On September 27, 2022, the SEC announced charges against 15 broker-dealers and one investment adviser […]
Monthly Regulatory Summary
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 21-42, FINRA alerted firms to a recently identified vulnerability in Apache Log4J software, which is an open-source, Java-based logging utility widely used by enterprise applications and cloud services. The “Log4Shell” vulnerability presents risk for member firms because they may be using this software in internal applications, or the software may be embedded in third-party software packages. In addition, many applications written in Java are potentially vulnerable.
Bad actors may take advantage of this vulnerability to compromise systems to potentially steal information or engage in fraudulent activities. For example, a remote attacker can exploit this vulnerability to take control of an affected system.
FINRA reminded firms that the U. S. Securities and Exchange Commission’s (SEC) Regulation S-P Rule 30 requires firms to have written policies and procedures that are reasonably designed to safeguard customer records and information and FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) also applies to denials of service and other interruptions to members’ operations. In addition to firms’ compliance with SEC regulations, FINRA expects firms to develop reasonably designed cybersecurity programs and controls that are consistent with their risk profile, business model and scale of operations.
For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page.
Per Notice 21-43, in August 2019, FINRA launched a retrospective review that, among other things, sought stakeholders’ input on the effectiveness of Rule 3240 (Borrowing from or Lending to Customers). Based on feedback received during the review, FINRA is proposing amendments to Rule 3240 to:
This Notice seeks comment on the proposed amendments to Rule 3240. This Notice also summarizes the predominant themes that emerged from stakeholder feedback, provides guidance to aid member firms when evaluating whether to approve a borrowing or lending arrangement that is within one of the limited exceptions to the general prohibition, and invites a broader consideration of the distinctions between Rule 3240 and federal and state approaches for regulating borrowing and lending arrangements between investment adviser representatives and their clients.
Per Notice 21-44, in February 2019, FINRA published Regulatory Notice 19-06, launching a retrospective review of Rule 4370 (Business Continuity Plans and Emergency Contact Information) to assess its effectiveness and efficiency (the BCP Rule Review). The COVID-19 pandemic, beginning in early 2020, caused unprecedented regulatory and operational impacts on member firms and other market participants, as well as regulators. During the early stages of the pandemic and while the BCP Rule Review was still underway, FINRA published Regulatory Notice 20-08 (March 2020) encouraging each member firm to review its business continuity plan (BCP) to consider pandemic preparedness and to review its emergency contacts to ensure that FINRA has a reliable means of contacting the firm.
Further, to understand broader pandemic-related regulatory and operational impacts on member firms and other stakeholders, in December 2020, through Regulatory Notice 20-42, FINRA launched a retrospective review on lessons learned from member firms and their customers’ experiences during the pandemic (the Pandemic Review).
Based on the BCP Rule Review and the Pandemic Review, both of which involved extensive feedback from a wide range of internal and external stakeholders, FINRA has determined to maintain Rule 4370 without change. This Notice summarizes the retrospective rule review process, the predominant themes that emerged from stakeholder feedback and resulting actions in both reviews, and provides guidance to member firms.
Per Notice 21-45, FINRA is updating the imbedded text of Securities Exchange Act (SEA) financial responsibility rules in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the Securities and Exchange Commission (SEC) adopted. The updated imbedded text relates to SEA Rules 15c3-1, 15c3-1a, 15c3-1b, 15c3-1d, 15c3-1e, 15c3-3, 15Fi-1 through 15Fi-5, 17a-3, 17a-4, 17a-5, 17a-11 and 18a-3. FINRA is also making available related updates of the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC’s Division of Trading and Markets (SEC staff). The updated interpretations relate to SEA Rules 15c3-1, 17a-3, 17a-4 and 17a-5.
There were no Special Notices in December.
