SEC Archives - Compliance Risk Concepts

Regulatory News Update: SEC Marketing Rule Risk Alert

CRC — Tue, 23 Apr 2024 14:14:40 +0000

What: The Division of Examinations issued a Risk Alert with preliminary observations about Marketing Rule items contained in Form ADV as well as related discussions concerning the Compliance Rule (206(4)-7), the Books and Records Rule (204-2), and the Marketing Rule’s General Prohibitions.

Who: SEC-Registered Investment Advisers (The Marketing Rule applies to investment advisers registered or required to be registered with the SEC under Section 203 of the Advisers Act.)

When: Risk Alert issued April 17, 2024.

Why: Marketing practice assessments were designated as a particular focus area in the Division of Examination’s FY 2024 examination priorities.

How: The Risk Alert provides examples of gaps in marketing policies and procedures and in the preservation and maintenance requirements under the Marketing Rule. In addition, with respect to the Marketing Rule’s General Prohibitions, the Risk Alert provides observations of deficiencies related to the following: (1) untrue statements of material fact and unsubstantiated statements of material fact; (2) omission of material facts or misleading inference, (3) fair and balanced treatment of material risks or limitations, (4) references to specific investment advice that were not presented in a fair and balanced manner, and (5) inclusion or exclusion of performance results or time period in matters that were not fair and balanced.

Why it matters: As a 2024 priority, investment advisers should expect Marketing Rule compliance to continue to be under the microscope in examinations this year. It is imperative that firms have appropriately tailored compliance procedures designed to prevent violations of the Marketing Rule and, just as importantly, that the procedures are fully implemented – including the maintenance of required books and records. Investment advisers are encouraged to review the focus areas laid out in the examination priorities letter and the initial examination observations included in the new Risk Alert relative to their specific programs and marketing practices.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, 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: SEC Marketing Rule Risk Alert appeared first on Compliance Risk Concepts.

Regulatory News Update: Proposed Amendment to FINRA 3240 (Borrowing From or Lending to Customers)

CRC — Fri, 12 Jan 2024 15:54:38 +0000

What: FINRA has proposed to amend Rule 3240 to strengthen the general prohibition against borrowing and lending arrangements between registered persons and customers.

Who: FINRA member broker-dealers.

When: The proposal to the SEC was initially filed on January 2, 2024. If the SEC approves the change, FINRA will announce the effective date in a Regulatory Notice.

Why: FINRA cited anecdotal evidence from member firms, law clinics, and previous enforcement cases as well as its experience in examining and enforcing for compliance with Rule 3240 that it believed suggests that there is some ambiguity about the scope of Rule 3240 and certain risks to investors due to conflicts of interest and the superior information that registered persons have about potential risks and returns.

How: Among various changes, the proposal adds several new limitations: 1) clarifying that the prohibition applies to arrangements that precede a new broker-customer relationship, 2) extending the rule to arrangements entered into within six months following the end of broker-customer relationship, and 3) to arrangements with parties related (family and businesses) to the registered person and customer. The proposal also narrows existing exceptions based on certain personal and business relationships.

Why it matters: Firms should monitor further developments with this proposal. If the SEC ultimately approves the requested rule change, written supervisory procedures and controls related to this topic will need to be reviewed and may require modifications for compliance with the final requirements. In addition, assuming the final rule change tracks with the proposal, there may be potential operational and training considerations (e.g., account opening and pre-existing arrangements, account terminations and subsequent arrangements, and related-party arrangements).

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

The post Regulatory News Update: Proposed Amendment to FINRA 3240 (Borrowing From or Lending to Customers) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (December 2023)

CRC — Fri, 05 Jan 2024 15:10:42 +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 23-20, FINRA discusses the guidance and other resources available to assist members with their compliance efforts in connection with the SEC’s Regulation Best Interest (Reg BI). In particular, FINRA highlights the SEC’s series of Staff Bulletins (Bulletins) reiterating standards of conduct for broker-dealers (BDs or members) and investment advisers (IAs): SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors; SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest; and SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations. FINRA encourages members to review these Bulletins closely, along with the Reg BI Adopting Release and the other guidance and resources identified in this Notice, as part of their ongoing efforts to meet their best interest obligations.

Per Regulatory Notice 23-21, FINRA has observed instances of non-compliance with SEA Rule 15c3-1, SEA Rule 17a-3 and SEA Rule 17a-5 resulting from misapplication of the Financial Accounting Standards Board’s Accounting Standard Codification 606, Revenue from Contracts with Customers (“ASC 606”). This Notice provides guidance regarding potential compliance issues with respect to these rules that may result from the misapplication of ASC 606.

SEC

Final Rules

Per Release No. 34-99149, the SEC is adopting rules under the Securities Exchange Act of 1934 to amend the standards applicable to covered clearing agencies for U.S. Treasury securities to require that such covered clearing agencies have written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty. In addition, the SEC is adopting additional amendments to the Covered Clearing Agency Standards with respect to risk management. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. Finally, the SEC is amending the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain conditions.

Per Release No. 34-99193, 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 23.4 will be deployed in the EDGAR system on December 18, 2023.

Proposed Rules

There were no proposed rules in December.

Interim Final Rules

There were no interim final rules in December.

Interpretive Releases

There were no interpretive releases in December.

Policy Statements

There were no policy statements in December.

NFA

Notices to Members

Notice I-23-22

December 4, 2023

Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA 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, which is February 29, 2024, for this affirmation cycle.

Persons re-affirming an exemption under 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) and 4.13(a)(5) will be required to attest that neither the person nor its principals has in its background any statutory disqualifications listed under Section 8a(2) of the Commodity Exchange Act.

Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 1, 2024. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC, if either continues to operate without registration or exemption.

See the Notice for details on how to complete the affirmation process.

Notice I-23-23

December 5, 2023

CPO Members—Effective date of FinCEN's beneficial ownership reporting rule

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule establishing beneficial ownership information (BOI) reporting requirements for existing and newly formed corporations, limited liability companies and similar entities (collectively referred to as a "reporting company"). As of January 1, 2024, subject to certain exemptions, reporting companies will be required to file a report with FinCEN identifying their BOI. Generally, BOI refers to identifying information about the individuals who directly or indirectly own or a control a reporting company.

FinCEN's final rule implements the Corporate Transparency Act's (Act) beneficial ownership reporting provisions. Under the Act, CFTC-registered entities are exempt from the reporting requirement. However, a pooled investment vehicle (PIV), such as a commodity pool, will be required to comply with FinCEN's reporting rule unless it qualifies for another exemption under the Act. Importantly, the Act exempts from the BOI reporting requirement any PIV operated or advised by an SEC-registered broker dealer (BD) or investment advisor (IA). As a result, a commodity pool operated or advised by an SEC-registered BD or IA is exempt from the reporting requirement.

However, NFA Member commodity pool operators (CPO) which operate a commodity pool that does not qualify for an exemption under the Act will be required to report BOI to FinCEN for any commodity pools they operate in accordance with the following deadlines.

For a commodity pool created or registered to do business before January 1, 2024, a CPO must file a BOI report with FinCEN by January 1, 2025.

For a commodity pool created or registered on or after January 1, 2024, a CPO must file a BOI report with FinCEN within 90 days from the time the CPO receives actual notice that the commodity pool's creation or registration is effective. In addition, for any commodity pool created or registered on or after January 1, 2024, a CPO will need to report the commodity pool's company applicants. A company applicant is the individual who directly files the document that creates or registers the company.

FinCEN will not accept any BOI reports prior to January 1, 2024, and FinCEN has emphasized that reporting companies should not submit any BOI reports prior to that date.

Notice I-23-24

December 14, 2023

FCM and RFED filing requirements for Christmas and New Year's Day—Reminder for upcoming holidays

This is a reminder that the following futures commission merchant (FCM) and retail foreign exchange dealer (RFED) regulatory filings will be impacted as follows by the Christmas and New Year's Day holidays:

Christmas Day—Monday, December 25, 2023

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 22, 2023, are required to be submitted by 12:00 noon on Tuesday, December 26, 2023; and

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements are required to be prepared as of Monday, December 25, 2023, and are required to be submitted by 12:00 noon on Tuesday, December 26, 2023.

New Year's Day—Monday, January 1, 2024

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 29, 2023, are required to be submitted by 12:00 noon on Tuesday, January 2, 2024;

Daily segregated, 30.7 secured and cleared swaps customer collateral statements are not required to be prepared as of Monday, January 1, 2024; and

Daily forex statements are required to be prepared as of Monday, January 1, 2024, and are required to be submitted by 12:00 noon on Tuesday, January 2, 2024.

Any information filed by FCMs or RFEDs after its due date must be accompanied by a fee for each business day that it is late.

Holiday Filing Schedule

Visit NFA's website to view a complete schedule of daily filing requirements for upcoming holidays and an updated calendar of Segregated Investment Detail Report (SIDR) due dates. NFA recommends viewing the calendars and keeping this Notice as a reference for the upcoming 2024 holiday filing requirements.

For more information about filing financial reports, visit NFA's website.

Questions concerning the requirements should be directed to NFA's Information Center (800-621-3570 or 312-781-1410 or information@nfa.futures.org).

Notice I-23-25

December 14, 2023

SD holiday filing requirements

Visit NFA's website to view schedules of 2024 swap dealer (SD) holiday filings, risk data and margin monitoring filings and financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2024 holiday filing requirements.

For more information about SD filing requirements visit NFA's website.

Questions concerning the requirements should be directed to NFA's Information Center (800-621-3570 or 312-781-1410 or information@nfa.futures.org).

NFA News Releases

There were no NFA News Releases in December.

FinCEN News Releases

December 07, 2023

WASHINGTON—During its ninth annual Law Enforcement Awards Program, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recognized agencies that used Bank Secrecy Act (BSA) data to successfully pursue and prosecute criminal investigations.

“While these awards recognize our law enforcement partners who have effectively used BSA data in their investigations, it is important to emphasize that these investigations and prosecutions may not have been possible without financial institutions’ efforts to identify and report suspicious activity,” said FinCEN Director Andrea Gacki during the ceremony. “Safeguarding the financial system and promoting national security is a collective effort.”

Financial industry representatives and law enforcement officials participated in the ceremony. FinCEN will post summaries of all case nominations to its website in the coming weeks. Brief descriptions of the award-receiving cases follow:

Fraud: Internal Revenue Service–Criminal Investigation, Federal Bureau of Investigation, and Small Business Administration Office of Inspector General

Investigators used BSA filings to identify more than 150 loans totaling approximately $21 million in a massive pandemic relief fraud ring. The United States Attorney’s Office for the Central District of California and the Department of Justice’s Fraud Section prosecuted this case.

Drug Trafficking Organization Activity: Federal Bureau of Investigation

Forensic accountants used complex analytics to review BSA data and other financial records to identify suspicious transactions in U.S. bank wire entries and trace illicit proceeds across three continents. The United States Attorney’s Offices for the Southern District of New York and the Southern District of Florida prosecuted the cases, with assistance from the United States Attorney’s Office for the Southern District of Texas.

Transnational Criminal Organization Activity: Drug Enforcement Administration

Investigators made extensive use of FinCEN’s programs and resources to aid this investigation, resulting in the seizure of approximately 4.5 metric tons of cocaine hydrochloride in South America bound for the United States. While searching BSA filings on one of the primary subjects, investigators identified additional information that led to the discovery of a money laundering, poly-drug trafficking, and human smuggling empire. This case was jointly prosecuted by the U.S. Attorney’s Office for the Eastern District of Virginia and the Department of Justice’s Money Laundering and Asset Recovery Section.

Proliferation Financing: Department of Defense Office of Inspector General, Defense Criminal Investigative Service, and Homeland Security Investigations

Information received from BSA filings as well as FinCEN’s 314(a) program led to nine defendants being charged with, among other things, conspiracy to commit money laundering and conspiracy to commit mail and wire fraud. As a result of this investigation and prosecution, law enforcement recovered approximately $3 million worth of electronics and communications. This case was prosecuted by the United States Attorney’s Office for the District of Maryland.

Cybercrime: U.S. Secret Service and U.S. Postal Inspection Service

This investigation focused on individuals laundering the proceeds from a business email compromise scheme. BSA information was crucial in identifying accounts and co-conspirators, ultimately leading to successful convictions. The United States Attorney’s Office for the Eastern District of Virginia prosecuted this case.

Corruption: Internal Revenue Service–Criminal Investigation and Global Illicit Financial Team and Homeland Security Investigations

While investigating third-party money laundering, the Internal Revenue Service–Criminal Investigation and Global Illicit Financial Team identified a money remitter who was an investment advisor controlling several U.S. and foreign companies. BSA data revealed that Homeland Security Investigations had also initiated a separate investigation; the agencies were able to merge their efforts. The Department of Justice’s Fraud Section is prosecuting the criminal cases. The United States Attorney’s Office for the Southern District of Florida is handling the asset forfeiture case.

Human Trafficking/Human Smuggling: Department of Justice’s Civil Rights Division, Criminal Section

BSA reporting provided critical leads during this multi-year investigation. Several law enforcement agencies and non-profit entities worked together to bring justice to the 17 victims who cooperated with law enforcement and hundreds of other victims who were subjected to the defendants’ abuse. The United States Attorney’s Office, Middle District of Florida and the Department of Justice’s Civil Rights Division prosecuted the case.

December 11, 2023

REGISTRATION CLOSED

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network will host a virtual information session on beneficial ownership information reporting requirements on Wednesday, December 13 at 2 p.m. Eastern Time.

Beginning January 1, 2024, a new law will require many companies doing business in the United States to report information to the U.S. government about who ultimately owns and controls them. This webinar will cover beneficial ownership information reporting requirements and how to comply with the law, followed by a Q&A session.

When: Dec 13, 2023, 02:00 PM Eastern Time (US and Canada)
Topic: Beneficial Ownership Information Reporting Requirements: What You Need to Know
Register in advance for this webinar:
https://fincen.zoomgov.com/webinar/register/WN_lh7pK9P8T5WD7w4ZPAYCGw

After registering, participants will receive a confirmation email containing information about joining the webinar.

Update: Due to high demand, registration for Wednesday’s beneficial ownership webinar has closed. Information will be forthcoming on additional webinars, which will take place in the coming weeks.

Update, 12/21/23: A recording of the webinar is available at https://www.youtube.com/watch?v=tJN6eB_Sm0U.

December 20, 2023

Please join U.S. Treasury Office of Terrorism and Financial Intelligence Under Secretary Brian Nelson and Financial Crimes Enforcement Network (FinCEN) Director Andrea Gacki for a briefing on the final rule that establishes parameters for access to and protection of beneficial ownership information. This briefing will cover key requirements for how authorized users will be able to access beneficial ownership information, mechanisms for protecting this sensitive data, and the differences between the proposed rule and the final rule. To attend the briefing, please visit https://www.youtube.com/@fincentreasury at 11 a.m. ET on Thursday, December 21.

December 21, 2023

WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) took another major step in support of U.S. Government efforts to crack down on illicit finance and enhance corporate transparency by issuing a final rule that establishes the framework for access to and protection of beneficial ownership information (BOI). Issued pursuant to the bipartisan Corporate Transparency Act (CTA), this final rule prescribes the circumstances under which BOI reported in compliance with FinCEN’s September 30, 2022 final BOI Reporting Rule may be disclosed to Federal agencies; state, local, tribal, and foreign governments; and financial institutions, and how it must be protected. FinCEN will also issue today two interagency statements to give banks and non-bank financial institutions guidance on the interplay between the final rule and FinCEN’s existing Customer Due Diligence Rule.

“This final rule is a significant step forward in our efforts to protect our financial system and curb illicit activities,” said FinCEN Director Andrea Gacki. “BOI can provide essential information to law enforcement, intelligence, and national security professionals as they work to protect the United States from bad actors who exploit anonymous shell companies to engage in money laundering, corruption, sanctions and tax evasion, drug trafficking, fraud, and a host of other criminal offenses with impunity, while legitimate businesses suffer from their misdeeds.”

The final rule is the second of three key rulemakings planned to implement the CTA. The first of these rulemakings, the BOI Reporting Rule, requires certain corporations, limited liability companies, and other similar entities created or registered to do business in the United States to report information about their beneficial owners to FinCEN. Those reporting requirements take effect on January 1, 2024, the same day that FinCEN will launch its beneficial ownership information technology system to securely collect, process, and store that information. FinCEN will undertake a third rulemaking to revise FinCEN’s Customer Due Diligence rule, as required by the CTA.

The final rule regarding access to BOI is effective on February 20, 2024. Starting in 2024, FinCEN will begin to provide access to BOI in phases to authorized government agencies and financial institutions that meet the requirements of the final rule.

Beneficial Ownership Information Access and Safeguards Final Rule Fact Sheet

Hot Issue

In early December, FINRA sanctioned four firms—M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc.—a combined $2.6 million, including over $1 million in restitution to retail customers enrolled in fully paid securities lending programs and fines of $1.6 million for the firms’ related supervisory and advertising violations. All four firms offered retail customers self-directed trading through their respective mobile applications and websites. The firms failed to establish, maintain, and enforce written supervisory procedures reasonably designed to supervise their fully paid securities lending offerings. The firms also provided customers with disclosure documents that contained misrepresentations that customers would receive compensation for the lending of their securities, but the customers did not receive any compensation.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

FINRA Notices
FINRA Press Release
SEC Regulatory Actions
SEC Press Releases
NFA Notices
FinCEN News Releases

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

Regulatory News Update: SEC Adopts New Rule Enhancing Short Sale Disclosure

CRC — Thu, 04 Jan 2024 01:42:47 +0000

What: The SEC recently adopted new Rule 13f-2 and related Form SHO and an amendment to the national market system plan governing the consolidated audit trail (CAT) to provide greater transparency of short sale-related data.

Who: Institutional investment managers (“Managers”). Managers are any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person - typically includes brokers and dealers, investment advisers, banks, insurance companies, pension funds and corporations.

When: Rule and plan amendment adopted on October 13, 2023, and they become effective on January 2, 2024. The compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date of the adopting release – with public aggregated reporting to follow 3 months later. The compliance date for the amendment to the CAT NMS Plan will be 18 months after the effective date of the adopting release.

Why: The SEC is adopting Rule 13f-2 and Form SHO to help enhance transparency regarding short selling in equity securities—including both exchange-listed and over-the-counter securities, and ETFs. The SEC believes that, through the publication of short sale-related data to investors and other market participants, the information reported by Managers will provide important additional context to market participants regarding short sale activity in these equity securities by Managers.

How: Under Rule 13f-2, institutional investment managers that meet or exceed certain prescribed reporting thresholds will report on Form SHO certain short position and short activity data for equity securities. The SEC will thereafter aggregate and publish certain data collected from Form SHO.

Why it matters: The SEC estimates that approximately 1,000 Managers per month will trigger a reporting threshold for at least one security and therefore be required to file the new Form SHO. The SEC concluded that it would take about 20 hours per Form SHO filing.

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

The post Regulatory News Update: SEC Adopts New Rule Enhancing Short Sale Disclosure appeared first on Compliance Risk Concepts.

SEC Adopts Amendments to Names Rule

CRC — Wed, 03 Jan 2024 14:31:20 +0000

On September 20, 2023, the SEC adopted amendments to the Investment Company Act “Names Rule,” as well as related disclosure and reporting requirements.

Principal Elements

Expands Scope

The rule’s 80% investment policy requirement will be expanded beyond its current scope, to apply to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics.
This coverage will include, for example, fund names with terms such as “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more ESG factors.

Temporary Departures from the 80% Investment Requirement

The amendments retain the names rule’s current requirements for a fund to invest in accordance with its 80% investment policy “under normal circumstances” (the “80% investment requirement”), and for the 80% investment requirement to apply at the time a fund invests its assets.
The amendments add a new provision that requires a fund to review its portfolio assets’ inclusion in its “80% basket” at least quarterly.
The amendments include specific time frames—generally 90 days—for getting back into compliance if a fund departs from the 80% requirement as a result of drift or in other-than-normal circumstances.

Derivatives

The amendments generally require funds to use a derivatives instrument’s notional amount to determine the fund’s compliance with its 80% investment policy, with certain adjustments.
The amendments include a limited modification to this approach that would exclude certain currency hedges from the names rule compliance calculation.

Unlisted Registered Closed-End Funds and BDCs

The amendments generally prohibit an unlisted registered closed-end fund or BDC that is required to adopt an 80% investment policy from changing that policy without a shareholder vote.
The amendments permit these funds to change their 80% investment policies without such a vote if:
- the fund conducts a tender or repurchase offer with at least 60 days’ prior notice of the policy change,
- that offer is not oversubscribed, and
- the fund purchases shares at their net asset value.

Enhanced Prospectus Disclosure

The amendments to funds’ prospectus disclosure requirements that will require a fund to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes.

Plain English Requirements for Terms Used in Fund Names

The amendments to the names rule effectively require that any terms used in the fund’s name that suggest either an investment focus, or that the fund’s distributions are tax-exempt, must be consistent with those terms’ plain English meaning or established industry use.

Form N-PORT Reporting Requirements

The amendments to Form N-PORT for funds will require funds to report the value of the fund’s 80% basket, and whether an investment is included in the fund’s 80% basket.
The amendments also include a new reporting item to include the definition(s) of terms used in the fund’s name. Funds will have to report this information for the third month of every quarter, instead of for each month as proposed.

Recordkeeping

The final rules include recordkeeping provisions related to a fund’s compliance with the rule’s requirements.

Compliance Date

Tiered Compliance Period

The compliance date for the final amendments is December 10, 2025 for larger entities, and June 10, 2026 for smaller entities.
- Larger entities are funds that, together with other investment companies in the same “group of related investment companies” (as such term is defined in rule 0-10 under the Investment Company Act [17 CFR 270.0-10]) have net assets of $1 billion or more as of the end of the most recent fiscal year
- Smaller entities are funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year

Compliance Cost Estimates

The SEC project direct compliance costs broadly attributable to the following activities:

reviewing the final rule’s requirements;
determining whether to change a fund’s name or comply with the new requirements, as applicable;
developing new (or modifying existing) practices, reporting, and recordkeeping requirements to align with the requirements of the final rule;
integrating and implementing those practices, reporting, and recordkeeping requirements to the rest of the funds’ activities; and
preparing new training materials and administering training sessions for staff in affected areas.

The SEC estimated that the initial costs to establish and implement practices designed to meet the requirements of the final amendments as described in the adopting release will range from $50,000 to $500,000 per fund, depending on the particular facts and circumstances of the fund. The SEC believes the costs would be closer to the lower end of the range for funds whose current practices are more similar to the requirements of the final rule and for a fund that only incurs costs associated with analyzing the requirements of the rule.

The SEC also concluded that some funds may change their name rather than comply with the amended rule, which it estimated would result in a total direct burden of $75,000 to $250,000 as a one-time cost, including analyzing the rule and deciding to change their name.

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

The post SEC Adopts Amendments to Names Rule appeared first on Compliance Risk Concepts.

Regulatory News Update: SEC Sweep Initiative Targeting AI-Driven Investment Advisers

CRC — Fri, 15 Dec 2023 14:19:35 +0000

December 13, 2023

What: The SEC’s Division of Examinations has initiated a sweep of investment advisers on how AI-based tools are being deployed by the firms across the industry.

Who: Investment advisers in receipt of examination notifications should expect requests related to AI practices, governance, and oversight.

When: Several investment advisers have reported AI-focused request lists in conjunction with recent examinations. CRC expects this trend to continue into 2024.

