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 22-27, FINRA has adopted amendments to Rule 6730 (Transaction Reporting) to (i) require members to report transactions in U.S. Treasury securities to FINRA’s Trade Reporting and Compliance Engine (TRACE) as soon as practicable but no later than 60 minutes from the time of execution; and (ii) require members to report electronically executed transactions in U.S. Treasury securities to TRACE in the finest increment captured by the system used to execute the transaction, subject to an exception for members with limited trading volume in U.S. Treasury securities. FINRA is also revising its TRACE Frequently Asked Questions (FAQs) to standardize price reporting for Treasury bills and Floating Rate Notes (FRNs) by requiring all transactions to be reported using the dollar price.
The amendments to reduce the trade reporting timeframe for transactions in U.S. Treasury securities will take effect on May 15, 2023. The amendments related to the granularity of execution timestamps, as well as the revisions to the TRACE FAQs to standardize price reporting, will take effect on November 6, 2023.
The amended text of Rule 6730 is set forth in Attachment A.
Per Notice 22-28, FINRA has adopted amendments to the Rule 6700 series (Trade Reporting and Compliance Engine (TRACE)) to require members to report to TRACE transactions in U.S. dollar-denominated foreign sovereign debt securities. The amendments will take effect on November 6, 2023.
The amended rule text is available in the online FINRA Manual.
Per Notice 22-29, FINRA has received reports about increasing numbers and sophistication of ransomware incidents. Ransomware typically involves bad actors gaining unauthorized access to firm systems and encrypting or otherwise accessing sensitive firm data or customer information, then holding that hijacked data for ransom. Some ransomware attacks have become significant threats that include theft of data and bad actors’ ongoing network access.
Ransomware attacks have proliferated due to, in part, increased use of technology and continued adoption of cryptocurrencies, which bad actors use to hide their identities when collecting ransom payments. Further, Ransomware-as-a-Service (RaaS) models, where bad actors purchase attack services on the dark web, have helped execute attacks on a much larger scale and make attacks available to less technologically savvy bad actors.
Rule 30 of the U.S. Securities and Exchange Commission’s (SEC) Regulation S-P requires firms to have written policies and procedures that are reasonably designed to safeguard customer records and information. FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) also applies to ransomware attacks that include denials of service and other interruptions to members’ operations.
This Notice provides questions firms can use to evaluate their cybersecurity programs in light ofthe increased ransomware threat, lists possible additional firm controls and provides relevant resources.
This Notice, including the questions for consideration, does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations. Member firms may consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member firm’s size and business model. Moreover, some questions may not be relevant due to certain firms’ business models, size or practices.
Per Notice 22-30, FINRA is issuing this Notice to re-open the comment period for Regulatory Notice 15-13. Rule 15b9-1 currently provides proprietary trading firms with an exemption from membership in a national securities association. If the SEC re-proposal is adopted, the amendments generally would require a proprietary trading firm relying on the current exemption to register with FINRA if the firm continues to effect transactions other than on an exchange of which it is a member, with limited exceptions. FINRA membership would, among other things, apply FINRA’s existing fee structure to these firms, including FINRA’s Trading Activity Fee. FINRA is re-opening the comment period for Regulatory Notice 15-13, which had previously proposed an exemption to exclude from FINRA’s Trading Activity Fee transactions by a proprietary trading firm on exchanges of which the firm is a member.
Per Notice 22-31, member firms are required to make reasonable efforts to obtain the name of and contact information for a trusted contact for a non-institutional customer’s account. This Notice summarizes member firms’ regulatory obligations, discusses the benefits of trusted contacts in administering customers’ accounts, highlights customer education resources and shares effective practices member firms use.
This Notice does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations. Member firms may consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member firm’s size and business model.
Special Notices
There were no special notices in November.
SEC
Final Rules
Per Release No. 33-11138, the SEC is adopting amendments to the rule under the Securities Exchange Act of 1934 (“Exchange Act”) that provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases. The amendments add new conditions to this rule that are designed to address concerns about abuse of the rule to trade securities opportunistically on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC is also adopting new disclosure requirements regarding the insider trading policies and procedures of issuers, the adoption and termination (including modification) of plans that are intended to meet the rule’s conditions for establishing an affirmative defense, and certain other similar trading arrangements by directors and officers. In addition, the SEC is adopting amendments to the disclosure requirements for director and executive compensation regarding equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information. Finally, the SEC is adopting amendments to Forms 4 and 5 to require filers to identify transactions made pursuant to a plan intended to meet the rule’s conditions for establishing an affirmative defense and to require disclosure of bona fide gifts of securities on Form 4.
