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 22-07, FINRA established an accounting support fee (GASB Accounting Support Fee) to adequately fund the annual budget of the Governmental Accounting Standards Board (GASB) in February 2012, pursuant to an SEC order. 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 $12,508,400 to adequately fund GASB’s annual budget by collecting $3,127,100 from its member firms each calendar quarter beginning in April 2022.
Per Notice 22-08, the availability of complex products and options can potentially expand the investment opportunities for retail investors and, if properly understood, offer favorable investment outcomes (e.g., enhancing returns, limiting losses or improving diversification). However, important regulatory concerns arise when investors trade complex products without understanding their unique characteristics and risks. Like complex products, trading in options may pose risks if investors do not have the financial experience to understand options and options trading strategies. Therefore, FINRA has taken steps to address complex products and options over the years, including publishing guidance regarding sales practice concerns raised by complex products and options; issuing investor-focused alerts to highlight the risks of these products; adopting rules with specific requirements for particular complex products and for options; and examining members for compliance with SEC and FINRA rules.
The number of accounts trading in complex products and options has increased significantly in recent years. As a result, FINRA is again reminding members of their current regulatory obligations, including, as discussed below, the application of Regulation Best Interest (Reg BI) when broker-dealers and their associated persons make securities recommendations, and recommendations of investment strategies involving securities, to retail customers. In addition, FINRA is soliciting comment on: (1) effective practices that members have developed for complex products and options, particularly when retail investors are involved; and (2) whether the current regulatory framework, which was adopted at a time when the majority of individuals accessed financial products through financial professionals, rather than through self-directed platforms, is appropriately tailored to address current concerns raised by complex products and options.
Per Notice 22-09, FINRA seeks comment on a proposal to accelerate arbitration case processing when requested by parties who are seriously ill or are at least 75 years old. The proposal would help ensure that these parties are able to participate meaningfully in FINRA arbitration by shortening certain case processing deadlines for parties and arbitrators under the Codes.
The text of the proposed amendments is set forth in Attachment A.
Per Notice 22-10, Chief Compliance Officers (CCOs) at member firms play a vital role. For example, CCOs and their compliance teams help design and implement compliance programs, help educate and train firm personnel, and work in tandem with senior business management and legal departments to foster compliance with regulatory requirements. In this way, CCOs help promote strong compliance practices that protect investors and market integrity, as well as the member firm itself.
Rule 3110 (Supervision) imposes specific supervisory obligations on member firms. The responsibility to meet these obligations rests with a firm’s business management, not its compliance officials. The CCO’s role, in and of itself, is advisory, not supervisory. Accordingly, FINRA will look first to a member firm’s senior business management and supervisors to determine responsibility for a failure to reasonably supervise. FINRA will not bring an action against a CCO under Rule 3110 for failure to supervise except when the firm conferred upon the CCO supervisory responsibilities and the CCO then failed to discharge those responsibilities in a reasonable manner. As a result, charges against CCOs for supervisory failures represent a small fraction of the enforcement actions involving supervision that FINRA brings each year.
Special Notices
Per Special Notice 3/31/22, FINRA has multiple committees that facilitate effective engagement with its member firms and representatives of the public regarding regulatory and policy initiatives related to FINRA’s mission of promoting market integrity and investor protection. The purpose of this Notice is to encourage employees of member firms and other interested parties with diverse skills, backgrounds, perspectives and experiences to become involved in these committees so they can provide innovative feedback and support FINRA’s mission of investor protection and market integrity. Interested individuals should use FINRA’s Engagement Portal to submit an online form to be considered for future committee vacancies.
SEC
Final Rules
Per Release No. 33-11043, 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. The EDGAR system was upgraded on March 21, 2022.
The updated EDGAR Filer Manual is available at https://www.sec.gov/edgar/filer-
information/current-edgar-filer-manual. Typically, the EDGAR Filer Manual is also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room.
Per Release No. 33-11047, the SEC is adopting technical amendments to various rules and forms under the Securities Act of 1933 (the “Securities Act”), the Investment Company Act of 1940 (the “Investment Company Act”), and the Investment Advisers Act of 1940 (the “Investment Advisers Act”). These revisions make technical changes to correct typographical errors and erroneous cross-references, as well as to clarify instructions.
Proposed Rules
Per Release No. 33-11038, the SEC is proposing rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and cybersecurity incident reporting by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Specifically, the SEC is proposing amendments to require current reporting about material cybersecurity incidents. The SEC is also proposing to require periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk. Additionally, the proposed rules would require registrants to provide updates about previously reported cybersecurity incidents in their periodic reports. Further, the proposed rules would require the cybersecurity disclosures to be presented in Inline eXtensible Business Reporting Language (“Inline XBRL”). The proposed amendments are intended to better inform investors about a registrant’s risk management, strategy, and governance and to provide timely notification of material cybersecurity incidents. Comments should be received on or before May 9, 2022.
Per Release No. 33-11042, the SEC is proposing for public comment amendments to its rules under the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) that would require registrants to provide certain climate-related information in their registration statements and annual reports. The proposed rules would require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements. Comments should be received on or before 30 days after date of publication in the Federal Register or May 20, 2022 (which is 60 days after issuance), whichever is later.
Per Release No. 34-94499, the SEC is re-proposing amendments to remove the references to credit ratings included in certain Commission rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), among other things, requires the Commission to remove any references to credit ratings from its regulations. In one rule governing the activity of distribution participants, the SEC is proposing to remove the reference to credit ratings, substitute alternative measures of credit-worthiness, and impose related recordkeeping obligations in certain instances. In another rule governing the activity of issuers and selling security holders during a distribution, the SEC is proposing to eliminate the exception for investment-grade nonconvertible debt, nonconvertible preferred securities, and asset-backed securities. Comments should be received on or before May 23, 2022.
Per Release No. 34-94524, the SEC is proposing new rules to further define the phrase “as a part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer” under Sections 3(a)(5) and 3(a)(44), respectively, of the Securities Exchange Act of 1934 (“Exchange Act”). Comments should be received on or before 30 days after date of publication in the Federal Register or May 27, 2022 (which is 60 days after issuance), whichever is later.
Per Release No. 33-11048, the SEC is proposing rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (“SPACs”) and in subsequent business combination transactions between SPACs and private operating companies. Specifically, the SEC is proposing specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions. The proposed new rules and amendments to certain rules and forms under the Securities Act of 1933 and the Securities Exchange Act of 1934 would address the application of disclosure, underwriter liability, and other provisions in the context of, and specifically address concerns associated with, business combination transactions involving SPACs as well as the scope of the Private Securities Litigation Reform Act of 1995. Further, the SEC is proposing a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company’s shareholders and are proposing to amend a number of financial statement requirements applicable to transactions involving shell companies. In addition, the SEC is proposing to update our guidance regarding the use of projections in SEC filings as well as to require additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, the SEC is proposing a new safe harbor under the Investment Company Act of 1940 that would provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under that Act. Comments should be received on or before 30 days after date of publication in the Federal Register or May 31, 2022 (which is 60 days after issuance), whichever is later.
Interim Final Rules
There were no interim final rules in March.
Interpretive Releases
There were no interpretive releases in March.
Policy Statements
There were no policy statements in March.
NFA
Notices to Members
Per Notice I-22-08:
March 02, 2022
NFA encourages Members to monitor U.S. sanctions on Russia and be vigilant of cybersecurity threats
NFA is monitoring the U.S. government's sanctions imposed in response to Russia's invasion of Ukraine and the impact of this activity on the global financial markets. NFA encourages Members to monitor the Department of the Treasury's Office of Foreign Assets Control (OFAC) webpage for more information on current sanctions.
Additionally, the Cybersecurity and Infrastructure Security Agency (CISA) and the Federal Bureau of Investigation (FBI) issued a joint Cybersecurity Advisory describing destructive malware that has been used to target organizations in Ukraine, as well as guidance on detecting cyber threats and protecting networks. While no specific, credible threat to the U.S. currently exists, CISA and the FBI encourage firms to assess and bolster their cybersecurity efforts.
Per Notice I-22-09:
March 09, 2022
FinCEN issues alert on potential Russian sanctions evasion efforts and reminds financial institutions of SAR and other reporting obligations
On March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) issued an alert reminding all financial institutions to be vigilant against efforts to evade the expansive sanctions (e.g., Office of Foreign Assets Control) and other U.S.-imposed restrictions implemented in connection with Russia's ongoing invasion of Ukraine. The alert contains examples of select red flag indicators to assist financial institutions in identifying potential sanctions evasions and reminds financial institutions of their Bank Secrecy Act reporting (e.g., suspicious activity report (SAR)) obligations. All NFA Members should carefully review the alert. A copy of the alert is available on FinCEN's website.
Per Notice I-22-10:
March 11, 2022
Reminder: CPO notice filing requirements under Compliance Rule 2-50
Given the recent market volatility in a number of asset classes, NFA reminds commodity pool operator (CPO) Members of their obligation under Compliance Rule 2-50 to notify NFA when specified market or other events affect a commodity pool's ability to fulfill its participant obligations.
Any required notice must be filed using NFA's EasyFile Extensions and Notice Filings and must identify all relevant subsections of Compliance Rule 2-50 and the impacted pool(s) and include a summary of the event. Step-by-step instructions for filing any type of notice are available in the Filing Extensions and Notice Filings with NFA Help Guide.
Per Notice I-22-11:
March 17, 2022
FCM and IB Members—FinCEN updates its list of FATF-identified jurisdictions with AML/CFT deficiencies
On March 10, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a news release announcing that the Financial Action Task Force (FATF) reissued its list of jurisdictions with strategic AML/CFT deficiencies. NFA Member futures commission merchants (FCM) and introducing brokers (IB) should review this release to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.
Per Notice I-22-12:
March 23, 2022
FinCEN issues additional alert regarding the importance of identifying and quickly reporting suspicious transactions involving Russian elites and their proxies
On March 16, 2022, the Financial Crimes Enforcement Network (FinCEN) issued an additional alert on the importance of all financial institutions identifying and quickly reporting any suspicious transactions involving assets of sanctioned Russian elites and their proxies. The alert also reminds futures commission merchants (FCM) and introducing brokers (IB) of their general AML program obligations and specifically highlights customer due diligence (CDD) requirements which may facilitate the identification of a legal entity owned or controlled by a foreign politically exposed person (PEP). Additionally, FinCEN's alert reminds FCMs and IBs to comply with their general due diligence obligations for correspondent accounts. A copy of the alert is available on FinCEN's website.
Per Notice I-22-13:
March 31, 2022
FCM and RFED filing requirements for Juneteenth
On June 18, 2021, Juneteenth (June 19th) was designated as a U.S. Federal Holiday. The following futures commission merchant (FCM) and retail foreign exchange dealer (RFED) regulatory filings will be impacted as follows by Juneteenth:
Juneteenth (observed)—Monday, June 20, 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.
Visit NFA's website to view a complete schedule of daily filing requirements for 2022 holidays.
For more information about filing financial reports, visit NFA's website.
Per Notice I-22-14:
March 31, 2022
SD filing requirements for Juneteenth
On June 18, 2021, Juneteenth (June 19th) was designated as a U.S. Federal Holiday. As such, NFA has updated its schedule of 2022 holiday filing requirements for swap dealers (SD) to include Juneteenth.
For more information about SD filing requirements, visit NFA's website.
News Releases
March 30, 2022
NFA orders London, U.K. introducing broker Marex Spectron International Limited to pay a $250,000 fine
March 30, Chicago—NFA has ordered London, U.K. introducing broker Member Marex Spectron International Limited (Marex) to pay a $250,000 fine.
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 Marex, in which it neither admitted nor denied the allegations. The Complaint alleged that Marex allowed unregistered individuals to act as associated persons without being registered as such. The Complaint also alleged that Marex failed to diligently supervise its employees and agents. In its Decision, the BCC found that Marex violated NFA Bylaw 301(b) and Compliance Rule 2-9(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
March 30, 2022
NFA permanently bars Chennai, India commodity pool operator and commodity trading advisor eDeal Market LLC and its principal Nithya Narasimhan from membership
March 30, Chicago—NFA has permanently barred eDeal Market LLC (eDeal), a former NFA Member commodity pool operator and commodity trading advisor located in Chennai, India, and Nithya Narasimhan, 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 eDeal and Narasimhan's failure to file an Answer. The BCC found that eDeal and Narasimhan failed to cooperate fully with an NFA examination and failed to supervise the firm's operations. The BCC also found that eDeal acted in the capacity of a futures commission merchant or retail foreign exchange dealer without registration or exemption, failed to list two individuals as principals and allowed one of those individuals to act as an associated person of eDeal without registration, made prohibited representations regarding NFA, and used misleading promotional material.
The complete text of the Complaint and Decision can be viewed on NFA's website.
March 30, 2022
NFA orders Dallas, Texas introducing broker and commodity trading advisor Member Coquest Incorporated to pay a $275,000 fine
March 30, Chicago—NFA has ordered Coquest Incorporated (Coquest), an NFA Member introducing broker and commodity trading advisor located in Dallas, Texas, to pay a $275,000 fine. John Alan Vassallo, a principal and associated person (AP) of Coquest, shares liability with the firm jointly and severally for $150,000.
The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the Committee and a settlement offer submitted by Coquest, Vassallo and Dennis Todd Weinmann, another firm principal and AP, in which they neither admitted nor denied the allegations. The Complaint alleged, among other things, that Coquest violated NFA Bylaw 1101 by doing futures business with an affiliate that was not an NFA Member but was required to be registered with the CFTC and was not. In addition, the Complaint alleged that Coquest and Vassallo negligently misrepresented to NFA that the non-Member affiliate was eligible for an exemption from CFTC registration. The Complaint also alleged that Vassallo facilitated a decade-long violation of Bylaw 1101, both while serving as an AP and principal of a former Member firm and while serving as an AP and principal of Coquest. Additionally, the Complaint alleged that Coquest, Vassallo and Weinmann failed to supervise. In its Decision, the BCC found that Coquest violated NFA Bylaw 1101 and NFA Compliance Rules 2-4 and 2-9(a); that Vassallo violated NFA Compliance Rules 2-4 and 2-9(a); and that Weinmann violated NFA Compliance Rule 2-9(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
March 31, 2022
NFA orders New York, N.Y. swap dealer Goldman Sachs & Co., LLC to pay a $2,500,000 fine
March 31, Chicago—NFA has ordered New York, N.Y. swap dealer Member Goldman Sachs & Co., LLC (Goldman) to pay a $2,500,000 fine.
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 Goldman, in which it neither admitted nor denied the allegations. The Complaint alleged that Goldman did not collect or post variation margin (VM) on uncleared swaps with counterparties that were covered by the CFTC VM regulations. The Complaint also alleged that Goldman did not implement policies and procedures reasonably designed to ensure compliance with its pre-trade mid-market mark (PTMM) obligations and did not provide PTMM to uncleared swaps counterparties when required. Additionally, the Complaint alleged that Goldman failed to promptly submit accurate and complete reports, documents and supplemental information to NFA, did not diligently supervise all activities relating to its business and did not monitor the firm's compliance with certain external business conduct standards policies and procedures. In its Decision, the BCC found that Goldman violated NFA Compliance Rule 2-49(a) and 2-49(b).
The complete text of the Complaint and Decision can be viewed on NFA's website.
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Hot Issues
CyberCrime
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.
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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