Why: In light of the SEC’s recent focus on AI-driven investment management services, as well as the proposed rule related to conflicts associated with such activity, a sweep initiative is a commonly-practiced next step for the regulator, and serves primarily as a data collection exercise. In light of findings, advisers should expect modifications to proposed rulemaking, risk alerts, and guidance in this area.

How: Advisers can prepare for AI-focused examinations and request list items by conducting a brief mock-audit of its AI-related policies, procedures, and practices. Firms should be prepared to produce the documents relating to AI use in the event of an SEC request, including (but not limited to):

Itemization of areas and instances where AI-based tools are deployed across the firm, particularly with respect to investment recommendations;
Data security measures relative to AI use;
Policies and procedures related to the use of AI within the firm, particularly with respect to investment recommendations;
An itemization of inputs that drive AI-based recommendations and other activity, including how such information is collected and updated;
Advertising materials and disclosures, including Form ADV, that reference the use of AI, particularly with respect to investment recommendations;
Information related to the development, testing, and ongoing management and oversight of AI tools; and
Plans in place to identify, resolve, and disclose AI system failures, AI-driven errors, and other issues related to AI use.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about the SEC’s AI-driven conflicts proposed rule and new sweep exam initiative, including updated proposals, rule finalization details, and CRC’s thoughts on how to ensure successful integration of new or updated rules 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: SEC Sweep Initiative Targeting AI-Driven Investment Advisers appeared first on Compliance Risk Concepts.

Regulatory News Update: New FINRA “Residential Supervisory Location” (RSL) Approved by SEC

CRC — Thu, 07 Dec 2023 14:52:05 +0000

What: The SEC recently approved FINRA’s amended rule proposal (SR-FINRA-006) to adopt new Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110, which will permit certain broker-dealers to treat an eligible private residence in which an associated person engages in specified supervisory activities as a non-branch location (subject to various conditions and limitations).

Who: FINRA member broker-dealers who allow supervisors to work from a private residence.

When: The SEC order approving the rule change was issued on November 17, 2023. FINRA will announce the effective date of the rule change in a Regulatory Notice.

Why: During the recent pandemic many FINRA member firms developed hybrid workforce models, and many of the supervisors who began working from home during the pandemic continue to do so, at least on a part-time basis. Under the pre-RSL regulatory framework, those supervisors likely conduct activities that would require the registration and designation of their private residence as supervisory branch offices or OSJ.

How: Generally, a private residence at which supervisory functions described in Rule 3110(f)(1) or (2)(B) occur must be registered and designated as a branch office or OSJ and inspected at least annually. The rule change will permit eligible FINRA members to treat such locations as non-branch locations (subject to terms and conditions under the rule), which would permit inspections to be conducted on a regular periodic schedule rather than annually.

Why it matters: Sooner or later the temporary pandemic regulatory relief related to Form BR reporting of new temporary office locations created due to Covid will end. Broker-dealers with hybrid/remote supervisory operations would be well-served to begin evaluating the eligibility criteria and associated requirements that will be necessary to utilize the RSL designation once it becomes effective. Likewise, broker-dealers who will be ineligible at the firm-level and those with one or more ineligible locations should begin evaluating what adjustments will need to be made to maintain compliance with Rule 3110 after the discontinuation of the Covid relief.

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

The post Regulatory News Update: New FINRA “Residential Supervisory Location” (RSL) Approved by SEC appeared first on Compliance Risk Concepts.

Regulatory News Update: FINRA Voluntary Remote Inspection Pilot Program Approved by the SEC

CRC — Tue, 28 Nov 2023 13:53:32 +0000

What: The SEC approved FINRA’s amended rule proposal (SR-FINRA-2023-007) to adopt a voluntary, three-year remote inspections pilot program.

Who: Eligible FINRA member firms who opt-in to the pilot.

When: The SEC order approving the rule change was issued on November 17, 2023. FINRA will announce the effective date of the program in a Regulatory Notice.

Why: FINRA has explained that the pilot program will provide it the opportunity to gauge the effectiveness of remote inspections as part of a modernized, reasonably designed supervisory system that reflects the current work environment and availability of technologies that did not exist when the on-site inspection originally was conceived.

How: The new rule will permit participating member firms to perform required inspections of OSJs, branch offices, and non-branch locations remotely under the applicable provisions of FINRA Rule 3110(c)(1), subject to specified safeguards and limitations. The pilot program will automatically sunset on a date that is three years after its effective date.

Why it matters: The potential operational flexibility to eligible firms comes at a cost.Firms that are interested in opting into the pilot should carefully weigh the various eligibility criteria and participation conditions (e.g., quarterly data collection and reporting to FINRA) to determine if the voluntary election makes sense for the firm.

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

The post Regulatory News Update: FINRA Voluntary Remote Inspection Pilot Program Approved by the SEC appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (October 2023)

CRC — Thu, 02 Nov 2023 13:23:12 +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 tostrengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Regulatory Notice 23-16, FINRA has amended its By-Laws to exempt from the Trading Activity Fee (TAF) any transaction by a proprietary trading firm that occurs on an exchange of which the proprietary trading firm is a member.

The amendment to FINRA’s TAF will take effect on November 6, 2023.

The amended text of the FINRA By-Laws is set forth in Attachment A.

Per Regulatory Notice 23-17, FINRA is issuing this Notice to inform members that it is discontinuing collection of data under Rule 4540. The data collected under Rule 4540 is used in the Integrated National Surveillance and Information Technology Enhancements program (INSITE). The decision to discontinue the collection of data under Rule 4540 at this time is based on the availability of alternative sources of data that were not available when INSITE was developed and that have enhanced FINRA’s ability to assess risk.

Effective November 30, 2023, FINRA will discontinue its collection of data under Rule 4540.

Per Regulatory Notice 23-18, 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. FINRA communicates information about renewal fees BD and IA firms owe via a Preliminary Statement in November and publishes a Final Statement in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2024. Renewal statements reflect all applicable renewal fees assessed for BD and IA firms, branches and individuals.

It is critical that firms ensure that they pay in full by the Preliminary Statement deadline. If payment is late, firms should ensure that the Preliminary Statement is paid in full before the year-end system shutdown. Payments received after the Preliminary Statement deadline for FINRA-registered firms are subject to a late fee.

In addition to this Notice, firms should review resources on the following pages:

• FINRA’s Renewal Program page (for BDs)

• IARD Renewal Program page (for IAs)

Special Notices

There were no Special Notices in October.

SEC

Final Rules

Per Release No. 34-98704, the SEC is adopting amendments to certain rules that govern beneficial ownership reporting. The amendments generally shorten the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G. The amendments also clarify the disclosure requirements of Schedule 13D with respect to derivative securities. The SEC also is expanding the timeframe within a given business day by which Schedules 13D and 13G must be filed, and separately requiring that Schedule 13D and 13G filings be made using a structured, machine-readable data language. Further, the SEC discusses how, under the current rules, an investor’s use of a cash-settled derivative security may result in the person being treated as a beneficial owner of the class of the reference equity security. The SEC also isproviding guidance on the application of the current legal standard found in Section 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934 to certain common types of shareholder engagement activities. Finally, the SEC is making certain technical revisions.

The amendments will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024

Per Release No. 34-98737, the SEC is adopting a new rule under the Securities Exchange Act of 1934 to increase the transparency and efficiency of the securities lending market by requiring certain persons to report information about securities loans to a registered national securities association (“RNSA”). The new rule also requires certain confidential information to be reported to an RNSA to enhance an RNSA’s oversight and enforcement functions. Further, the new rulerequires that an RNSA make certain information it receives, along with daily informationpertaining to the aggregate transaction activity and distribution of loan rates for each reportablesecurity, available to the public.

Rule 10c-1a will become effective 60 days following the date of publication of the adoptingrelease in the Federal Register. The compliance dates for Rule 10c-1a require that: (1) an RNSA propose rules to implement Rule 10c-1a within four months of the effective date of Rule 10c-1a and that such RNSA rules are effective no later than 12 months after the effective date of Rule 10c-1a; (2) covered persons report the information required by Rule 10c-1a to an RNSA starting on the first business day 24 months after the effective date of Rule 10c-1a (“reporting date”); and (3) an RNSA make specified information publicly available within 90 calendar days of the reporting date.

Per Release No. 34-98738, the SEC is adopting a new rule and new Form SHO pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rule and related form are designed to provide greater transparency through the publication of short sale-related data to investors and other market participants. Under the new rule, institutional investment managers that meet or exceed certain specified reporting thresholds are required to report, on a monthly basis using the related form, specified short position data and short activity data for equity securities. In addition, the SEC is adopting an amendment to the national market system (“NMS”) plan governing the consolidated audit trail (“CAT”) created pursuant to the Exchange Act to require the reporting of reliance on the bona fide market making exception in the SEC’s short sale rules. The SEC is publishing the text of the amendments to the NMS plan governing the CAT (“CAT NMS Plan”) in a separate notice.

Effective date: January 2, 2024.

Proposed Rules

Per Release No. 34-98766, the SEC is proposing a new rule under the Securities Exchange Act of 1934 to prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency-related orders in certain stocks. If exchanges offer such pricing for their members’ proprietary orders, the proposal would require the exchanges to adopt rules and written policies and procedures related to compliance with the prohibition, as well as disclose, on a monthly basis, certain information including the total number of members that qualified for each volume tier during the month.

Interim Final Rules

There were no interim final rules in October.

Interpretive Releases

There were no interpretive releases in October.

Policy Statements

There were no policy statements in October.

NFA

Notices to Members

Notice I-23-18

October 2, 2023

CPOs and IBs—NFA enhances notice filing user experience

On Tuesday, October 3, NFA will add fillable forms to the following commodity pool operator (CPO) and introducing broker (IB) notices and requests to improve the filing process efficiency. The type and amount of required information Members must provide remains the same.

Registration Category	CFTC Regulation	Description	System
CPO	4.22(f)(1)	Annual Report Extension Request - Undue Hardship	Easy File
CPO	4.22(f)(2)	Annual Report Extension Request - Fund of Funds	Easy File
CPO	4.22(d)(1)	Replacement of Pool's CPA	Easy File
CPO	4.22(g)	Change in Pool's FYE	Easy File
IB	1.16(g)	Replacement of IB's CPA	Easy File and WinJammer
IB	1.12(a)	Firm is Under-Capitalized	Easy File and WinJammer
IB	1.10(f)(1)(i)	Extension to File Uncertified Statement	Easy File
IB	1.16(f)(1)	Extension to File Certified Statement	Easy File

Following the update, IBs that are SEC registered broker dealers will now select "Regulation Notices - IBs" to file all notices and requests in WinJammer.

Notice I-23-19

October 23, 2023

NFA Announces 2023 Nominating Committee Nominations

NFA's Board of Directors amended NFA's Articles of Incorporation to reduce the size of NFA's Board of Directors from 29 to 21 Directors. The new Board composition becomes effective at the Board's Annual Meeting on February 15, 2024, and all current Directors' terms expire on that date. Pursuant to NFA's Articles of Incorporation (NFA's Articles), NFA's 2023 Nominating Committee has provided NFA's Secretary with a list of its nominees for the open positions on NFA's Board of Directors and 2024 Member Category Nominating Committee. The list of nominees included with this Notice shall serve as notification to NFA Members of the candidates nominated by the 2023 Nominating Committee.

Article VII, Section 3(b) of NFA's Articles provides that other nominations may be made for elected FCM and LTM, IB; CPO and CTA; and SD, MSP and RFED Director positions as follows:

(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 (See)(i) above) for which the nomination is made.

No petition may nominate more than one candidate for the same position.

Article X, Section 3 of NFA's Articles 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 petitions must be received by the Secretary within 21 days of the date of this Notice. Any petition received after November 13, 2023 will not be considered.

News Releases

October 30, 2023

NFA orders New York, N.Y. introducing broker Oscar Gruss & Son Inc. to pay a $140,000 fine

October 30, Chicago—NFA has ordered Oscar Gruss & Son Inc. (Oscar Gruss & Son) to pay a $140,000 fine. Oscar Gruss & Son is an introducing broker (IB) Member of NFA located in New York, N.Y.

The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaintissued by the BCC and a settlement offer submitted by Oscar Gruss & Son, in which the firm neither admitted nor denied the allegations in the Complaint. The Complaint charged Oscar Gruss & Son with failing to comply with its communication recordkeeping obligations, in violation of NFA Compliance Rule 2-10(a), and allowing unregistered individuals to act as associated persons (AP) without being registered as APs and NFA Associates, in violation of NFA Bylaw 301(b). The Complaint further charged Oscar Gruss & Son with a failure to supervise, in violation of NFA Compliance Rule 2-9(a).

In its Decision, the BCC found that Oscar Gruss & Son violated NFA Compliance Rules 2-9(a) and 2-10(a), and NFA Bylaw 301(b).

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

Hot Issue

The SEC released its 2024 examination priorities in October to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. As further detailed in the priorities statement, the SEC is priorities include but are not limited to:

For broker-dealers – Regulation Best Interest (notably dual-registrants, conflicts of interest, account allocation practices, account selection practices and branch office supervision), Form CRS, financial responsibility rules (e.g., accounting for reward programs, point programs, gift cards, and non-brokerage services), and trading practices (particularly Regulations SHO and ATS and Exchange Act Rule 15c2-11).

For investment advisers – advice regarding complex, high cost, and/or illiquid products, and unconventional strategies, processes to determine if advice is in the client’s best interest, how advisers address conflicts of interest and sufficiency of disclosures relating to those conflicts (of note are dual-registrants, those who use affiliated firms for clients services, and have FPs that service brokerage and advisory clients).

For private fund advisers – portfolio management risks when there is exposure to market volatility and higher interest rates, adherence to contractual requirements regarding LP advisory committees or similar structures (e.g., notification and consent processes), accurate calculation and allocation of private fund fees and expenses, due diligence practice consistency (with policies and procedures and disclosures), Advisers Act compliance (e.g., custody, Form ADV, timely audits, and distribution of audited financial statements), and policies and procedures for reporting on Form PF.

For multiple market participants – information security and operational resiliency, crypto assets and emerging financial technology, Regulation Systems Compliance and Integrity, and anti-money laundering.

Our Perspective

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

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.

Regulatory News Update: SEC Publishes 2024 Exam Priorities

CRC — Thu, 19 Oct 2023 13:34:29 +0000

October 19, 2023

What: The Securities and Exchange Commission (SEC) announced its examination priorities for fiscal year 2024.

Who: Priorities for Broker-Dealers, Investment Advisers, Investment Companies, SROs, Clearing Agencies, and Other Market Participants (Municipal Advisors, Security-Based Swap Dealers, and Transfer Agents)

When: October 16, 2023. Although typically provided in Q1 of the same calendar year, the SEC is re-aligning its publication of examination priorities with the beginning of its fiscal year.

Why: The SEC prioritizes examination of certain practices, products, and services that it believes present potentially heightened risks to investors or the integrity of the U.S. capital markets.

How: In addition to focus areas for specific market participants, the SEC highlighted four areas applicable across the multiple participants: 1) Information Security and Operational Resiliency, 2) Crypto Assets and Emerging Financial Technology, 3) Regulation Systems Compliance and Integrity, and 4) Anti-Money Laundering and OFAC Sanctions.

Why it matters: The SEC has explained that it will allocate significant resources to the 2024 examination priorities. It is worth noting that the multiple participant topics noted above were similarly identified in the prior year’s priorities, which means that participants have now had two publication cycles of notice from the SEC regarding the importance of addressing these matters. As we close out 2023, firms should thoughtfully evaluate their compliance programs in light of the recent priorities to ensure they are particularly responsive to the SEC’s focus areas.

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

The post Regulatory News Update: SEC Publishes 2024 Exam Priorities appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (September 2023)

CRC — Sun, 01 Oct 2023 03:56:25 +0000

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.

Policy Statements

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

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.

Regulatory News Update: SEC Probes Investment Adviser Electronic Communications

CRC — Tue, 26 Sep 2023 12:58:44 +0000

September 25, 2023

What: Sources close to relevant investigations indicate that at least a dozen advisory firms and hedge funds have been subject to deep-dive probes of employee electronic communications.

Who: While relevant fines and enforcement actions to date have typically centered around broker-dealers, this move signals a shift in focus to the electronic communication practices of investment advisers.

When: CRC anticipates that this area of focus will be the star of the SEC’s examination priorities list once it is released in early 2024.

Why: Chairman Gensler has defended his standing position that diving into advisers’ communications at recordkeeping practices is a crucial component of investor protection, despite industry backlash and an open letter from SIFMA stating the overreach of the SEC’s regulatory scope.

How: While during previous sweep efforts, the SEC has previously required firms under examination to sample employee electronic communications and report back, their new approach is much more invasive and ups the ante considerably. Exam staff is requesting the phones of specific employees, including executives, and reviewing all communications themselves.

Why it matters: Firms using a certification only or “wait and see” approach are operating at a disadvantage and need to evaluate their existing policies and procedures relative to electronic communications to ensure they are clear and reasonably designed for the size and scope of their operations. The question is not if, but when the SEC review adviser communications, and it seems the scope and methodology of their investigation are escalating.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about 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: SEC Probes Investment Adviser Electronic Communications appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (August 2023)

CRC — Fri, 01 Sep 2023 03:48:26 +0000

FINRA

Regulatory Notices

Per Regulatory Notice 23-12, FINRA has adopted amendments to its Codes of Arbitration Procedure (Codes) to modify the process relating to requests to expunge customer dispute information in the FINRA Dispute Resolution Services (DRS) arbitration forum. The amendments impose requirements on expungement requests (a) filed by an associated person during an investment-related, customer-initiated arbitration (customer arbitration), or filed by a party to the customer arbitration on behalf of an associated person (on-behalf-of request), or (b) filed by an associated person separate from a customer arbitration (straight-in request). The amendments become effective on October 16, 2023. The rule text is available in Attachment A. The Guidance is available in Attachment B. The Form Requesting Expungement on Behalf of an Unnamed Person is available in Attachment C.

Per Regulatory Notice 23-13, FINRA has adopted changes to its rules to allow for video conference hearings before the Office of Hearing Officers and the National Adjudicatory Council under specified conditions. These amendments became effective August 23, 2023.

Per Regulatory Notice 23-14, FINRA has amended the requirements relating to Covered Agency Transactions that FINRA originally adopted in 2016. Covered Agency Transactions include (1) To Be Announced transactions, inclusive of adjustable rate mortgage transactions, (2) Specified Pool Transactions and (3) transactions in Collateralized Mortgage Obligations, issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as recapped more fully in this Notice.

This Notice provides an overview of the amendments. The SEC approved the amendments on July 27, 2023. FINRA stated in its rule filing, and the SEC noted in approving the rule change, that the amendments would become effective between nine and ten months following the SEC’s approval. Consistent with this timeframe, the amendments become effective on May 22, 2024. FINRA will monitor the implementation of the amendments and their impact. Prior to the May 22, 2024, effective date, FINRA will engage with market participants to make available updated guidance as appropriate.

The text of the amendments to the Covered Agency Transaction requirements is included as Attachment A. In this Notice, all references to provisions of the amended requirements are to the rule text as shown in Attachment A.

Special Notices

There were no Special Notices in August.

SEC

Final Rules

Per Release No. 34-98202, the SEC is adopting amendments to a rule under the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) that exempts certain SEC-registered brokers or dealers from membership in a registered national securities association (“Association”). The amendments replace rule provisions that provide an exemption for proprietary trading with narrower exemptions from Association membership for any registered broker or dealer that is a member of a national securities exchange, carries no customer accounts, and effects transactions in securities otherwise than on a national securities exchange of which it is a member. The amendments create exemptions for such a registered broker or dealer that effects securities transactions otherwise than on an exchange of which it is a member that result solely from orders that are routed by a national securities exchange of which it is a member to comply with order protection regulatory requirements, or are solely for the purpose of executing the stock leg of a stock-option order.

Per Release No. IA-6383, the SEC is adopting new rules under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”). The rules are designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest through disclosure; establishing requirements to address such practices that have the potential to lead to investor harm; and restricting practices that are contrary to the public interest and the protection of investors. These rules are likewise designed to prevent fraud, deception, or manipulation by the investment advisers to those funds. Specifically, the new rules require registered investment advisers to private funds to provide transparency to their investors regarding the fees and expenses and other terms of their relationship with private fund advisers and the performance of such private funds. The new rules also require a registered private fund adviser to obtain an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion from an independent opinion provider. In addition, the new rules restrict all private fund advisers, including those that are not registered with the SEC, from engaging in certain activities unless they provide specified disclosure to and, for certain restricted activities, obtain consent from investors. All private fund advisers are also prohibited from providing certain types of preferential treatment that would have a material, negative effect on other investors, subject to certain exceptions; and other types of preferential treatment to any investor in a private fund, unless the adviser satisfies certain disclosure obligations. The SEC is adopting corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these new rules and assist our examination staff. Finally, the SEC is adopting amendments to the Advisers Act compliance rule, which affect all registered investment advisers, to better enable SEC staff to conduct examinations.

Proposed Rules

Per Release No. IA-6384, the SEC is reopening the comment period for its proposal, Safeguarding Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023) (“Proposal”), which proposed a new rule under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) that would redesignate and amend the current custody rule. In light of the adoption of the private fund adviser audit rule, which generally requires a registered investment adviser to obtain an annual financial statement audit of each private fund it advises in accordance with the audit provision of the current custody rule, reopening the comment period will allow interested persons additional time to assess the proposed amendments to the current custody rule’s audit provision in light of the private fund adviser audit rule.

Interim Final Rules

There were no interim final rules in August.

Interpretive Releases

There were no interpretive releases in August.

Policy Statements

There were no policy statements in August.

NFA

Notices to Members

There were no NFA Notices to Members in August.

News Releases

There were no NFA news releases in August.

Hot Issue

In August, the SEC continued with its enforcement actions against broker-dealers for failing to preserve electronic communications. According to the SEC, this brings the total to 30 enforcement actions and $1.5 billion in penalties. In what is becoming a familiar script, the firms admitted that their employees (including supervisors and executives) often communicated through various messaging platforms on personal devices about the business of their employers, which were often not preserved in violation of federal securities laws. The SEC’s sustained enforcement activity in this area strongly suggests that firms should not delay taking the initiative to conduct meaningful reviews of their communication practices, policies and procedures.

Our Perspective

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

Sources:

FINRA Notices
SEC Regulatory Actions
SEC Press Release 2023-149

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

Monthly Regulatory Summary (July 2023)

CRC — Tue, 01 Aug 2023 03:33:07 +0000

FINRA

Regulatory Notices

There were no Regulatory Notices in July.

Special Notices

There were no Special Notices in July.

SEC

Final Rules

Per Release No. 33-11211, the SEC is adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. These amendments are designed to improve the resilience and transparency of money market funds. The amendments will revise the primary rule that governs money market funds to remove the ability for a fund board to temporarily suspend redemptions if the fund’s liquidity falls below a threshold. In addition, the amendments will remove the tie between liquidity thresholds and the potential imposition of liquidity fees. The amendments will also require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors. In addition, the SEC is increasing the daily liquid asset and weekly liquid asset minimum requirements to 25% and 50%, respectively. The SEC also is amending certain reporting requirements on Form N-MFP and Form N-CR and making certain conforming changes to Form N-1A to reflect amendments to the regulatory framework for money market funds. In addition, the SEC is addressing how money market funds with stable net asset values may handle a negative interest rate environment, including by adopting amendments that will permit these funds to use share cancellation, subject to certain conditions. Further, the SEC is adopting rule amendments to specify how funds must calculate weighted average maturity and weighted average life. In addition, the SEC is adopting amendments to Form PF concerning the information large liquidity fund advisers must report for the liquidity funds they advise. Finally, the SEC is adopting two technical amendments to Form N-CSR and Form N-1A to correct errors from recent Commission rulemakings.

