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 22-23, member firms often encourage registered representatives to have succession plans in place to plan for expected or unexpected life events. Succession planning can benefit customers, member firms and registered representatives. This Notice discusses these benefits, as well as common types of succession plans. This Notice also provides an overview of related FINRA rules and administrative processes and includes questions to consider when developing and implementing succession plans.
Per Notice 22-24, FINRA has amended Rule 11880 (Settlement of Syndicate Accounts) to revise the syndicate account settlement timeframe for offerings of corporate debt securities. The amendments to Rule 11880 establish a two-stage syndicate account settlement process whereby the syndicate manager is required to remit to each syndicate member at least 70 percent of the gross amount due to such syndicate member within 30 days following the syndicate settlement date, with any final balance due remitted within 90 days following the syndicate settlement date.
The amendments are effective for public offerings of corporate debt securities that commence on or after January 1, 2023.
The amended rule text is available in the online FINRA Manual.
Per Notice 22-25, FINRA alerts members to an emerging threat to customers and members, where FINRA, NASDAQ and NYSE have observed initial public offerings (IPOs) for certain small capitalization (small-cap) issuers listed on U.S. stock exchanges that may be the subject of pump-and-dump-like schemes (sometimes referred to as "ramp-and-dump" schemes in other jurisdictions). FINRA has observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries. FINRA has concerns regarding potential nominee accounts that invest in the small-cap IPOs and subsequently engage in apparent manipulative limit order and trading activity. Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams. This Notice addresses concerns similar to those previously raised in the Anti-Money Laundering sections of the 2022 and 2021 Reports on FINRA’s Examination and Risk Monitoring Program.
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 and under FINRA rules. Members may consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with applicable regulatory obligations based on the member’s size and business model.
Per Notice 22-26, FINRA requests comment on a proposal to provide additional transparency into delayed Treasury spot trades in corporate debt securities—i.e., corporate bond trades where the dollar price of the trade is based on a spread to a benchmark U.S. Treasury security that was agreed upon at an earlier time on the same day. The proposed changes would provide for immediate transparency into the size and spread-based economics of delayed Treasury spot trades by requiring members to report the spread and identify the associated benchmark Treasury security (i.e., the CUSIP or other appropriate identifier) at the time at which the spread is agreed, and then subsequently report the dollar price of the transaction once the trade is spotted.
Special Notices
There were no special notices in November.
SEC
Final Rules
Per Release No. 33-11131, the SEC is adopting amendments to Form N-PX under the Investment Company Act of 1940 (“Investment Company Act”) to enhance the information mutual funds, exchange-traded funds (“ETFs”), and certain other funds currently report about their proxy votes and to make that information easier to analyze. The SEC also is adopting rule and form amendments under the Securities Exchange Act of 1934 (“Exchange Act”) that would require an institutional investment manager subject to the Exchange Act to report on Form N-PX how it voted proxies relating to executive compensation matters, as required by the Exchange Act. The reporting requirements for institutional investment managers complete implementation of those requirements added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). This rule is effective July 1, 2024.
Proposed Rules
Per Release No. 33-11130, the SEC is proposing amendments to its current rules for open-end management investment companies (“open-end funds”) regarding liquidity risk management programs and swing pricing. The proposed amendments are designed to improve liquidity risk management programs to better prepare funds for stressed conditions and improve transparency in liquidity classifications. The amendments are also designed to mitigate dilution of shareholders’ interests in a fund by requiring any open-end fund, other than a money market fund or exchange-traded fund, to use swing pricing to adjust a fund’s net asset value (“NAV”) per share to pass on costs stemming from shareholder purchase or redemption activity to the shareholders engaged in that activity. In addition, to help operationalize the proposed swing pricing requirement, and to improve order processing more generally, the SEC is proposing a “hard close” requirement for these funds. Under this requirement, an order to purchase or redeem a fund’s shares would be executed at the current day’s price only if the fund, its designated transfer agent, or a registered securities clearing agency receives the order before the pricing time as of which the fund calculates its NAV. The SEC also is proposing amendments to reporting and disclosure requirements on Forms N-PORT, N-1A, and N-CEN that apply to certain registered investment companies, including registered open-end funds (other than money market funds), registered closed-end funds, and unit investment trusts. The proposed amendments would require more frequent reporting of monthly portfolio holdings and related information to the SEC and the public, amend certain reported identifiers, and make other amendments to require additional information about funds’ liquidity risk management and use of swing pricing.
Interim Final Rules
There were no interim final rules in November.
Interpretive Releases
There were no interpretive releases in November.
Policy Statements
There were no policy statements in November.
NFA
November 03, 2022
FCM and IB Members—FinCEN updates its list of FATF-identified jurisdictions with AML/CFT/CPF deficiencies
On November 3, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a news release announcing that the Financial Action Task Force (FATF) updated its list of jurisdictions with strategic AML/CFT/CPF 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/CPF deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.
Notice I-22-22
November 10, 2022
NFA Announces Nominations Made by the 2022 Nominating Committee
In accordance with NFA Bylaw 406, the Office of the Secretary has received from the 2022 Nominating Committee a list of its nominees for positions on NFA's Board of Directors and 2023 Nominating Committee. The list of nominees included with this Notice shall serve as notification to NFA Members of the candidates proposed by the 2022 Nominating Committee.
