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 22-05, FINRA has adopted amendments to Rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) place a hold on a securities transaction (in addition to the already-permitted hold on a disbursement of funds or securities) where there is a reasonable belief of financial exploitation; and (2) extend a temporary hold on a disbursement or transaction for an additional 30 business days, beyond the current maximum of 25 business days (for a total of 55 business days), if the member firm has reported the matter to a state regulator or agency, or a court of competent jurisdiction. The amendments to Rule 2165 become effective March 17, 2022.
The rule text is available in Attachment A.
Per Notice 22-06, the U.S. government has imposed sanctions in response to Russia’s actions in Ukraine. FINRA is issuing this Notice to provide member firms with information about these recent actions. FINRA encourages member firms to continue to monitor the Department of Treasury’s Office of Foreign Asset Control (OFAC) website for relevant information.
There were no Special Notices in February.
There were no Final Rules in February.
Per Release No. IA-5955, the SEC is proposing new rules under the Investment Advisers Act of 1940 (the “Advisers Act” or the “Act”). The SEC proposes to require registered investment advisers to private funds to provide transparency to their investors regarding the full cost of investing in private funds and the performance of such private funds. The SEC also is proposing rules that would require a registered private fund adviser to obtain an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion from an independent opinion provider. In addition, the SEC is proposing rules that would prohibit all private fund advisers, including those that are not registered with the Commission, from engaging in certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest and the protection of investors. All private fund advisers would also be prohibited from providing preferential treatment to certain investors in a private fund, unless the adviser discloses such treatment to other current and prospective investors. The SEC is proposing corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these proposed new rules and assist our examination staff. Finally, the SEC is proposing amendments to the Advisers Act compliance rule, which would affect all registered investment advisers, to better enable SEC staff to conduct examinations.
Per Release No. 33-11028, the SEC is proposing new rules under the Investment Advisers Act of 1940 (“Advisers Act”) and the Investment Company Act of 1940 (“Investment Company Act”) to require registered investment advisers (“advisers”) and investment companies (“funds”) to adopt and implement written cybersecurity policies and procedures reasonably designed to address cybersecurity risks. The SEC also is proposing a new rule and form under the Advisers Act to require advisers to report significant cybersecurity incidents affecting the adviser, or its fund or private fund clients, to the Commission. With respect to disclosure, the SEC is proposing amendments to various forms regarding the disclosure related to significant cybersecurity risks and cybersecurity incidents that affect advisers and funds and their clients and shareholders. Finally, the SEC is proposing new recordkeeping requirements under the Advisers Act and Investment Company Act.
Per Release No. 34-94196, the SEC proposes rules to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). To facilitate a T+1 standard settlement cycle, the SEC also proposes new requirements for the processing of institutional trades by broker-dealers, investment advisers, and certain clearing agencies. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. The SEC proposes to require compliance with a T+1 standard settlement cycle, if adopted, by March 31, 2024. The SEC also solicits comment on how best to further advance beyond T+1.
Per Release No. 33-11030, the SEC is proposing to amend certain rules that govern beneficial ownership reporting. The proposed amendments would modernize the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G. The proposed amendments also would deem holders of certain cash-settled derivative securities as beneficial owners of the reference equity securities and clarify the disclosure requirements of Schedule 13D with respect to derivative securities. In addition, the proposed amendments would clarify and affirm the operation of the regulation as applied to two or more persons that form a group under the Securities Exchange Act of 1934, and provide new exemptions to permit such persons to communicate and consult with each other, jointly engage issuers and execute certain transactions without being subject to regulation as a group. The SEC also is proposing to amend provisions regarding the date on which Schedules 13D and 13G filings are deemed to have been made. Finally, the SEC is proposing to require that Schedules 13D and 13G be filed using a structured, machine-readable data language.
Per Release No. 34-94212, the SEC is proposing for public comment amendments to the SEC’s rules implementing its whistleblower program. The Securities Exchange Act of 1934 (“Exchange Act”) provides for, among other things, the issuance of monetary awards to any eligible whistleblower who voluntarily provides the SEC with original information about a securities law violation that leads to the SEC’s success in obtaining a monetary order of more than a million dollars in a covered judicial or administrative action brought by the SEC (“covered action”). If an eligible whistleblower qualifies for an award, Section 21F requires an award that is at least 10 percent, but no more than 30 percent, of the amount of the monetary sanctions collected in the covered action. The receipt of an award in a covered action also enables a whistleblower to qualify for an award in connection with judicial or administrative actions based on the whistleblower’s same original information and brought by the U.S. Department of Justice (“DOJ”) and certain other statutorily identified agencies or entities (“related actions”). The proposed rules would make two substantive changes to the Commission’s whistleblower rules that implement the whistleblower program, as well as several conforming amendments and technical corrections.
