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 23-03, FINRA established an accounting support fee (GASB Accounting Support Fee) in February 2012 pursuant to an SEC order to adequately fund the annual budget of the Governmental Accounting Standards Board (GASB). The GASB Accounting Support Fee is collected on a quarterly basis from member firms that report trades to the Municipal Securities Rulemaking Board (MSRB). Each member firm’s assessment is based on its portion of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB during the previous quarter. FINRA will assess and collect a total of $14,403,500 to adequately fund GASB’s annual budget by collecting $3,600,875 from its member firms each calendar quarter beginning in April 2023.
Special Notices
There were no special notices in February.
SEC
Final Rules
Per Release No. 34-96930, the SEC is adopting rule amendments 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”). In addition, the SEC is adopting new rules related to the processing of institutional trades by broker-dealers and certain clearing agencies. The SEC is also amending certain recordkeeping requirements applicable to registered investment advisers.
Per Release No. 33-11159, the SEC is adopting an amendment to Regulation S-T to extend the filing deadline for Form 144 from 5:30 p.m. to 10 p.m., Eastern Standard Time or Eastern Daylight Saving Time, whichever is currently in effect, on SEC business days. The SEC is also adopting technical amendments to enhance the consistency of recently revised provisions related to the filing format of Form 144.
Proposed Rules
Per Release No. 34-96906, the SEC is proposing amendments to the SEC’s regulations under the Privacy Act of 1974, as amended (“Privacy Act”). The proposed amendments would revise the SEC’s regulations under the Privacy Act to clarify, update, and streamline the language of several procedural provisions.
Per Release No. IA-6240, the SEC is proposing a new rule under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) to address how investment advisers safeguard client assets. To effect the redesignation of the current custody rule for the proposed new safeguarding rule, the SEC is proposing to renumber the current rule. In addition the SEC is proposing to amend certain provisions of the current custody rule for enhanced investor protections. The SEC is proposing corresponding amendments to the recordkeeping rule under the Advisers Act and to Form ADV for investment adviser registration under the Advisers Act.
Interim Final Rules
There were no interim final rules in February.
Interpretive Releases
There were no interpretive releases in February.
There were no policy statements in February.
NFA
Notice I-23-04
February 6, 2023
Educational resources, common deficiencies and other important regulatory information for SD Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:
Regulatory Obligations Related to Common Deficiencies
The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations.
Daily Trading Records: SD Members are required to make and keep daily trading records of all swaps executed, including all documents on which transaction information is originally recorded, pursuant to CFTC Regulation 23.202. SD Members should consider taking preventative measures against the use of unauthorized or unrecorded channels for pre-execution trade communications.
Supervision: SD Members are required to have a supervisory program and must diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602.
Business Conduct Standards: SD Members are required to obtain and retain a record of essential facts to accurately categorize their counterparties to facilitate compliance with various regulatory requirements pursuant to CFTC Regulation 23.402. The failure to properly identify and classify counterparties may result in non-compliance with other transaction-specific requirements. Additionally, SD Members are required to make several disclosures to non-SD counterparties pursuant to CFTC Regulation 23.431. A common deficiency in this area is a failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into uncleared swap transactions.
Market Practice: SD Members are required to implement policies and procedures designed to prevent fraud, manipulation and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:
Portfolio Reconciliation: SD Members must engage in portfolio reconciliation pursuant to CFTC Regulation 23.502. Firms are required to establish, maintain and follow written procedures to resolve discrepancies identified by portfolio reconciliation.
Swap Valuation Disputes: SD Members, including non-U.S. SDs relying on substituted compliance with respect to CFTC Regulation 23.502, must submit valuation disputes to NFA as set forth in Interpretive Notice 9072.
Swap Data Reporting: SD Members must report swap transaction data to swap data repositories pursuant to CFTC Regulation 23.204 and CFTC Regulation 23.205. Additionally, they must report corrections of identified errors or omissions as soon as technologically practicable (ASATP) after discovery. Common deficiencies in this area include:
Ongoing Updates
On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins to hold or transact in digital assets, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA has correct information about the firm's business activities and that the firm receives all applicable notices relating to its reporting requirements in a timely manner.
Recent Amendments and Reminders
Capital Requirements: The compliance date for CFTC minimum capital requirements was October 6, 2021. SD Members subject to CFTC minimum capital requirements must maintain regulatory capital as defined under the bank holding company regulations in 12 CFR Part 217 as if the SD itself were a bank holding company or as defined in SEC Regulation 240.18a-1 as if the SD were a security-based SD registered with the SEC. Certain SDs that are predominately engaged in non-financial activities may instead choose to maintain tangible net worth in an amount equal to or in excess of minimum capital requirements. Regulatory capital, tangible net worth and minimum capital requirements are determined at the legal entity level. Additionally, when internal models are used to determine regulatory capital or minimum capital requirements, the SD must demonstrate independent model validation and ongoing performance monitoring of the SD's own use of the internal models at the legal entity level.