Per Release No. 33-11139, the SEC is adopting technical amendments to its regulations regarding organization, conduct and ethics; and information requests. The technical amendments move the citations of statutory authority for the regulations from the subpart level to the part level and amend related citations to remove duplicative statutory citations at the subpart level.
Per Release No. 33-11140, the SEC is adopting amendments to Volumes I and II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“Filer Manual”) and related rules and forms. EDGAR Releases 22.4 and 22.4.1 will be deployed in the EDGAR system on or about December 19, 2022, and January 3, 2023, respectively.
Proposed Rules
Per Release No. 34-96458, the SEC is reopening the comment period for its proposal, Share Repurchase Disclosure Modernization, Exchange Act Release No. 34-93783 (Dec. 15, 2021) (“Proposing Release”). The SEC proposed amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under 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. The SEC subsequently reopened the comment period for the Proposing Release in Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments, Exchange Act Release No. 34-96005 (Oct. 7, 2022). In addition, after the proposed amendments were published for public comment, an excise tax on share repurchases was signed into law. A staff memorandum was added to the public comment file on December 7, 2022 to analyze the impact of the new excise tax on the potential economic effects of the proposed amendments. The SEC is reopening the comment period to allow interested persons the opportunity to analyze and comment on the additional analysis.
Per Release No. 34-96493, the SEC is proposing to amend existing requirements under the Securities Exchange Act of 1934 (“Exchange Act”) to update the disclosure required for order executions in national market system (“NMS”) stocks. First, the SEC is proposing to expand the scope of reporting entities subject to the rule that requires market centers to make available to the public monthly execution quality reports to encompass broker-dealers with a larger number of customers. Next, the SEC is proposing to modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices. In addition, the SEC is proposing modifications to the information required to be reported under the rule, including changing how orders are categorized by order size as well as how they are categorized by order type. As part of the changes to these categories, the SEC is proposing to capture execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Additionally, the SEC is proposing to modify reporting requirements for non-marketable limit orders (“NMLOs”) in order to capture more relevant execution quality information for these orders by requiring statistics to be reported from the time such orders become executable. The SEC is also proposing to eliminate time-to-execution categories in favor of average time-to-execution, the median time-to-execution, and 99th percentile time-to-execution, each as measured in increments of a millisecond or finer and calculated on a share-weighted basis. In order to better reflect the speed of the marketplace, the SEC is proposing that the time of order receipt and time of order execution be measured in increments of a millisecond or finer and that realized spread be calculated at both 15 seconds and one minute. Finally, the SEC is proposing to enhance the accessibility of the required reports by requiring all reporting entities to make a summary report available.
Per Release No. 34-96494, the SEC is proposing to amend certain rules of Regulation National Market System (“Regulation NMS”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) to adopt variable minimum pricing increments for the quoting and trading of NMS stocks, reduce the access fee caps, and enhance the transparency of better-priced orders.
Per Release No. 34-96495, the SEC is proposing to amend the regulation governing the national market system (“NMS”) under the Securities Exchange Act of 1934 (“Exchange Act”) to add a new rule designed to promote competition as a means to protect the interests of individual investors and to further the objectives of an NMS. The proposed rule would prohibit a restricted competition trading center from internally executing certain orders of individual investors at a price unless the orders are first exposed to competition at that price in a qualified auction operated by an open competition trading center. The proposed rule would also include limited exceptions to this general prohibition. In addition, the SEC is proposing to amend the regulation governing the NMS to add new defined terms included in the proposed rule.
Per Release No. 34-96496, the SEC is proposing new rules under the Securities Exchange Act of 1934 (“Exchange Act”) relating to a broker-dealer’s duty of best execution. Proposed Regulation Best Execution would enhance the existing regulatory framework concerning the duty of best execution by requiring detailed policies and procedures for all broker-dealers and more robust policies and procedures for broker-dealers engaging in certain conflicted transactions with retail customers, as well as related review and documentation requirements.
Interim Final Rules
There were no interim final rules in December.
Interpretive Releases
There were no interpretive releases in December.
There were no policy statements in December.
NFA
Notice I-22-24
December 1, 2022
FINRA announces increase in proficiency examination fees for 2023
The Financial Industry Regulatory Authority (FINRA) notified NFA that it will increase its fees for the administration and delivery of NFA's qualifications examinations on January 1, 2023.