Per Release No. 34-93701, the SEC adopted amendments to finalize interim final rules that revised Forms 20-F, 40-F, 10-K, and N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act (“HFCA Act”). The final amendments apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Consistent with the HFCA Act, the amendments require the submission of documentation to the SEC establishing that such a registrant is not owned or controlled by a governmental entity in that foreign jurisdiction and also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such registrants.
Per Release No. 33-11016, the SEC adopted amendments to Volume 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 December 20, 2021.
Per Release No. 33-11013, the SEC is proposing amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. The proposed amendments would add new conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) that are designed to address concerns about abuse of the rule to opportunistically trade securities on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC is also proposing new disclosure requirements regarding the insider trading policies of issuers, and the adoption and termination (including modification) of Rule 10b5‑1 and certain other trading arrangements by directors, officers, and issuers. In addition, the SEC is proposing amendments to the disclosure requirements for executive and director compensation regarding the timing of equity compensation awards made in close proximity in time to the issuer’s disclosure of material nonpublic information. Finally, the SEC is proposing amendments to Forms 4 and 5 to require corporate insiders subject to the reporting requirements of Exchange Act Section 16 to identify transactions made pursuant to a Rule 10b5-1(c)(1) trading arrangement, and to disclose all gifts of securities on Form 4.
Per Release No. 34-93783, the SEC is proposing amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under Section 12 of the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases.
Per Release No. IC-34441, the SEC is proposing amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The proposed amendments are designed to improve the resilience and transparency of money market funds. The proposal would remove the liquidity fee and redemption gate provisions in the existing rule, which would eliminate an incentive for preemptive redemptions from certain money market funds and could encourage funds to more effectively use their existing liquidity buffers in times of stress. The proposal would also require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to require redeeming investors to bear the liquidity costs of their decisions to redeem. The SEC is also proposing to increase the daily liquid asset and weekly liquid asset minimum liquidity requirements, to 25% and 50% respectively, to provide a more substantial buffer in the event of rapid redemptions. The proposal would amend certain reporting requirements on Forms N-MFP and N-CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N-1A to reflect our proposed changes to the regulatory framework for these funds. In addition, the SEC is proposing rule amendments to address how money market funds with stable net asset values should handle a negative interest rate environment. Finally, the SEC is proposing rule amendments to specify how funds must calculate weighted average maturity and weighted average life.
Per Release No. 34-93784, the SEC is re-proposing for comment a rule under the Securities Exchange Act of 1934 (“Exchange Act”), which would be a new rule designed to prevent fraud, manipulation, and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security-based swap. The rule is designed specifically to take into account the unique features of a security-based swap and would explicitly reach misconduct in connection with the ongoing payments and deliveries that typically occur throughout the life of a security-based swap. The SEC also is proposing a new rule, which would make it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer or major security-based swap participant, or any person acting under such person’s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the security-based swap dealer’s or major security-based swap participant’s chief compliance officer (“CCO”) in the performance of their duties under the federal securities laws or the rules and regulations thereunder. Finally, the SEC is using its authority under the Exchange Act to propose for comment a new rule, which would require any person with a security-based swap position that exceeds a certain threshold to promptly file with the Commission a schedule disclosing certain information related to its security-based swap position.
Interim Final Rules
There were no interim final rules in December.
There were no interpretive releases in December.
There were no policy statements in December.
Notices to Members
Per Notice I-21-38:
December 01, 2021
Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA registration
The CFTC requires any person that claims an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end, which is March 1, 2022 for this affirmation cycle.
Persons re-affirming an exemption under 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) and 4.13(a)(5) will be required to attest that neither the person nor its principals has in its background any statutory disqualifications listed under Section 8a(2) of the Commodity Exchange Act.
Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 2, 2022. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC, if either continues to operate without registration or exemption.
The Notice includes instructions on how to complete the affirmation process.
The Notice also includes frequently asked questions about exemptions.