Phase VI Margin Requirements: The compliance date for entities in scope for Phase VI of the CFTC's final margin rules was September 1, 2022. SD Members without a prudential regulator must exchange initial margin with all covered counterparties exceeding initial margin threshold amounts.
Reporting Requirements: The compliance date for the CFTC's amendments to its final rules for SD reporting was December 5, 2022. The final rules revise the current CFTC reporting requirements to improve the quality, accuracy and completeness of the reporting data. Included in the amended rules are requirements for each reporting counterparty to compare swap data maintained by the relevant SDR to swap data in the firm's own internal records to verify accuracy and completeness of reported swap data.
Position Limits: The compliance date for CFTC's position limits regulations was January 1, 2023. SD Members must establish and enforce written policies and procedures that are reasonably designed to monitor for, and prevent violations of, applicable position limits.
Recent Notices to Members
I-22-27: SD holiday filing requirements
I-22-20: Reminder: NFA Member cybersecurity responsibilities
I-22-18: SD notice filing requirements under CFTC Regulation 23.154
Notice I-23-05
February 6, 2023
Educational resources, common deficiencies and other important regulatory information for CPO and CTA Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:
Commodity Pool Operators (CPO)
Commodity Trading Advisors (CTA)
Regulatory Obligations Related to Common Deficiencies
The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations of CPO and CTA Members.
Self-Examination Questionnaire
NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the self-examination questionnaire. Thorough questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA rules.
Digital Assets
Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.
Third Party Service Providers
Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions intended to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.
Cybersecurity
CPO and CTA Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.
Members that fail to establish and implement an ISSP may be subject to disciplinary action.
Pool Financial Reporting—Notification Requirements
Notice Filing Requirements: CPOs are required to file notice with NFA when a market or other event affects a commodity pool's ability to fulfill its participant obligations. Notice must be filed by 5:00 p.m. CT the next business day following one of the events outlined in Compliance Rule 2-50 and Interpretive Notice 9080.
Changes in Fiscal Year End: If a CPO elects a fiscal year end other than the calendar year end for a pool, it must give written notice of the election to all participants and file notice with NFA via EasyFile pursuant to CFTC Regulation 4.22(g) within 90 calendar days after the pool's formation. If this notice is not given, the CPO will be deemed to have elected the calendar year end as the pool's fiscal year end. The CPO must continue to use the elected fiscal year end for the pool unless it provides written notice of any proposed change to all participants and files such notice with NFA via EasyFile at least 90 days before the change.
Changes in Certified Public Accountant (CPA): In the event that a CPO changes the independent CPA engaged to audit a pool's financial statements, the CPO must file notice with NFA via EasyFile pursuant to CFTC Regulation 1.16(g) no more than 15 days after the CPA's resignation or dismissal by the CPO.
Extension Requests: If a CPO requests an extension to file an annual pool financial statement, the extension must be filed with NFA via EasyFile prior to the due date of the filing.
Cessation of Trading: When a pool ceases trading, the CPO must promptly update the Annual Questionnaire. With few exceptions, a CPO must also distribute to participants a final Annual Report and file the Annual Report with NFA. This Annual Report is due within 90 days after the pool ceases trading, absent an extension.
Calculation of Financial Ratios
CPO and CTA Members must compute financial ratios using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles or another internationally recognized accounting standard as outlined in Interpretive Notice 9071. Members should consult Notice I-18-20 for additional guidance on calculating these ratios.
Financial Reporting: With few exceptions, each CPO Members must distribute an Annual Report, certified by an independent public accountant, to pool participants within 90 days of the pool's fiscal year-end or the permanent cessation of trading, whichever is earlier. Each CPO must also report to NFA on a quarterly basis specific information about the firm and the pools it operates. These pool quarterly reports (PQRs) are due within 60 days of each calendar quarter end. Each PQR filed after its due date will be subject to a late filing fee of $200 for each business day it is late.
CTA Members that direct trading of commodity interests are required to file a quarterly CTA Form PR report within 45 days of the quarter end. Each Form PR report filed after its due date will be subject to a late filing fee of $200 for each business day it is late. CTAs that commence trading client accounts during a quarter must update the Annual Questionnaire immediately to receive timely reporting notifications.
As a reminder, NFA views late filings as a serious rule violation, and we have taken disciplinary action against Member firms in the past for filing reports after the due date.
Ongoing Updates
On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins doing business or begins soliciting for digital asset or micro contract products, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA's BASIC system displays correct information about the firm's business activities and ensures the firm receives all applicable notices relating to its reporting requirements in a timely manner.
A CPO Member who operates an umbrella-series structure (i.e., a single legal entity that has several distinct sub-funds which, in effect, are traded as individual funds) needs to list the umbrella entity with NFA through the Annual Questionnaire and mark it as such. CPOs may also identify the series funds that are tied to that umbrella through the questionnaire. Exemptions must be claimed at the umbrella level and must apply to the structure as a whole.
Recent Amendments and Reminders
The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.
I-22-20: Reminder: NFA Member cybersecurity responsibilities
I-22-10: Reminder: CPO notice filing requirements under Compliance Rule 2-50
I-22-05: Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs
Notice I-23-06
February 6, 2023
Educational resources, common deficiencies and other important regulatory information for FCM, FDM and IB Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:
Futures Commission Merchants (FCM)
Forex Dealer Members (FDM)
Introducing Brokers (IB)
Regulatory Obligations Related to Common Deficiencies
The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations of Member FCMs for which NFA is the DSRO, FDMs and IBs.
Self-Examination Questionnaire: NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the self-examination questionnaire. Thorough questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA rules.
Supervision: FCM, FDMs and IBs Members must have written supervisory policies and procedures to address the manner, frequency and results of monitoring written and oral communications. Such supervision includes, when required1, maintaining a record of all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. Common deficiencies in this area include firms not maintaining all required communications, failing to identify brokers using unapproved and unrecorded communication methods and permitting unregistered individuals to act as associated persons.
Digital Assets: Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.
Third Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.
Cybersecurity: FCM, FDM and IB Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.
Members that fail to establish and implement an ISSP may be subject to disciplinary action.
Financial Reporting: FCM, FDM and IB Members must periodically file financial reports. Each financial report filed late will be subject to a fee of $1,000 for each business day it is late. Firms that fail to file financial reports in a timely manner may be subject to disciplinary action.
Ongoing Updates
On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins doing business or begins soliciting for digital asset or micro contract products, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA's BASIC system displays correct information about the firm's business activities and ensures the firm receives all applicable notices relating to its reporting requirements in a timely manner.
Recent Amendments and Reminders
The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.
I-22-20: Reminder: NFA Member cybersecurity responsibilities
I-22-17: Forex Dealer Members: Effective date for amendment to NFA Compliance Rule 2-43
I-22-05: Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs
I-22-01: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration
Notice I-23-07
February 23, 2023
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.
Public Directors
Additionally at its February meeting, the Board elected the following individuals to serve as public directors:
Executive Committee
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.
During its meeting on January 19, 2023, 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
FCM Category:
IB Category:
CPO/CTA Category:
SD/MSP/RFED Category:
2023 NFA Nominating Committee
FCM Category:
IB Category:
CPO/CTA Category:
SD/MSP/RFED Category:
The terms of NFA's Board of Directors and Nominating Committee began on February 16, 2023.
A complete list of NFA's Board of Directors, Executive Committee, and Nominating Committee can be found on NFA's website.
News Releases
For Immediate Release
February 16, 2023
NFA orders Sioux Falls, S.D. introducing broker VBI Company to pay a $135,000 fine
February 16, Chicago—NFA has ordered Sioux Falls, S.D. introducing broker Member VBI Company (VBI) to pay a $135,000 fine. Peter Mark Vanden Berge, an associated person and principal of VBI, shares liability with the firm jointly and severally for the fine.
The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee (BCC) and a settlement offer submitted by VBI and Vanden Berge. In the settlement offer, the firm and Vanden Berge neither admitted nor denied the allegations in the Complaint.
The BCC's Complaint alleged that VBI violated NFA Compliance Rule 2-10 by failing to maintain required oral and written pre-trade communications. The Complaint also alleged that VBI and Vanden Berge violated NFA Compliance Rule 2-2(f) by providing NFA with a number of excuses for the firm's communication recordkeeping deficiencies and, in doing so, provided NFA with materially false or misleading information regarding whether VBI ever complied with its recordkeeping obligations. The Complaint also alleged that VBI and Vanden Berge violated NFA Compliance Rule 2-9(a) by failing to supervise the firm's operations.
In its Decision, the Panel found that VBI violated NFA Compliance Rule 2-10, and that VBI and Vanden Berge violated NFA Compliance Rules 2-2(f) and 2-9(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
Hot Issues
On February 7, the SEC announced its 2023 examination priorities. The following are a selection of the Division’s 2023 priorities: New Rules – including the new Marketing Rule, RIAs to Private Funds – including Reg BI and management of conflicts of interest, ESG-related advisory services and fund offerings – including whether ESG products are appropriately labeled, Information Security and Operational Resiliency – including BDs/RIAs practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets, and Emerging Technologies and Crypto-Assets – including a focus on registrants’ offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets.
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:
