Compliance Archives - Compliance Risk Concepts

David Amster

p. (917) 568-6470

Sources:

• FINRA Notices

• SEC Regulatory Actions

• SEC 2024 Examination Priorities

• NFA Notices

• NFA New Releases

The post Monthly Regulatory Summary (October 2023) appeared first on Compliance Risk Concepts.

Regulatory News Update: SIPC Nearing Launch of Broker-Dealer Portal

CRC — Wed, 25 Oct 2023 13:44:15 +0000

October 20, 2023

What: The Securities Investor Protection Corporation (“SIPC”) is nearing the launch of an online portal for Broker-Dealers.

Who: Broker-Dealers (including Broker-Dealers claiming exclusion from SIPC membership)

When: Portal launches on November 1, 2023.

Why: The new portal will allow Broker-Dealers to file forms, pay assessments, and communicate with SIPC.

How: Initial access to the SIPC Portal will be on a staggered basis, based on the broker-dealer’s fiscal year. Each Broker-Dealer’s Chief Compliance Officer (CCO) must either act as the Broker-Dealer’s Portal Administrator or delegate this responsibility to another individual. Check out SIPC’s Portal Administrator Delegation webpage for more details.

Why it matters: Once the SIPC Portal is operational, SIPC will no longer accept filings by mail, email, or fax. Broker-dealers that fail to use the SIPC Portal will not be able to submit required filings with SIPC.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: SIPC Nearing Launch of Broker-Dealer Portal appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (September 2023)

CRC — Sun, 01 Oct 2023 03:56:25 +0000

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 Regulatory Notice 23-15, the SEC has amended Rule 15c6-1(a) under the Securities Exchange Act of 1934 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 aid firms in preparing for this transition, FINRA is updating the Regulatory Extension (REX) system to enable firms to file extension of time requests under the shortened settlement cycle. Firms may file such requests beginning May 31, 2024, via the batch file process and by completing the online request form by logging into the REX system via FINRA Gateway. Further, FINRA is updating the REX Customer Test Environment to allow testing under various scenarios for both batch and online request form filings.

Special Notices

There were no Special Notices in September.

SEC

Final Rules

Per Release No. 33-11235, the SEC is adopting amendments to Volume II of the Electronic Data Gathering, Analysis, and Retrieval system Filer Manual (“EDGAR Filer Manual” or “Filer Manual”) and related rules and forms. EDGAR Release 23.3 will be deployed in the EDGAR system on September 18, 2023.

Per Release No. 33-11238, the SEC is amending the rule under the Investment Company Act of 1940 (“Investment Company Act” or “Act”) that addresses certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks. The amendments to this rule are designed to increase investor protection by improving, and broadening the scope of, the requirement for certain funds to adopt a policy to invest at least 80 percent of the value of their assets in accordance with the investment focus that the fund’s name suggests, updating the rule’s notice requirements, and establishing recordkeeping requirements. The SEC is also adopting enhanced prospectus disclosure requirements for terminology used in fund names, and additional requirements for funds to report information on Form N-PORT regarding compliance with the names-related regulatory requirements.

Per Release No. 34-98437, the SEC is adopting amendments to the SEC’s regulations under the Privacy Act of 1974, as amended (“Privacy Act”). The amendments revise the SEC’s regulations under the Privacy Act to clarify, update, and streamline the language of several procedural provisions.

Proposed Rules

Per Release No. 33-11232, the SEC is proposing rule and form amendments concerning access to and management of accounts on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) that are related to potential technical changes to EDGAR (collectively referred to as “EDGAR Next”). The SEC is proposing to require that electronic filers (“filers”) authorize and maintain designated individuals as account administrators and that filers, through their account administrators, take certain actions to manage their accounts on a dashboard on EDGAR. Further, we propose that filers may only authorize individuals as account administrators or in the other roles described herein if those individuals first obtain individual account credentials in the manner to be specified in the EDGAR Filer Manual. As part of the EDGAR Next changes, the SEC would offer filers optional Application Programming Interfaces (“APIs”) for machine-to-machine communication with EDGAR, including submission of filings and retrieval of related information. If the proposed rule and form amendments are adopted, the SEC would make corresponding changes to the EDGAR Filer Manual and implement the potential technical changes.

Per Release No. 33-11250, the SEC is proposing rule and form amendments to provide a tailored form to register the offerings of registered index-linked annuities (“RILAs”). Specifically, the SEC is proposing to amend the form currently used by most variable annuity separate accounts, Form N-4, to require issuers of RILAs to register offerings on that form as well. To facilitate this amendment, the SEC is also proposing to amend certain filing rules and make other related amendments. These changes would, if adopted, implement the requirements relating to RILAs contained in Division AA, Title I of the Consolidated Appropriations Act, 2023. Further, the SEC is proposing other amendments to Form N-4 that would apply to all issuers that would use that form under the proposal. The SEC is also proposing to apply to RILA advertisements and sales literature a current SEC rule that provides guidance as to when sales literature is materially misleading under the Federal securities laws. The SEC is proposing a technical amendment to Form N-6 to correct an error from a prior SEC rulemaking. Finally, the SEC requests comment as to whether to require the registration of market-value adjustments associated with certain annuities on Form N-4 as well.

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-23-16

September 8, 2023

Board and Nominating Committee Members Whose Terms Will Expire at the Board's 2024 Regular Annual Meeting and Executive Representative Reminder

On November 17, 2022, NFA's Board of Directors unanimously approved amendments to NFA's Articles of Incorporation (Articles)¹. As a result, effective February 2024, NFA's Board will be reduced from 29 to 21 Directors, and the terms of all current Directors will expire at the Board's regular Annual Meeting on February 15, 2024.

Each year, prior to October 15th, NFA's Secretary notifies all Members of the elected Board Directors and Nominating Committee members whose terms will expire at the Board of Directors' regular annual meeting in the following categories: FCM and LTM; IB; CPO and CTA; and SD, MSP and RFED. Given NFA's Board's reduction, the attached list of Board members whose terms expire in February 2024 contains the names of all current Directors in the Member categories. Also attached is a list of Nominating Committee members in each of the Member categories whose terms expire in February 2024.

NFA's Secretary requests Members to recommend eligible persons to the Nominating Committee for consideration to fill each open Board position and the open Nominating Committee position for each Board category. Incumbent Directors, if otherwise eligible, may be recommended to the Nominating Committee. The specific criteria regarding the composition of the representatives in each Member category on the Board of Directors and the Nominating Committee is provided below. Please use the attached form to submit names of persons eligible to fill the vacancies on the Board of Directors and the Nominating Committee.

The Nominating Committee will consider the names that are submitted and nominate at least one person for each open Board position and one person for each open Nominating Committee position. Thereafter, additional nominations may be made by petition pursuant to NFA's Articles. Upon completion of its work, NFA will issue a Notice to Members announcing the Nominating Committee's nominations to fill the Board and Nominating Committee vacancies, which will also provide the procedures for filing a nomination by petition.

NFA's Board of Directors and Open Positions as of the February 15, 2024 Board of Directors' Regular Annual Meeting

Since all Directors' terms will expire at the February 2024 Board meeting, the following vacancies must be filled:

Four (4) FCM representatives of which two (2) must be FCMs ranked as a top-ten FCM and (2) must be FCMs not ranked as a top-ten FCM based on the total of futures customer segregated funds, cleared swaps customer collateral and foreign futures or foreign options secured amounts (customer segregated funds), as those terms are defined in the applicable Commission regulations, held as of June 30 preceding the election;

One (1) IB representative;

Three (3) representatives of CPOs or CTAs that are NFA Members reporting funds under management allocated to futures and swaps (as defined in Article XVIII) on NFA Form PQR or NFA Form PR as of June 30 preceding the election (Funds Under Management) of which one (1) representative must be a CPO or CTA ranked within the top 10 percent based on Funds Under Management; one (1) representative must be a CPO or CTA ranked within the top 20 percent based on Funds Under Management; and one (1) is an at-large representative from CPOs or CTAs with no restriction on its rank among CPOs and CTAs reporting Funds Under Management; and

Four (4) SD/MSP/RFED representatives of which two (2) must be representatives of SDs that are Large Financial Institutions as of June 30 preceding the election and two (2) representatives of SDs, MSPs or RFEDs that are not Large Financial Institutions as of June 30 preceding the election. NFA's Board of Directors has resolved to use the list of Participating Dealers on the Federal Reserve Bank of New York's website on a designated webpage "OTC Derivatives Supervisors Group" to define Large Financial Institutions.

Nominating Committee Open Positions

Nominating Committee open positions for the 2024 Member election:

One (1) open position for an FCM Representative who may be affiliated with either a top-ten FCM or a non-top ten FCM based on customer segregated funds as of June 30 preceding the election;
One (1) open position for an IB Representative who may be affiliated with either a Guaranteed IB or an Independent IB;
One (1) open position for a CPO/CTA Representative who must be affiliated with a CPO or CTA ranked within the top ten percent based on Funds Under Management; and
One (1) open position for an SD/MSP/RFED Representative who is affiliated with an SD/MSP/RFED of a Non-Large Financial Institution as of June 30 preceding the election.

