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 22-20, the NAC has revised FINRA’s Sanction Guidelines, which guide FINRA adjudicators in developing remedial sanctions for violations of the securities rules. These revisions were based on a review to ensure that the guidelines accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings. The revisions tailor sanctions to differentiate between types of respondents and modify the Sanction Guidelines in the following ways:
• split each current guideline into separate guidelines for individuals and firms;
• create separate fine ranges for small and mid-size or large-size firms;
• remove the upper limit of the fine ranges for mid-size and large-size firms for select guidelines;
• create Anti-Money Laundering guidelines;
• add additional discussion of non-monetary sanctions for firms;
• introduce single fine ranges for all actions in the Quality of Markets guidelines and other select guidelines;
• establish $5,000 as the minimum low end for all firm fine ranges; and delete select guidelines.
The revised Sanction Guidelines are effective immediately and available on FINRA’s website.
Special Notices
There were no special notices in September.
SEC
Final Rules
Per Release No. 33-11098, the SEC is adopting amendments to adjust the thresholds in the definition of “emerging growth company” as well as dollar amounts in Regulation Crowdfundingto effectuate inflation adjustments required under Title I and Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).
Per Release No. 33-11101, the SEC is adopting amendments to Volume II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual and related rules and forms. The EDGAR system was upgraded on September 19, 2022.
Proposed Rules
Per Release No. 34-95763, the SEC is proposing to amend the standards applicable to covered clearing agencies for U.S. Treasury securities to require that such covered clearing agencies have written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty. In addition, the SEC is proposing additional amendments to the Covered Clearing Agency Standards, with respect to risk management. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. Finally, the SEC is proposing to amend the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain conditions.
Interim Final Rules
There were no interim final rules in September.
Interpretive Releases
There were no interpretive releases in September.
There were no policy statements in September.
NFA
Notices to Members
Notice I-22-19
September 26, 2022
Executive Representative Reminder and Board and Nominating Committee Members Whose Terms Will Expire at the Board's 2023 Regular Annual Meeting
Executive Representative Reminder
NFA utilizes an electronic voting process, administered by a third-party service provider, for contested Board Director elections, contested Nominating Committee member elections and approval votes for amendments to NFA's Articles of Incorporation. To facilitate the voting process, NFA requires each Member to designate an individual to act as the Member's Executive Representative, who has the sole authority on behalf of the Member to sign petitions to nominate candidates for Director or Nominating Committee positions, receive notices of Member meetings and proxy materials, complete proxy cards and provide voting instructions and cast votes on behalf of the Member. Members designate an Executive Representative through NFA's website by completing the Executive Representative Contact Form. Only firm personnel who are Security Manager(s) or are authorized to "view, update and file" information in ORS may complete this form.
If a Member fails to designate an Executive Representative by completing this form, NFA will deem the Member's membership contact listed in ORS as the Member's Executive Representative. Members that have already designated an Executive Representative are not required to again complete this form unless the information on the Executive Representative has changed.
Board and Nominating Committee Members' Terms to Expire at 2023 Board of Directors' Regular Annual Meeting
Before October 15th of each year, NFA’s Secretary shall notify all Members in the Futures Commission Merchant (FCM), Introducing Broker (IB), Commodity Pool Operator and Commodity Trading Advisor (CPO/CTA) and Swap Dealer, Major Swap Participant and Retail Foreign Exchange Dealer (SD/MSP/RFED) categories of the elected Directors and the members of the Nominating Committee whose terms shall expire at the Board of Directors' regular annual meeting and shall request that the names of eligible persons to fill those positions be submitted to the Nominating Committee.
The Notice provides a list of the FCM, IB, CPO/CTA and SD/MSP/RFED Board and Nominating Committee members whose terms shall expire at the Board of Directors' regular annual meeting on February 16, 2023. Please use the form provided in the Notice to submit names of persons eligible to fill the vacancies on the Board of Directors and the Nominating Committee. For your reference, an explanation of the composition of the Board of Directors and the Nominating Committee is provided in the Notice. The Nominating Committee shall consider names that are submitted and the membership will be notified of the Committee's nominations. Thereafter, additional nominations may be made by petition pursuant to NFA's Articles. The procedure for filing a nomination by petition will be contained in a subsequent Notice to Members announcing the Nominating Committee's nominations to fill the Board and Nominating Committee vacancies.
News Releases
September 06, 2022
NFA orders Denmark firm Direct Hedge Danmark Fondsmaeglerselskab AS to pay a $70,000 fine
September 6, Chicago—NFA has ordered Direct Hedge Danmark Fondsmaeglerselskab AS(Direct Hedge) to pay a $70,000 fine. Direct Hedge is a registered introducing broker and approved swap firm Member of NFA located in Hellerup, Denmark.
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 Direct Hedge, in which the firm neither admitted nor denied the allegations in the Complaint. The Complaint alleged that Direct Hedge failed to keep required communications records, in violation of NFA Compliance Rule 2-10(a) and failed to register an individual as an AP and NFA Associate, in violation of NFA Bylaw 301(b). The Complaint further alleged that Direct Hedge failed to diligently supervise the firm and its employees, in violation of NFA Compliance Rule 2-9(a).
In its Decision, the Hearing Panel found that Direct Hedge violated NFA Compliance Rules 2-9(a) and 2-10(a) and NFA Bylaw 301(b).
The complete text of the Complaint and Decision can be viewed on NFA's website.
Hot Issues
Advertising & Solicitation
The compliance deadline for the SEC’s new marketing rule is approximately one month away. The single rule that 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. The compliance date with the new rule is November 4, 2022.
Investment advisers are encouraged to conduct a comprehensive review their compliance programs related to marketing as well as assess existing communications in advance of the compliance date. Please reach out today to find out how CRC resources and expertise can be leveraged to support your reviews.
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:
• FINRA September 2022 Industry Notices
• SEC Regulatory Actions
• NFA Notice to Members
• NFA Press Releases