Per Notice I-21-39:
December 01, 2021
Reminder: Increases to NFA Member swap dealer and major swap participant dues effective January 1, 2022
NFA Bylaw 1301 imposes annual dues on NFA Member swap dealers (SD) and major swap participants (MSP). The current annual dues amounts have remained unchanged, except for a reduction in MSP annual dues, since NFA established its swap regulatory program in 2013. Given the expansion of NFA's swaps regulatory program over the past eight years, NFA's Board of Directors unanimously approved the following increases to these annual dues amounts, which will become effective January 1, 2022 for dues payable after that date:
For more information on the increases, see Notice to Members I-21-16.
Per Notice I-21-40:
December 02, 2021
FCM and RFED filing requirements for Christmas and New Year's Day—Reminder for upcoming holidays
This is a reminder that the following futures commission merchant (FCM) and retail foreign exchange dealer (RFED) regulatory filings will be impacted as follows by the Christmas and New Year's Day holidays:
Christmas Day—Saturday, December 25, 2021
New Year's Day—Saturday, January 1, 2022
Any information filed by FCMs or RFEDs after its due date must be accompanied by a fee for each business day that it is late.
Holiday Filing Schedule
Visit NFA's website to view a complete schedule of daily filing requirements for upcoming holidays and an updated calendar of Segregated Investment Detail Report (SIDR) due dates. NFA recommends viewing the calendars and keeping this Notice as a reference for the upcoming 2022 holiday filing requirements.
For more information about filing financial reports, visit NFA's website.
Per Notice I-21-41:
December 02, 2021
SD holiday filing requirements
Visit NFA's website to view schedules of 2022 swap dealer (SD) holiday filings, risk data and margin monitoring filingsand financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2022 holiday filing requirements.
Per Notice I-21-42:
December 06, 2021
Action required: NFA adds virtual currency and micro contract-related questions to Annual Questionnaire
NFA Members must complete the Annual Questionnaire annually and update it throughout the year to reflect significant changes in business activity. Due to recent increased interest and activity in virtual currency and micro contract products, NFA has updated the Questionnaire to address Members' spot/physical virtual currency, virtual currency derivatives and micro contract transactions.
NFA requires all CPO, CTA, FCM, FDM and IB Members to complete the new questions as soon as possible to avoid unnecessary inquiries.
Per Notice I-21-43:
December 07, 2021
Action encouraged: CPO and CTA Members should ensure Executive Representative information is accurate prior to December 27, 2021 to facilitate voting in upcoming contested election
Contested Election in CPO and CTA Category
The upcoming 2022 Board of Directors election includes a contested election in the CPO and CTA category for a position with no conditions as to funds under management, as of June 30, 2021. Two individuals have been nominated for this position and therefore NFA will be conducting an election for CPO and CTA Members to vote for the individual to fill this Board position. More information on the candidates and the election process will be provided prior to the election period.
Who Can Vote in a Contested Election
Bylaw 409 requires each Member to designate an Executive Representative who has the sole authority, among other things, to cast votes on a Member's behalf in a contested election for an NFA Director position. Therefore, it is important that each CPO and CTA Member ensure that the individual currently listed as the Member's Executive Representative and their contact information are accurate. CPO and CTA Members should review, and if necessary, update this information prior to December 27, 2021 to ensure that NFA distributes the election materials to the appropriate Executive Representative.
Designate/Update Executive Representative
Each Member may designate or update its Executive Representative by accessing NFA's Executive Representative Contact form found on NFA's Electronic Filing Systems page. Only firm employees who are Security Manager(s) or are authorized to "View, Update, and File" information in ORS may complete this form.
If a Member has not designated an Executive Representative, the Membership Contact listed on the Member's Form 7-R will be deemed to be the Member's Executive Representative and will have the authority to cast votes on the Member's behalf.
Votes submitted by any person other than the Executive Representative (or the Membership Contact if no Executive Representative is designated) will be not be counted.