NFA is a membership organization. NFA Members have a voice in NFA's governance through the exercise of the right to recommend candidates and to nominate and elect individuals to serve on NFA's Nominating Committee and Board of Directors. The Nominating Committee relies heavily on the recommendations of the membership in making its nominating decisions. Please give this matter serious consideration and return your submission(s) to NFA for receipt no later than September 29, 2023.

Notice I-23-17

September 20, 2023

FCM and IB Members—FinCEN issues alert on virtual currency investment scam known as "Pig Butchering"

On September 8, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a news release alerting U.S. financial institutions of a prominent virtual currency investment scam known as “pig butchering.” The alert explains the scam’s methodology; provides behavioral, financial, and technical red flags to help financial institutions identify and report related suspicious activity; and reminds financial institutions of their reporting requirements under the Bank Secrecy Act (BSA). As U.S. financial institutions under the BSA, NFA Member futures commission merchants and introducing brokers should review the alert and comply with the suspicious activity report (SAR) requirements if applicable.

News Releases

September 12, 2023

NFA orders Denver-based firm Transamerica Asset Management Inc. to pay a $140,000 fine and sanctions a former Transamerica employee

September 12, Chicago—NFA issued Decisions against Transamerica Asset Management Inc. (Transamerica), an NFA Member commodity pool operator located in Denver, Colorado, and its former employee, Quynh Pham Keiser, resolving charges brought against them by NFA's Business Conduct Committee (Committee or BCC).

The BCC Decisions are based on a Complaint issued by the Committee and separate settlement offers submitted by Transamerica and Keiser, in which they neither admitted nor denied the Complaint's allegations. In the Transamerica Decision, the BCC found Transamerica failed to diligently supervise the firm's operations, in violation of NFA Compliance Rule 2-9(a), and ordered Transamerica to pay a $140,000 fine to NFA. In the Keiser Decision, the BCC found Keiser willfully submitted materially false or misleading information to NFA, in violation of NFA Compliance Rule 2-2(f), and ordered Keiser not to reapply for NFA associate membership, apply for NFA membership or principal status with a Member, or act as a principal of a Member at any time in the future.

The complete text of the Complaint, the Transamerica Decision, and the Keiser Decision can be viewed on NFA's website.

September 18, 2023

NFA takes emergency enforcement action against Doral, Fla. commodity pool operator Bit5ive Mining Fund Advisor, LLC and its principal Richard Alexander Acosta

September 18, Chicago—NFA has taken an emergency enforcement action against Bit5ive Mining Fund Advisor, LLC, (Bit5ive Advisor), an NFA Member commodity pool operator located in Doral, Florida, and Richard Alexander Acosta, a listed principal and the sole associated person of Bit5ive Advisor.

NFA took this action to protect participants in Bit5ive Mining Fund LP, a commodity pool operated by Bit5ive Advisor, as well as the investing public, the derivatives markets, and other NFA Members because of Bit5ive Advisor and Acosta's failure to cooperate with NFA. Due to their failure to produce requested documents and information, NFA is unable to determine, among other things, who invested in the Fund, as well as when and how much; whether there are additional investors in the Fund other than those disclosed to NFA; what Bit5ive Advisor and Acosta did with the funds received for investment in the Fund; and the source of funds used to repay one investor.

Effective immediately, Bit5ive Advisor and Acosta are suspended from NFA membership and prohibited from soliciting or accepting any funds for investment in the Fund or in any other pools or other investment vehicles over which Bit5ive Advisor or Acosta exercise control. Bit5ive Advisor and Acosta are further prohibited from disbursing or transferring any funds from any accounts in the name of Bit5ive Advisor, Bit5ive Fund, or from the account of any other commodity pool or other investment vehicle operated by Bit5ive Advisor or Acosta, without NFA's prior approval. This action will remain in effect until Bit5ive Advisor and Acosta demonstrate to NFA's satisfaction that they are in complete compliance with all NFA requirements.

Bit5ive Advisor or Acosta may request a hearing before NFA's Hearing Committee.

The complete text of the emergency action is available on NFA's website.

September 18, 2023

NFA orders Houston-based introducing broker Bosworth Brokers LLC and one of its principals to each pay a $100,000 fine

September 18, Chicago—NFA has ordered Bosworth Brokers LLC, an NFA Member introducing broker located in Houston, Texas, and Andrew Michael Gizienski, a principal and associated person of Bosworth Brokers LLC, to each pay a $100,000 fine.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint authorized by NFA's Business Conduct Committee (BCC) and a settlement offer submitted by Bosworth Brokers LLC, Gizienski and Dennis Michael Bosworth, another principal and AP of Bosworth Brokers LLC, in which they neither admitted nor denied the Complaint's allegations. The BCC Complaint alleged that Bosworth Brokers LLC failed to comply with its recordkeeping obligations under NFA Compliance Rule 2-10 and that Gizienski failed to observe high standards of commercial honor and just and equitable principles of trade under NFA Compliance Rule 2-4, due to Gizienski's use of an unapproved, unmonitored platform to communicate with a Bosworth Brokers LLC customer, which deleted communications after seven days. The Complaint also alleged that Bosworth Brokers LLC failed to promptly list Gizienski as a principal, in violation of NFA Registration Rule 208. Finally, the Complaint alleged that Bosworth Brokers LLC and Bosworth failed to supervise, in violation of NFA Compliance Rule 2-9.

In its Decision, the Panel found that Bosworth Brokers LLC and Bosworth violated NFA Compliance Rule 2-9; that Bosworth Brokers LLC violated NFA Compliance Rule 2-10 and NFA Registration Rule 208; and that Gizienski violated NFA Compliance Rule 2-4.

The complete text of the Complaint and the Decision can be viewed on NFA's website.

September 25, 2023

NFA permanently bars Chicago-based commodity pool operator Tyche Asset Management LLC and its principal Phillip Moncel Galles from membership

September 25, Chicago—NFA has permanently barred Tyche Asset Management LLC, a former NFA Member commodity pool operator (CPO) located in Chicago, Illinois, and Phillip Moncel Galles, a former NFA Associate and principal of Tyche Asset Management LLC, from NFA membership status and from acting or being listed 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 Tyche Asset Management LLC and Galles' failure to file an Answer. The BCC found that Tyche Asset Management LLC and Galles engaged in a deceitful course of conduct to defraud customers and failed to uphold high standards of commercial honor and just and equitable principles of trade in connection with a commodity pool or other investment vehicle that Tyche Asset Management LLC and/or Galles operated. The BCC also found that Tyche Asset Management LLC and Galles provided misleading information to NFA about the firm's activities as a CPO and failed to cooperate promptly with NFA during an examination.

The complete text of the Complaint and Decision can be viewed on NFA's website.

Hot Issue

At the end of September, the SEC continued with its enforcement actions for failing to preserve electronic communications. The SEC’s investigations uncovered pervasive and longstanding off-channel communications at 10 more firms. The firms agreed to pay combined penalties of $79 million. These actions follow on the heels of similar charges against 11 other firms only the previous month that resulted in $289 million in combined penalties.

With the sustained SEC enforcement concerning communications recordkeeping, firms should ensure that they have recently reviewed their communications surveillance policies and procedures, particularly those involving personal mobile devices and messaging applications. In this context, CRC believes that it is more of a question of when – not if – firms will face questions about off-channel communications as part of an examination or other focused requests from the SEC and/or FINRA.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA Notices
SEC Regulatory Actions
NFA Notices
NFA New Releases

The post Monthly Regulatory Summary (September 2023) appeared first on Compliance Risk Concepts.

Regulatory News Update: Citadel Prepared to Take Legal Action Against SEC Amid WhatsApp Probe

CRC — Fri, 29 Sep 2023 17:16:46 +0000

September 29, 2023

Bloomberg reported that Citadel has indicated it is planning to push back against the SEC if it moves against the firm, going so far as to take the SEC to court. Such a court case would be a first among firms against whom the SEC has made allegations of untracked communications.

This update follows a Reuters article earlier in the week that identified Citadel among a group of more than two dozen investment advisers from whom the SEC has reportedly requested messages on personal devices or applications of a selection of employees, including senior management.

The SEC’s approach appears to put senior executives at risk as a matter of course in these investigations. As noted in the reporting, the general review of business communications on personal devices opens the door to a range of inquiry. This transforms what may have been seen as a books and record issue into an entry point for the SEC to take an interest in the underlying substantive communications, which could relate to any aspect of the business, transactions, dealings with customers, etc.

Additionally, executives who are found to have violated their employer’s compliance policies regarding off-channel communications may face employment consequences.

CRC will continue to monitor developments in what could result in the first legal challenge to the SEC’s recent off-channel communications approach to investment advisers, however, despite the potential for a legal challenge from the industry, any resolution is speculative and does not change the reality for firms at the present. Our view is that firms should be very focused on taking steps now to understand and mitigate their risks related to electronic communications to better position themselves ahead of a regulator request or examination.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about this developing situation, as well as the SEC’s continued focus on electronic communications, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: Citadel Prepared to Take Legal Action Against SEC Amid WhatsApp Probe appeared first on Compliance Risk Concepts.