Per Release No. 33-11216, the SEC is adopting new rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incidents by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Specifically, the SEC is adopting amendments to require current disclosure about material cybersecurity incidents. The SEC is also adopting rules requiring periodic disclosures about a registrant’s processes to assess, identify, and manage material cybersecurity risks, management’s role in assessing and managing material cybersecurity risks, and the board of directors’ oversight of cybersecurity risks. Lastly, the final rules require the cybersecurity disclosures to be presented in Inline eXtensible Business Reporting Language (“Inline XBRL”).

Proposed Rules

Per Release No. 34-97877, the SEC proposes to amend the broker-dealer customer protection rule to require certain broker-dealers to perform their customer and broker-dealer reserve computations and make any required deposits into their reserve bank accounts daily rather than weekly. The SEC also is seeking comment on whether similar daily reserve computation requirements should apply to broker-dealers and security-based swap dealers with respect to their security-based swap customers.

Comments should be received on or before September 11, 2023.

Per Release No. 34-97990, the SEC is proposing new rules (“proposed conflicts rules”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Investment Advisers Act of 1940 (“Advisers Act”) to eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes. The SEC is also proposing amendments to rules under the Exchange Act and Advisers Act that would require firms to make and maintain certain records in accordance with the proposed conflicts rules.

The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

Per Release No. IA-6354, the SEC is proposing amendments to the rule under the Investment Advisers Act of 1940 that exempts certain investment advisers that provide advisory services through the internet (“internet investment advisers”) from the prohibition on Commission registration, as well as related amendments to Form ADV. The proposed amendments are designed to modernize the rule’s conditions to account for the evolution in technology and the investment advisory industry since the adoption of the rule.

The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

Interim Final Rules

There were no interim final rules in July.

Interpretive Releases

There were no interpretive releases in July.

Policy Statements

There were no policy statements in July.

NFA

Notices to Members

Notice I-23-14

July 10, 2023

FCM and IB Members—FinCEN updates its list of FATF-identified jurisdictions with AML/CFT deficiencies

On June 29, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a news release informing U.S. financial institutions of the Financial Action Task Force's (FATF) recent public statement. The statement reiterates that all jurisdictions should be vigilant of current and emerging risks from the circumvention of measures taken against the Russian Federation in order to protect the international financial system. The release also announced that the FATF reissued its list of jurisdictions with strategic AML/CFT deficiencies. NFA Member futures commission merchants (FCM) and introducing brokers (IB) should review this release to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.

Notice I-23-15

July 25, 2023

Effective date for repeal of NFA Interpretive Notice regarding reduced NFA assessment fee for diminutive notional value-designated contracts

NFA recently repealed its Interpretive Notice entitled NFA Bylaw 1301(b): NFA's Assessment Fee-Diminutive Notional Value Contracts and Security Futures Products, to eliminate the reduced assessment fee for security futures products (SFP) and diminutive notional value (DNV)-designated contracts. This action becomes effective on January 1, 2024, at which time DNV-designated contracts¹ will be subject to the assessment fee under NFA Bylaw 1301. The fee is currently $.04 per round turn. NFA's Board of Directors unanimously approved this repeal after concluding that NFA's regulatory oversight costs are the same for DNV-designated contracts as they are for other exchange traded futures products, and therefore the assessment fee should be the same.

News Releases

There were no NFA news releases in July.

Hot Issue

Broker-dealers and Investment Advisers, particularly FinTech firms, should monitor the SEC’s recent proposed rulemaking around conflicts of interest and predictive data analytics. Although any final rule would likely incorporate some changes resulting from public comments, the rule proposal demonstrates the SEC’s intent to build upon existing regulatory protections to address conflicts of interest from the use of artificial intelligence, predictive data analytics, or similar technologies in investor interactions. Firms that use or plan to use such technologies may want to begin planning for review of its processes for the purposes of identifying and evaluating potential conflicts of interest between the firm and its customers resulting from its use of predictive technologies. Such proactive steps will position firms to better gauge any potential impact to its business operations as the rulemaking proceeds.

Our Perspective

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

Sources:

SEC Regulatory Actions
NFA Notice to Members

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

SEC Recordkeeping Enforcement Continues to Result in Large Penalties for Off-Channel Communications

CRC — Fri, 14 Jul 2023 14:18:02 +0000

The list of firms that have been charged in less than 12 months with recordkeeping failures for off-channel electronic communications continues to grow. Last month, 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, which resulted in multimillion dollar SEC enforcement penalties for both broker-dealers. Their employees often communicated about securities business matters on their personal devices, using messaging platforms, such as Whatsapp. Most of these messages were not preserved and involved employees at multiple levels of authority, including supervisors and executives.

The SEC’s investigation of HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc., both registered broker dealers, uncovered pervasive and longstanding use of off-channel communications at both firms. Messages sent through unapproved communications methods, such as WhatsApp and those sent from unapproved applications on personal devices, were not monitored, subject to review, or archived. According to the resulting SEC orders, the firms failed to implement a system of follow-up and review to determine that supervisors were reasonably following the firms’ policies and also failed to implement sufficient monitoring to assure that its recordkeeping and communications policies were being followed.

The recent actions follow enforcement activity against several other firms for recordkeeping failures in September 2022, in which those charged firms agreed to pay combined penalties of more than one billion dollars. However, it appears that one meaningful contrast between those earlier cases and the recent actions are that the published orders in 2022 reported that it was the SEC that discovered the misconduct through its investigations, but, in the recent actions both firms self-reported after having already initiated a review of their recordkeeping failures and begun a program of remediation prior to contacting the Division of Enforcement. One may draw the conclusion that the repeated references to proactive steps by HSBC and Scotia in identifying and addressing the recordkeeping issues were a relevant consideration that may help to explain the difference in the scale of the monetary penalties when comparing the two clusters of cases. In 2022, all but one of the charged firms had penalties of at least $50 million (most were $125 million), and while still significant, HSBC and Scotia were penalized $15 million and $7.5 million respectively.

Likewise, CRC believes that the best approach to regulatory compliance is a proactive one. The SEC’s 2023 Examination Priorities report identified electronic communications as an examination focus area for both broker-dealers and registered investment advisers. Rather than scrambling to rectify issues or meet deadlines after an examination has begun, 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.

What can firms do?

In one of the recent orders, the SEC highlighted several remedial steps taken by the firm, which included:

Clarifying the application of relevant policies;
Enhancing training to reinforce the requirement to use authorized communications channels; and
Providing clear messaging to employees from senior management regarding the use of unauthorized communication channels.

In addition to these shorter-term steps, the recent firms were also required to conduct reviews or assessments of:

Supervisory, compliance, and other policies and procedures;
Training and employee certifications;
Surveillance program measures;
Technological solutions to meet record retention requirements;
Measures used to prevent the use of unauthorized communications methods for business communications by employees;
Electronic communications surveillance routines to ensure that electronic communications through approved communications methods found on personal devices are incorporated into the overall surveillance program; and
The framework to address instances of non-compliance by employees with the firm’s policies and procedures concerning the use of personal devices for business communications in the past.

For more information about how CRC can help your firm, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

CRC is a business-focused team of senior compliance consultants and executives who furnish top-tier compliance advisory services to clients on an as-needed, project or part-time basis. We provide our clients with the critical skills and expertise required to establish, maintain and enhance a balanced and effective compliance operational risk management program. We help organizations demonstrate a commitment to a strong risk management culture. We bring a unique tailored approach to help our clients succeed in today’s challenging regulatory and economic environment, enabling and empowering our clients to manage the “cost of compliance” without sacrificing the necessary infrastructure and control environment.

The post SEC Recordkeeping Enforcement Continues to Result in Large Penalties for Off-Channel Communications appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (June 2023)

CRC — Fri, 30 Jun 2023 13:38:48 +0000

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.

Policy Statements

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

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

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.

Policy Statements

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

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

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.

Policy Statements

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

SEC Regulatory Actions

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

Monthly Regulatory Summary (February 2023)

CRC — Wed, 08 Mar 2023 14:35:04 +0000

FINRA

Regulatory Notices

Per Notice 23-03, FINRA established an accounting support fee (GASB Accounting Support Fee) in February 2012 pursuant to an SEC order to adequately fund the annual budget of the Governmental Accounting Standards Board (GASB). The GASB Accounting Support Fee is collected on a quarterly basis from member firms that report trades to the Municipal Securities Rulemaking Board (MSRB). Each member firm’s assessment is based on its portion of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB during the previous quarter. FINRA will assess and collect a total of $14,403,500 to adequately fund GASB’s annual budget by collecting $3,600,875 from its member firms each calendar quarter beginning in April 2023.

Special Notices

There were no special notices in February.

SEC

Final Rules

Per Release No. 34-96930, the SEC is adopting rule amendments to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). In addition, the SEC is adopting new rules related to the processing of institutional trades by broker-dealers and certain clearing agencies. The SEC is also amending certain recordkeeping requirements applicable to registered investment advisers.

Per Release No. 33-11159, the SEC is adopting an amendment to Regulation S-T to extend the filing deadline for Form 144 from 5:30 p.m. to 10 p.m., Eastern Standard Time or Eastern Daylight Saving Time, whichever is currently in effect, on SEC business days. The SEC is also adopting technical amendments to enhance the consistency of recently revised provisions related to the filing format of Form 144.

Proposed Rules

Per Release No. 34-96906, the SEC is proposing amendments to the SEC’s regulations under the Privacy Act of 1974, as amended (“Privacy Act”). The proposed amendments would revise the SEC’s regulations under the Privacy Act to clarify, update, and streamline the language of several procedural provisions.

Per Release No. IA-6240, the SEC is proposing a new rule under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) to address how investment advisers safeguard client assets. To effect the redesignation of the current custody rule for the proposed new safeguarding rule, the SEC is proposing to renumber the current rule. In addition the SEC is proposing to amend certain provisions of the current custody rule for enhanced investor protections. The SEC is proposing corresponding amendments to the recordkeeping rule under the Advisers Act and to Form ADV for investment adviser registration under the Advisers Act.

Interim Final Rules

There were no interim final rules in February.

Interpretive Releases

There were no interpretive releases in February.

Policy Statements

There were no policy statements in February.

NFA

Notice I-23-04

February 6, 2023

Educational resources, common deficiencies and other important regulatory information for SD Members

NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.

Members Section of NFA's Website

From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:

Regulatory Obligations Related to Common Deficiencies

The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations.

Daily Trading Records: SD Members are required to make and keep daily trading records of all swaps executed, including all documents on which transaction information is originally recorded, pursuant to CFTC Regulation 23.202. SD Members should consider taking preventative measures against the use of unauthorized or unrecorded channels for pre-execution trade communications.

Supervision: SD Members are required to have a supervisory program and must diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602.

Business Conduct Standards: SD Members are required to obtain and retain a record of essential facts to accurately categorize their counterparties to facilitate compliance with various regulatory requirements pursuant to CFTC Regulation 23.402. The failure to properly identify and classify counterparties may result in non-compliance with other transaction-specific requirements. Additionally, SD Members are required to make several disclosures to non-SD counterparties pursuant to CFTC Regulation 23.431. A common deficiency in this area is a failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into uncleared swap transactions.

Market Practice: SD Members are required to implement policies and procedures designed to prevent fraud, manipulation and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:

Failure to implement adequate trade surveillance to detect fraud, manipulation and abusive practices; and
Failure to conduct communication surveillance reasonably designed to ensure fair and balanced communications and the prohibition of fraud, manipulation and other abusive practices.

Portfolio Reconciliation: SD Members must engage in portfolio reconciliation pursuant to CFTC Regulation 23.502. Firms are required to establish, maintain and follow written procedures to resolve discrepancies identified by portfolio reconciliation.

Swap Valuation Disputes: SD Members, including non-U.S. SDs relying on substituted compliance with respect to CFTC Regulation 23.502, must submit valuation disputes to NFA as set forth in Interpretive Notice 9072.

Swap Data Reporting: SD Members must report swap transaction data to swap data repositories pursuant to CFTC Regulation 23.204 and CFTC Regulation 23.205. Additionally, they must report corrections of identified errors or omissions as soon as technologically practicable (ASATP) after discovery. Common deficiencies in this area include:

Failure to report required regulatory messages, either at all or within the regulatory timeframes;
Failure to report accurately required data fields to the SDR; and
Failure to remediate errors and omissions ASATP after discovery.

Ongoing Updates

On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins to hold or transact in digital assets, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA has correct information about the firm's business activities and that the firm receives all applicable notices relating to its reporting requirements in a timely manner.

Recent Amendments and Reminders

Capital Requirements: The compliance date for CFTC minimum capital requirements was October 6, 2021. SD Members subject to CFTC minimum capital requirements must maintain regulatory capital as defined under the bank holding company regulations in 12 CFR Part 217 as if the SD itself were a bank holding company or as defined in SEC Regulation 240.18a-1 as if the SD were a security-based SD registered with the SEC. Certain SDs that are predominately engaged in non-financial activities may instead choose to maintain tangible net worth in an amount equal to or in excess of minimum capital requirements. Regulatory capital, tangible net worth and minimum capital requirements are determined at the legal entity level. Additionally, when internal models are used to determine regulatory capital or minimum capital requirements, the SD must demonstrate independent model validation and ongoing performance monitoring of the SD's own use of the internal models at the legal entity level.

Phase VI Margin Requirements: The compliance date for entities in scope for Phase VI of the CFTC's final margin rules was September 1, 2022. SD Members without a prudential regulator must exchange initial margin with all covered counterparties exceeding initial margin threshold amounts.

Reporting Requirements: The compliance date for the CFTC's amendments to its final rules for SD reporting was December 5, 2022. The final rules revise the current CFTC reporting requirements to improve the quality, accuracy and completeness of the reporting data. Included in the amended rules are requirements for each reporting counterparty to compare swap data maintained by the relevant SDR to swap data in the firm's own internal records to verify accuracy and completeness of reported swap data.

Position Limits: The compliance date for CFTC's position limits regulations was January 1, 2023. SD Members must establish and enforce written policies and procedures that are reasonably designed to monitor for, and prevent violations of, applicable position limits.

Recent Notices to Members

I-21-30: Effective date for amendment imposing a late fee for certain SD filings and new Interpretive Notice clarifying existing SD filing requirements

I-22-27: SD holiday filing requirements

I-22-20: Reminder: NFA Member cybersecurity responsibilities

I-22-18: SD notice filing requirements under CFTC Regulation 23.154

I-22-15: Proxies and Approximations Related to Alternative Reference Rates and Other Indices for Initial Margin Model Purposes

I-22-08: NFA encourages Members to monitor U.S. sanctions on Russia and be vigilant of cybersecurity threats

Notice I-23-05

February 6, 2023

Educational resources, common deficiencies and other important regulatory information for CPO and CTA Members

Members Section of NFA's Website

From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:

Commodity Pool Operators (CPO)

Commodity Trading Advisors (CTA)

Regulatory Obligations Related to Common Deficiencies

The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations of CPO and CTA Members.

Self-Examination Questionnaire

NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the self-examination questionnaire. Thorough questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA rules.

Digital Assets

Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.

Third Party Service Providers

Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions intended to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.

Cybersecurity

CPO and CTA Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.

Members that fail to establish and implement an ISSP may be subject to disciplinary action.

Pool Financial Reporting—Notification Requirements

Notice Filing Requirements: CPOs are required to file notice with NFA when a market or other event affects a commodity pool's ability to fulfill its participant obligations. Notice must be filed by 5:00 p.m. CT the next business day following one of the events outlined in Compliance Rule 2-50 and Interpretive Notice 9080.

Changes in Fiscal Year End: If a CPO elects a fiscal year end other than the calendar year end for a pool, it must give written notice of the election to all participants and file notice with NFA via EasyFile pursuant to CFTC Regulation 4.22(g) within 90 calendar days after the pool's formation. If this notice is not given, the CPO will be deemed to have elected the calendar year end as the pool's fiscal year end. The CPO must continue to use the elected fiscal year end for the pool unless it provides written notice of any proposed change to all participants and files such notice with NFA via EasyFile at least 90 days before the change.

Changes in Certified Public Accountant (CPA): In the event that a CPO changes the independent CPA engaged to audit a pool's financial statements, the CPO must file notice with NFA via EasyFile pursuant to CFTC Regulation 1.16(g) no more than 15 days after the CPA's resignation or dismissal by the CPO.

Extension Requests: If a CPO requests an extension to file an annual pool financial statement, the extension must be filed with NFA via EasyFile prior to the due date of the filing.

Cessation of Trading: When a pool ceases trading, the CPO must promptly update the Annual Questionnaire. With few exceptions, a CPO must also distribute to participants a final Annual Report and file the Annual Report with NFA. This Annual Report is due within 90 days after the pool ceases trading, absent an extension.

Calculation of Financial Ratios

CPO and CTA Members must compute financial ratios using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles or another internationally recognized accounting standard as outlined in Interpretive Notice 9071. Members should consult Notice I-18-20 for additional guidance on calculating these ratios.

Financial Reporting: With few exceptions, each CPO Members must distribute an Annual Report, certified by an independent public accountant, to pool participants within 90 days of the pool's fiscal year-end or the permanent cessation of trading, whichever is earlier. Each CPO must also report to NFA on a quarterly basis specific information about the firm and the pools it operates. These pool quarterly reports (PQRs) are due within 60 days of each calendar quarter end. Each PQR filed after its due date will be subject to a late filing fee of $200 for each business day it is late.

CTA Members that direct trading of commodity interests are required to file a quarterly CTA Form PR report within 45 days of the quarter end. Each Form PR report filed after its due date will be subject to a late filing fee of $200 for each business day it is late. CTAs that commence trading client accounts during a quarter must update the Annual Questionnaire immediately to receive timely reporting notifications.

As a reminder, NFA views late filings as a serious rule violation, and we have taken disciplinary action against Member firms in the past for filing reports after the due date.

Ongoing Updates

On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins doing business or begins soliciting for digital asset or micro contract products, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA's BASIC system displays correct information about the firm's business activities and ensures the firm receives all applicable notices relating to its reporting requirements in a timely manner.

A CPO Member who operates an umbrella-series structure (i.e., a single legal entity that has several distinct sub-funds which, in effect, are traded as individual funds) needs to list the umbrella entity with NFA through the Annual Questionnaire and mark it as such. CPOs may also identify the series funds that are tied to that umbrella through the questionnaire. Exemptions must be claimed at the umbrella level and must apply to the structure as a whole.

Recent Amendments and Reminders

The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

I-22-25: Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA registration

I-22-20: Reminder: NFA Member cybersecurity responsibilities

I-22-10: Reminder: CPO notice filing requirements under Compliance Rule 2-50

I-22-08: NFA encourages Members to monitor U.S. sanctions on Russia and be vigilant of cybersecurity threats

I-22-05: Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs

I-22-01: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

Notice I-23-06

February 6, 2023

Educational resources, common deficiencies and other important regulatory information for FCM, FDM and IB Members

Members Section of NFA's Website

From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:

Futures Commission Merchants (FCM)

Forex Dealer Members (FDM)

Introducing Brokers (IB)

Regulatory Obligations Related to Common Deficiencies

The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations of Member FCMs for which NFA is the DSRO, FDMs and IBs.

Self-Examination Questionnaire: NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the self-examination questionnaire. Thorough questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA rules.

Supervision: FCM, FDMs and IBs Members must have written supervisory policies and procedures to address the manner, frequency and results of monitoring written and oral communications. Such supervision includes, when required¹, maintaining a record of all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. Common deficiencies in this area include firms not maintaining all required communications, failing to identify brokers using unapproved and unrecorded communication methods and permitting unregistered individuals to act as associated persons.

Digital Assets: Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.

Third Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.

Cybersecurity: FCM, FDM and IB Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.

Members that fail to establish and implement an ISSP may be subject to disciplinary action.

Financial Reporting: FCM, FDM and IB Members must periodically file financial reports. Each financial report filed late will be subject to a fee of $1,000 for each business day it is late. Firms that fail to file financial reports in a timely manner may be subject to disciplinary action.

Ongoing Updates

Recent Amendments and Reminders

The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

I-22-20: Reminder: NFA Member cybersecurity responsibilities

I-22-17: Forex Dealer Members: Effective date for amendment to NFA Compliance Rule 2-43

I-22-09: FinCEN issues alert on potential Russian sanctions evasion efforts and reminds financial institutions of SAR and other reporting obligations

I-22-08: NFA encourages Members to monitor U.S. sanctions on Russia and be vigilant of cybersecurity threats

I-22-05: Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs

I-22-01: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

Notice I-23-07

February 23, 2023

NFA's Board of Directors re-elects Maureen C. Downs to serve as Chair

Public Directors

Additionally at its February meeting, the Board elected the following individuals to serve as public directors:

Michael C. Dawley, BlueFin Partners LLC;
Douglas E. Harris;
Ronald S. Oppenheimer;
Todd E. Petzel, Offit Capital Advisors LLC; and
Michael R. Schaefer.

Executive Committee

The Board also elected the following individuals to serve one-year terms on NFA's Executive Committee:

Mark G. Bagan, Minneapolis Grain Exchange;
Douglas L. Bry, Augur Trading Company;
Gerald F. Corcoran, R.J. O'Brien & Associates LLC;
Michael C. Dawley, Bluefin Partners LLC;
Arthur W. Hahn;
Julie Holzrichter, CME Group;
Ernest L. Jaffarian, Efficient Capital Management LLC;
William F. McCoy, Morgan Stanley;
Mary M. McDonnell, McDonnell & Associates;
Michael H. Moskow, The Chicago Council on Global Affairs;
Ronald S. Oppenheimer;
Scott W. Stewart, Stewart-Peterson Group, Inc.; and
Don Thompson, JPMorgan Chase & Co.

Ms. Downs, NFA Permanent Special Advisor Leo Melamed, and NFA's President also serve on the Executive Committee.

During its meeting on January 19, 2023, NFA's Executive Committee, pursuant to Article VII, Section (3)(c) and Article X, Section 3 of NFA's Articles of Incorporation, elected the following nominees to the Board and Nominating Committee:

Board of Directors

FCM Category:

Thomas R. Kadlec, ADM Investor Services, Inc.

IB Category:

Michael T. Burke, HighGround Trading LLC

CPO/CTA Category:

Ernest L. Jaffarian, Efficient Capital Management LLC
Martin Lueck, Aspect Capital Limited

SD/MSP/RFED Category:

Seth P. Bender, HSBC Bank USA, NA
Charlotte B. McLaughlin, PNC Capital Markets LLC

2023 NFA Nominating Committee

FCM Category:

Melissa B. Zierk, R.J. O'Brien & Associates LLC

IB Category:

Ilan Levy-Mayer, Cannon Trading Company

CPO/CTA Category:

Tobias B. Hekster, True Partner Advisor Limited

SD/MSP/RFED Category:

Thomas Salatte, Nomura Holding America Inc.

The terms of NFA's Board of Directors and Nominating Committee began on February 16, 2023.

A complete list of NFA's Board of Directors, Executive Committee, and Nominating Committee can be found on NFA's website.

News Releases

For Immediate Release
February 16, 2023

NFA orders Sioux Falls, S.D. introducing broker VBI Company to pay a $135,000 fine

February 16, Chicago—NFA has ordered Sioux Falls, S.D. introducing broker Member VBI Company (VBI) to pay a $135,000 fine. Peter Mark Vanden Berge, an associated person and principal of VBI, shares liability with the firm jointly and severally for the fine.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee (BCC) and a settlement offer submitted by VBI and Vanden Berge. In the settlement offer, the firm and Vanden Berge neither admitted nor denied the allegations in the Complaint.