Per Notice I-21-44:
December 20, 2021
Effective date for amendment to exclude certain associated persons from the Branch Office Manager Examination requirement
NFA Compliance Rule 2-7 generally prohibits a Member from permitting an associated person (AP) to act as a branch office manager unless the individual has taken and passed NFA's Branch Office Manager Examination (Series 30). NFA recently amended NFA Compliance Rule 2-7 to exclude from the Series 30 requirement any swap AP acting as a branch office manager for a Member engaged solely in swap activities. NFA adopted this amendment because swap APs are also required to pass NFA's Swaps Proficiency Requirements, which include a section on supervision and are directly related to a Member's swap activities. Passing the Series 30, which in addition to supervision covers topics not directly applicable to a branch office solely engaged in swaps, is no longer necessary for these APs.
This amendment was unanimously approved by the Board and will become effective on January 3, 2022.
More information regarding this amendment can be found in NFA's November 22, 2021 submission letter to the CFTC.
Per Notice I-21-45:
December 21, 2021
Effective date for amendment to NFA Financial Requirements Section 18
NFA Financial Requirements Section 18 requires each swap dealer (SD) Member that is also a broker-dealer or security-based SD (SBSD) to file financial reports with NFA using the SEC's FOCUS report. NFA recently learned that certain SDs intend to comply with the CFTC's capital, margin, segregation, recordkeeping and reporting requirements in lieu of the equivalent SEC regulations, pursuant to SEC Rule 18a-10, and will not file the FOCUS report with the SEC. Therefore, NFA amended Financial Requirements Section 18 to require SBSDs that do not file the FOCUS report with the SEC to use one of the other two forms developed by NFA: Form FR-CSE-NLA or FR-CSE-BHC.
This amendment was unanimously approved by NFA's Board of Directors and is effective immediately.
NFA's November 22, 2021 submission letter to the CFTC contains more detailed information regarding this amendment.
Per Notice I-21-46:
December 29, 2021
Notice of Annual Meeting of NFA Members and Board and Nominating Committee Election
Notice of Annual Meeting
NFA will hold its Annual Meeting of Members (Annual Meeting) on Tuesday, February 1, 2022 at 10:00 a.m. (CST), at its offices located at 300 S. Riverside Plaza, Suite 1800, Chicago, IL. The agenda of the meeting is:
To register to attend the Annual Meeting, please email your name, NFA ID# and contact email to firstname.lastname@example.org. Registration is due by Friday, January 28, 2022, at 5:00 p.m. (CST).
December 09, 2021
NFA orders Chicago, Ill. commodity trading advisor K-Ratio Advisory LLC and former introducing broker K-Ratio Brokerage LLC never to reapply for NFA membership
December 9, Chicago—NFA has ordered K-Ratio Advisory LLC (KRA), a CFTC-registered commodity trading advisor and former NFA Member located in Chicago, Ill., and K-Ratio Brokerage LLC (KRB), a previously CFTC-registered introducing broker Member located in Chicago, Ill., never to reapply for membership or act 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 and a settlement offer submitted by KRA and KRB, in which they neither admitted nor denied the allegations. The Complaint alleges that KRA and KRB operated an unregulated trading program without having adequate financial wherewithal to do so. The Complaint also alleges that KRA and KRB used misleading and deceptive promotional material and communications. The Complaint also alleges that KRA and KRB allowed an unregistered individual to act as an associated person without being registered in such capacity and an NFA Associate. Finally, the Complaint alleges that KRA and KRB failed to supervise.
December 16, 2021
NFA statement regarding confirmation of Russ Behnam as CFTC Chairman
December 16, Chicago—NFA congratulates Rostin (Russ) Behnam on his confirmation as Chairman of the Commodity Futures Trading Commission. His deep knowledge and experience are integral to advancing our common mission of protecting investors and ensuring market integrity. We look forward to working with Chairman Behnam and the Commission on our industry's important regulatory matters.
- Thomas W. Sexton, III, NFA President and CEO
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.
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:
p. (646) 346-2468
p. (917) 568-6470