News Update: SEC Provides Road Map for Investment Advisory Firm Examinations

CRC — Thu, 28 Sep 2023 15:25:02 +0000

September 2023

Overview & Summary

On Sept. 6, 2023, the Securities and Exchange Commission’s Division of Examinations issued a Risk Alert detailing the Division’s examination selection process for SEC-registered investment advisers.

Given the size and variety of the adviser population, the Division utilizes a risk-based approach for both selecting advisers to examine and in determining the scope of risk areas to examine. The Risk Alert highlights the Division’s risk-based approach for both (A) selecting Advisers to examine and (B) determining examination focus areas and documents. The Division leverages technology to collect and analyze large sets of industry- and firm-level data to help identify risks and better understand the firm’s business during examinations. The Division also reviews disclosure documents and various filings with regulators (e.g., Form ADV) and other regulatory filings.

A. Selecting Firms to Examine

Some of the reasons the Division may select an adviser to examine include, but are not limited to, one or more of the following: the firm’s risk characteristics; a tip, complaint, or referral; or the staff’s interest in a particular compliance risk area.

There are also firm-specific risk factors that the staff considers when selecting advisers for examination, such as those related to a particular adviser’s business activities, conflicts of interest, and regulatory history. In the Risk Alert, the Division lists 11 firm-specific factors it may consider: (1) prior examination observations and conduct, such as when the staff has observed what it believes to be repetitive deficient practices during more than one review of a firm, significant fee- and expense-related issues, and significant compliance program concerns; (2) supervisory concerns, such as disciplinary history of associated individuals or affiliates; (3) tips, complaints, or referrals involving the firm; (4) business activities of the firm or its personnel that may create conflicts of interest, such as outside business activities and the conflicts associated with advisers dually registered as, or affiliated with, brokers; (5) the length of time since the firm’s registration or last examination, such as advisers newly registered with the SEC; (6) material changes in a firm’s leadership or other personnel; (7) indications that the adviser might be vulnerable to financial or market stresses; (8) reporting by news and media that may involve or impact the firm; (9) data provided by certain third-party data services; (10) the disclosure history of the firm; and (11) whether the firm has access to client and investor assets and/or presents certain gatekeeper or service provider compliance risks.

B. Selecting Examination Focus Areas

Once an adviser is selected for examination, additional risk assessment occurs to determine the scope of the examination, such as selecting areas of the business that examiners will review. This involves requesting documents with respect to the firm’s operations, disclosures, conflicts of interest, and compliance practices related to core areas, including custody and safekeeping of client assets, valuation, portfolio management, fees, expenses, brokerage, and best execution.

The Risk Alert includes an attachment that outlines the types of information and documents the staff requests during a typical exam. The list includes (1) general information about the Adviser’s business and investment activities, (2) information about the assessment of risks and the implementation of a written compliance program and internal controls, (3) information with respect to advisory trading activities, and (4) information for compliance testing in particular areas.

The Division is providing this information so that advisers may prepare themselves for an examination. Although the Division continuously refines and enhances its risk assessment process, the information shared herein also may assist firms in their compliance efforts.

Our Take

This SEC Risk Alert lays out how the SEC approaches the selection of firms for examination, as well as their selection examination focus areas. In doing so, the SEC has essentially established a step-by-step guide for Advisers to follow relative to examination preparedness.CRC recommends that firms consider partnering with an established compliance team who can help you navigate and prepare for future examinations. A mock examination utilizing the document request areas outlined within the Risk Alert should serve as an accurate predictor of overall examination preparedness.

Opportunities for CRC to Assist Your Firm

CRC will conduct a mock examination to identify any gaps or weaknesses relative to your firm’s examination preparedness.
CRC is available for general and ongoing outsourced support with respect to SEC-registered investment advisers.
CRC can proactively conduct a review of your existing compliance program to identify opportunities to potentially implement enhancements in preparation for regulatory examinations.
CRC is available to assist with examination responses.

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com or (646) 346.2468

The post News Update: SEC Provides Road Map for Investment Advisory Firm Examinations appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (June 2023)

CRC — Fri, 30 Jun 2023 13:38:48 +0000

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 Regulatory Notice 23-11, FINRA is soliciting comment on a concept proposal to establish liquidity risk management requirements. The concept proposal describes a potential rule, labeled Rule 4610, that is intended to ensure that members have sufficient liquid assets to meet their funding needs in both normal and stressed conditions. Broadly, the proposal outlines three areas where a potential rule might address liquidity risk, including liquidity stress testing, contingent funding plans and a requirement to maintain sufficient liquidity on a current basis at all times. FINRA is issuing this concept proposal so that any feedback received can be taken into account as FINRA considers a proposed rule; any proposed rule would need to be reviewed and approved by the FINRA Board of Governors, and then filed with and approved by the Securities and Exchange Commission. FINRA welcomes comment on all aspects of the concept proposal, including comment on alternatives to the proposed approach.

The draft text of potential Rule 4610 is included as Attachment A.

Special Notices

There were no Special Notices in June.

SEC

Final Rules

Per Release No. 34-97656, the SEC is adopting a final rule, under the Securities Exchange Act of 1934 (“Exchange Act”), that is designed to prevent fraud, manipulation, and deception in connection with effecting any transaction in, or attempting to effect any transaction in, or purchasing or selling, or inducing or attempting to induce the purchase or sale of, any security-based swap. The rule takes into account the features fundamental to a security-based swap and the broad definitions of purchase and sale under the Exchange Act as they relate to security-based swaps. In addition, the Commission is adopting a final rule, under the Exchange Act, that makes it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer (“SBSD”) or major security-based swap participant (“MSBSP”) (each SBSD and each MSBSP also referred to as an “SBS Entity” and together referred to as “SBS Entities”), or any person acting under such person’s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the SBS Entity’s chief compliance officer (“CCO”) in the performance of their duties under the Federal securities laws or the rules and regulations thereunder.

Per Release No. 34-97657, the SEC is adopting rule amendments to implement section 939A(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which requires, among other things, that the SEC remove from its regulations any references to credit ratings and substitute in their place alternative standards of creditworthiness. The amendments remove certain existing rule exceptions that reference credit ratings for nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities and substitute in their place new exceptions that are based on alternative standards of creditworthiness. These substitutes include exceptions for nonconvertible debt securities and nonconvertible preferred securities (together, “Nonconvertible Securities”) of issuers who meet a specified probability of default threshold, as well as exceptions for asset-backed securities that are offered pursuant to an effective shelf registration statement filed on a certain form that is tailored to asset-backed securities offerings. The SEC is also adopting an amendment to a recordkeeping rule applicable to broker-dealers in connection with their reliance on an exception involving probability of default determinations.

Per Release No. 33-11205, the SEC is adopting amendments to Volume II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“Filer Manual”) and related rules and forms. EDGAR Release 23.2 will be deployed in the EDGAR system on June 20, 2023.

Proposed Rules

Per Release No. 34-97762, the SEC is reopening the comment period for its proposal, Position Reporting of Large Security-Based Swap Positions, Release No. 34-93784, (Dec. 15, 2021) (“Proposing Release”). In the Proposing Release, the SEC proposed for comment a new rule, which would require any person with a security-based swap position that exceeds a certain threshold to promptly file with the SEC a schedule disclosing certain information related to its security-based swap position (“Proposed Rule”). The SEC is reopening the comment period to allow interested persons an opportunity to comment on the additional analysis and data contained in a staff memorandum that was added to the public comment file on June 20, 2023, including providing comment on questions identified below.

Interim Final Rules

There were no interim final rules in June.

Interpretive Releases

There were no interpretive releases in June.

There were no policy statements in June.

NFA

Notices to Members

Notice I-23-12

June 5, 2023

Information regarding NFA's upcoming move to new Chicago office space

NFA's Chicago headquarters will move to a new location next week. Effective Monday, June 12th, NFA will be located at 320 South Canal, Suite 2400, Chicago, IL 60606. All mail sent to NFA after June 12th should be sent to the new address.

Notice I-23-13

June 29, 2023

Effective date of amendments to NFA's Articles of Incorporation and Bylaws to implement changes to NFA's governance structure

The CFTC recently approved amendments to NFA's Articles of Incorporation and Bylaws to implement the recommendations of an NFA Board of Directors-appointed Special Committee on NFA Governance. The amendments, which are effective February 15, 2024, will:

Reduce the size of the Board and modify its composition;
Adopt Director and Board Chair term limits;
Require that a Director complete one full two-year term before being eligible to serve as Board Chair;
Eliminate the position of Board Vice Chair;
Reduce the size of the Executive Committee and modify its composition and the process for electing Directors to the Executive Committee;
Create a Nominating and Governance Committee to advise the Board on corporate governance matters, nominate Public Representative candidates and make recommendations to the Board regarding Directors to serve on various Board Committees;
Amend the Public Representative definition;
Modify the composition of the CPO/CTA Nominating Committee to mirror the composition of the CPO/CTA Board category's seats; and
Make other technical amendments.