Other nominations may be made by petition. Article VII, Section 3(b) of NFA's Articles of Incorporation provides that:
"Nominations may be made for elected FCM and LTM; IB; CPO and CTA; and SD, MSP and RFED Director positions by:
(i) Petition signed by 50 or more NFA Members* in the category for which the nomination is made (i.e., FCM and LTM; SD, MSP and RFED; IB; and CPO and CTA); or
(ii) Petition submitted by any organization or association recognized by NFA as fairly representing the category...or which the nomination is made.
Petitions shall be submitted in the manner specified in the Bylaws. No petition may nominate more than one candidate for the same position."
Article X, Section 3 of NFA's Articles of Incorporation similarly permits nominations for the Nominating Committee by petition.
NFA Bylaw 406 requires that each petition identify the position to which the nomination pertains, and that all petitions must be received by the Secretary within 21 days of the date of this Notice. Therefore, if you wish to submit nominations by petition, please make sure that such petitions are received by the Secretary of NFA on or before December 1, 2022. Petitions received after that date will not be considered.
NFA Bylaw 409 provides that each Member shall designate an Executive Representative, who among other things, has the sole authority to sign nomination petitions on behalf of the Member. Members may designate an Executive Representative through NFA's website by completing an electronic Executive Representative contact form. Only firm personnel who are Security Managers or are authorized to view, update and file information in NFA's Online Registration System (ORS) may complete the Executive Representative Contact form. If a Member does not complete this form and designate an Executive Representative, the Member's membership contact listed in ORS will be deemed to be the Executive Representative. If a Member designated an Executive Representative last year, it is not necessary to do so again unless the person designated as the Executive Representative has changed.
Notice I-22-23
November 21, 2022
Request for Public Representative Nominations for NFA's Board of Directors
The terms of five of NFA's current Public Representatives—Michael C. Dawley, Douglas E. Harris, Ronald S. Oppenheimer, Todd E. Petzel, and Michael R. Schaefer—will expire at the Board of Directors' (Board) regular Annual Meeting on February 16, 2023. NFA is seeking nominations to fill the five Public Representative vacancies. NFA's Articles of Incorporation (Articles) permit Public Representatives to be nominated by either NFA Members or non-Members.
Over the years, NFA has consistently had Public Representatives with outstanding credentials and their contributions to NFA have been enormous. Public Representatives bring the perspective of non-Members to the Board. Public Representative candidates must be knowledgeable of the markets and the Members regulated by NFA and have no material relationship with NFA that would impact their ability to provide an impartial, objective analysis of the issues that come before the Board.
At its regular Annual Meeting, on February 16, 2023, the Board will elect, by majority vote, from among the nominees five Public Representatives to serve on the Board for two-year terms.
Under Article XVIII, a "Public Representative" on NFA's Board is a public director as that term is defined in Section (b)(2) of Core Principle 16 in Appendix B to Part 38 of the Commodity Futures Trading Commission's Rules, read in the context as applied to NFA. Therefore, although Core Principle 16 specifically applies to contract markets, the same disqualifying circumstances regarding "material relationships" set forth therein apply to NFA’s Public Representatives and their relationship with NFA. The applicable text of Section (b)(2) of Core Principle 16 in Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles is included in this Notice for your information. In the applicable text, please substitute "NFA" for "Contract Market."
Public representation on NFA's Board of Directors is an important matter, and we ask that you give serious consideration to submitting a nomination to fill these vacancies. NFA requests that Public Representative nominations be submitted by January 10, 2023 so that NFA's Executive Committee can review the potential nominees at its meeting on January 19, 2023.
News Releases
November 01, 2022
NFA orders Houston, Texas introducing broker Empire Energy Group LLC never to reapply for NFA membership
November 1, Chicago—NFA has ordered Empire Energy Group LLC (Empire Energy), a CFTC-registered introducing broker and former NFA Member located in Houston, Texas, not to reapply for membership or act as a principal of an NFA Member at any time in the future. NFA also ordered Mark Fairchild, a principal and associated person of Empire Energy and former NFA Associate, not to reapply for NFA membership or act as a principal of an NFA Member for five years and to comply with other requirements if he seeks NFA membership or principal status following the five-year period.
The default Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and Empire Energy's and Fairchild's failure to file an Answer. The BCC found that Empire Energy failed to file its 2021 audited financial statement and that Empire Energy and Fairchild failed to cooperate fully and promptly with NFA.
The complete text of the Complaint and Decision can be viewed on NFA's website.
November 09, 2022
NFA orders Chicago, Ill. introducing broker Stage 5 Trading Corp. to pay a $75,000 fine
November 9, Chicago—NFA has ordered Stage 5 Trading Corp. (Stage 5) to pay a $75,000 fine. Stage 5 is an introducing broker (IB) Member of NFA located in Chicago, Illinois.
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 Stage 5, in which the firm neither admitted nor denied the allegations in the Complaint. The BCC's Complaint charged Stage 5 with doing business with an unregistered forex IB and using a website that did not distinguish clearly between Stage 5 and the unregistered forex IB. The Complaint also charged Stage 5 with failing to diligently supervise the firm's forex operations.
In its Decision, the BCC found that Stage 5 violated NFA Compliance Rules 2-36(d), 2-36(e) and 2-36(g), as incorporated through NFA Compliance Rule 2-39(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
Bottom of Form
Hot Issues
Advertising & Solicitation
The SEC’s new marketing rule went into full compliance effect last month. 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
The SEC recently 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:
