Chicago—NFA has ordered Makor Securities London Ltd. (Makor) to pay a $375,000 fine. Makor is a former introducing broker (IB) and current provisionally registered swap dealer Member of NFA located in London, U.K.
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 Makor, in which the firm neither admitted nor denied the allegations in the Complaint. The BCC's Complaint alleged that Makor, in its capacity as an IB, failed to disclose to NFA intra-month transfers of assets with an affiliate between August 2021 and February 2022, which gave the impression Makor was holding the assets at all times during this period. The Complaint also alleged that Makor represented to NFA, through a former associated person (AP) of Makor, that the firm held the assets as inventory when the AP should have known the firm transferred the assets to its affiliate and, therefore, was not holding them as inventory. In addition, the Complaint alleged that Makor failed to maintain at all times the required minimum adjusted net capital during various periods since July 2017 and failed to give timely notice to NFA of the firm's capital shortfalls. Lastly, the Complaint alleged that Makor failed to adequately supervise its employees and agents in the conduct of their commodity interest activities for or on behalf of the firm.
In its Decision, the BCC found that Makor violated NFA Compliance Rules 2-4 and 2-9(a) and NFA Financial Requirement Sections 4, 5(a) and 5(c).
The complete text of the Complaint and Decision can be viewed on NFA's website.
August 18, 2022
NFA permanently bars Denver-based commodity pool operator Yas Castellum LLC and its principal Marcus Brisco from membership
August 18, Chicago—NFA has permanently barred Yas Castellum LLC (Yas), a former NFA Member and commodity pool operator located in Denver, Colorado, and Marcus Brisco, its former principal, and associated person, from membership and from acting as a principal of an NFA Member.
The default Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and Yas and Brisco's failure to file an Answer. The BCC found that Yas failed to operate its commodity pool as a separate legal entity, failed to receive funds in the name of its commodity pool, and commingled pool funds with the property of other persons. The BCC also found that Yas and Brisco failed to uphold high standards of commercial honor and just and equitable principles of trade by, among other things, operating the commodity pool in a manner that showed no regard for safeguarding the money they solicited and accepted from the pool participants. In addition, the BCC found that Yas and Brisco failed to cooperate in NFA's examination of Yas.
The complete text of the Complaint and Decision can be viewed on NFA's website.
August 24, 2022
NFA Board appoints Dale Spoljaric as new Vice President, Capital & Exams
August 24, Chicago—NFA's Board of Directors approved the appointment of Dale Spoljaric as Vice President, Capital & Exams at its August meeting.
"We are extremely pleased to promote Dale to this important leadership position," says NFA's CEO and President Thomas Sexton. "With his significant regulatory experience and expertise in futures commission merchant and swap dealer capital, segregation, and margin, Dale will play an important role leading our rigorous regulatory oversight programs."
Mr. Spoljaric has been with NFA for close to ten years. He has served as a Managing Director in both NFA's Futures Compliance and OTC Derivatives Compliance departments. Before joining NFA, Mr. Spoljaric served as U.S. Head of Agency Derivative Services Compliance at Barclays Capital, Inc. He began his career as an FCM Examiner with CME Group. Mr. Spoljaric holds a Bachelor of Science degree from Marquette University and is a registered CPA in Illinois.Bottom of Form
Hot Issues
In June, the SEC charged a broker-dealer and five of its registered representatives with violating Best Interest Obligation rules (Regulation Best Interest or Reg BI). The SEC alleged that the defendants failed to comply with Reg BI’s Care Obligation both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with an unrated, high-risk debt security, and also because they recommended such security to at least seven particular customers without a reasonable basis to believe they were in their customers’ best interests. The SEC also alleged that the broker-dealer failed to comply with Reg BI’s “Compliance Obligation” because it did not adequately establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
Reg BI continues to be a focus area for regulators, and it is important to review your program to ensure that it addresses all aspects of Reg BI as it relates to your business.
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
David Amster
p. (917) 568-6470
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