NFA's Board unanimously approved these amendments at its November 17, 2022, meeting. In accordance with Article XVII, the proposed amendments to NFA's Articles were submitted to a ballot vote of NFA Members, and on February 14, 2023, Corporate Election Services, an external tabulation service overseeing the ballot process, certified that Members voted in favor of the amendments.

NFA's March 13, 2023, submission letter to the CFTC contains more detailed information regarding these amendments.

News Releases

There were no NFA news releases in June.

Hot Issue

Off-channel communications continue to be a hot issue with the SEC with the potential for significant enforcement consequences.

In May, the SEC charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for widespread and longstanding failures by both firms and their employees to maintain and preserve electronic communications. To settle the charges, HSBC and Scotia agreed to pay penalties of $15 million and $7.5 million, respectively. As described in the SEC’s orders, the firms admitted that their employees often communicated “off-channel” about securities business matters on their personal devices, using messaging platforms, such as WhatsApp. Neither firm maintained or preserved the substantial majority of these communications, in violation of the federal securities laws. The failings involved employees at multiple levels of authority, including supervisors and senior executives.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA June 2023 Industry Notices
SEC Regulatory Actions
SEC Press Release 2023-91

NFA Notice to Members

The post Monthly Regulatory Summary (June 2023) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (May 2023)

CRC — Fri, 09 Jun 2023 15:15:06 +0000

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 Regulatory Notice 23-07, FINRA has adopted amendments to Rule 8312 (FINRA BrokerCheck Disclosure) to release information on BrokerCheck as to whether a particular current or former member firm is currently designated as a Restricted Firm pursuant to FINRA Rules 4111 (Restricted Firm Obligations) and 9561 (Procedures for Regulating Activities Under Rule 4111).

The new rule amendments become effective on June 1, 2023.

The amended rule text is available in Attachment A.

Per Regulatory Notice 23-08, FINRA reminds members of their obligations when selling private placements (i.e., unregistered offerings sold pursuant to the Regulation D safe harbors under Sections 3 and 4 of the Securities Act of 1933 (Securities Act)). In Regulatory Notice 10-22 (Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings), FINRA reminded members of their obligations to conduct reasonable investigations of the issuers and the securities they recommend in private offerings made under Regulation D. In the years since FINRA published Regulatory Notice 10-22, the unregistered offering market and the related regulatory landscape have evolved, and FINRA has observed both areas of concern and effective practices in the sales of private placements by members. This Notice updates and supplements the prior guidance in light of those developments and observations. It is not intended to alter the principles or the guidance FINRA provided in prior Regulatory Notices.

This Notice highlights a member’s obligation, when recommending a security, to conduct a reasonable investigation of the security. This duty has long been rooted in the antifraud provisions of the federal securities laws and is a core component of a broker-dealer’s obligations under Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI) and FINRA Rule 2111 (Suitability), the fundamental standards that members must meet when recommending securities. This Notice also addresses certain additional obligations for members when selling private placements, including FINRA’s filing requirements and its communications with the public and supervision rules.

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. Members may consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member’s size and business model.

FINRA notes that it is issuing a companion notice, Regulatory Notice 23-09, requesting comment on whether changes to FINRA rules, operations or administrative processes would enhance the capital-raising process without compromising protections for investors and issuers. FINRA encourages members to provide feedback pursuant to that Notice.

Per Regulatory Notice 23-09, FINRA promotes the capital raising process through appropriately tailored rules for its members that are designed to promote transparency and to establish important standards of conduct for the benefit of all market participants, including investors and issuers.

In 2017, in Regulatory Notice 17-14, FINRA requested comment on ways to increase efficiency and reduce unnecessary burdens on the capital raising process. Since that time, FINRA has completed certain actions (including rule changes) and is undertaking additional actions, that promote capital formation. While these actions increase efficiency and reduce unnecessary burdens on the capital-raising process, FINRA is requesting comment on whether additional changes to these or other FINRA rules, operations or administrative processes would further enhance the capital-raising process without compromising protections for investors and issuers.

Comment Period Expires: August 7, 2023

Per Regulatory Notice 23-10, FINRA requests comment on a proposal to facilitate centralized access to members’ order execution quality reports for NMS stocks that are required to be published by market centers under Rule 605 of Regulation NMS. Under the proposal, FINRA members would be required to provide their Rule 605 reports to FINRA, which FINRA would publish in a centralized location on the FINRA website.

Comment Period Expires: July 31, 2023

Special Notices

There were no Special Notices in May.

SEC

Final Rules

Per Release No. 34-97424, the SEC is adopting amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under the Securities Exchange Act of 1934. The amendments require additional detail regarding the structure of an issuer’s repurchase program and its share repurchases, require the filing of daily quantitative repurchase data either quarterly or semi-annually, and eliminate the requirement to file monthly repurchase data in an issuer’s periodic reports. The amendments also revise and expand the existing periodic disclosure requirements about these repurchases. Finally, the amendments add new quarterly disclosure in certain periodic reports related to an issuer’s adoption and termination of certain trading arrangements. This final rule is effective on July 31, 2023.

Per Release No. IA-6297, the SEC is adopting amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require event reporting upon the occurrence of key events. The amendments also require large private equity fund advisers to provide additional information to the SEC about the private equity funds they advise. The reporting requirements are designed to
enhance the Financial Stability Oversight Council’s (“FSOC”) ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts.

Per Release No. 34-97478, the SEC is making technical amendments to Form BD and Form BDW, the uniform broker-dealer registration form and the uniform request for withdrawal from broker-dealer registration, respectively. The technical amendments will update the current list of self-regulatory organizations (“SROs”) and government jurisdictions listed on Form BD and Form BDW, and make conforming changes to the definition of “jurisdiction” in the forms.

Per Release No. 33-11197, the SEC is adopting technical amendments to various rules and forms under the Securities Act of 1933 (“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Investment Company Act of 1940 (“Investment Company Act”), as well as to the rule setting forth undertakings that certain registrants must include in their registration statements, and to the general authority provision corresponding to SEC rules under the Investment Advisers Act of 1940 (“Investment Advisers Act”). These revisions make changes to correct errors that are technical in nature, including typographical errors and erroneous cross-references in various SEC rules and
forms.

Proposed Rules

Per Release No. 34-97516, the SEC is proposing to amend certain portions of the Covered Clearing Agency Standards under the Securities Exchange Act of 1934 (“Exchange Act”) to strengthen the existing rules regarding margin with respect to intraday margin and the use of substantive inputs to a covered clearing agency’s risk-based margin system. The SEC is also proposing a new rule to establish requirements for the contents of a covered clearing agency’s recovery and wind-down plan.

Comments should be received on or before July 17, 2023.

Interim Final Rules

There were no interim final rules in May.

Interpretive Releases

There were no interpretive releases in May.

There were no policy statements in May.

NFA

Notices to Members

Notice I-23-11

May 24, 2023

FINRA adjusts online testing requirements for candidates seeking to take futures industry proficiency exams

FINRA administers the futures industry proficiency exams on behalf of NFA, including the Series 3, Series 30, Series 31, Series 32 and Series 34. Beginning Friday, June 9, 2023, FINRA will end its interim accommodation process, and only certain individuals will be able to request online administration of these exams. These individuals include:

Those experiencing underlying health conditions or are immunocompromised and at an increased risk for severe illness; or
Those who live more than 150 miles from a test center.

Candidates can visit FINRA's website for more information about proficiency exam administration and how to request available accommodations.

Note that NFA's Swaps Proficiency Requirements are not impacted by this change.

News Releases

May 10, 2023

FINRA and NFA Discuss Crypto Assets at Special Summit

FINRA, NFA Expand MOU to Include Information Sharing, Collaboration

May 10, Washington—FINRA and NFA recently held a special summit focused on crypto assets and agreed to expand their Memorandum of Understanding (MOU) to address crypto activities that fall within their respective regulatory mandates.

During the day-long summit held at FINRA's San Francisco office, crypto and blockchain experts from both organizations met to share regulatory intelligence and ways to leverage new technology. FINRA and NFA also discussed the importance of investor protection, as well as potential risks, reporting and supervisory obligations associated with crypto-related activities.

The meeting culminated in an agreement to expand the existing MOU to address information sharing and collaboration regarding crypto assets, blockchain technology developments and crypto asset regulatory risks.

"We are excited to build on our strong relationship with our colleagues at NFA in finding new ways to benefit from one another's deep expertise," said Greg Ruppert, Executive Vice President, Member Supervision at FINRA. "Maintaining effective regulatory partnership and information sharing across various products and asset classes helps each of our organizations better serve the investing public."

"NFA looks forward to collaborating with FINRA as the crypto market continues to evolve," said Regina Thoele, Senior Vice President, Compliance at NFA. "By leveraging our shared expertise, we can continue enhancing our investor protection efforts in light of market developments."

Hot Issue

Off-channel communications continue to be a hot issue with the SEC with the potential for significant enforcement consequences.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA May 2023 Industry Notices
SEC Regulatory Actions
SEC Press Release
NFA Notice to Members
NFA Press Releases

The post Monthly Regulatory Summary (May 2023) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (April 2023)

CRC — Thu, 11 May 2023 13:16:12 +0000

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

There were no Regulatory Notices in April.