Per Release No. 34-94313, the SEC is proposing a new rule and related form pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”), including Section 13(f)(2), which was added by Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”). The proposed rule and related form are designed to provide greater transparency through the publication of short sale related data to investors and other market participants. Under the rule, institutional investment managers that meet or exceed a specified reporting threshold would be required to report, on a monthly basis using the proposed form, specified short position data and short activity data for equity securities. In addition, the SEC is proposing a new rule under the Exchange Act to prescribe a new “buy to cover” order marking requirement, and proposing to amend the national market system plan governing the consolidated audit trail (“CAT”) created pursuant to the Exchange Act to require the reporting of “buy to cover” order marking information and reliance on the bona fide market making exception in the Commission’s short sale rules. The SEC is publishing the text of the proposed amendments to the CAT NMS Plan in a separate notice.
Per Release No. 34-94314, the SEC is publishing notice of the text of the proposed amendments to the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”) in connection with the Commission’s issuance of Release No. 34-94313, the “Short Position and Short Activity Reporting by Institutional Investment Managers” (the “Proposing Release”).
Per Release No. 34-94315, on November 18, 2021, the SEC issued for comment a proposed rule under the Securities Exchange Act of 1934 (“Exchange Act”) in Release No. 34-93613 (Nov. 18, 2021), 86 FR 69802 (Dec. 8, 2021) regarding the reporting of securities loans. The Commission is reopening the comment period for the proposed rule in light of the proposed Exchange Act rule regarding short sale disclosure. In particular, the SEC is soliciting comment on any potential effects of the proposed Exchange Act rule regarding short sale disclosure that the Commission should consider in determining whether to adopt the proposed Exchange Act rule regarding the reporting of securities loans.
Interim Final Rules
There were no interim final rules in February.
There were no interpretive releases in February.
There were no policy statements in February.
Notices to Members
Per Notice I-22-05:
February 01, 2022
Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs
Due to COVID-19, NFA allowed Members to conduct all calendar year 2020 and 2021 annual inspections of branch offices and guaranteed introducing brokers (IB) remotely (see Notices to Members I-20-35 and I-21-25). NFA is extending the relief provided in Notices I-20-35 and I-21-25 through the end of 2022. Although Members must conduct the required annual inspection of each branch office and guaranteed IB by December 31, 2022, firms may conduct these inspections remotely. A Member that conducts a remote examination in 2022 based on this relief may still conduct a remote examination in 2023 if its risk assessment indicates it is appropriate to do so. This risk assessment should take into account when the firm most recently conducted an on-site exam.
Per Notice I-22-06:
February 02, 2022
Notice of Members Elected to NFA's Board of Directors and Nominating Committee
Board of Directors
This year there was one contested election in the CPO/CTA category of NFA's Board of Directors. The result of the election is as follows:
During its meeting on January 20, 2022, NFA's Executive Committee, pursuant to Article VII, Section (3)(c) and Article X, Section 3 of NFA's Articles of Incorporation, elected the following nominees to the Board and Nominating Committee:
Board of Directors
2022 NFA Nominating Committee
The terms of NFA's Board of Directors and Nominating Committee members will begin on February 17, 2022. Board members representing contract markets serve one-year terms. All other Board members serve two-year terms. Nominating Committee members serve three-year terms.
* Newly elected
Per Notice I-22-07:
February 22, 2022
NFA's Board of Directors re-elects Maureen C. Downs to serve as Chair
At its February meeting, NFA's Board of Directors re-elected Maureen C. Downs, Phillip Capital, Inc., to serve a one-year term as Chair. The Board also re-elected Don Thompson, JPMorgan Chase & Co., to serve as Vice-Chair.
In addition, the Board elected the following individuals to serve as public directors for two-year terms:
The Board also elected the following individuals to serve one-year terms on NFA's Executive Committee:
Ms. Downs, NFA Permanent Special Advisor Leo Melamed, and NFA's President also serve on the Executive Committee.
February 28, 2022
NFA orders Newport Beach, Calif. commodity trading advisor Plus EV Capital LLC never to reapply for NFA membership
February 28, Chicago—NFA has ordered Plus EV Capital LLC (EV Capital), a former NFA Member commodity trading advisor located in Newport Beach, Calif., never to reapply for membership or act as a principal of an NFA Member. NFA also ordered Rohit Chopra, EV Capital's sole owner, principal and associated person, not to reapply for membership or act as a principal of an NFA Member for three years. If Chopra seeks NFA membership following the three-year period, he must pay a $100,000 fine.
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 EV Capital and Chopra, in which they neither admitted nor denied the allegations. The Complaint alleges that EV Capital and Chopra placed unauthorized trades in customers' accounts, misrepresented to customers about the trades placed in their accounts, made highly risky trades in a customer's account and manipulated allocation instructions to benefit Chopra to the detriment of customers.
Bottom of Form
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