The BCC's Complaint alleged that VBI violated NFA Compliance Rule 2-10 by failing to maintain required oral and written pre-trade communications. The Complaint also alleged that VBI and Vanden Berge violated NFA Compliance Rule 2-2(f) by providing NFA with a number of excuses for the firm's communication recordkeeping deficiencies and, in doing so, provided NFA with materially false or misleading information regarding whether VBI ever complied with its recordkeeping obligations. The Complaint also alleged that VBI and Vanden Berge violated NFA Compliance Rule 2-9(a) by failing to supervise the firm's operations.

In its Decision, the Panel found that VBI violated NFA Compliance Rule 2-10, and that VBI and Vanden Berge violated NFA Compliance Rules 2-2(f) and 2-9(a).

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

Hot Issues

On February 7, the SEC announced its 2023 examination priorities. The following are a selection of the Division’s 2023 priorities: New Rules – including the new Marketing Rule, RIAs to Private Funds – including Reg BI and management of conflicts of interest, ESG-related advisory services and fund offerings – including whether ESG products are appropriately labeled, Information Security and Operational Resiliency – including BDs/RIAs practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets, and Emerging Technologies and Crypto-Assets – including a focus on registrants’ offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets.

Our Perspective

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

Sources:

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

The post Monthly Regulatory Summary (February 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

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.

Policy Statements

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

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.

Monthly Regulatory Summary (December 2022)

CRC — Thu, 19 Jan 2023 15:36:42 +0000

FINRA

Regulatory Notices

Per Notice 22-27, FINRA has adopted amendments to Rule 6730 (Transaction Reporting) to (i) require members to report transactions in U.S. Treasury securities to FINRA’s Trade Reporting and Compliance Engine (TRACE) as soon as practicable but no later than 60 minutes from the time of execution; and (ii) require members to report electronically executed transactions in U.S. Treasury securities to TRACE in the finest increment captured by the system used to execute the transaction, subject to an exception for members with limited trading volume in U.S. Treasury securities. FINRA is also revising its TRACE Frequently Asked Questions (FAQs) to standardize price reporting for Treasury bills and Floating Rate Notes (FRNs) by requiring all transactions to be reported using the dollar price.

The amendments to reduce the trade reporting timeframe for transactions in U.S. Treasury securities will take effect on May 15, 2023. The amendments related to the granularity of execution timestamps, as well as the revisions to the TRACE FAQs to standardize price reporting, will take effect on November 6, 2023.

The amended text of Rule 6730 is set forth in Attachment A.

Per Notice 22-28, FINRA has adopted amendments to the Rule 6700 series (Trade Reporting and Compliance Engine (TRACE)) to require members to report to TRACE transactions in U.S. dollar-denominated foreign sovereign debt securities. The amendments will take effect on November 6, 2023.

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

Per Notice 22-29, FINRA has received reports about increasing numbers and sophistication of ransomware incidents. Ransomware typically involves bad actors gaining unauthorized access to firm systems and encrypting or otherwise accessing sensitive firm data or customer information, then holding that hijacked data for ransom. Some ransomware attacks have become significant threats that include theft of data and bad actors’ ongoing network access.

Ransomware attacks have proliferated due to, in part, increased use of technology and continued adoption of cryptocurrencies, which bad actors use to hide their identities when collecting ransom payments. Further, Ransomware-as-a-Service (RaaS) models, where bad actors purchase attack services on the dark web, have helped execute attacks on a much larger scale and make attacks available to less technologically savvy bad actors.

Rule 30 of the U.S. Securities and Exchange Commission’s (SEC) Regulation S-P requires firms to have written policies and procedures that are reasonably designed to safeguard customer records and information. FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) also applies to ransomware attacks that include denials of service and other interruptions to members’ operations.

This Notice provides questions firms can use to evaluate their cybersecurity programs in light ofthe increased ransomware threat, lists possible additional firm controls and provides relevant resources.

This Notice, including the questions for consideration, 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. Member firms 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 firm’s size and business model. Moreover, some questions may not be relevant due to certain firms’ business models, size or practices.

Per Notice 22-30, FINRA is issuing this Notice to re-open the comment period for Regulatory Notice 15-13. Rule 15b9-1 currently provides proprietary trading firms with an exemption from membership in a national securities association. If the SEC re-proposal is adopted, the amendments generally would require a proprietary trading firm relying on the current exemption to register with FINRA if the firm continues to effect transactions other than on an exchange of which it is a member, with limited exceptions. FINRA membership would, among other things, apply FINRA’s existing fee structure to these firms, including FINRA’s Trading Activity Fee. FINRA is re-opening the comment period for Regulatory Notice 15-13, which had previously proposed an exemption to exclude from FINRA’s Trading Activity Fee transactions by a proprietary trading firm on exchanges of which the firm is a member.

Per Notice 22-31, member firms are required to make reasonable efforts to obtain the name of and contact information for a trusted contact for a non-institutional customer’s account. This Notice summarizes member firms’ regulatory obligations, discusses the benefits of trusted contacts in administering customers’ accounts, highlights customer education resources and shares effective practices member firms use.

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. Member firms 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 firm’s size and business model.

Special Notices

There were no special notices in November.

SEC

Final Rules

Per Release No. 33-11138, the SEC is adopting amendments to the rule under the Securities Exchange Act of 1934 (“Exchange Act”) that provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases. The amendments add new conditions to this rule that are designed to address concerns about abuse of the rule to trade securities opportunistically on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC is also adopting new disclosure requirements regarding the insider trading policies and procedures of issuers, the adoption and termination (including modification) of plans that are intended to meet the rule’s conditions for establishing an affirmative defense, and certain other similar trading arrangements by directors and officers. In addition, the SEC is adopting amendments to the disclosure requirements for director and executive compensation regarding equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information. Finally, the SEC is adopting amendments to Forms 4 and 5 to require filers to identify transactions made pursuant to a plan intended to meet the rule’s conditions for establishing an affirmative defense and to require disclosure of bona fide gifts of securities on Form 4.

Per Release No. 33-11139, the SEC is adopting technical amendments to its regulations regarding organization, conduct and ethics; and information requests. The technical amendments move the citations of statutory authority for the regulations from the subpart level to the part level and amend related citations to remove duplicative statutory citations at the subpart level.

Per Release No. 33-11140, the SEC is adopting amendments to Volumes I and II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual (“Filer Manual”) and related rules and forms. EDGAR Releases 22.4 and 22.4.1 will be deployed in the EDGAR system on or about December 19, 2022, and January 3, 2023, respectively.

Proposed Rules

Per Release No. 34-96458, the SEC is reopening the comment period for its proposal, Share Repurchase Disclosure Modernization, Exchange Act Release No. 34-93783 (Dec. 15, 2021) (“Proposing Release”). The SEC proposed amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases. The SEC subsequently reopened the comment period for the Proposing Release in Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments, Exchange Act Release No. 34-96005 (Oct. 7, 2022). In addition, after the proposed amendments were published for public comment, an excise tax on share repurchases was signed into law. A staff memorandum was added to the public comment file on December 7, 2022 to analyze the impact of the new excise tax on the potential economic effects of the proposed amendments. The SEC is reopening the comment period to allow interested persons the opportunity to analyze and comment on the additional analysis.

Per Release No. 34-96493, the SEC is proposing to amend existing requirements under the Securities Exchange Act of 1934 (“Exchange Act”) to update the disclosure required for order executions in national market system (“NMS”) stocks. First, the SEC is proposing to expand the scope of reporting entities subject to the rule that requires market centers to make available to the public monthly execution quality reports to encompass broker-dealers with a larger number of customers. Next, the SEC is proposing to modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices. In addition, the SEC is proposing modifications to the information required to be reported under the rule, including changing how orders are categorized by order size as well as how they are categorized by order type. As part of the changes to these categories, the SEC is proposing to capture execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Additionally, the SEC is proposing to modify reporting requirements for non-marketable limit orders (“NMLOs”) in order to capture more relevant execution quality information for these orders by requiring statistics to be reported from the time such orders become executable. The SEC is also proposing to eliminate time-to-execution categories in favor of average time-to-execution, the median time-to-execution, and 99th percentile time-to-execution, each as measured in increments of a millisecond or finer and calculated on a share-weighted basis. In order to better reflect the speed of the marketplace, the SEC is proposing that the time of order receipt and time of order execution be measured in increments of a millisecond or finer and that realized spread be calculated at both 15 seconds and one minute. Finally, the SEC is proposing to enhance the accessibility of the required reports by requiring all reporting entities to make a summary report available.

Per Release No. 34-96494, the SEC is proposing to amend certain rules of Regulation National Market System (“Regulation NMS”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) to adopt variable minimum pricing increments for the quoting and trading of NMS stocks, reduce the access fee caps, and enhance the transparency of better-priced orders.

Per Release No. 34-96495, the SEC is proposing to amend the regulation governing the national market system (“NMS”) under the Securities Exchange Act of 1934 (“Exchange Act”) to add a new rule designed to promote competition as a means to protect the interests of individual investors and to further the objectives of an NMS. The proposed rule would prohibit a restricted competition trading center from internally executing certain orders of individual investors at a price unless the orders are first exposed to competition at that price in a qualified auction operated by an open competition trading center. The proposed rule would also include limited exceptions to this general prohibition. In addition, the SEC is proposing to amend the regulation governing the NMS to add new defined terms included in the proposed rule.

Per Release No. 34-96496, the SEC is proposing new rules under the Securities Exchange Act of 1934 (“Exchange Act”) relating to a broker-dealer’s duty of best execution. Proposed Regulation Best Execution would enhance the existing regulatory framework concerning the duty of best execution by requiring detailed policies and procedures for all broker-dealers and more robust policies and procedures for broker-dealers engaging in certain conflicted transactions with retail customers, as well as related review and documentation requirements.

Interim Final Rules

There were no interim final rules in December.

Interpretive Releases

There were no interpretive releases in December.

Policy Statements

There were no policy statements in December.

NFA

Notice I-22-24

December 1, 2022

FINRA announces increase in proficiency examination fees for 2023

The Financial Industry Regulatory Authority (FINRA) notified NFA that it will increase its fees for the administration and delivery of NFA's qualifications examinations on January 1, 2023.

On this date, the fee for an individual to take the Series 3: National Commodity Futures Examination will be $140, an increase of $10. The fee for the Series 30: NFA Branch Manager Examination; Series 31: Futures Managed Funds Examination; Series 32: Limited Futures Examination–Regulations; and Series 34: Retail Off-Exchange Forex Examination will be $90, a $5 increase.

To sign up for any of these examinations, an applicant must apply online by visiting FINRA's website.

For information on proficiency requirements, including study outlines, visit NFA's proficiency requirements webpage.

Notice I-22-25

December 5, 2022

Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA 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, which is March 1, 2023, for this affirmation cycle.

Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 2, 2023. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC, if either continues to operate without registration or exemption.

How to complete the affirmation process

To complete the affirmation process, access the Exemptions System from the Electronic Filing Systems page on NFA's website.

The Notice also includes frequently asked questions about exemptions.

Notice I-22-26

December 12, 2022

FCM and RFED filing requirements for Christmas and New Year's Day—Reminder for upcoming holidays

Christmas Day (Observed)—Monday, December 26, 2022

• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 23, 2022, are required to be submitted by 12:00 noon on Tuesday, December 27, 2022; and

• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements are required to be prepared as of Monday, December 26, 2022, and are required to be submitted by 12:00 noon on Tuesday, December 27, 2022.

New Year's Day (Observed)—Monday, January 2, 2023

• Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 30, 2022, are required to be submitted by 12:00 noon on Tuesday, January 3, 2023;

• Daily segregated, 30.7 secured, and cleared swaps customer collateral statements are not required to be prepared as of Monday, January 2, 2023; and

• Daily forex statements are required to be prepared as of Monday, January 2, 2023, and are required to be submitted by 12:00 noon on Tuesday, January 3, 2023.

Any information filed by FCMs or RFEDs after its due date must be accompanied by a fee for each business day that it is late.

Holiday Filing Schedule

For more information about filing financial reports, visit NFA's website.

Notice I-22-27

December 12, 2022

SD holiday filing requirements

Visit NFA's website to view schedules of 2023 swap dealer (SD) holiday filings, risk data and margin monitoring filings and financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2023 holiday filing requirements.

For more information about SD filing requirements visit NFA's website.

News Releases

December 8, 2022

NFA orders Warren, NJ retail forex dealer and futures commission merchant Gain Capital Group LLC to pay a $700,000 fine

December 8, Chicago—NFA has ordered Gain Capital Group LLC (Gain) to pay a $700,000 fine. Gain, which does business as FOREX.com, is a registered retail forex dealer and futures commission merchant Member of NFA headquartered in Warren, New Jersey.

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 Gain and Alexander Robert Bobinski, Jr. (Bobinski), an associated person and principal of the firm and Associate Member of NFA. In the settlement offer, the firm and Bobinski neither admitted nor denied the allegations in the Complaint.

In its Decision, the BCC found that Gain violated NFA Compliance Rule 2-43(a)(1) by improperly adjusting customer accounts following a system malfunction; violated NFA Compliance Rule 2-36(c) by its treatment of customers affected by the system malfunction and Gain's account adjustments; violated NFA Compliance Rules 2-5 and 2-36(c) by submitting inaccurate and incomplete information to NFA; and violated NFA Compliance Rules 2-36(e) and 2-9(a) by failing to supervise. The BCC also found that Bobinski violated NFA Compliance Rule 2-36(e) by failing to supervise.

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

Hot Issues

Advertising & Solicitation

The SEC’s new marketing rule went into full compliance effect in November. 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

In September, the SEC 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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

• FINRA December 2022 Industry Notices

• SEC Regulatory Actions

• NFA Notice to Members

• NFA Press Releases

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

Monthly Regulatory Summary (November 2022)

CRC — Wed, 07 Dec 2022 15:11:15 +0000

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.

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

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 (October 2022)

CRC — Tue, 15 Nov 2022 15:59:35 +0000

FINRA

Regulatory Notices

Per Notice 22-21, FINRA alerts member firms to a rising trend in the fraudulent transfer of customer accounts through the Automated Customer Account Transfer Service (ACATS), an automated system administered by the National Securities Clearing Corporation (NSCC), that facilitates the transfer of customer account assets from one firm to another.

This Notice provides an overview of how bad actors effect fraudulent transfers of customer accounts using ACATS (referred to as ACATS fraud), lists several existing regulatory obligations that may apply in connection with ACATS fraud, and provides contact information for reporting the fraud. As FINRA continues to gather additional information related to ACATS fraud, FINRA is committed to providing guidance, updates and other information to help member firms stay informed about the latest developments, and will supplement this Notice, as appropriate.

Per Notice 22-22, 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. FINRA communicates information about renewal fees BD and IA firms owe via a Preliminary Statement in November and publishes a Final Statement in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2023. Renewal statements reflect all applicable renewal fees assessed for BD and IA firms, branches and individuals.

Important 2023 Renewal Program dates are provided on the Annual Renewal Program and Compliance Calendar pages, including payment and system shutdown deadlines. See the CRD Availability Schedule page for exceptions to regular operating hours for CRD/IARD.

Special Notices

There were no special notices in October.

SEC

Final Rules

Per Release No. 34-96034, the SEC is adopting amendments to the recordkeeping rules applicable to broker-dealers, security-based swap dealers, and major security-based swap participants. The amendments modify requirements regarding the maintenance and preservation of electronic records, the use of third-party recordkeeping services to hold records, and the prompt production of records. The SEC also is designating broker-dealer examining authorities as SEC designees for purposes of certain provisions of the broker-dealer record maintenance and preservation rule.

The compliance date for the amendments to 17 CFR 240.17a-4 is six months after publication in the Federal Register. The compliance date for the amendments to 17 CFR 240.18a-6 is twelve months after publication in the Federal Register.

Per Release No. 33-11126, the SEC is adopting a new rule and rule amendments to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which added Section 10D to the Securities Exchange Act of 1934 (“Exchange Act”). In accordance with Section 10D of the Exchange Act, the final rules direct the national securities exchanges and associations that list securities to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information. The listing standards must also require the disclosure of the policy. Additionally, the final rules require a listed issuer to file the policy as an exhibit to its annual report and to include other disclosures in the event a recovery analysis is triggered under the policy.

The amendments are effective 60 days after date of publication in the Federal Register.

Per Release No. 33-11125, the SEC is adopting rule and form amendments that require open-end management investment companies to transmit concise and visually engaging annual and semi-annual reports to shareholders that highlight key information that is particularly important for retail investors to assess and monitor their fund investments. Certain information that may be more relevant to financial professionals and investors who desire more in-depth information will no longer appear in funds’ shareholder reports but will be available online, delivered free of charge upon request, and filed on a semi-annual basis on Form N-CSR. The amendments exclude open-end management investment companies from the scope of the current rule that generally permits registered investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability. The amendments also require that funds tag their reports to shareholders using the Inline eXtensible Business Reporting Language (“Inline XBRL”) structured data language to provide machine-readable data that retail investors and other market participants may use to more efficiently access and evaluate investments. Finally, the SEC is adopting amendments to the advertising rules for registered investment companies and business development companies to promote more transparent and balanced statements about investment costs.

This rule is effective 60 days after the date of publication in the Federal Register.

Proposed Rules

Per Release No. 33-11117, due to a technological error, a number of public comments submitted through the SEC internet comment form were not received by the SEC. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021. All commenters who submitted a public comment to one of the affected comment files through the internet comment form between June 2021 and August 2022 are advised to check the relevant comment file posted on SEC.gov to determine whether their comment was received and posted. If a comment has not been posted, commenters should resubmit that comment by following the instructions provided below. To further ensure that interested persons, including any affected commenters, have the opportunity to comment on the affected releases or to resubmit comments, the SEC is reopening the comment periods for certain SEC rulemaking releases listed in this release.

Per Release No. IA-6176, the SEC is proposing a new rule under the Investment Advisers Act of 1940 (“Advisers Act”) to prohibit registered investment advisers (“advisers”) from outsourcing certain services or functions without first meeting minimum requirements. The proposed rule would require advisers to conduct due diligence prior to engaging a service provider to perform certain services or functions. It would further require advisers to periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider. The SEC is also proposing corresponding amendments to the investment adviser registration form to collect census-type information about the service providers defined in the proposed rule. In addition, the SEC is proposing related amendments to the Advisers Act books and records rule, including a new provision requiring advisers that rely on a third party to make and/or keep books and records to conduct due diligence and monitoring of that third party and obtain certain reasonable assurances that the third party will meet certain standards.

Interim Final Rules

There were no interim final rules in October.

Interpretive Releases

There were no interpretive releases in October.

Policy Statements

There were no policy statements in October.

NFA

Notice I-22-20

October 31, 2022

Reminder: NFA Member cybersecurity responsibilities

As Cybersecurity Awareness Month comes to a close, NFA reminds Members of their cybersecurity obligations and to remain vigilant online. Given the sensitive nature of customer data that Members possess and the growing risks associated with cyber breaches, NFA continues to consider cybersecurity a top priority and expects Members to do the same.

For information on NFA's cybersecurity requirements, refer to the resources below.

News Releases

There were no NFA news releases in October.

Bottom of Form

Hot Issues

Advertising & Solicitation

The compliance deadline for the SEC’s new marketing rule is days away. The single rule that draws from and replaces the previous advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The new rule is designed to comprehensively and efficiently regulate advisers’ marketing communications. The new rule also made related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule. The compliance date with the new rule is November 4, 2022.

Investment advisers are encouraged to conduct a comprehensive review their compliance programs related to marketing as well as assess existing communications in advance of the compliance date. Please reach out today to find out how CRC resources and expertise can be leveraged to support your reviews.

Archiving Electronic Communications

The SEC recently fined 16 firms, with penalties totaling over $1.1B due to archiving failures related to electronic communications. Under specific scrutiny is personnel use of texting on personal devices for business-related communications and the use of messaging applications, such as WhatsApp. CRC advises that firms review and address policies and procedures related to the use of personal mobile devices, texting, and other electronic channels to communicate for business purposes. Firms should carefully consider what is permitted under its policies, how such policies are enforced and confirmed, and whether additional solutions need to be built out to ensure appropriate archiving and oversight of such communications.

Our Perspective

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

Sources:

FINRA October 2022 Industry Notices
SEC Regulatory Actions
NFA Notice to Members

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

Broker-Dealer Regulatory Update: Amended Electronic Recordkeeping Requirements

CRC — Tue, 25 Oct 2022 14:58:04 +0000

On October 12, 2022, the SEC adopted amendments to the electronic recordkeeping, prompt production of records, and third-party recordkeeping service requirements that are applicable to broker-dealers. The broker-dealer compliance date for the new requirements is six months after the date of the publication of the adopting release in the Federal Register.

Some key highlights of the amendments to Rule 17a-4:

Adds an audit-trail as an alternative to the existing WORM requirement for electronic recordkeeping systems.
- Under the audit-trail alternative, a broker-dealer will need to use an electronic recordkeeping system that maintains and preserves electronic records in a manner that permits the recreation of an original record if it is modified or deleted.
- Electronic regulatory records may be preserved using an electronic record keeping system that meets either the audit-trail or the WORM requirement.
Adds an option for a designated executive officer (DEO) of the firm to make the required undertakings instead of a designated third party (D3P) when using an electronic recordkeeping system.
- DEO must be a member of the broker-dealer’s senior management.
- Subject to the organization’s reporting structure, DEO can designate in writing a limited number of other broker-dealer employees who have the knowledge, credentials, and information necessary to access and provide the records.
Adds an alternative undertaking for third parties who hold electronic regulatory records for the broker-dealer (e.g., cloud service provider) in lieu of the traditional undertaking under 17a-4(i).
- Records must be preserved by electronic recordkeeping system as defined in Rule 17a-4(f), utilizing servers or other storage devices that are owned or operated by a third-party (including an affiliate) and the broker-dealer must have independent access to the records.
Adds a requirement for electronic recordkeeping systems to be able to produce copies of a record and its audit trial (if applicable) in a reasonably useable electronic format.
- Such formats would be common and compatible with commonly used systems for accessing and reading electronic records.
Eliminates 90-Day DEA notice requirement before employing an electronic recordkeeping system.
Designates a broker-dealer’s DEA as a SEC designee for the purposes of the various provisions of the Rule that refer to “representatives and designees of the Commission.”

Important things for broker-dealers to note moving forward:

Existing WORM-compliant electronic recordkeeping system can continue to be used, but firms will be subject to the requirement to be able to produce a record in both a human readable format and a reasonably useable electronic format.
Existing designated third parties can continue to be used, however, updated undertakings will need to be filed with DEA.
If cloud storage providers are being used for electronic regulatory records and a traditional undertaking has not already been filed with DEA, firms must either file a traditional or alternative undertaking.

CRC believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of this rulemaking activity can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post Broker-Dealer Regulatory Update: Amended Electronic Recordkeeping Requirements appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (September 2022)

CRC — Tue, 11 Oct 2022 16:50:42 +0000

FINRA

Regulatory Notices

Per Notice 22-20, the NAC has revised FINRA’s Sanction Guidelines, which guide FINRA adjudicators in developing remedial sanctions for violations of the securities rules. These revisions were based on a review to ensure that the guidelines accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings. The revisions tailor sanctions to differentiate between types of respondents and modify the Sanction Guidelines in the following ways:

• split each current guideline into separate guidelines for individuals and firms;

• create separate fine ranges for small and mid-size or large-size firms;

• remove the upper limit of the fine ranges for mid-size and large-size firms for select guidelines;

• create Anti-Money Laundering guidelines;

• add additional discussion of non-monetary sanctions for firms;

• introduce single fine ranges for all actions in the Quality of Markets guidelines and other select guidelines;

• establish $5,000 as the minimum low end for all firm fine ranges; and delete select guidelines.

The revised Sanction Guidelines are effective immediately and available on FINRA’s website.

Special Notices

There were no special notices in September.

SEC

Final Rules

Per Release No. 33-11098, the SEC is adopting amendments to adjust the thresholds in the definition of “emerging growth company” as well as dollar amounts in Regulation Crowdfundingto effectuate inflation adjustments required under Title I and Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).

Per Release No. 33-11101, the SEC is adopting amendments to Volume II of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual and related rules and forms. The EDGAR system was upgraded on September 19, 2022.

Proposed Rules

Per Release No. 34-95763, the SEC is proposing to amend the standards applicable to covered clearing agencies for U.S. Treasury securities to require that such covered clearing agencies have written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty. In addition, the SEC is proposing additional amendments to the Covered Clearing Agency Standards, with respect to risk management. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. Finally, the SEC is proposing to amend the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain conditions.

Interim Final Rules

There were no interim final rules in September.

Interpretive Releases

There were no interpretive releases in September.

Policy Statements

There were no policy statements in September.

NFA

Notices to Members

Notice I-22-19

September 26, 2022

Executive Representative Reminder and Board and Nominating Committee Members Whose Terms Will Expire at the Board's 2023 Regular Annual Meeting

Executive Representative Reminder

NFA utilizes an electronic voting process, administered by a third-party service provider, for contested Board Director elections, contested Nominating Committee member elections and approval votes for amendments to NFA's Articles of Incorporation. To facilitate the voting process, NFA requires each Member to designate an individual to act as the Member's Executive Representative, who has the sole authority on behalf of the Member to sign petitions to nominate candidates for Director or Nominating Committee positions, receive notices of Member meetings and proxy materials, complete proxy cards and provide voting instructions and cast votes on behalf of the Member. Members designate an Executive Representative through NFA's website by completing the Executive Representative Contact Form. Only firm personnel who are Security Manager(s) or are authorized to "view, update and file" information in ORS may complete this form.

If a Member fails to designate an Executive Representative by completing this form, NFA will deem the Member's membership contact listed in ORS as the Member's Executive Representative. Members that have already designated an Executive Representative are not required to again complete this form unless the information on the Executive Representative has changed.

Board and Nominating Committee Members' Terms to Expire at 2023 Board of Directors' Regular Annual Meeting

Before October 15th of each year, NFA’s Secretary shall notify all Members in the Futures Commission Merchant (FCM), Introducing Broker (IB), Commodity Pool Operator and Commodity Trading Advisor (CPO/CTA) and Swap Dealer, Major Swap Participant and Retail Foreign Exchange Dealer (SD/MSP/RFED) categories of the elected Directors and the members of the Nominating Committee whose terms shall expire at the Board of Directors' regular annual meeting and shall request that the names of eligible persons to fill those positions be submitted to the Nominating Committee.

The Notice provides a list of the FCM, IB, CPO/CTA and SD/MSP/RFED Board and Nominating Committee members whose terms shall expire at the Board of Directors' regular annual meeting on February 16, 2023. Please use the form provided in the Notice to submit names of persons eligible to fill the vacancies on the Board of Directors and the Nominating Committee. For your reference, an explanation of the composition of the Board of Directors and the Nominating Committee is provided in the Notice. The Nominating Committee shall consider names that are submitted and the membership will be notified of the Committee's nominations. Thereafter, additional nominations may be made by petition pursuant to NFA's Articles. The procedure for filing a nomination by petition will be contained in a subsequent Notice to Members announcing the Nominating Committee's nominations to fill the Board and Nominating Committee vacancies.

News Releases

September 06, 2022

NFA orders Denmark firm Direct Hedge Danmark Fondsmaeglerselskab AS to pay a $70,000 fine

September 6, Chicago—NFA has ordered Direct Hedge Danmark Fondsmaeglerselskab AS(Direct Hedge) to pay a $70,000 fine. Direct Hedge is a registered introducing broker and approved swap firm Member of NFA located in Hellerup, Denmark.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee and a settlement offer submitted by Direct Hedge, in which the firm neither admitted nor denied the allegations in the Complaint. The Complaint alleged that Direct Hedge failed to keep required communications records, in violation of NFA Compliance Rule 2-10(a) and failed to register an individual as an AP and NFA Associate, in violation of NFA Bylaw 301(b). The Complaint further alleged that Direct Hedge failed to diligently supervise the firm and its employees, in violation of NFA Compliance Rule 2-9(a).

In its Decision, the Hearing Panel found that Direct Hedge violated NFA Compliance Rules 2-9(a) and 2-10(a) and NFA Bylaw 301(b).

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

Hot Issues

Advertising & Solicitation

The compliance deadline for the SEC’s new marketing rule is approximately one month away. The single rule that draws from and replaces the previous advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The new rule is designed to comprehensively and efficiently regulate advisers’ marketing communications. The new rule also made related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule. The compliance date with the new rule is November 4, 2022.

Archiving Electronic Communications

Our Perspective

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

Sources:

• FINRA September 2022 Industry Notices

• SEC Regulatory Actions

• NFA Notice to Members

• NFA Press Releases

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

SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures

CRC — Thu, 29 Sep 2022 13:21:59 +0000

On September 27, 2022, the SEC announced charges against 15 broker-dealers and one investment adviser for pervasive and longstanding failures to maintain and preserve electronic communications. Monetary penalties ranged from $50 million to $125 million for the charged firms. The settlements also required the firms to retain a compliance consultant to review and assess the firm’s remedial steps relating to recordkeeping practices, policies and procedures, related supervisory practices, and employment actions. The SEC’s investigation found that the firm’s employees, including supervisors and executives, routinely used text-messaging applications on personal devices to communicate about business matters. The SEC determined that the substantial majority of these communications were not maintained or preserved by the firms, which violated federal securities laws.

Regarding a focus on managers in the settlements, Bloomberg News in its reporting on the SEC’s action said: “The SEC’s decision to call out executives -- based on a sampling of messages that banks were asked to gather for the investigation -- may ramp up the pressure on firms to ensure certain managers are held accountable.”

Yesterday’s SEC press release comes less than a year after a similar action by the SEC involving J.P. Morgan Securities LLC (JPMS) was announced in December 2021. In that instance, JPMS’ settlement with the SEC included a $125 million penalty.

CRC believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of this enforcement activity and using it as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (August 2022)

CRC — Tue, 06 Sep 2022 13:37:17 +0000

FINRA

Regulatory Notices

Per Notice 22-17, FINRA is soliciting comment on a proposal to amend Rule 6730 to reduce the Trade Reporting and Compliance Engine (TRACE) trade reporting timeframe for transactions in all TRACE-Eligible Securities that currently are subject to a 15-minute reporting timeframe. Specifically, members would be required to submit a report to TRACE as soon as practicable (as is currently the case), but no later than one minute from the time of execution, for transactions in corporate bonds, agency debt securities, asset-backed securities and agency pass-through mortgage-backed securities traded to-be-announced for good delivery. As is the case today, FINRA would make information on the reported transactions publicly available immediately upon receipt of the trade report.

Per Notice 22-18, FINRA has received an increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. Firms have, for example, identified signature issues involving a wide range of forms, including account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions.

These types of incidents underscore the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification.

To help firms address the risks these signature forgeries and falsifications present, FINRA is sharing information in this Notice about:

relevant regulatory obligations;
forgery and falsification scenarios firms have reported to FINRA; and
methods firms have used to identify those scenarios.

Per Notice 22-19, the NSCC administers ACATS, a system that automates and imposes specified duties and performance timeframes to facilitate the transfer of accounts, in whole or in part, from one firm to another. The NSCC recently announced a change to ACATS that will allow a receiving member (the firm slated to receive the customer’s account) to use the “receiver delete” function to remove alternative investments from an ACATS transfer.

This Notice reminds members of their obligations under FINRA Rule 11870 (Customer Account Transfer Contracts), including that:

members must expedite and coordinate their activities when a customer gives authorized instructions to transfer securities account assets;
notwithstanding the availability of the receiver delete function, a member may not remove an asset from an ACATS transfer unless the member has determined that the asset is a “nontransferable asset” as defined in Rule 11870; and
a receiving member that uses the receiver delete function to remove certain nontransferable assets from an ACATS transfer is required to provide the customer with a list of the nontransferable assets and request in writing, and prior to the time it designates the assets as nontransferable, instructions from the customer with respect to the disposition of the assets.

Special Notices

There were no special notices in August.

SEC

Final Rules

Per Release No. 34-95607, the SEC is adopting amendments to implement Section 14(i) (“Section 14(i)”) of the Securities Exchange Act of 1934 (“Exchange Act”), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 14(i) directs the SEC to adopt rules requiring registrants to provide disclosure of pay versus performance. The disclosure is required in proxy or information statements in which executive compensation disclosure is required. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers.

Per Release No. 34-95620, the SEC is adopting amendments to the SEC’s rules implementing its whistleblower program. Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) and the SEC’s implementing rules provide that the SEC shall pay an award to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action or a non-SEC related action. The amendments: expand the scope of related actions eligible for an award under the SEC’s whistleblower program; clarify that the SEC may use its statutory authority under Section 21F to consider the dollar amount of a potential award to increase an award but provide that the SEC will not use any statutory authority it might have to decrease the amount of an award; and make several conforming changes and technical corrections.

Proposed Rules

Per Release No. 34-95431, the SEC is proposing rules under the Securities Exchange Act of 1934 (“Exchange Act”) to help improve the governance of clearing agencies registered with the Commission (“registered clearing agencies”) by reducing the likelihood that conflicts of interest may influence the board of directors or equivalent governing body (“board”) of a registered clearing agency. The proposed rules would identify certain responsibilities of the board, increase transparency into board governance, and, more
generally, improve the alignment of incentives among owners and participants of a registered clearing agency. In support of these objectives, the proposed rules would establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.

Per Release No. IA-6083, the CFTC and the SEC are proposing to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the CFTC as a commodity pool operator (“CPO”) or commodity trading adviser (“CTA”). The amendments are designed to enhance the Financial Stability Oversight Council’s (“FSOC’s”) ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts. In connection with the amendments to Form PF, the SEC proposes to amend a rule under the Investment Advisers Act of 1940 (the “Advisers Act”) to revise instructions for requesting a temporary hardship exemption. The Commissions also are soliciting comment on the proposed rules and a number of alternatives, including whether certain possible changes to the proposal should apply to Form ADV.

Interim Final Rules

There were no interim final rules in August.

Interpretive Releases

There were no interpretive releases in August.

Policy Statements

There were no policy statements in August.

NFA

Notices to Members

Notice I-22-18

August 30, 2022

SD notice filing requirements under CFTC Regulation 23.154

CFTC Regulation 23.154 requires swap dealer (SD) Members that are subject to the CFTC Margin Rules and approved by NFA to use initial margin (IM) models to notify the CFTC and NFA of certain events related to an NFA-approved IM model. Starting September 1, 2022, SD Members must file these notices through NFA's WinJammer filing system and not via email.

The specific notices required are detailed below.

Modifications to an Approved Model

SD Members are required to notify the CFTC and NFA in writing 60 days prior to:

Extending the use of a previously approved IM model to an additional product type;
Making any change to any previously approved IM model that would result in a material change to the SD's assessment of IM requirements; or
Making any material change to modeling assumptions used by the IM model.

This notification requirement does not apply to new releases of ISDA SIMM made by ISDA.

Material Issues with an Approved Model

SD Members must promptly notify the CFTC and NFA if the IM model validation process reveals any material problems with the model. The SD also must describe any remedial actions taken and adjust the model to ensure an appropriately conservative amount of required IM is being calculated. This requirement extends to material issues identified during ongoing monitoring and the validation activities of each new version of SIMM, in light of its application to the SD Member's specific portfolio. At a minimum, an SD Member must notify NFA and the CFTC when it identifies problems with its IM model exceeding internal remediation thresholds. The notice filing must include:

Counterparty and portfolio IDs;
When and how the problem was identified, including relevant thresholds and testing results;
Detailed description of the model performance issue (e.g., risk factors causing exceedances, sensitivity amounts, market volatility relative to IM model calibration, nonlinear effects, risks-not-in-IM-model);
Remediation plan, including associated compensating controls;
Identified need for add-ons/multipliers, including amounts/values;
Current status of negotiations with the counterparty; and
Remediation timeline.

An SD Member should not delay filing the required notice due to incomplete information related to the remediation plan and timeline. The SD Member must amend its initial notice to provide updated information on remediation, if necessary.

Step-by-step notice filing instructions are available in the Margin Model WinJammer Notice User Guide.

News Releases

August 18, 2022

NFA orders London, U.K. firm Makor Securities London Ltd. to pay a $375,000 fine

August 18, Chicago—NFA has ordered Makor Securities London Ltd. (Makor) to pay a $375,000 fine. Makor is a former introducing broker (IB) and current provisionally registered swap dealer Member of NFA located in London, U.K.

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 Makor, in which the firm neither admitted nor denied the allegations in the Complaint. The BCC's Complaint alleged that Makor, in its capacity as an IB, failed to disclose to NFA intra-month transfers of assets with an affiliate between August 2021 and February 2022, which gave the impression Makor was holding the assets at all times during this period. The Complaint also alleged that Makor represented to NFA, through a former associated person (AP) of Makor, that the firm held the assets as inventory when the AP should have known the firm transferred the assets to its affiliate and, therefore, was not holding them as inventory. In addition, the Complaint alleged that Makor failed to maintain at all times the required minimum adjusted net capital during various periods since July 2017 and failed to give timely notice to NFA of the firm's capital shortfalls. Lastly, the Complaint alleged that Makor failed to adequately supervise its employees and agents in the conduct of their commodity interest activities for or on behalf of the firm.

In its Decision, the BCC found that Makor violated NFA Compliance Rules 2-4 and 2-9(a) and NFA Financial Requirement Sections 4, 5(a) and 5(c).

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

August 18, 2022

NFA permanently bars Denver-based commodity pool operator Yas Castellum LLC and its principal Marcus Brisco from membership

August 18, Chicago—NFA has permanently barred Yas Castellum LLC (Yas), a former NFA Member and commodity pool operator located in Denver, Colorado, and Marcus Brisco, its former principal, and associated person, from membership and from acting as a principal of an NFA Member.

The default Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and Yas and Brisco's failure to file an Answer. The BCC found that Yas failed to operate its commodity pool as a separate legal entity, failed to receive funds in the name of its commodity pool, and commingled pool funds with the property of other persons. The BCC also found that Yas and Brisco failed to uphold high standards of commercial honor and just and equitable principles of trade by, among other things, operating the commodity pool in a manner that showed no regard for safeguarding the money they solicited and accepted from the pool participants. In addition, the BCC found that Yas and Brisco failed to cooperate in NFA's examination of Yas.

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

August 24, 2022

NFA Board appoints Dale Spoljaric as new Vice President, Capital & Exams

August 24, Chicago—NFA's Board of Directors approved the appointment of Dale Spoljaric as Vice President, Capital & Exams at its August meeting.

"We are extremely pleased to promote Dale to this important leadership position," says NFA's CEO and President Thomas Sexton. "With his significant regulatory experience and expertise in futures commission merchant and swap dealer capital, segregation, and margin, Dale will play an important role leading our rigorous regulatory oversight programs."

Mr. Spoljaric has been with NFA for close to ten years. He has served as a Managing Director in both NFA's Futures Compliance and OTC Derivatives Compliance departments. Before joining NFA, Mr. Spoljaric served as U.S. Head of Agency Derivative Services Compliance at Barclays Capital, Inc. He began his career as an FCM Examiner with CME Group. Mr. Spoljaric holds a Bachelor of Science degree from Marquette University and is a registered CPA in Illinois.Bottom of Form

Hot Issues

In June, the SEC charged a broker-dealer and five of its registered representatives with violating Best Interest Obligation rules (Regulation Best Interest or Reg BI). The SEC alleged that the defendants failed to comply with Reg BI’s Care Obligation both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with an unrated, high-risk debt security, and also because they recommended such security to at least seven particular customers without a reasonable basis to believe they were in their customers’ best interests. The SEC also alleged that the broker-dealer failed to comply with Reg BI’s “Compliance Obligation” because it did not adequately establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.

Reg BI continues to be a focus area for regulators, and it is important to review your program to ensure that it addresses all aspects of Reg BI as it relates to your business.

Our Perspective

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

Sources:

FINRA August 2022 Industry Notices
SEC Regulatory Actions
SEC Press Release 2022-110
NFA Notice to Members
NFA Press Releases

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

News Update: SEC Approves FINRA Rules Change

CRC — Thu, 01 Sep 2022 15:27:01 +0000

In an order[1] dated July 30, 2021, the SEC approved the adoption of new FINRA Rule 4111 and Rule 9561 and the amendment of Rule 9559. FINRA has extended the effective date for the proposed rule change to no later than 180 days after publication of a Regulatory Notice announcing this Commission approval. At time of this update, FINRA has not yet published such a Regulatory Notice.

From the SEC’s approval order:

The proposal to establish a process in new Rule 4111 to identify members firms that present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose a Restricted Deposit Requirement, conditions, or restrictions on the member firm’s operations, or both, will help protect investors and encourage such member firms to change their behavior. FINRA has designed the proposed rule change to establish an annual, multi-step process to determine whether a member firm raises investor protection concerns substantial enough to require the imposition of additional obligations, while allowing identified firms several means of challenging FINRA’s decisions and affecting the ultimate outcome.

The Department would begin each member firms’ annual Rule 4111 review process by calculating specified “Preliminary Identification Metrics” for each firm for each of six categories of events or conditions, collectively defined as the “Disclosure Event and Expelled Firm Association Categories.”

The six categories are: (1) Registered Person Adjudicated Events; (2) Registered Person Pending Events; (3) Registered Person Termination and Internal Review Events; (4) Member Firm Adjudicated Events; (5) Member Firm Pending Events; and (6) Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If the Department determines that a member firm warrants further review under Rule 4111, and such member firm would be meeting the Preliminary Criteria for Identification for the first time, the member firm would have a one-time opportunity to reduce its staffing level to avoid meeting the Preliminary Criteria for Identification, within 30 business days after being informed by the Department that it met the Preliminary Criteria for Identification. However, if the Department determines that the member firm still meets the Preliminary Criteria for Identification (or if the member firm did not opted to reduce staffing levels) the Department would determine the firm’s maximum Restricted Deposit Requirement, and the member firm would proceed to a “Consultation” with the Department.

During the Consultation, the Department would give the member firm an opportunity to demonstrate why it does not meet the Preliminary Criteria for Identification, why it should not be designated as a Restricted Firm, and why it should not be subject to the maximum Restricted Deposit Requirement. (42930) Pursuant to Proposed Rule 4111(e)(2), the Department would provide the member firm with written notice of its decision no later than 30 days from the date of FINRA’s letter scheduling the Consultation, stating any conditions or restrictions to be imposed, and the ability of the member firm to request a hearing with the Office of Hearing Officers in an expedited proceeding.

Under new Rule 9561(a)(1), the Department would serve to the member firm a notice of the Department’s decision following the Rule 4111 process. The proposed rule change would also provide that if a member firm does not request a hearing, the decision would constitute final FINRA action. In general, a request for a hearing would not stay any of the Rule 4111 Requirements imposed in the Department’s decision, which would be immediately effective with one exception being when member requests review of imposition of Restricted Deposit Requirement. In that case, the firm would be required to deposit the lesser of 25% of its Restricted Deposit Requirement or 25% of its average excess net capital over the prior year, while the proceeding is pending.

If a member firm fails to comply with any of the requirements imposed on it under Rule 4111, the Department would be authorized to serve a notice pursuant to proposed Rule 9561 stating that the member firm’s continued failure to comply within seven days of service of the notice would result in a suspension or cancellation of membership.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Opportunities for CRC to Assist Your Firm:

CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with CRC resources to address concern areas.
CRC can develop and implement enhanced diligence processes relative to hiring or acquisition processes designed to avoid scrutiny under Rule 4111.

Please contact Mitch Avnet for more information:

mavnet@compliance-risk.com

p. (646)346-2468

[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post News Update: SEC Approves FINRA Rules Change appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (July 2022)

CRC — Thu, 04 Aug 2022 13:24:28 +0000

FINRA

Regulatory Notices

Per Notice 22-15, FINRA amended the Code of Arbitration Procedure for Industry Disputes (Code) to align the Code with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. Among other things, the amendments permit persons with sexual assault claims and sexual harassment claims to elect not to enforce predispute arbitration agreements in cases that relate to those disputes. The amendments also make a conforming change to FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4).

The text of the rule change is available as Attachment A.

Per Notice 22-16, FINRA has adopted changes to its rules to permit, and in some instances require, electronic service and filing of documents in disciplinary and other proceedings and appeals. FINRA has also amended its rules to require parties in proceedings before the Office of Hearing Officers (OHO) to file and serve the parties with their current email address and contact information at the time of their first appearance, and to file and serve any change in email address or contact information during the course of the proceeding. These amendments will become effective August 22, 2022.

Special Notices

There were no special notices in July.

SEC

Final Rules

Per Release No. 34-95266, the SEC is adopting amendments to the Federal proxy rules governing proxy voting advice as part of its reassessment of those rules and in light of feedback from market participants on those rules, certain developments in the market for proxy voting advice, and comments received regarding the proposed amendments. The amendments remove a condition to the availability of certain exemptions from the information and filing requirements of the Federal proxy rules for proxy voting advice businesses. The release also rescinds certain guidance that the SEC issued to investment advisers about their proxy voting obligations. In addition, the amendments remove a note that provides examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the Federal proxy rules’ prohibition on material misstatements or omissions. Finally, the release discusses the SEC’s views regarding the application of that prohibition to proxy voting advice, in particular with respect to statements of opinion.

Per Release No. 33-11082, 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. The EDGAR system was upgraded on June 21, 2022.

Proposed Rules

Per Release No. 34-95267, the SEC is proposing to update certain substantive bases for the exclusion of shareholder proposals under the SEC’s shareholder proposal rule. The proposed amendments would amend the substantial implementation exclusion to specify that a proposal may be excluded if the company has already implemented the essential elements of the proposal. The SEC also proposes to specify when a proposal substantially duplicates another proposal for purposes of the duplication exclusion. In addition, the SEC proposes to amend the resubmission exclusion to provide that a proposal constitutes a resubmission if it substantially duplicates another proposal. Under the proposed amendments, for purposes of both the duplication exclusion and the resubmission exclusion, a proposal would substantially duplicate another proposal if it addresses the same subject matter and seeks the same objective by the same means.

Per Release No. 34-95388, the SEC is re-proposing amendments to a rule under the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) that exempts certain registered brokers or dealers from membership in a registered national securities association (“Association”). The re-proposed amendments would replace the rule’s de minimis allowance, including the exclusion therefrom for proprietary trading, with narrower exemptions from Association membership for any registered broker or dealer that is a member of a national securities exchange, carries no customer accounts, and effects transactions in securities otherwise than on a national securities exchange of which it is a member. The re-proposed amendments would create exemptions for such a registered broker or dealer that affects transactions off an exchange of which it is a member that results solely from orders that are routed by a national securities exchange of which it is a member to comply with order protection regulatory requirements or are solely for the purpose of executing the stock leg of a stock-option order.