Special Notices

There were no Special Notices in April.

SEC

Final Rules

There were no final rules in April.

Proposed Rules

Per Release No. 34-97309, the SEC is reopening the comment period for its proposal (“Proposed Rules”) to amend the rule under the Securities Exchange Act of 1934 (“Exchange Act”) that defines certain terms used in the statutory definition of “exchange.” The reopening provides supplemental information and economic analysis regarding trading systems that trade crypto asset securities that would be newly included in the definition of “exchange” under the Proposed Rules. The SEC is requesting further information and public comment on certain aspects of the Proposed Rules as applicable to all securities and the compliance dates and other alternatives for the Proposed Rules. The Proposed Rules were set forth in Release No. 34-94062 (“Proposing Release”), and the related comment period, which was reopened in Release No. 34-94868 on May 9, 2022, ended on June 13, 2022. The reopening of this comment period is intended to allow interested persons further opportunity to analyze and comment on the Proposed Rules in light of the supplemental information provided herein (“Reopening Release”).

Per Release No. 33-11180, the SEC is reopening the comment period for its proposal, Modernization of Beneficial Ownership Reporting, Release No. 33-11030, (Feb. 10, 2022) (“Proposing Release”). In the Proposing Release, the SEC proposed to amend certain rules that govern beneficial ownership reporting (“Proposed Amendments”). 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 beneficial ownership reporting rules 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. Finally, the Proposed Amendments would require that Schedules 13D and 13G be filed using a structured, machine-readable data language. The SEC is reopening the comment period to allow interested persons an opportunity to comment on the additional analysis and data contained in a staff memorandum that was added to the public comment file on April 28, 2023.

Interim Final Rules

There were no interim final rules in April.

Interpretive Releases

There were no interpretive releases in April.

There were no policy statements in April.

NFA

There were no Notices to Members in April.

News Releases

There were no NFA news releases in April.

Hot Issue

Although the initial compliance date for the amended Rule 17a-4 (broker-dealer records rule) came and went on May 3, 2023, the new requirements and options with respect to books and records maintained on electronic recordkeeping systems should be an ongoing consideration for broker-dealers. If you need help evaluating your systems and program for compliance with the new requirements, please contact CRC.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

SEC Regulatory Actions

The post Monthly Regulatory Summary (April 2023) appeared first on Compliance Risk Concepts.

The Message from the SEC’s Reg BI Risk Alert: “Come on, be reasonable."

CRC — Thu, 09 Feb 2023 14:20:44 +0000

Overview

At the end of January, the SEC’s Division of Examinations published a Risk Alert to highlight observations from examinations related to Regulation Best Interest. The primary takeaway: generic policies and procedures or those that merely regurgitate the rule do not meet the “reasonably designed” standard under the Compliance Obligation of Reg BI. A firm’s policies should be highly specific to the firm itself, its products, its clients, Further, firms should be taking the next step with their policies and procedures to ensure that policies, procedures, and training materials are providing sufficient guidance to Financial Professionals (FPs) and other staff about how to meet their obligations.

Deficiencies and Weaknesses Highlighted in the Risk Alert

Specific areas which were highlighted as wide-spread weaknesses and deficiencies across policies and procedures:

Disclosure Obligation
- Not identifying when disclosures should be created or updated and who is responsible for doing so.
- Failing to have a process to demonstrate that disclosure had been provided to retail customers.
- Only posting Regulation Best Interest disclosures on their website or referencing in disclosures in other documents delivered to customers.
- Not having policies and procedures to ensure that FPs with multiple licenses were disclosing their capacity to retail customers prior to or at the time of the recommendation.
- Lacking guidance to FPs about oral disclosures when there were differences between specific FP conflicts and a firm’s standard disclosures – e.g., circumstances requiring additional disclosures and how to maintain a record of making oral disclosures.
Care Obligation
- Directing FPs to consider reasonably available alternatives and/or costs without providing any guidance how to do so.
  - If systems were put in place to allow FPs to evaluate costs or alternatives, firms failed to mandate their use or could not determine if the systems were used.
- Directing FPs to document the basis for their recommendation but without providing instructions as to when it is necessary and what information is appropriate to include.
Conflict of Interest Obligation
- Policies and procedures did not specify how conflicts of interest are to be identified or addressed. Firms failed to provide a structure to identify and address conflicts (e.g., a conflicts officer or committee or a particular unit within Compliance).
- Generic conflict language (e.g., we have conflicts related to compensation differences) without reflecting all conflicts of interest associated with the recommendations made by a firm or its FPs.
- Inappropriately relying on disclosure to “mitigate” conflicts that appeared to create an incentive for FPs to place their interest ahead of the retail customer without establishing any mitigation measures (i.e., modifying practices to reasonably reduce conflicts of interest) at the FP level.
Training and Testing
- Relying heavily on surveillance systems that existed before the effective date of Regulation Best Interest without considering whether those systems needed modification in order to effective monitor Reg BI compliance – e.g., failing to consider new obligations regarding rollovers, account recommendations, implicit hold recommendations, and account monitoring (if agreed to).
  - Relying on surveillance systems that did not capture hold recommendations or recommendations that are not accepted by the retail customer, which resulted in those recommendations going unreviewed.
- Relying on locally stored documents that limited surveillance regarding Care Obligation to branch examinations.
- Relying on Reg BI training that did not provide employees with the specific tools, methods, or policies and procedures that they could use to comply with Reg BI.

Our Take

CRC believes that 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.

In light of the recent Risk Alert related to Reg BI, as well as the ongoing trend of increased findings and enforcements in this area since its implementation, firms should take this opportunity to assess their existing Reg BI compliance procedures, training materials, and operational processes to ensure that no gaps exist. Firms should pay careful attention to technological solutions deployed to meet the obligations of Reg BI and confirm that such solutions do not implicate the regulatory pitfalls outlined in this most recent Risk Alert.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post The Message from the SEC’s Reg BI Risk Alert: “Come on, be reasonable." appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (January 2023)

CRC — Tue, 07 Feb 2023 17:10:47 +0000

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 23-01, FINRA’s Renewal Program supports the collection and disbursement of fees related to the renewal of broker-dealer (BD) and investment adviser (IA) registrations, exempt reporting and notice filings with participating self-regulatory organizations (SRO) and jurisdictions. During this program, FINRA announces renewal fees BD and IA firms owe via Preliminary Statements issued in November. FINRA publishes Final Statements in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2023.

FINRA is issuing this Notice to help firms review, reconcile and respond to their Final Statements in E-Bill as well as view the reports that are currently available in the Central Registration Depository (CRD) and Investment Adviser Registration Depository (IARD) systems for the annual registration renewal process.

The deadline to remit payment for any additional amounts owed and to report any discrepancies to FINRA is Jan. 27, 2023. It is critical that firms ensure they pay in full or report discrepancies by this deadline. More information about reporting discrepancies, as well as key dates, is in the Notice.

Per Notice 23-02, FINRA has adopted amendments to Rule 2231 (Customer Account Statements) to add eight new supplementary materials pertaining to:

compliance with Rule 4311 (Carrying Agreements);
the transmission of customer account statements to other persons or entities;
the use of electronic media to satisfy delivery obligations;
compliance with Rule 3150 (Holding of Customer Mail);
the information disclosed on customer account statements;
assets externally held;
the use of logos and trademarks, etc.; and
the use of summary statements.

Several of these new supplementary materials are derived largely from Temporary Dual FINRA-NYSE Rule 409T (Statements of Accounts to Customers) and Temporary Dual FINRA-NYSE Rule Interpretation 409T (together, the NYSE provisions).

These changes become effective on January 1, 2024.

The amended rule text is available in Attachment A.

Special Notices

There were no special notices in January.

SEC

Final Rules

Per Release No. 33-11143, the SEC is publishing this notice (the “Notice”) pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the “2015 Act”). This Act requires all agencies to adjust annually for inflation the civil monetary penalties that can be imposed under the statutes administered by the agency and publish the adjusted amounts in the Federal Register. This Notice sets forth the annual inflation adjustment of the maximum amount of civil monetary penalties (“CMPs”) administered by the Commission under the Securities Act of 1933, the Securities Exchange Act of 1934 (the “Exchange Act”), the Investment Company Act of 1940, the Investment Advisers Act of 1940, and certain penalties under the Sarbanes-Oxley Act of 2002. These amounts are effective beginning on January 15, 2023, and will apply to all penalties imposed after that date for violations of the aforementioned statutes that occurred after November 2, 2015.

Proposed Rules

Per Release No. 33-11151, the SEC is revising and re-proposing a rule that was initially proposed in September 2011 that would implement a provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) prohibiting an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security (including a synthetic asset-backed security), or any affiliate or subsidiary of any such entity, from engaging in any transaction that would involve or result in certain material conflicts of interest.