On this date, the fee for an individual to take the Series 3: National Commodity Futures Examination will be $140, an increase of $10. The fee for the Series 30: NFA Branch Manager Examination; Series 31: Futures Managed Funds Examination; Series 32: Limited Futures Examination–Regulations; and Series 34: Retail Off-Exchange Forex Examination will be $90, a $5 increase.
To sign up for any of these examinations, an applicant must apply online by visiting FINRA's website.
For information on proficiency requirements, including study outlines, visit NFA's proficiency requirements webpage.
Notice I-22-25
December 5, 2022
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, 2023, 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, 2023. 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.
How to complete the affirmation process
To complete the affirmation process, access the Exemptions System from the Electronic Filing Systems page on NFA's website.
The Notice also includes frequently asked questions about exemptions.
Notice I-22-26
December 12, 2022
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 (Observed)—Monday, December 26, 2022
• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 23, 2022, are required to be submitted by 12:00 noon on Tuesday, December 27, 2022; and
• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements are required to be prepared as of Monday, December 26, 2022, and are required to be submitted by 12:00 noon on Tuesday, December 27, 2022.
New Year's Day (Observed)—Monday, January 2, 2023
• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 30, 2022, are required to be submitted by 12:00 noon on Tuesday, January 3, 2023;
• Daily segregated, 30.7 secured, and cleared swaps customer collateral statements are not required to be prepared as of Monday, January 2, 2023; and
• Daily forex statements are required to be prepared as of Monday, January 2, 2023, and are required to be submitted by 12:00 noon on Tuesday, January 3, 2023.
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 2023 holiday filing requirements.
For more information about filing financial reports, visit NFA's website.
Notice I-22-27
December 12, 2022
SD holiday filing requirements
Visit NFA's website to view schedules of 2023 swap dealer (SD) holiday filings, risk data and margin monitoring filings and financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2023 holiday filing requirements.
For more information about SD filing requirements visit NFA's website.
News Releases
December 8, 2022
NFA orders Warren, NJ retail forex dealer and futures commission merchant Gain Capital Group LLC to pay a $700,000 fine
December 8, Chicago—NFA has ordered Gain Capital Group LLC (Gain) to pay a $700,000 fine. Gain, which does business as FOREX.com, is a registered retail forex dealer and futures commission merchant Member of NFA headquartered in Warren, New Jersey.
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 Gain and Alexander Robert Bobinski, Jr. (Bobinski), an associated person and principal of the firm and Associate Member of NFA. In the settlement offer, the firm and Bobinski neither admitted nor denied the allegations in the Complaint.
In its Decision, the BCC found that Gain violated NFA Compliance Rule 2-43(a)(1) by improperly adjusting customer accounts following a system malfunction; violated NFA Compliance Rule 2-36(c) by its treatment of customers affected by the system malfunction and Gain's account adjustments; violated NFA Compliance Rules 2-5 and 2-36(c) by submitting inaccurate and incomplete information to NFA; and violated NFA Compliance Rules 2-36(e) and 2-9(a) by failing to supervise. The BCC also found that Bobinski violated NFA Compliance Rule 2-36(e) by failing to supervise.
The complete text of the Complaint and Decision can be viewed on NFA's website.
Hot Issues
Advertising & Solicitation
The SEC’s new marketing rule went into full compliance effect in November. The single rule draws from and replaces the previous advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The new rule is designed to comprehensively and efficiently regulate advisers’ marketing communications. The new rule also made related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule.
Please reach out today to find out how CRC resources and expertise can be leveraged to support a comprehensive review your compliance programs related to marketing as well as assess existing communications.
Archiving Electronic Communications
In September, the SEC fined 16 firms with penalties totaling over $1.1B due to archiving failures related to electronic communications. Under specific scrutiny is personnel use of texting on personal devices for business-related communications and the use of messaging applications, such as WhatsApp. CRC advises that firms review and address policies and procedures related to the use of personal mobile devices, texting, and other electronic channels to communicate for business purposes. Firms should carefully consider what is permitted under its policies, how such policies are enforced and confirmed, and whether additional solutions need to be built out to ensure appropriate archiving and oversight of such communications.
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
Sources:
• FINRA December 2022 Industry Notices
• SEC Regulatory Actions
• NFA Notice to Members
• NFA Press Releases