Per Release No. 34-96768, the SEC, with the concurrence of the Office of Government Ethics (“OGE”), is jointly issuing with OGE this proposed rule for Commission members and employees. This proposed rule would amend the existing Supplemental Standards of Ethical Conduct for Members and Employees of the SEC (“Supplemental Standards”) jointly issued by SEC and OGE, would supplement the Standards of Ethical Conduct for Employees of the Executive Branch (OGE Standards) issued by OGE, and is necessary and appropriate to address ethical issues unique to the SEC. The SEC is proposing to revise transaction and reporting requirements for certain assets that pose a low risk of conflicts of interest or appearance concerns, and to prohibit employee ownership of sector funds that have a stated policy of concentrating their investments in entities directly regulated by the SEC. Further, the SEC proposes to authorize collection of covered securities transactions and holdings data from financial institutions through a third-party automated compliance system. The SEC also proposes to correct certain technical matters and adjust its transaction and reporting requirements to provide the flexibility necessary to implement a third-party automated compliance system.

Interim Final Rules

There were no interim final rules in January.

Interpretive Releases

There were no interpretive releases in January.

There were no policy statements in January.

NFA

Notice I-23-01

January 4, 2023

Notice of Annual Meeting of NFA Members and Board and Nominating Committee Selection

Notice of Annual Meeting

NFA will hold its Annual Meeting of Members on Tuesday, February 7, 2023 at 12:00 p.m. (CST), via video conferencing. The agenda of the meeting is:

Opening remarks.
Members' questions regarding NFA-related topics.
Any other business that may properly come before the Annual Meeting (or any adjournment or postponement thereof).

To register for the Annual Meeting of Members, please email your name, NFA ID and contact email to MemberMeeting2023@nfa.futures.org. Registration is due by Tuesday, January 31, 2023. NFA will then provide you with information on accessing the Annual Meeting.

Board and Nominating Committee Election

On November 10, 2022, NFA notified all Members of the candidates that the 2022 Nominating Committee nominated for election to NFA's Board of Directors and 2023 Nominating Committee and advised Members of the procedures by which additional candidates could petition to be nominated for election (NTM I-22-22). No Members have petitioned for nomination of a candidate for election to the Board or Nominating Committee. Accordingly, NFA's Executive Committee, pursuant to Article VII, Section (3)(c) and Article X, Section 3 of NFA's Certificate of Incorporation, will elect the nominees to the Board and Nominating Committee in January 2023.

Notice I-23-02

January 10, 2023

Executive Representative Reminder and Proposed Amendments to NFA's Articles of Incorporation Relating to NFA's Governance

Executive Representative Reminder

As discussed more fully below, NFA's Board of Directors (Board) recently approved unanimously amendments to NFA's Articles of Incorporation (Articles). NFA's Articles require that these amendments be submitted to a vote of the Members and adopted upon the affirmative vote of the majority of those Members that cast a vote in each Member Category—FCM/IB, CPO/CTA, SD/MSP/RFED and Contract Market. NFA utilizes an electronic voting process for Member approval of amendments to NFA's Articles. NFA has engaged Corporate Election Services (CES) to administer the electronic voting process. To facilitate the electronic voting process, CES will send the voting materials to each Member's designated Executive Representative who has the Member's sole authority to sign and complete proxy cards and provide voting instructions and cast votes on behalf of the Member.

If a Member has already designated an Executive Representative, it is not necessary to do so again unless the person designated as the Executive Representative has changed. Any Member that needs to designate or change its Executive Representative should do so through NFA's website by accessing NFA's Executive Representative Contact form found on NFA's Electronic Filing Systems page. Only firm employees who are Security Manager(s) or are authorized to "View, Update, and File" information in ORS may complete this form. Any addition or change must be made by January 16, 2023.

If a Member does not have a designated Executive Representative by January 16, 2023, NFA will deem the Membership Contact listed on the Member's Form 7-R as the Member's Executive Representative, and that person will have the sole authority to cast votes on the Member's behalf. Votes submitted by any person other than the Executive Representative (or the Membership Contact if no Executive Representative is designated) will not be counted.

Notice I-23-03

January 23, 2023

Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

The CFTC requires any person that claims an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end. Persons that fail to file the affirmation notice by March 1, 2023, will be deemed to have requested a withdrawal of the exemption and, therefore, may be required to be registered and NFA Members.

Since exempt CPOs/CTAs have until March 1, 2023, to complete the affirmation process, NFA recognizes that it may be difficult for a Member to conclusively determine prior to that date whether a previously exempt CPO/CTA continues to be eligible for a current exemption.

Therefore, Members that take reasonable steps to determine the registration and membership status of these previously exempt persons will not be in violation of NFA Bylaw 1101 or Compliance Rule 2-36(d) if, between January 1 and March 31, 2023, they transact customer business with a previously exempt person that fails to become registered and an NFA Member, file a notice affirming its exemption from CPO/CTA registration, or provide a written representation as to why the person is not required to register or file the notice affirming the exemption.

How to identify whether an exempt CPO/CTA has affirmed its exemption

Members should compare their list of exempt CPO/CTAs with which the Member transacts customer business to the information NFA makes available to assist Members in determining whether an exempt CPO/CTA has affirmed its exemption(s).

Members can review exemption information in two ways. Members can view individual persons or entities by navigating to NFA's BASIC System, opening the person or entity's record, and, if applicable, clicking 'View All' in the Firm Exemptions box and/or the Pools & Pool Exemptions box. The Firm Exemptions page and/or the Pools & Pool Exemptions page will reflect an affirmation date if an exempt person or entity has properly filed a notice affirming an exemption, if applicable. Any exemption that was not affirmed in the previous year will no longer appear in BASIC as of March 2, 2023.

Alternatively, Members can access a spreadsheet that includes a list of all persons or entities that have exemptions on file with NFA that must be affirmed on an annual basis. This spreadsheet, which is updated nightly, can be found in the Member's Annual Questionnaire which can be accessed by logging into the system. The spreadsheet includes all persons or entities with an exemption(s) that requires an annual affirmation, as well as the most recent affirmation date, if applicable, and the affirmation due date. If the affirmation due date is March 1, 2023 the exemption has not yet been affirmed. Once the exemption has been affirmed, the affirmation due date will change to February 29, 2024. Any exemptions not affirmed after March 1, 2023, will be withdrawn.

Expectations for Members transacting customer business with an exempt CPO/CTA that has not affirmed its exemption

NFA expects any Member transacting customer business with a person that previously claimed an exemption from CPO/CTA registration under the regulations listed above, and that has not filed a notice in NFA's Exemption System affirming the exemption, not filed a notice of exemption for another available exemption, or not properly registered and become an NFA Member by December 31, 2022, to promptly contact the person to determine whether the person intends to file a notice affirming the exemption.

If the Member learns that the person does not intend to file a notice affirming the exemption, or the person does not file a notice affirming the exemption by March 1, 2023, then the Member must promptly obtain a written representation as to why the person is not required to register or file a notice of exemption and evaluate whether the representation appears adequate. If the Member determines that this written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g., liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101 or Compliance Rule 2-36(d).

Any Member that acts in accordance with the information provided in this Notice will not be charged with violating NFA Bylaw 1101 or Compliance Rule 2-36(d). Members should be aware, however, that this Notice does not relieve their regulatory obligations pursuant to the Commodity Exchange Act and the CFTC's Regulations.

News Releases

January 12, 2023

NFA orders Chicago, IL swap dealer StoneX Markets LLC to pay a $1,000,000 fine

NFA has ordered Chicago, Illinois swap dealer Member StoneX Markets LLC (Stone) to pay a $1,000,000 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 Stone. In the settlement offer, the firm neither admitted nor denied the allegations in the Complaint.

In its Decision, the BCC found that Stone violated NFA Compliance Rule 2-4 by failing to provide timely and complete disclosure to its counterparties that the firm was not calculating initial margin (IM) according to its customary procedures; violated NFA Compliance Rule 2-49(a) by failing to maintain and enforce an adequate risk management program with respect to the firm's value-at-risk calculation and daily IM determination, and by failing to retain required records and provide pre-trade mid-market marks to counterparties; and violated NFA Compliance Rules 2-9(d) and 2-49(a) by failing to supervise the firm's operations.

The complete text of the Complaint and Decision can be viewed on NFA's website.

Hot Issues

In January, the 2023 Report on FINRA’s Examination and Risk Monitoring Program was published. This year’s report addresses a materially broader range of topics than in prior years particularly in the Market Integrity section). Additionally, the report introduces a new Financial Crimes section, consisting of three topics—Anti-Money Laundering (AML), Fraud and Sanctions; Cybersecurity and Technological Governance; and Manipulative Trading. The report also identifies several emerging risks: Manipulative Trading in Small Cap IPOs, Sanctions Evasion, ACATS Fraud, and Senior Investors and Financial Crime.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA January 2023 Industry Notices
SEC Regulatory Actions
NFA Notice to Members
NFA Press Releases
2023 Report on FINRA’s Examination and Risk Monitoring Program

The post Monthly Regulatory Summary (January 2023) appeared first on Compliance Risk Concepts.

Considerations for FINRA Membership involving Digital Asset Securities

CRC — Fri, 27 Jan 2023 15:01:42 +0000

In November 2022, FINRA published a podcast that discussed available guidance concerning several paths through which broker-dealers can be approved by FINRA for digital asset securities activity: 1) as a placement agent in private placement digital asset securities offerings, 2) as an ATS facilitating secondary transaction of digital asset securities, and 3) as a special purpose broker-dealer (SPBD) with custody of digital asset securities.

1) Placement agent in private placement digital asset securities offerings

Overview

The broker-dealer sends the trade-matching details (e.g., identity of the parties, price, and quantity) to the buyer and issuer of a digital asset security—like a traditional private placement—and the issuer settles the transaction bilaterally between the buyer and issuer, away from the broker-dealer. In this case, the broker-dealer instructs the customer to pay the issuer directly and instructs the issuer to issue the digital asset security to the customer directly (e.g., the customer’s “digital wallet”).

Everything happens away from the broker-dealer so it does not custody the digital asset. The broker-dealer does not handle, control, or receive customer funds or securities. Issuers and investors directly transact with each other through an escrow account established by issuer.

Key Considerations in a Placement Agent Application

Demonstrate an understanding of the risks of the digital asset security.
Communicate how the risks will be disclosed and how the offering documents will be reviewed.
Evidence an understanding of the obligations under FINRA’s advertising rules (including if first-year firm conditions apply).
Detail the role and function of the broker-dealer with specificity.
Be able to show that that there are procedures that are specific to digital asset securities and the distributed ledger.

2) ATS facilitating secondary transaction of digital asset securities (two types)

ATS #1: Bilateral settlement without ATS involvement

Overview

The ATS matches the orders of buyers and sellers of digital asset securities, and the trades are either settled directly between the buyer and seller or the buyer and seller give instructions to their respective custodians to settle the transactions. In either case, a broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed).

Step 1 - the buyer and seller send their respective orders to the ATS;
Step 2 - the ATS matches the orders;
Step 3 - the ATS notifies the buyer and seller of the matched trade; and
Step 4 - the buyer and seller settle the transaction bilaterally, either directly with each other or by instructing their respective custodians to settle the transaction on their behalf.

ATS #2: Custodians carry out conditional instructions using information from ATS

Overview

In this case, there is a higher degree of control exercised by the broker-dealer operator because it tells the buyer’s custodian where to send the funds and the seller’s custodian where to deliver the securities. As with the four-step process, the broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed) but it notifies the custodians for the buyer and seller, and the buyer and seller, of the match.

Step 1 - the buyer and seller send their respective orders to the ATS, notify their respective custodians of their respective orders submitted to the ATS, and instruct their respective custodians to settle transactions in accordance with the terms of their orders when the ATS notifies the custodians of a match on the ATS;
- Step 2 - the ATS matches the orders; and
- Step 3 - the ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions.

Key Considerations in ATS Applications

Explain in detail how the transaction flows and business model involving digital asset securities and the ATS comply with either the three-step or the four-step process.
Ensure other documents are consistent with that process, such as:
1. User disclosure
1. Draft Form ATS
1. Contracts
1. Custodian disclosure
1. Disclosures with other third-parties

3) Special Purpose Broker-Dealer (SPBD) with Custody of Digital Asset Securities

Overview

The business activities of a special purpose broker-dealer are limited to digital assets that are also securities (this can include operation of an ATS that trades only in digital assets securities or otherwise engages in other business involving digital assets securities). It cannot engage in business activities involving non-security digital assets or securities that are not digital assets (e.g., traditional securities).

Key Considerations in SPBD Applications

Demonstrate an understanding how the business model is impacted by the nine conditions detailed in the SEC Statement (dated April 27, 2021).
Explain how each of the nine conditions are met.
Make it clear where staff can find information responsive to each of the nine conditions.

Lastly, the FINRA podcast also identified several common issues with membership applications involving digital asset securities.

Show that the applicant is capable of complying with FINRA rules and the U.S. federal securities laws and regulations.
Missing details. For example:
- What is the business plan?
- What is the relationship between different parts of the broker-dealer’s business?
- How does the transaction flow and business model involving digital asset securities fit with the available guidance?
- How will the broker-dealer ensure that it functions in a way comporting with the applicable guidance?
- How do the transaction flows address compliance and legal requirements?
- Is there documentation to support that each step in the transaction flow meets those requirements?
Being inconsistent in describing the proposed business activities involving digital assets, cryptocurrencies, distributed ledger or related products.

CRC has extensive experience with helping firms successfully navigate the New Member and Continuing Member Application process with FINRA. We are specifically familiar with the fintech space and offer clients the ability to quickly scale and support their application with experienced C-Suite level personnel. Contact us today to discuss how we can provide right-sized support as you consider forming a broker-dealer.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

The post Considerations for FINRA Membership involving Digital Asset Securities appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (November 2022)

CRC — Wed, 07 Dec 2022 15:11:15 +0000

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

Notice I-22-21

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

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA November 2022 Industry Notices
SEC Regulatory Actions
NFA Notice to Members
NFA Press Releases

The post Monthly Regulatory Summary (November 2022) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (September 2021)

CRC — Wed, 06 Oct 2021 13:56:01 +0000

FINRA

Regulatory Notices

Per Notice 21-31, FINRA has established a new Supplemental Liquidity Schedule (SLS). The new SLS, which members subject to the requirement will need to file as a supplement to the FOCUS Report, is designed to improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of the members with the largest customer and counterparty exposures. FINRA is issuing this Notice to provide further information on the new requirement, which will become effective on March 1, 2022. For members subject to the requirement, the first SLS must be completed as of the end of March 2022 and will be due by May 4, 2022.

The SLS, and instructions thereto, is available in Attachment A. FINRA will make the SLS available through FINRA Gateway.

Per Notice 21-32, FINRA requests comment on a proposed change to its current policy relating to the assignment of OTC symbols to unlisted equity securities. Specifically, FINRA is considering whether it should begin assigning OTC symbols to unlisted equity securities that do not have a valid CUSIP identifier, in the limited circumstance where a member firm demonstrates its best efforts to obtain a CUSIP identifier and provides documentation to identify the security.

Per Notice 21-33, FINRA adopted amendments to Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11) in light of the Securities and Exchange Commission’s (SEC) amendments to SEC Rule 15c2-11 (SEC Rule 15c2-11). As amended, Rule 6432 will require a qualified inter-dealer quotation system (Qualified IDQS) to submit a modified Form 211 filing to FINRA in connection with each initial information review, and a daily security file to FINRA containing summary information for all securities quoted on its system on each day that it makes a publicly available determination permitted under SEC Rule 15c2-11, among other amendments. The amendments to Rule 6432 will take effect on September 28, 2021—in line with the compliance date for the amendments to SEC Rule 15c2-11.

The amended rule text is available in the online FINRA Manual.

Per Notice 21-34, FINRA has adopted new rules to address firms with a significant history of misconduct. New Rule 4111 (Restricted Firm Obligations) requires member firms that are identified as “Restricted Firms” to deposit cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations. New Rule 9561 (Procedures for Regulating Activities Under Rule 4111) and amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) establish a new expedited proceeding to implement Rule 4111.

The new rules and rule amendments become effective on January 1, 2022.

The rule text is available in Attachment A. A flow chart of the Rule 4111 process is available in Attachment B.

Special Notices

There were no Special Notices in September.

SEC

Final Rules

Per Release No. 33-10984, The Securities and Exchange Commission (“Commission”) 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 September 20, 2021.

Proposed Rules

Per Release No. 34-91603, The Securities and Exchange Commission (“Commission”) is proposing to amend 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 annually about their proxy votes and to make that information easier to analyze. The Commission also is proposing rule and form amendments under the Securities Exchange Act of 1934 (“Exchange Act”) that would require an institutional investment manager subject to section 13(f) of the Exchange Act to report annually on Form N-PX how it voted proxies relating to executive compensation matters, as required by section 14A of the Exchange Act. The proposed reporting requirements for institutional investment managers, if adopted, would complete implementation of section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Interim Final Rules

There were no interim final rules in September.

Interpretive Releases

There were no interpretive releases in September.

Policy Statements

There were no policy statements in September.

NFA

Notices to Members

Per Notice I-21-28:

Recognizing that Members may permanently adopt hybrid work environments and permit APs to work remotely, NFA recently amended its definition of branch office. The amended definition excludes any remote working location or flexible shared workspace where one or more APs from the same household live or rent/lease, provided:

The AP(s) does not hold the location out publicly as the Member's office;
The AP(s) does not meet with customers or physically handle customer funds at the location; and
Any CFTC or NFA-required records created at the remote location are accessible at the firm's main or applicable branch office(s) as required under CFTC and NFA requirements.

Members may delist locations currently identified as branch offices if they fall outside of the amended definition.

These amendments will become effective on September 23, 2021, at which time the relief provided in Notice to Members I-20-12 will expire.

Per Notice I-21-29:

NFA has amended Financial Requirements Section 18 to specify that Swap Dealers (SD) Members subject to the filing requirements under CFTC Regulation 23.105(k) will satisfy NFA's requirement by filing the information specified by NFA in the form and manner provided by NFA. This amendment will become effective October 6, 2021.

NFA adopted the proposed amendments for two reasons. First, NFA has developed standardized tables available in WinJammer™ to collect the specific information from SD Members. The tables will facilitate NFA's collection and analysis of the information and will also provide SD Members with certainty on the format for filing the information. Second, NFA has identified certain information required by CFTC Regulation 23.105(k) that is similar in nature to information that NFA will collect under CFTC Regulation 23.105(l). NFA's standardized tables will not collect this similar information.

The information that will be required by the standardized tables includes:

Product category and the amount of the deduction for market risk on each product for which the SD calculates a deduction for market risk other than in accordance with a model;
Daily intra-month VaR;
Product category and the deduction for market risk on each product for which the SD uses scenario analysis;
10 largest commitments listed by counterparty;
Number of business days for which the actual daily net trading loss exceeded the corresponding daily VaR; and
Backtesting results of all internal models used to compute allowable capital, including VaR, and credit risk models, indicating the number of backtesting exceptions.

Per Notice I-21-30:

NFA has amended Financial Requirements Section 10 to impose a $1,000 per business day late fee on each financial report or other filing required by Financial Requirements Section 17 submitted after its due date. This late fee is consistent with the late fee NFA imposes on futures commission merchant, introducing broker and forex dealer Members that submit late financial filings.

NFA also adopted a new Interpretive Notice to Financial Requirements Section 17 entitled Financial Requirements Section 17: Initial Margin Model Ongoing Monitoring Reports clarifying NFA's expectations regarding quarterly and annual initial margin (IM) model performance reporting. The Interpretive Notice specifies the information currently required to be submitted and clarifies due dates for these filings.

The amendment to Financial Requirements Section 10 and the new Interpretive Notice will become effective on October 6, 2021.

Per Notice I-21-31:

NFA utilizes an electronic voting process for contested Directors' elections, contested Nominating Committee member elections and Articles' amendments approval votes. If elections are necessary, NFA has engaged a third-party election service provider to administer the electronic voting process. To facilitate the electronic voting process, each Member shall designate an Executive Representative who will have the Member's sole authority to sign nominations made by petition, receive notices of Member meetings and proxy materials, complete proxy cards and provide voting instructions and cast votes on behalf of the Member. Members may designate an Executive Representative through NFA's website. Only firm personnel who are the Security Manager or are authorized to view, update and file information in ORS may complete the Executive Representative Contact form.

If a Member fails to 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 has already designated an Executive Representative, it is not necessary to do so again unless the person designated as the Executive Representative has changed.

Board and Nominating Committee Members' Terms to Expire at 2022 Board of Directors' Regular Annual Meeting

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 17, 2022.

The Nominating Committee relies heavily on the recommendations of the membership in making its nominating decisions. Please give this matter serious consideration and return your submission(s) to NFA by mail, email or fax for receipt no later than October 13, 2021.

Per Notice I-21-32:

NFA has amended Compliance Rule 2-49 to provide that any swap dealer (SD) Member that violates CFTC Regulation 37.12 or the Part 50 Regulations will be deemed to have also violated an NFA requirement. This amendment will become effective on September 30, 2021.

News Releases

September 16, 2021

NFA orders London, U.K. swap dealer ED&F Man Capital Markets Limited to pay a $150,000 fine

September 16, Chicago—NFA has ordered London, U.K. swap dealer ED&F Man Capital Markets Limited (ED&F Man) to pay a $150,000 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 ED&F Man, in which it neither admitted nor denied the allegations. The Committee found that ED&F Man failed to comply with the qualification testing requirement as to certain associated persons by the compliance date.

The complete text of the Complaint and Decision can be viewed on NFA's website.

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

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

David Amster

p. (917) 568-6470

Sources:

FINRA September 2021 Industry Notices
SEC Regulatory Actions
NFA Notices
NFA Press Releases

The post Monthly Regulatory Summary (September 2021) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (August 2021)

Amir Lahoud — Fri, 03 Sep 2021 13:23:48 +0000

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.

FINRA

Regulatory Notices

Per Notice 21-28, FINRA has adopted new Rule 6439 (Requirements for Member Inter-Dealer Quotation Systems), which implements additional requirements for firms that operate systems that regularly disseminate the quotations of identified broker-dealers in OTC Equity Securities (each an “inter-dealer quotation system” or “IDQS”). Rule 6439 will become effective on October 1, 2021, except for paragraph (d)(1)(B), which relates to the collection of order-level information. The effective date for this paragraph will be announced at a later date to better coordinate, and avoid regulatory duplication, with reporting obligations to the Consolidated Audit Trail (CAT) under Rule 6830 (Industry Member Data Reporting).

FINRA also is deleting the Rule 6500 Series and other rules related to the OTC Bulletin Board (OTCBB) – a FINRA-operated inter-dealer quotation system – and ceasing its operation. The permanent closure of the OTCBB will not occur prior to October 1, 2021. FINRA will announce the effective date of the deletion of the OTCBB-related rules and its closure in a separate communication.

Per Notice 21-29, FINRA is publishing this Notice to remind member firms of their obligation to establish and maintain a supervisory system, including written supervisory procedures (WSPs), for any activities or functions performed by third-party vendors, including any sub-vendors (collectively, Vendors) that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. This Notice reiterates applicable regulatory obligations; summarizes recent trends in examination findings, observations and disciplinary actions; and provides questions member firms may consider when evaluating their systems, procedures and controls relating to Vendor management.

This Notice—including the “Questions for Consideration”—does not create new legal or regulatory requirements or new interpretations of existing requirements. Many of the reports, tools or methods described herein reflect information firms have told FINRA they find useful in their Vendor management practices. FINRA recognizes that there is no one-size-fits-all approach to Vendor management and related compliance obligations, and that firms use risk-based approaches that may involve different levels of supervisory oversight, depending on the activity or function Vendors perform. Firms may consider the information in this Notice and employ the practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the firm’s size and business model.

FINRA also notes that the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency recently published and requested comment on proposed guidance designed to help banking organizations manage risks associated with third-party relationships. FINRA will monitor this proposed guidance and consider comparable action, where appropriate.

Per Notice 21-30, FINRA warns member firms of an ongoing phishing campaign that involves fraudulent emails (see sample in Appendix) purporting to be from FINRA and using one of at least three imposter FINRA domain names:

“@finrar-reporting.org”
“@Finpro-finrar.org”
“@gateway2-finra.org”

The email asks the recipient to click a link to “view request” and provide information to “complete” that request, noting that “late submission may attract penalties.”

FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident.

None of these domain names are connected to FINRA and firms should delete all emails originating from any of these domain names.

FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding, opening any attachments or clicking on any embedded links.

FINRA has requested that the relevant Internet domain registrars suspend services for all three domain names.

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page, including the Phishing section of our Report on Cybersecurity Practices - 2018.

Special Notices

There were no Special Notices in August.

SEC

Final Rules

Per Release No. 34-92727, the Securities and Exchange Commission (“Commission”) is making an amendment to the Commission’s Freedom of Information Act (“FOIA”) regulations to remove a provision stating that records that the FOIA requires to be made available for public inspection in an electronic format will be available to persons who do not have access to the internet in the Commission’s Public Reference Room. The Commission’s FOIA regulations will continue to provide that persons who do not have access to the internet can obtain the documents required to be made available for public inspection by telephone or email request to the Office of FOIA Services.

Effective Date: August 26, 2021

Proposed Rules

There were no proposed rules in August.

Interim Final Rules

There were no interim final rules in August.

Interpretive Releases

There were no interpretive releases in August.

Policy Statements

Per Release No. 34-92565, The Securities and Exchange Commission (“Commission” or “SEC”) is issuing this statement to clarify how the SEC will proceed when addressing certain issues under Exchange Act Rule 21F-3(b)(3) and Exchange Act Rule 21F-6 while the staff is preparing and the Commission is considering potential amendments to those rules (“Interim Policy-Review Period”). These procedures will remain in effect until withdrawn by the Commission.

NFA

Notices to Members

Per Notice I-21-27:

NFA Financial Requirements Section 12 requires forex dealer members to collect and maintain a minimum security deposit of 2% of the notional value of transactions in ten listed major currencies and 5% of the notional value of other transactions. In 2016, NFA's Executive Committee, pursuant to its authority under Section 12, increased the minimum security deposit for currency pairs involving the British pound to 5% and the minimum security deposit for currency pairs involving the Japanese yen to 4%.

The Executive Committee recently reviewed these increases and determined to reduce the minimum security deposit for currency pairs involving the British pound to 3% and for currency pairs involving the Japanese yen to 2%. The decreases are effective immediately.

News Releases

August 5, Chicago—NFA has ordered New York, N.Y. introducing broker Tullett Prebon Financial Services LLC(TPFS) to pay a $150,000 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 TPFS, in which it neither admitted nor denied the allegations. The Committee found that TPFS failed to keep full, complete and systematic records of all transactions relating to TPFS's business of dealing in commodity interests. The Committee also found that TPFS failed to supervise its employees' recordkeeping activities and failed to review and supervise its associated persons' communications.

The complete text of the Complaint and Decision can be viewed on NFA's website.

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