Interim Final Rules

There were no interim final rules in July

Interpretive Releases

There were no interpretive releases in July.

Policy Statements

There were no policy statements in July.

NFA

Notices to Members

Notice I-22-17

July 13, 2022

Forex Dealer Members: Effective date for amendment to NFA Compliance Rule 2-43

NFA Compliance Rule 2-43 prohibits a forex dealer member (FDM) from cancelling or adjusting a customer account in a manner that would directly or indirectly change the price of the executed order except under two limited circumstances. The first exception permits a cancellation or adjustment if it is favorable to the customer and done as part of settling a customer complaint, provided the FDM adjusts all adversely affected customer orders. The second exception permits an FDM to adjust or cancel an order if the FDM exclusively uses straight-through processing and the counterparty to the offsetting position with the FDM cancels or adjusts that order. NFA recently amended NFA Compliance Rule 2-43 to specify that the second exception is limited to FDMs that exclusively use straight-through processing with a counterparty that is not an affiliate of the FDM.

This amendment was unanimously approved by the Board and will become effective on September 15, 2022.

More information regarding this amendment can be found in NFA's June 7, 2022 submission letter to the CFTC.

News Releases

There were no NFA news releases in July.

Bottom of Form

Hot Issues

Reg BI continues to a be a focus area for regulators, and it is important to review your program to ensure that it addresses all aspects of Reg BI as it relates to your business.

Our Perspective

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

Sources:

FINRA July 2022 Industry Notices
SEC Regulatory Actions
SEC Press Release 2022-110
NFA Notices to Members

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

Monthly Regulatory Summary (April 2022)

CRC — Thu, 05 May 2022 11:49:08 +0000

FINRA

Regulatory Notices

Per Notice 22-11, FINRA recently took enforcement action against several firms for failing to establish or maintain a reasonably designed supervisory system for recommendations of alternative mutual funds, also sometimes referred to as “alt funds” or “liquid alts” (“Alt Funds”). FINRA is continuing to note such deficiencies in its examinations and communications reviews of such products.

This Notice reminds member firms of their sales practice and supervisory obligations for such funds, and, to that end:

describes frequent findings in recent examinations and enforcement matters;
shares effective practices FINRA observed at member firms; and
notes considerations member firms may wish to take into account to improve their supervisory and compliance programs.

Special Notices

Per Special Notice 4/22/22, FINRA conducts annual elections to fill positions on the Small Firm Advisory Committee (SFAC), Regional Committees, National Adjudicatory Council (NAC) and FINRA Board of Governors (FINRA Board). This Notice provides:

a description of responsibilities for the various groups;
an overview of each elected vacancy to be filled in 2022; and
a summary of how eligible individuals can become candidates for election.

FINRA will issue an Election Notice describing the nomination and election procedures for each specific election at the start of each election cycle. Individuals interested in being considered for nomination to positions on the Regional Committees, SFAC, NAC or FINRA Board may submit an indication of interest through FINRA’s online Engagement Portal.

FINRA is committed to promoting greater representation of underrepresented minorities and women across the industry and is seeking to increase such representation on its committees. FINRA encourages those with diverse backgrounds and perspectives to consider running for the vacancies discussed in this Notice.

SEC

Final Rules

There were no final rules in April.

Proposed Rules

Per Release No. 34-94615, the SEC is proposing a set of rules (“Regulation SE”) and forms under Section 3D of the Securities Exchange Act of 1934 (“SEA”) that would create a regime for the registration and regulation of security-based swap execution facilities (“SBSEFs”) and address other issues relating to security-based swap (“SBS”) execution generally. One of the rules being proposed as part of Regulation SE would implement Section 765 of the Dodd-Frank Act, which is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS (“SBS exchanges”). Other rules being proposed as part of Regulation SE would address the cross-border application of the SEA’s trading venue registration requirements and the trade execution requirement for SBS. In addition, the SEC is proposing to amend an existing rule to exempt, from the SEA definition of “exchange,” certain registered clearing agencies as well as registered SBSEFs that provide a market place only for SBS. The SEC also is proposing a new rule that, while affirming that an SBSEF would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements. Finally, the SEC is proposing certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the SEC. The SEC also is withdrawing all previously proposed rules regarding these subjects.

Interim Final Rules

There were no interim final rules in April.

Interpretive Releases

There were no interpretive releases in April.

Policy Statements

There were no policy statements in April.

NFA

Notices to Members

There were no Notices to Members in April.

News Releases

April 14, 2022

NFA orders Connecticut-based Interactive Brokers LLC to pay a $250,000 fine

April 14, Chicago—NFA has ordered Connecticut-based futures commission merchant and forex dealer Member Interactive Brokers LLC to pay a $250,000 fine.

The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by Interactive Brokers, in which the firm neither admitted nor denied the allegations in the Complaint. In its Complaint, the BCC alleged that Interactive Brokers canceled retail customer forex orders contrary to the reasons permitted under NFA Compliance Rule 2-43(a)(1) and failed to adequately supervise its employees in the conduct of their forex activities on behalf of the firm to ensure compliance with the relevant NFA requirements, contrary to NFA Compliance Rule 2-36(e). In its Decision, the BCC found that Interactive Brokers violated NFA Compliance Rules 2-43(a)(1) and 2-36(e).

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

Bottom of Form

Hot Issues

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.

FINRA has released its Examination and Risk Monitoring Program for 2022. Similarly, the SEC has also released its 2022 Examination Priorities. Firms should review these reports to identify if the regulators’ exam priorities intersect with the firm’s business lines.

Our Perspective

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

Sources:

FINRA April 2022 Industry Notices
SEC Regulatory Actions
NFA News Releases

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

News Update: Biden Takes Step to Regulate Cryptocurrencies

CRC — Thu, 10 Mar 2022 16:45:08 +0000

March 2022

Overview & Summary

President Biden signed an executive order on Wednesday, March 9 that will direct the federal government to produce a plan to regulate cryptocurrencies. This Executive Order will outline the first approach to addressing the risks and potential benefits of digital assets and their underlying technology. The order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Notably, the order directs the Federal Reserve to research and potentially develop its own digital dollar, which would be similar to cryptocurrencies. The order also directs the Treasury Department to develop guidelines for Americans trading and using cryptocurrency to facilitate the mitigation and reduction of fraud or market volatility. The Treasury will conduct further research on the potential role of digital assets and blockchain in future payment systems. In addition, other agencies will examine cryptocurrency's role as a speculative asset and its role in illicit finance.

The current administration has been under pressure to play more of a coordinating role in Washington’s approach regarding this asset class, as industry executives continue to lament what they believe is a lack of clarity on rules; this executive order takes a step in that direction.

Our Take

The cryptocurrency market is now worth more than $3 trillion. Surveys suggest that around 16 percent of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies.

Whether you are an adviser looking to expand your investment strategy to include digital assets, or you are looking to participate in ICOs or build out a platform for trading cryptocurrency as a broker-dealer, it is wise to consider partnering with an established compliance team who can help you navigate this imminent regulation and provide assistance from initial registration to regulatory examination.

CRC recommends that firms prepare to ensure that appropriate controls and procedures are developed to allow sufficient oversight into this area.

As with any compliance initiative or change to regulation, CRC recommends that all personnel are well trained, and that such training is both highly specific to firm policies and procedures and appropriately documented.

Opportunities for CRC to Assist Your Firm

CRC is available for outsourced support with respect to cryptocurrency.
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.
CRC can prepare written electronic communications and record retention policies and procedures designed to comply with relevant industry rules, regulations, and laws.
CRC offers best practices guidance to firms that seek to improve current protocols or to further strengthen existing program compliance.

Please contact Mitch Avnet for more information.

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

The post News Update: Biden Takes Step to Regulate Cryptocurrencies appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (February 2022)

CRC — Wed, 02 Mar 2022 15:23:30 +0000

Monthly Regulatory Summary

FINRA

Regulatory Notices

Per Notice 22-05, FINRA has adopted amendments to Rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) place a hold on a securities transaction (in addition to the already-permitted hold on a disbursement of funds or securities) where there is a reasonable belief of financial exploitation; and (2) extend a temporary hold on a disbursement or transaction for an additional 30 business days, beyond the current maximum of 25 business days (for a total of 55 business days), if the member firm has reported the matter to a state regulator or agency, or a court of competent jurisdiction. The amendments to Rule 2165 become effective March 17, 2022.

The rule text is available in Attachment A.

Per Notice 22-06, the U.S. government has imposed sanctions in response to Russia’s actions in Ukraine. FINRA is issuing this Notice to provide member firms with information about these recent actions. FINRA encourages member firms to continue to monitor the Department of Treasury’s Office of Foreign Asset Control (OFAC) website for relevant information.

Special Notices

There were no Special Notices in February.

SEC

Final Rules

There were no Final Rules in February.

Proposed Rules

Per Release No. IA-5955, the SEC is proposing new rules under the Investment Advisers Act of 1940 (the “Advisers Act” or the “Act”). The SEC proposes to require registered investment advisers to private funds to provide transparency to their investors regarding the full cost of investing in private funds and the performance of such private funds. The SEC also is proposing rules that would require a registered private fund adviser to obtain an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion from an independent opinion provider. In addition, the SEC is proposing rules that would prohibit all private fund advisers, including those that are not registered with the Commission, from engaging in certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest and the protection of investors. All private fund advisers would also be prohibited from providing preferential treatment to certain investors in a private fund, unless the adviser discloses such treatment to other current and prospective investors. The SEC is proposing corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these proposed new rules and assist our examination staff. Finally, the SEC is proposing amendments to the Advisers Act compliance rule, which would affect all registered investment advisers, to better enable SEC staff to conduct examinations.

Per Release No. 33-11028, the SEC is proposing new rules under the Investment Advisers Act of 1940 (“Advisers Act”) and the Investment Company Act of 1940 (“Investment Company Act”) to require registered investment advisers (“advisers”) and investment companies (“funds”) to adopt and implement written cybersecurity policies and procedures reasonably designed to address cybersecurity risks. The SEC also is proposing a new rule and form under the Advisers Act to require advisers to report significant cybersecurity incidents affecting the adviser, or its fund or private fund clients, to the Commission. With respect to disclosure, the SEC is proposing amendments to various forms regarding the disclosure related to significant cybersecurity risks and cybersecurity incidents that affect advisers and funds and their clients and shareholders. Finally, the SEC is proposing new recordkeeping requirements under the Advisers Act and Investment Company Act.

Per Release No. 34-94196, the SEC proposes rules 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 facilitate a T+1 standard settlement cycle, the SEC also proposes new requirements for the processing of institutional trades by broker-dealers, investment advisers, and certain clearing agencies. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. The SEC proposes to require compliance with a T+1 standard settlement cycle, if adopted, by March 31, 2024. The SEC also solicits comment on how best to further advance beyond T+1.

Per Release No. 33-11030, the SEC is proposing to amend certain rules that govern beneficial ownership reporting. 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 regulation 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. The SEC also is proposing to amend provisions regarding the date on which Schedules 13D and 13G filings are deemed to have been made. Finally, the SEC is proposing to require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

Per Release No. 34-94212, the SEC is proposing for public comment amendments to the SEC’s rules implementing its whistleblower program. The Securities Exchange Act of 1934 (“Exchange Act”) provides for, among other things, the issuance of monetary awards to any eligible whistleblower who voluntarily provides the SEC with original information about a securities law violation that leads to the SEC’s success in obtaining a monetary order of more than a million dollars in a covered judicial or administrative action brought by the SEC (“covered action”). If an eligible whistleblower qualifies for an award, Section 21F requires an award that is at least 10 percent, but no more than 30 percent, of the amount of the monetary sanctions collected in the covered action. The receipt of an award in a covered action also enables a whistleblower to qualify for an award in connection with judicial or administrative actions based on the whistleblower’s same original information and brought by the U.S. Department of Justice (“DOJ”) and certain other statutorily identified agencies or entities (“related actions”). The proposed rules would make two substantive changes to the Commission’s whistleblower rules that implement the whistleblower program, as well as several conforming amendments and technical corrections.

Per Release No. 34-94313, the SEC is proposing a new rule and related form pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”), including Section 13(f)(2), which was added by Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”). The proposed rule and related form are designed to provide greater transparency through the publication of short sale related data to investors and other market participants. Under the rule, institutional investment managers that meet or exceed a specified reporting threshold would be required to report, on a monthly basis using the proposed form, specified short position data and short activity data for equity securities. In addition, the SEC is proposing a new rule under the Exchange Act to prescribe a new “buy to cover” order marking requirement, and proposing to amend the national market system plan governing the consolidated audit trail (“CAT”) created pursuant to the Exchange Act to require the reporting of “buy to cover” order marking information and reliance on the bona fide market making exception in the Commission’s short sale rules. The SEC is publishing the text of the proposed amendments to the CAT NMS Plan in a separate notice.

Per Release No. 34-94314, the SEC is publishing notice of the text of the proposed amendments to the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”) in connection with the Commission’s issuance of Release No. 34-94313, the “Short Position and Short Activity Reporting by Institutional Investment Managers” (the “Proposing Release”).

Per Release No. 34-94315, on November 18, 2021, the SEC issued for comment a proposed rule under the Securities Exchange Act of 1934 (“Exchange Act”) in Release No. 34-93613 (Nov. 18, 2021), 86 FR 69802 (Dec. 8, 2021) regarding the reporting of securities loans. The Commission is reopening the comment period for the proposed rule in light of the proposed Exchange Act rule regarding short sale disclosure. In particular, the SEC is soliciting comment on any potential effects of the proposed Exchange Act rule regarding short sale disclosure that the Commission should consider in determining whether to adopt the proposed Exchange Act rule regarding the reporting of securities loans.

Interim Final Rules

There were no interim final rules in February.

Interpretive Releases

There were no interpretive releases in February.

Policy Statements

There were no policy statements in February.

NFA

Notices to Members

Per Notice I-22-05:

February 01, 2022

Extension of relief from the on-site annual inspection of branch offices and guaranteed IBs

Due to COVID-19, NFA allowed Members to conduct all calendar year 2020 and 2021 annual inspections of branch offices and guaranteed introducing brokers (IB) remotely (see Notices to Members I-20-35 and I-21-25). NFA is extending the relief provided in Notices I-20-35 and I-21-25 through the end of 2022. Although Members must conduct the required annual inspection of each branch office and guaranteed IB by December 31, 2022, firms may conduct these inspections remotely. A Member that conducts a remote examination in 2022 based on this relief may still conduct a remote examination in 2023 if its risk assessment indicates it is appropriate to do so. This risk assessment should take into account when the firm most recently conducted an on-site exam.

Per Notice I-22-06:

February 02, 2022

Notice of Members Elected to NFA's Board of Directors and Nominating Committee

Board of Directors

This year there was one contested election in the CPO/CTA category of NFA's Board of Directors. The result of the election is as follows:

CPO/CTA Category:

Douglas L. Bry, Augur Trading Company

During its meeting on January 20, 2022, NFA's Executive Committee, pursuant to Article VII, Section (3)(c) and Article X, Section 3 of NFA's Articles of Incorporation, elected the following nominees to the Board and Nominating Committee:

Board of Directors

FCM Category:

Scott Andersen*, SG Americas Securities LLC
Gerald F. Corcoran, R.J. O'Brien & Associates LLC
Maureen C. Downs, Phillip Capital, Inc.

IB Category:

Scott W. Stewart, Stewart-Peterson Group, Inc.

CPO/CTA Category:

Constance R. Wick, Crabel Capital Management LLC

SD/MSP/RFED Category:

Mark L. Maurer, StoneX Markets LLC
William F. McCoy, Morgan Stanley
Don Thompson, JP Morgan Chase & Co.

2022 NFA Nominating Committee

FCM Category:

David Allocco*, Citigroup Global Markets, Inc.

IB Category:

Trent Hurley*, Hurley & Associates, Inc.

CPO/CTA Category:

Simon Raykher*, Kepos Capital LP

SD/MSP/RFED Category:

Syed Ali*, Barclays Bank PLC

The terms of NFA's Board of Directors and Nominating Committee members will begin on February 17, 2022. Board members representing contract markets serve one-year terms. All other Board members serve two-year terms. Nominating Committee members serve three-year terms.

* Newly elected

Per Notice I-22-07:

February 22, 2022

NFA's Board of Directors re-elects Maureen C. Downs to serve as Chair

At its February meeting, NFA's Board of Directors re-elected Maureen C. Downs, Phillip Capital, Inc., to serve a one-year term as Chair. The Board also re-elected Don Thompson, JPMorgan Chase & Co., to serve as Vice-Chair.

In addition, the Board elected the following individuals to serve as public directors for two-year terms:

Ana Beskin, Amazon People Experience and Tech;
Ronald F. Filler, New York Law School;
Arthur W. Hahn;
Mary M. McDonnell, McDonnell & Associates; and
Michael H. Moskow, The Chicago Council on Global Affairs.

The Board also elected the following individuals to serve one-year terms on NFA's Executive Committee:

Mark G. Bagan, Minneapolis Grain Exchange;
Seth P. Bender, HSBC Bank PLC;
Douglas L. Bry, Augur Trading Company;
Michael T. Burke, HighGround Trading LLC;
Michael C. Dawley, Bluefin Partners LLC;
Arthur W. Hahn;
Julie Holzrichter, CME Group, Inc.;
Ernest L. Jaffarian, Efficient Capital Management LLC;
Thomas R. Kadlec, ADM Investor Services, Inc.;
Mary M. McDonnell, McDonnell & Associates;
Michael H. Moskow, The Chicago Council on Global Affairs;
Todd E. Petzel, Offit Capital Advisors LLC; and
Don Thompson, JPMorgan Chase & Co.

Ms. Downs, NFA Permanent Special Advisor Leo Melamed, and NFA's President also serve on the Executive Committee.

News Releases

February 28, 2022

NFA orders Newport Beach, Calif. commodity trading advisor Plus EV Capital LLC never to reapply for NFA membership

February 28, Chicago—NFA has ordered Plus EV Capital LLC (EV Capital), a former NFA Member commodity trading advisor located in Newport Beach, Calif., never to reapply for membership or act as a principal of an NFA Member. NFA also ordered Rohit Chopra, EV Capital's sole owner, principal and associated person, not to reapply for membership or act as a principal of an NFA Member for three years. If Chopra seeks NFA membership following the three-year period, he must pay a $100,000 fine.

The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee and a settlement offer submitted by EV Capital and Chopra, in which they neither admitted nor denied the allegations. The Complaint alleges that EV Capital and Chopra placed unauthorized trades in customers' accounts, misrepresented to customers about the trades placed in their accounts, made highly risky trades in a customer's account and manipulated allocation instructions to benefit Chopra to the detriment of customers.

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

Bottom of Form

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

Our Perspective

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

Sources:

FINRA February 2022 Industry Notices
SEC Regulatory Actions
NFA Notices
NFA News Releases

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

Monthly Regulatory Summary (January 2022)

CRC — Fri, 25 Feb 2022 13:25:35 +0000

Monthly Regulatory Summary

FINRA

Rule Filings

Per File No. SR-FINRA-2022-001, FINRA filed with the SEC a proposed rule change to extend temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Years 2020 and 2021, and Through June 30 of Calendar Year 2022) under FINRA Rule 3110 (Supervision) to include calendar year 2022 inspection obligations through December 31, 2022 within the scope of the supplementary material. The proposed additional six-month extension of Rule 3110.17 is necessary to address the operational challenges resulting from the COVID-19 pandemic that many member firms continue to face in planning for and timely conducting, during the second half of calendar year 2022, the on-site inspection component of Rule 3110(c) (Internal Inspections) at locations requiring inspection in calendar year 2022.

FINRA has designated the proposed rule change as constituting a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4 under the Act, which renders the proposal effective upon receipt upon of the filing by the SEC.

At any time within 60 days of the filing of the proposed rule change, the SEC summarily may temporarily suspend such rule change if it appears to the SEC that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the SEC takes such action, the SEC shall institute proceedings to determine whether the proposed rule should be approved or disapproved.

Per File No. SR-FINRA-2022-002, FINRA is filing with the SEC a proposed rule change to amend FINRA Rule 7620A (FINRA/Nasdaq Trade Reporting Facility Reporting Fees) to modify the query fee applicable to non-retail participants that use the FINRA/Nasdaq Trade Reporting Facility Carteret (the “FINRA/Nasdaq TRF Carteret”) and the FINRA/Nasdaq Trade Reporting Facility Chicago (the “FINRA/Nasdaq TRF Chicago”) (collectively, the “FINRA/Nasdaq TRF”).

Regulatory Notices

Per Notice 22-01, FINRA issued 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 was Jan. 28, 2022. It is critical that firms ensure they paid in full or reported discrepancies by this deadline.

Per Notice 22-02, FINRA has amended, with immediate effectiveness, the provisions of FINRA Rule 2251 regarding rates of reimbursement for expenses incurred in processing and forwarding proxy and other issuer-related materials. As specified in more detail within the Notice, the amendments apply the notice and access fees set forth under the rule to the distribution of investment company shareholder reports and further prohibit fees on accounts containing only shares that were transferred to the account holder by the member without charge. These amendments conform Rule 2251 to provisions in the New York Stock Exchange (NYSE) rules approved by the Securities and Exchange Commission (SEC).

The text of the rule change is available as Attachment A.

Per Notice 22-03, FINRA has adopted amendments to its rules to clarify the application of FINRA rules to security-based swaps (SBS):

FINRA has adopted a new Rule 0180 (Application of Rules to Security-Based Swaps), which, along with conforming amendments to Rule 9610 (Procedures for Exemptions—Application), became effective February 6, 2022. The new rule replaces the expiring temporary Rule 0180 and generally applies FINRA rules to members’ activities and positions with respect to SBS, with limited exceptions.
FINRA has amended its financial responsibility and operational rules, including Rule 4120 (Regulatory Notification and Business Curtailment), to conform to the Securities and Exchange Commission’s (SEC or Commission) SBS-related capital, margin and segregation requirements. These amendments became effective February 6, 2022.
FINRA has adopted a new SBS-specific margin rule, Rule 4240 (Security-Based Swap Margin Requirements), which replaces the expiring interim pilot program establishing margin requirements for credit default swaps (CDS). The new margin rule, along with related amendments to Rules 4210 (Margin Requirements) and 4220 (Daily Record of Required Margin), will become effective April 6, 2022.

The amended text of the rules is set forth in Attachment A.

Per Notice 22-04, FINRA issued this Notice toremind member firms of their obligation to execute marketable customer orders fully and promptly. FINRA also reminded firms of their obligation to ensure that their supervisory systems are reasonably designed to achieve compliance with this obligation.

Special Notices

There were no Special Notices in January.

SEC

Final Rules

There were no Final Rules in January.

Proposed Rules

Per Release No. 33-11013, the SEC proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. The proposed amendments would add new conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) that are designed to address concerns about abuse of the rule to opportunistically trade securities on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC also proposed new disclosure requirements regarding the insider trading policies of issuers, and the adoption and termination (including modification) of Rule 10b5‑1 and certain other trading arrangements by directors, officers, and issuers. In addition, the SEC proposed amendments to the disclosure requirements for executive and director compensation regarding the timing of equity compensation awards made in close proximity in time to the issuer’s disclosure of material nonpublic information. Finally, the SEC proposed amendments to Forms 4 and 5 to require corporate insiders subject to the reporting requirements of Exchange Act Section 16 to identify transactions made pursuant to a Rule 10b5-1(c)(1) trading arrangement, and to disclose all gifts of securities on Form 4.

Per Release No. IA-5950, the SEC proposed to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require current reporting upon the occurrence of key events. The proposed amendments also would decrease the reporting threshold for large private equity advisers and require these advisers to provide additional information to the SEC about the private equity funds they advise. Finally, the SEC proposed to amend requirements concerning how large liquidity advisers report information about the liquidity funds they advise. The proposed amendments are designed to enhance the Financial Stability Oversight Counsel’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. 34-94062, the SEC proposed to amend a rule which defines certain terms used in the statutory definition of “exchange” under Section 3(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) to include systems that offer the use of non-firm trading interest and communication protocols to bring together buyers and sellers of securities. In addition, the SEC re-proposed amendments to Regulation ATS under the Exchange Act that were initially proposed in September 2020 for alternative trading systems (“ATSs”) to take into consideration systems that may fall within the definition of exchange because of the proposed amendments and operate as an ATS. The SEC re-proposed, with certain revisions, amendments to Regulation ATS for ATSs that trade government securities as defined under Section 3(a)(42) of the Exchange Act (“government securities”) or repurchase and reverse repurchase agreements on government securities (“Government Securities ATSs”) to: eliminate the exemption from compliance with Regulation ATS for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities (“repos”), and registers as a broker-dealer or is a bank; require Government Securities ATSs to file public revised Forms ATS-N, which would be subject to SEC review and effectiveness process, and would require a Government Securities ATS to disclose information about its manner of operations and the ATS-related activities of the registered broker-dealer or government securities broker or government securities dealer that operates the ATS and its affiliates; and apply the fair access rule to Government Securities ATSs that meet certain volume thresholds in U.S. Treasury Securities or in a debt security issued or guaranteed by a U.S. executive agency, or government-sponsored enterprise (“Agency Securities”). The SEC also proposed to amend Form ATS-N for NMS Stock ATSs, which would require existing NMS Stock ATSs to file an amendment to their existing disclosures. In addition, the SEC proposed to amend the Regulation ATS fair access rule. The SEC also proposed to require electronic filing of and to modernize Form ATS-R and Form ATS, which would require existing Form ATS filers to amend their existing disclosures. Further, the SEC re-proposed amendments to Regulation Systems Compliance and Integrity (“Regulation SCI”) to apply it to ATSs that meet certain volume thresholds in U.S. Treasury Securities or Agency Securities.

Per Release No. 34-94074, the SEC reopened the comment period for its proposal to implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The proposed rule would amend the current executive compensation disclosure rule to require a description of how executive compensation actually paid by a registrant related to the financial performance of that company (“Proposed Rules”). The Proposed Rules were first set forth in a release published in the Federal Register on May 7, 2015 (Release No. 34-74835) (“Proposing Release”), and the related comment period ended on July 6, 2015. The reopening of this comment period is intended to allow interested persons further opportunity to analyze and comment upon the Proposed Rules in light of developments since the publication of the Proposing Release and our further consideration of the Section 953(a) mandate, including by responding to the additional requests for comment included in this release.

Interim Final Rules

There were no interim final rules in January.

Interpretive Releases

There were no interpretive releases in January.

Policy Statements

There were no policy statements in January.

NFA

Notices to Members

Per Notice I-22-01:

January 12, 2022

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, 2022, 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, 2022, 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, 2022, 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

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, 2021, the exemption has not yet been affirmed. Once the exemption has been affirmed, the affirmation due date will change to March 1, 2022. Any exemptions not affirmed after March 1, 2022 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, 2021, 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, 2022, 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).

Per Notice I-22-02:

January 13, 2022

Educational resources, common deficiencies and other important regulatory information for FCM, FDM and IB Members

This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.

Members Section of NFA's Website

From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:

Futures Commission Merchants (FCM)

Forex Dealer Members (FDM)

Introducing Brokers (IB)

Regulatory Obligations Related to Common Deficiencies

The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations of Member FCMs for which NFA is the DSRO, FDMs and IBs.

Self-Examination Questionnaire: NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened.

Supervision: Pursuant to NFA Compliance Rules 2-9 and 2-36, FCM, FDM and IB Members are required to diligently supervise their employees and agents in the conduct of their commodity interest activities. NFA expects firms to ensure that they have written supervisory policies and procedures to address the manner, frequency and results of monitoring written and oral communications. Such supervision includes, when required, maintaining a record of all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. With respect to trading activity, firms should monitor to ensure any transfers or trades are not made to customers' detriment.

Third-Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. Firms must maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.

Cybersecurity: FCM, FDM and IB Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.

Members that fail to establish and implement an ISSP may be subject to disciplinary action.

Notifications (FCMs only): Under certain circumstances, an FCM must transmit a notice filing (PDF) to NFA via WinJammer^TM. For example, an FCM must notify its DSRO within 24 hours if it becomes the subject of a formal investigation by the SEC, a securities SRO or a futures SRO. An FCM must provide its DSRO a copy of any examination report issued to the FCM by the SEC or a securities SRO. An FCM must also provide notice of any correspondence received from the SEC or a securities SRO that raises issues with the adequacy of its capital position, liquidity to meet its obligations or ability to operate its business or internal controls.

Public Disclosures (FCMs only): Under CFTC Regulation 1.55, FCMs must provide disclosures on certain material business operations to customers prior to opening an account and must make those disclosures available to the general public. Firms must update this disclosure information, including any changes to the principals of the firm, as changes to firm operations arise.

Risk Management Programs (FCMs only): CFTC Regulation 1.11 requires FCMs that holds customer funds to establish, maintain and enforce a system of risk management policies and procedures designed to monitor and manage the risks associated with the FCM's activities. Firms must provide its senior management and its governing body with a quarterly Risk Exposure Report (RER), as well as interim RERs at any time the FCM detects a material change in the FCM's risk exposure. FCMs must file a copy of the quarterly RER and any interim RERs within five business days of providing the report to its senior management.

Ongoing Updates

On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins soliciting for virtual currency or micro contract products or begins doing business, the Member must immediately update its Annual Questionnaire. Keeping the Annual Questionnaire up-to-date ensures firms receive all applicable notices relating to their reporting requirements in a timely manner and ensures that BASIC displays accurate information about firms' business activities when applicable.

Recent Amendments and Reminders

The Notice also provides additional links to certain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

Per Notice I-22-03:

January 13, 2022

Educational resources, common deficiencies and other important regulatory information for CPO and CTA Members

This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.

Members Section of NFA's Website

From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:

Commodity Pool Operators (CPO)

Commodity Trading Advisors (CTA)

Regulatory Obligations Related to Common Deficiencies

The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations of CPO and CTA Members.

Self-Examination Questionnaire

Third-Party Service Providers

Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. Firms must maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.

Cybersecurity

Members that fail to establish and implement an ISSP may be subject to disciplinary action.

Pool Financial Reporting—Notification Requirements

Notice Filing Requirements: CPOs are required to file notice with NFA when a market or other event affects a commodity pool's ability to fulfill its participant obligations. Notice must be filed by 5:00 p.m. CT the next business day following one of the events outlined in Compliance Rule 2-50 and Interpretive Notice 9080.

Changes in Certified Public Accountant (CPA): In the event that a CPO changes the independent CPA engaged to audit a pool's financial statements, the CPO must file notice with NFA via EasyFile pursuant to CFTC Regulation 1.16(g) no more than 15 days after the CPA's resignation or dismissal by the CPO.

Extension Requests: If a CPO requests an extension to file an annual pool financial statement, the extension must be filed with NFA via EasyFile prior to the due date of the filing.

Cessation of Trading: When a pool ceases trading, the CPO must promptly update the Annual Questionnaire. With few exceptions, a CPO must also distribute to participants a final Annual Report and file the Annual Report with NFA. This Annual Report is due within 90 days after the pool ceases trading, absent an extension.

Calculation of Financial Ratios

Ongoing Updates

Recent Amendments and Reminders

The Notice also provides additional links to certain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

Per Notice I-22-04:

January 13, 2022

Educational resources, common deficiencies and other important regulatory information for SD Members

This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.

Members Section of NFA's Website

From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:

Regulatory Obligations Related to Common Deficiencies

The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations.

Cybersecurity: SD Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. Common deficiencies in this area include:

Failure to provide cybersecurity training to employees upon hiring and at least annually thereafter; and
Failure to establish appropriate identity and access controls to their systems and data.

Members that fail to establish and implement an ISSP may be subject to disciplinary action.

Supervision: SD Members are required to have a supervisory program and must diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602.

Market Practice: SD Members are required to implement policies and procedures designed to prevent fraud, manipulation, and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:

Failure to implement adequate trade surveillance to detect fraud, manipulation and abusive practices; and
Failure to conduct communication surveillance reasonably designed to ensure fair and balanced communications and the prohibition of fraud, manipulation and other abusive practices.

Portfolio Reconciliation: SD Members must engage in portfolio reconciliation pursuant to CFTC Regulation 23.502. Firms are required to establish, maintain and follow written procedures to resolve discrepancies identified by portfolio reconciliation.

Failure to report required regulatory messages, either at all or within the regulatory timeframes;
Failure to report accurately required data fields to the SDR; and
Failure to remediate errors and omissions ASATP after discovery.

Ongoing Updates

Recent Amendments and Reminders

The Notice also provides additional links to certain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

Recent CFTC Amendments

Capital Requirements: In July 2020, the CFTC approved its final rules for SD capital requirements. Pursuant to the final rules, SDs that are not subject to prudential regulation are required to compute regulatory capital using either standardized market and credit risk charges or internal models approved by the CFTC or NFA to calculate market and credit risk exposures. SDs electing to use internal models can use the net liquid assets method, the bank-based method, or the tangible net worth method to meet minimum capital requirements, based on the nature of their business. The compliance date for the new capital requirements was October 6, 2021.

Phase VI Margin Requirements: In December 2020, the CFTC approved its final rules for margin requirements for uncleared swaps for SD Members without a prudential regulator. The final rules include revisions to the calculation method for determining which entities are in the initial margin requirement scope for Phase VI and the timing for compliance with the initial margin requirements. Additionally, the final rules address minimum transfer amount rules for separately managed accounts and allows for separate minimum transfer amounts for initial and variation margin. Phase VI margin requirements begin on September 1, 2022.

Reporting Requirements: In September 2020, the CFTC approved its final rules for SD reporting. The final rules revise the current CFTC reporting requirements in order to improve the quality, accuracy, and completeness of the reporting data. The compliance date for the new reporting requirements is May 25, 2022.

News Releases

There were no NFA news releases in January.

Bottom of Form

Hot Issues

CyberCrime

Regulatory Exam Preparedness

Our Perspective

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

Sources:

FINRA January 2022 Industry Notices
FINRA Rule Filings
SEC Regulatory Actions
NFA Notices

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

SEC Offers Guidance on Form CRS

CRC — Tue, 18 Jan 2022 15:41:14 +0000

Overview

As firms prepare their annual ADV updates or review their compliance programs, one area where advisers and brokers who provide services to retail clients should highlight is Form CRS.

On December 17, 2021, the staff of the U.S. Securities and Exchange Commission issued observations and guidance regarding Form CRS disclosures required of SEC-registered broker-dealers and investment advisers who offer services to retail investors. The statement provides insight into CRS findings for recently examined firms. While SEC staff notes that they did observe appropriately drafted Form CRS samples from various firms, there were consistent issues found across a broad sampling within the industry. Areas where CRS improvements were most frequently noted are described below and represent areas where firms should pay close attention when reviewing the CRS to see if updates are necessary, whether or not material changes have occurred this year.

Areas of Focus

Plain English

The purpose of Regulation Best Interest and the Form CRS is to create transparency within the financial service industry. As such, the Form CRS should not contain legal jargon or esoteric industry terms that may inhibit comprehension amongst retail investors.

Live Hyperlinks

Firms were cited for including the text of links in their Form CRS which did not navigate to the correct destination or were not actually live hyperlinks. All hyperlinks to regulatory resources or additional disclosure must be live.

Delivery

Perhaps the most common deficiency cited amongst broker-dealers and investment advisers was their failure to properly deliver or evidence such delivery of Form CRS. Ensure that the Form CRS is delivered at the appropriate point in a retail client’s relationship with the firm. Policies, procedures, training, and recordkeeping should all support this distribution process.

Proper Format

Many firms were cited for failure to comply with the formatting requirements imposed by the Form CRS instructions. Firms should take care to confirm that all required headings, conversation starters, emphasized text, etc. are included throughout the document.

Website

Form CRS should be prominently linked, along with other documents such as the firm’s Form ADV Part 2 and privacy policy, on a firm’s publicly available website. This should always be updated whenever the Form CRS is updated to ensure that the most current version is available on the website.

Conflicts of Interest

Conflicts of interest are not static and can evolve over time as industry relationships, products, client-base, fee structures, etc. change and develop. As such, firms should be aware that all new conflicts (whether real, potential, or perceived) must be reported to compliance for possible inclusion in Form CRS, Form ADV Part 2, or other relevant disclosure documents.

Monitoring For Updates

CRC recommends that firms adopt a process whereby trigger events for Form CRS updates are recognized, tracked, and implemented within Form CRS by compliance. Such process should also include identifying material updates and tracking and confirmation of related re-distributions of the Form to current retail investors, clients, and customers. Such trigger events could include updates and changes to offerings, fees, compensation structure, or any other content within Form CRS.

Conclusion

The Commission is not likely to give firms a break regarding Form CRS in 2022; in fact, CRC anticipates quite the opposite. We consider that 2021 was the honeymoon period for Regulation Best Interest, and even so, it brought 27+ enforcement actions related to Form CRS alone. Those actions, in conjunction with the most recent guidance and findings from the SEC should serve as both a warning and a road map as firms review and update their Form CRS.

Next Steps for Advisers and Broker-Dealers

As always, CRC believes that the most effective compliance program is a proactive one. Accordingly, CRC recommends that advisers take this opportunity to review existing Form CRS content, format, and any related practices, policies, and procedures to ensure they adhere to current rules, and evaluate and implement any process re-engineering that might be necessary to comply fully with both Regulation Best Interest and the Form CRS instructions.

Contact Us

To discuss the Form CRS, contact a regulatory specialist at CRC. Our team is available to assist with outsourced policy and procedure management, gap analysis, policy implementation, and training.

The post SEC Offers Guidance on Form CRS appeared first on Compliance Risk Concepts.

News Reminder: SEC Approves FINRA Rules Change

CRC — Thu, 13 Jan 2022 12:53:22 +0000

Overview

In an order^[1] dated July 30, 2021, the SEC approved the adoption of new FINRA Rule 4111 and Rule 9561 and the amendment of Rule 9559. FINRA has extended the effective date for the proposed rule change to no later than 180 days after publication of a Regulatory Notice announcing this Commission approval. At time of this update, FINRA has not yet published such a Regulatory Notice.

From the SEC’s approval order:

The proposal to establish a process in new Rule 4111 to identify members firms that present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose a Restricted Deposit Requirement, conditions or restrictions on the member firm’s operations, or both, will help protect investors and encourage such member firms to change their behavior. FINRA has designed the proposed rule change to establish an annual, multi-step process to determine whether a member firm raises investor protection concerns substantial enough to require the imposition of additional obligations, while allowing identified firms several means of challenging FINRA’s decisions and affecting the ultimate outcome.

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Opportunities for CRC to Assist Your Firm

CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with CRC resources to address concern areas.

Please contact Mitch Avnet or for more information.

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

^[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post News Reminder: SEC Approves FINRA Rules Change appeared first on Compliance Risk Concepts.

News Update: JP Morgan to pay $200M for Electronic Recordkeeping Lapses

CRC — Wed, 12 Jan 2022 14:39:13 +0000

December 2021

Overview & Summary

JP Morgan has agreed to pay the SEC and CFTC a combined $200 million in response to regulatory findings which include “widespread and longstanding failures” surrounding the retention of employee electronic communications. The settlement order alleges that JP Morgan employees regularly communicated using personal email accounts, text messages, and WhatsApp as a means of conducting business. Such communication also took place on personal devices rather than firm-issued and controlled devices despite JP Morgan’s written policies and procedures and industry recordkeeping regulations.

According to the settlement order, the failures stemmed from communications-related misconduct between January 2018 and November 2020. The settlement order also states that supervisory personnel participated in the misconduct it should have been supervising and preventing; this makes the offense particularly egregious. The settlement order enumerates various specific issues relative to the failures in recordkeeping as well as JP Morgan’s responsiveness and level of cooperation with the SEC during the examination process with respect to the producing of requested communications documents.

Our Take

Electronic communications and related recordkeeping practices have been a hot topic amongst regulators in recent years. This landmark settlement is a clear indication that regulatory interest in this area is not waning and, as such, should be on the forefront of all compliance teams’ focus areas in 2022.

As always, CRC reminds firms that the best compliance program is a proactive one. Accordingly, we suggest that firms (whether registered with FINRA as a BD or with the SEC as an RIA) who permit the use of text messages, chat features, and use of personal devices for the purpose of conducting firm-related business have sufficient oversight over such processes and have appropriate record-keeping practices in place for such communication methods. Further, where firm policies and procedures have clear prohibitions or limitations on use of personal email, personal devices, chat features of social media platforms and other chat applications, text messages, etc., CRC recommends that firms ensure that controls and procedures in place allow sufficient oversight into this area.

As with any compliance initiative, CRC recommends that all personnel are well trained, and that such training is highly specific to firm policies and procedures and is appropriately documented.

Opportunities for CRC to Assist Your Firm

CRC is available for outsourced support with respect to email review and electronic communications archiving solutions. We are versed with industry-leading email review and retention platforms (e.g., Global Relay, Smarsh) and can advise on appropriate compliance-driven configuration that meets regulatory standards.
CRC can proactively conduct a review of your current compliance program and electronic communications to identify opportunities to potentially implement enhancements in preparation for regulatory examinations.
CRC is available to assist with examination responses.
CRC can prepare written electronic communications and record retention policies and procedures designed to comply with relevant industry rules, regulations and laws.
CRC offers best practices guidance to firms that seek to improve current protocols or to further strengthen current program compliance.

Please contact Mitch Avnet for more information.

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

The post News Update: JP Morgan to pay $200M for Electronic Recordkeeping Lapses appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (December 2021)

CRC — Tue, 04 Jan 2022 14:31:33 +0000

Monthly Regulatory Summary

FINRA

Regulatory Notices

Per Notice 21-42, FINRA alerted firms to a recently identified vulnerability in Apache Log4J software, which is an open-source, Java-based logging utility widely used by enterprise applications and cloud services. The “Log4Shell” vulnerability presents risk for member firms because they may be using this software in internal applications, or the software may be embedded in third-party software packages. In addition, many applications written in Java are potentially vulnerable.

Bad actors may take advantage of this vulnerability to compromise systems to potentially steal information or engage in fraudulent activities. For example, a remote attacker can exploit this vulnerability to take control of an affected system.

FINRA reminded firms that the U. S. Securities and Exchange Commission’s (SEC) Regulation S-P Rule 30 requires firms to have written policies and procedures that are reasonably designed to safeguard customer records and information and FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) also applies to denials of service and other interruptions to members’ operations. In addition to firms’ compliance with SEC regulations, FINRA expects firms to develop reasonably designed cybersecurity programs and controls that are consistent with their risk profile, business model and scale of operations.

For more information, firms should review the resources provided on FINRA’s Cybersecurity Topic Page.

Per Notice 21-43, in August 2019, FINRA launched a retrospective review that, among other things, sought stakeholders’ input on the effectiveness of Rule 3240 (Borrowing from or Lending to Customers). Based on feedback received during the review, FINRA is proposing amendments to Rule 3240 to:

emphasize that the rule generally prohibits registered persons from entering into borrowing or lending arrangements with their customers;
clarify that the rule applies to borrowing or lending arrangements that pre-exist the broker-customer relationship;
extend the rule to prohibit entering into borrowing or lending arrangements within six months after the broker-customer relationship ends;
extend the rule to prohibit borrowing or lending arrangements with persons related to either the registered person or the customer, such as an arrangement between the registered person and the customer’s spouse or between the registered person’s outside business and the customer;
modernize the “immediate family” definition;
narrow the scope of the “personal relationship” exception; and
provide factors for evaluating whether an arrangement is within the “personal relationship” or “business relationship” exceptions.

This Notice seeks comment on the proposed amendments to Rule 3240. This Notice also summarizes the predominant themes that emerged from stakeholder feedback, provides guidance to aid member firms when evaluating whether to approve a borrowing or lending arrangement that is within one of the limited exceptions to the general prohibition, and invites a broader consideration of the distinctions between Rule 3240 and federal and state approaches for regulating borrowing and lending arrangements between investment adviser representatives and their clients.

Per Notice 21-44, in February 2019, FINRA published Regulatory Notice 19-06, launching a retrospective review of Rule 4370 (Business Continuity Plans and Emergency Contact Information) to assess its effectiveness and efficiency (the BCP Rule Review). The COVID-19 pandemic, beginning in early 2020, caused unprecedented regulatory and operational impacts on member firms and other market participants, as well as regulators. During the early stages of the pandemic and while the BCP Rule Review was still underway, FINRA published Regulatory Notice 20-08 (March 2020) encouraging each member firm to review its business continuity plan (BCP) to consider pandemic preparedness and to review its emergency contacts to ensure that FINRA has a reliable means of contacting the firm.

Further, to understand broader pandemic-related regulatory and operational impacts on member firms and other stakeholders, in December 2020, through Regulatory Notice 20-42, FINRA launched a retrospective review on lessons learned from member firms and their customers’ experiences during the pandemic (the Pandemic Review).

Based on the BCP Rule Review and the Pandemic Review, both of which involved extensive feedback from a wide range of internal and external stakeholders, FINRA has determined to maintain Rule 4370 without change. This Notice summarizes the retrospective rule review process, the predominant themes that emerged from stakeholder feedback and resulting actions in both reviews, and provides guidance to member firms.

Per Notice 21-45, FINRA is updating the imbedded text of Securities Exchange Act (SEA) financial responsibility rules in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the Securities and Exchange Commission (SEC) adopted. The updated imbedded text relates to SEA Rules 15c3-1, 15c3-1a, 15c3-1b, 15c3-1d, 15c3-1e, 15c3-3, 15Fi-1 through 15Fi-5, 17a-3, 17a-4, 17a-5, 17a-11 and 18a-3. FINRA is also making available related updates of the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC’s Division of Trading and Markets (SEC staff). The updated interpretations relate to SEA Rules 15c3-1, 17a-3, 17a-4 and 17a-5.

Special Notices

There were no Special Notices in December.

SEC

Final Rules

Per Release No. 34-93701, the SEC adopted amendments to finalize interim final rules that revised Forms 20-F, 40-F, 10-K, and N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act (“HFCA Act”). The final amendments apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Consistent with the HFCA Act, the amendments require the submission of documentation to the SEC establishing that such a registrant is not owned or controlled by a governmental entity in that foreign jurisdiction and also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such registrants.

Per Release No. 33-11016, the SEC adopted amendments to Volume 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 December 20, 2021.

Proposed Rules

Per Release No. 33-11013, the SEC is proposing amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. The proposed amendments would add new conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) that are designed to address concerns about abuse of the rule to opportunistically trade securities on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC is also proposing new disclosure requirements regarding the insider trading policies of issuers, and the adoption and termination (including modification) of Rule 10b5‑1 and certain other trading arrangements by directors, officers, and issuers. In addition, the SEC is proposing amendments to the disclosure requirements for executive and director compensation regarding the timing of equity compensation awards made in close proximity in time to the issuer’s disclosure of material nonpublic information. Finally, the SEC is proposing amendments to Forms 4 and 5 to require corporate insiders subject to the reporting requirements of Exchange Act Section 16 to identify transactions made pursuant to a Rule 10b5-1(c)(1) trading arrangement, and to disclose all gifts of securities on Form 4.

Per Release No. 34-93783, the SEC is proposing amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under Section 12 of the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases.

Per Release No. IC-34441, the SEC is proposing amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The proposed amendments are designed to improve the resilience and transparency of money market funds. The proposal would remove the liquidity fee and redemption gate provisions in the existing rule, which would eliminate an incentive for preemptive redemptions from certain money market funds and could encourage funds to more effectively use their existing liquidity buffers in times of stress. The proposal would also require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to require redeeming investors to bear the liquidity costs of their decisions to redeem. The SEC is also proposing to increase the daily liquid asset and weekly liquid asset minimum liquidity requirements, to 25% and 50% respectively, to provide a more substantial buffer in the event of rapid redemptions. The proposal would amend certain reporting requirements on Forms N-MFP and N-CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N-1A to reflect our proposed changes to the regulatory framework for these funds. In addition, the SEC is proposing rule amendments to address how money market funds with stable net asset values should handle a negative interest rate environment. Finally, the SEC is proposing rule amendments to specify how funds must calculate weighted average maturity and weighted average life.

Per Release No. 34-93784, the SEC is re-proposing for comment a rule under the Securities Exchange Act of 1934 (“Exchange Act”), which would be a new rule designed to prevent fraud, manipulation, and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security-based swap. The rule is designed specifically to take into account the unique features of a security-based swap and would explicitly reach misconduct in connection with the ongoing payments and deliveries that typically occur throughout the life of a security-based swap. The SEC also is proposing a new rule, which would make it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer or major security-based swap participant, or any person acting under such person’s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the security-based swap dealer’s or major security-based swap participant’s chief compliance officer (“CCO”) in the performance of their duties under the federal securities laws or the rules and regulations thereunder. Finally, the SEC is using its authority under the Exchange Act to propose 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 Commission a schedule disclosing certain information related to its security-based swap position.

Interim Final Rules

There were no interim final rules in December.

Interpretive Releases

There were no interpretive releases in December.

Policy Statements

There were no policy statements in December.

NFA

Notices to Members

Per Notice I-21-38:

December 01, 2021

Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA 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, which is March 1, 2022 for this affirmation cycle.

Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 2, 2022. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC, if either continues to operate without registration or exemption.

The Notice includes instructions on how to complete the affirmation process.

The Notice also includes frequently asked questions about exemptions.

Per Notice I-21-39:

December 01, 2021

Reminder: Increases to NFA Member swap dealer and major swap participant dues effective January 1, 2022

NFA Bylaw 1301 imposes annual dues on NFA Member swap dealers (SD) and major swap participants (MSP). The current annual dues amounts have remained unchanged, except for a reduction in MSP annual dues, since NFA established its swap regulatory program in 2013. Given the expansion of NFA's swaps regulatory program over the past eight years, NFA's Board of Directors unanimously approved the following increases to these annual dues amounts, which will become effective January 1, 2022 for dues payable after that date:

Annual dues for large financial institution (LFI) SD Members will increase from $1,000,000 to $1,300,000;
Annual dues for non-LFI SD Members will increase from $250,000 to $325,000;
Annual dues for SD Members that are affiliates of SD Members paying dues in one of the above categories will increase from $150,000 to $200,000; and
Annual dues for MSP Members will increase from $150,000 to $200,000.

For more information on the increases, see Notice to Members I-21-16.

Per Notice I-21-40:

December 02, 2021

FCM and RFED filing requirements for Christmas and New Year's Day—Reminder for upcoming holidays

Christmas Day—Saturday, December 25, 2021

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Thursday, December 23, 2021 are required to be submitted by 12:00 noon on Friday, December 24, 2021; and
Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements are required to be prepared as of Friday, December 24, 2021 and are required to be submitted by 12:00 noon on Monday, December 27, 2021.

New Year's Day—Saturday, January 1, 2022

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Thursday, December 30, 2021 are required to be submitted by 12:00 noon on Friday, December 31, 2021;
Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 31, 2021 are required to be submitted by 12:00 noon on Monday, January 3, 2022.

Any information filed by FCMs or RFEDs after its due date must be accompanied by a fee for each business day that it is late.

Holiday Filing Schedule

Per Notice I-21-41:

December 02, 2021

SD holiday filing requirements

Visit NFA's website to view schedules of 2022 swap dealer (SD) holiday filings, risk data and margin monitoring filingsand financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2022 holiday filing requirements.

For more information about SD filing requirements visit NFA's website.

Per Notice I-21-42:

December 06, 2021

Action required: NFA adds virtual currency and micro contract-related questions to Annual Questionnaire

NFA Members must complete the Annual Questionnaire annually and update it throughout the year to reflect significant changes in business activity. Due to recent increased interest and activity in virtual currency and micro contract products, NFA has updated the Questionnaire to address Members' spot/physical virtual currency, virtual currency derivatives and micro contract transactions.

NFA requires all CPO, CTA, FCM, FDM and IB Members to complete the new questions as soon as possible to avoid unnecessary inquiries.

Per Notice I-21-43:

December 07, 2021

Action encouraged: CPO and CTA Members should ensure Executive Representative information is accurate prior to December 27, 2021 to facilitate voting in upcoming contested election

Contested Election in CPO and CTA Category

The upcoming 2022 Board of Directors election includes a contested election in the CPO and CTA category for a position with no conditions as to funds under management, as of June 30, 2021. Two individuals have been nominated for this position and therefore NFA will be conducting an election for CPO and CTA Members to vote for the individual to fill this Board position. More information on the candidates and the election process will be provided prior to the election period.

Who Can Vote in a Contested Election

Bylaw 409 requires each Member to designate an Executive Representative who has the sole authority, among other things, to cast votes on a Member's behalf in a contested election for an NFA Director position. Therefore, it is important that each CPO and CTA Member ensure that the individual currently listed as the Member's Executive Representative and their contact information are accurate. CPO and CTA Members should review, and if necessary, update this information prior to December 27, 2021 to ensure that NFA distributes the election materials to the appropriate Executive Representative.

Designate/Update Executive Representative

Each Member may designate or update its Executive Representative 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.

If a Member has not designated an Executive Representative, the Membership Contact listed on the Member's Form 7-R will be deemed to be the Member's Executive Representative and will have the 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 be not be counted.

Per Notice I-21-44:

December 20, 2021

Effective date for amendment to exclude certain associated persons from the Branch Office Manager Examination requirement

NFA Compliance Rule 2-7 generally prohibits a Member from permitting an associated person (AP) to act as a branch office manager unless the individual has taken and passed NFA's Branch Office Manager Examination (Series 30). NFA recently amended NFA Compliance Rule 2-7 to exclude from the Series 30 requirement any swap AP acting as a branch office manager for a Member engaged solely in swap activities. NFA adopted this amendment because swap APs are also required to pass NFA's Swaps Proficiency Requirements, which include a section on supervision and are directly related to a Member's swap activities. Passing the Series 30, which in addition to supervision covers topics not directly applicable to a branch office solely engaged in swaps, is no longer necessary for these APs.

This amendment was unanimously approved by the Board and will become effective on January 3, 2022.

More information regarding this amendment can be found in NFA's November 22, 2021 submission letter to the CFTC.

Per Notice I-21-45:

December 21, 2021

Effective date for amendment to NFA Financial Requirements Section 18

NFA Financial Requirements Section 18 requires each swap dealer (SD) Member that is also a broker-dealer or security-based SD (SBSD) to file financial reports with NFA using the SEC's FOCUS report. NFA recently learned that certain SDs intend to comply with the CFTC's capital, margin, segregation, recordkeeping and reporting requirements in lieu of the equivalent SEC regulations, pursuant to SEC Rule 18a-10, and will not file the FOCUS report with the SEC. Therefore, NFA amended Financial Requirements Section 18 to require SBSDs that do not file the FOCUS report with the SEC to use one of the other two forms developed by NFA: Form FR-CSE-NLA or FR-CSE-BHC.

This amendment was unanimously approved by NFA's Board of Directors and is effective immediately.

NFA's November 22, 2021 submission letter to the CFTC contains more detailed information regarding this amendment.

Per Notice I-21-46:

December 29, 2021

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

Notice of Annual Meeting

NFA will hold its Annual Meeting of Members (Annual Meeting) on Tuesday, February 1, 2022 at 10:00 a.m. (CST), at its offices located at 300 S. Riverside Plaza, Suite 1800, Chicago, IL. The agenda of the meeting is:

Opening remarks
Election of one (1) individual to NFA's Board of Directors (NFA Board) in the CPO and CTA category for a position with no conditions on its ranking of CPOs and CTAs reporting any funds under management allocated to futures and swaps on NFA Form PQR and NFA Form PR as of June 30, 2021 (At-Large position).
Members' questions regarding NFA-related topics.
Any other business that may properly come before the Annual Meeting.

To register to attend the Annual Meeting, please email your name, NFA ID# and contact email to membermeeting2022@nfa.futures.org. Registration is due by Friday, January 28, 2022, at 5:00 p.m. (CST).

News Releases

December 09, 2021

NFA orders Chicago, Ill. commodity trading advisor K-Ratio Advisory LLC and former introducing broker K-Ratio Brokerage LLC never to reapply for NFA membership

December 9, Chicago—NFA has ordered K-Ratio Advisory LLC (KRA), a CFTC-registered commodity trading advisor and former NFA Member located in Chicago, Ill., and K-Ratio Brokerage LLC (KRB), a previously CFTC-registered introducing broker Member located in Chicago, Ill., never to reapply for membership or act as a principal of an NFA Member.

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 KRA and KRB, in which they neither admitted nor denied the allegations. The Complaint alleges that KRA and KRB operated an unregulated trading program without having adequate financial wherewithal to do so. The Complaint also alleges that KRA and KRB used misleading and deceptive promotional material and communications. The Complaint also alleges that KRA and KRB allowed an unregistered individual to act as an associated person without being registered in such capacity and an NFA Associate. Finally, the Complaint alleges that KRA and KRB failed to supervise.

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

December 16, 2021

NFA statement regarding confirmation of Russ Behnam as CFTC Chairman

December 16, Chicago—NFA congratulates Rostin (Russ) Behnam on his confirmation as Chairman of the Commodity Futures Trading Commission. His deep knowledge and experience are integral to advancing our common mission of protecting investors and ensuring market integrity. We look forward to working with Chairman Behnam and the Commission on our industry's important regulatory matters.

- Thomas W. Sexton, III, NFA President and CEO

Hot Issues

CyberCrime

Regulatory Exam Preparedness

Our Perspective

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

Sources:

FINRA December 2021 Industry Notices
SEC Regulatory Actions
NFA Notices

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

Monthly Regulatory Summary (November 2021)

CRC — Thu, 09 Dec 2021 14:29:44 +0000

FINRA

Regulatory Notices

Per Notice 21-41, FINRA has adopted important changes to its continuing education (CE) and registration rules to train registered persons more effectively while accommodating registered persons, particularly women and underrepresented minorities, whose personal circumstances take them away from the industry for a time. The changes to Rules 1210 and 1240: (1) provide eligible individuals who terminate any of their representative or principal registration categories the option of maintaining their qualification for any terminated registration categories by completing annual CE through a new program, the Maintaining Qualifications Program (MQP); (2) require registered persons to complete CE Regulatory Element annually for each representative or principal registration category that they hold; and (3) expressly allow firms to consider other required training toward satisfying an individual’s annual CE Firm Element and extend the Firm Element requirement to all registered persons.

The changes relating to the MQP (paragraph (c) of Rule 1240) and the Financial Services Affiliate Waiver Program (FSAWP) (Rule 1210.09) will become effective March 15, 2022.

All other changes, including the changes relating to the Regulatory Element, Firm Element and the two-year qualification period, will become effective January 1, 2023.

The amended text of the rules is set forth in Attachment A. FINRA is also providing frequently asked questions relating to the changes on its website.

Special Notices

There were no Special Notices in November.

SEC

Final Rules

Per Release No. IA-5904, the SEC adopted amendments to the rule under the Advisers Act that permits investment advisers to charge performance-based compensation to “qualified clients.” The rule defines “qualified client” with reference to specific dollar amount thresholds, which are required to be adjusted every five years to account for the effects of inflation. These amendments replace specific dollar amount thresholds in the rule’s “qualified client” definition with references to the SEC’s “most recent order,” as defined by the amended rule, containing the specific dollar amount thresholds adjusted for inflation.

The amendments were effective on November 10, 2021.

Per Release No. 34-93596, the SEC amended the Federal proxy rules to enhance the ability of shareholders to elect directors though the proxy process in a manner consistent with their ability to vote in person at a shareholder meeting. Specifically, the SEC is requiring the use of a universal proxy card in all non-exempt solicitations involving director election contests, except those involving registered investment companies and business development companies. To facilitate the use of a universal proxy card, the SEC also amended the Federal proxy rules to establish certain notice, minimum solicitation, filing, formatting and presentation requirements, along with other related rule changes consistent with the adoption of a universal proxy requirement. In addition, the SEC adopted new disclosure requirements relating to voting standards and further requiring certain voting options for all director elections, whether or not contested.

The rules are effective January 31, 2022.

Compliance Date:

The rule changes the SEC adopted in this document will become effective for any shareholder meeting featuring an election contest held after August 31, 2022.

Some of the rule amendments adopted in this document will apply to all director elections, not just those that are contested. While these changes do not require coordination and notice to the other party, as is required in a contested election, they do involve enhanced disclosure of the legal effect of votes under the applicable voting standard for the election. The amendments also impose new voting options where the applicable voting standards give effect to abstain or withhold votes. Given these changes, the SEC determined that the same transition period for compliance (for shareholder meetings held after August 31, 2022) is appropriate for all of the rule amendments adopted in this document.

Proposed Rules

Per Release No. 34-93518, the SEC is proposing amendments to rules to convert the filing of certain applications, confidential treatment requests, and forms from paper to electronic submission. Specifically, the SEC proposes to amend its rules to require that the following types of filings be submitted via its Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system: applications for orders under any section of the Investment Advisers Act of 1940 (“Advisers Act”) and confidential treatment requests for filings made under section 13(f) of the Securities Exchange Act of 1934 (“Exchange Act”). The SEC also proposes rule amendments to harmonize the requirements for the submission of applications for orders under the Advisers Act and the Investment Company Act of 1940 (“Investment Company Act”). In addition, the SEC proposes to amend other rules and a form to require the electronic submission of Form ADV-NR through the Investment Adviser Registration Depository (“IARD”) system. The SEC also proposes to require non-resident general partners and non-resident managing agents to amend their Form ADV-NR within 30 days whenever any information contained in the form becomes inaccurate by filing with the Commission a new Form ADV-NR. Further, the SEC is re-proposing amendments to Form 13F to require managers to provide additional identifying information. Finally, the SEC is re-proposing certain technical amendments to Form 13F, including modernizing the structure of data reporting and amending the instructions on Form 13F for confidential treatment requests in light of a recent decision of the U.S. Supreme Court.

Per Release No. 33-11005, the SEC is proposing rule and form amendments to update filing requirements under its Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. The proposed amendments would mandate the electronic filing or submission of most of the documents that are currently permitted electronic submissions under Regulation S-T, including all filings on Form 6-K and filings made by multilateral development banks; mandate the electronic submission in portable document format (“PDF format”) of the “glossy” annual report to security holders; mandate the electronic filing of the certification made pursuant to the Exchange Act and its rules that a security has been approved by an exchange for listing and registration; mandate the use of Inline eXtensible Business Reporting Language (“Inline XBRL”) for the filing of the financial statements and accompanying notes to the financial statements required by Form 11-K; and allow for the electronic submission in PDF format of certain foreign language documents.

Per Release No. 34- 93595, the SEC is proposing amendments to the Federal proxy rules governing proxy voting advice. The SEC is proposing these amendments in light of feedback from market participants on those rules and certain developments in the market for proxy voting advice. The proposed amendments would remove a condition to the availability of certain exemptions from the information and filing requirements of the Federal proxy rules for proxy voting advice businesses. In addition, the proposed amendments would remove a note that provides examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the Federal proxy rules’ prohibition on material misstatements or omissions. Finally, the release includes a discussion regarding the application of that prohibition to proxy voting advice, in particular with respect to statements of opinion.

Per Release No. 34-93613, the SEC is proposing a rule to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association (“RNSA”). The proposed rule would also require that the RNSA make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan.

Per Release No. 34-93614, the SEC is proposing amendments to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers (“SBSDs”), and major security-based swap participants (“MSBSPs”).

The SEC is proposing amendments to the introductory text of Rule 17a-4(f) to make the rule more technology neutral. In particular, the phrase “electronic storage media” would be replaced with the phrase “electronic recordkeeping system” throughout the rule, including in the introductory text. The SEC is proposing a conforming amendment to Rule 18a-6(e) to replace the phrase “electronic storage system” with the phrase “electronic recordkeeping system” throughout the rule, including in the introductory text. Consistent with this proposal, the amendments to Rule 18a-6(e) would replace the term “electronic storage system” throughout the rule with the term “electronic recordkeeping system,” including in the introductory text. In addition, the SEC is proposing amendments to the introductory text of Rules 17a-4(f) and 18a-6(e) solely to improve clarity and readability, but that otherwise are not intended to alter the meaning of either introductory text.

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

Notices to Members

Per Notice I-21-34:

FCM and IB Members—FinCEN updates its list of FATF-identified jurisdictions with AML/CFT deficiencies

On October 26, 2021, the Financial Crimes Enforcement Network (FinCEN) issued a news release announcing that the Financial Action Task Force (FATF) reissued its list of jurisdictions with strategic AML/CFT deficiencies. NFA Member futures commission merchants and introducing brokers should review this release to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.

Per Notice I-21-35:

NFA Announces Nominations Made by the 2021 Nominating Committee

In accordance with NFA Bylaw 406, the Office of the Secretary has received from the 2021 Nominating Committee a list of its nominees for positions on NFA's Board of Directors and 2022 Nominating Committee. The list of nominees included with this Notice shall serve as notification to NFA Members of the candidates proposed by the 2021 Nominating Committee.

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 2, 2021. 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.

Per Notice I-21-36:

Request for Public Representative Nominations for NFA's Board of Directors

The terms of five of NFA's current Public Representatives—Ronald H. Filler, Arthur W. Hahn, Jim Marshall, Mary M. McDonnell, and Michael H. Moskow—will expire at the Board of Directors' (Board) regular Annual Meeting on February 17, 2022. 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.

At its regular Annual Meeting, on February 17, 2022, the Board will elect, by majority vote, from among the nominees five Public Representatives to serve on the Board for two-year terms.

NFA requests that Public Representative nominations be submitted by January 7, 2022 so that NFA's Executive Committee can review the potential nominees at its meeting on January 20, 2022.

Per Notice I-21-37:

Action encouraged: Complete Firm Application and Annual Registration Update processes prior to December 3, 2021

On December 4, 2021, NFA will update the Firm Application and Annual Registration Update in the Online Registration System (ORS). In order to complete these updates, all incomplete Firm Application (FIRMAPPL) and Annual Registration Update (FIRMARU) processes will be deleted. Therefore, NFA encourages firms to complete any FIRMAPPL or FIRMARU process listed on the Processes Not Complete page in ORS no later than December 3, 2021. This system implementation will not affect any completed applications or processes.

To implement these updates, ORS will be unavailable from 8:00 a.m. CT/9:00 a.m. ET until 5:00 p.m. CT/6:00 p.m. ET on Saturday, December 4, 2021.

If you have questions, please contact NFA's Information Center (312-781-1410 or 800-621-3570 or information@nfa.futures.org).

News Releases

There were no News Releases in November.

Hot Issues

CyberCrime

Regulatory Exam Preparedness

Our Perspective

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

Sources:

FINRA November 2021 Industry Notices
SEC Regulatory Actions
NFA Notices

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

Monthly Regulatory Summary (October 2021)

CRC — Wed, 03 Nov 2021 12:23:18 +0000

Monthly Regulatory Summary

FINRA

Regulatory Notices

Per Notice 21-35, FINRA requests comment on a proposal to require members to publish quarterly order routing disclosure reports for held orders in OTC Equity Securities. The proposed new quarterly reports would be similar to those required for NMS stocks under the Securities and Exchange Commission’s (SEC) Rule 606(a) of Regulation NMS, with certain modifications reflecting the different structure of the OTC market. FINRA also requests input on possible steps to further facilitate investor access and understanding of current order routing disclosures for NMS securities.

FINRA encourages all interested parties to comment on this proposal. Comments must be received by December 6, 2021.

Per Notice 21-36, the Financial Crimes Enforcement Network (FinCEN) has issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism policy, which was mandated by the Anti-Money Laundering Act of 2020 (AML Act). FinCEN also issued a statement to provide covered non-bank financial institutions (NBFIs), including broker-dealers, with guidance on how to approach the AML/CFT Priorities.

FINRA is issuing this Notice to inform member firms of the AML/CFT Priorities and the Statement, and to encourage member firms to consider how to incorporate the AML/CFT Priorities into their risk-based anti-money laundering (AML) compliance programs.

FinCEN has clarified that the publication of the AML/CFT Priorities does not create an immediate change in the BSA requirements or supervisory expectations for covered NBFIs, including broker-dealers. FinCEN has noted further that covered NBFIs are not required to incorporate the AML/CFT Priorities into their risk-based AML programs until the effective date of final regulations promulgated by it. The BSA, as amended by the AML Act, requires that FinCEN promulgate any appropriate regulations regarding the AML/CFT Priorities within 180 days of their establishment.

FinCEN has stated that the final regulations will specify how financial institutions should incorporate the AML/CFT Priorities into their risk-based AML programs, and that not every priority will be relevant to every covered institution. FinCEN has also stated that covered NBFIs may nevertheless wish to start considering how they will incorporate the AML/CFT Priorities into their risk-based AML programs, such as by assessing the potential risks associated with the products and services they offer, the customers they serve, and the geographic areas in which they operate.

Per Notice 21-37, the NAC has revised FINRA’s Sanction Guidelines to incorporate a new guideline for violations of the Consolidated Audit Trail System (CAT) industry member compliance rules.

The revised Sanction Guidelines are effective immediately and available on FINRA’s website.

Per Notice 21-38, on November 8, 2021, FINRA will cease operation of the OTC Bulletin Board (OTCBB)—a FINRA-operated inter-dealer quotation system—and delete the OTCBB-related rules from the FINRA rulebook.

Per Notice 21-39, 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. FINRA communicates information about renewal fees BD and IA firms owe via a Preliminary Statement in November, and publishes a Final Statement in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2022. Renewal statements reflect all applicable renewal fees assessed for BD and IA firms, branches and individuals.

Firms should note that, as announced in SR-FINRA-2020-032, FINRA’s Branch Office Processing fee, which includes the branch renewal processing fee, will increase from $20 to $75 on Jan. 1, 2022. This new fee amount will affect 2022 renewal fees assessed for branches registered with FINRA. See the Renewal Fees & Payment Methods section in the Notice for additional information.

Special Notices

There were no Special Notices in October.

SEC

Final Rules

Per Release No. 33-10997, the SEC (or “Commission”) is adopting amendments that will modernize filing fee disclosure and payment methods. The Commission is amending most fee-bearing forms, schedules, statements, and related rules to require each filing fee table and accompanying disclosure to include all required information for fee calculation in a structured format. The amendments will add options for fee payment via Automated Clearing House (“ACH”) and debit and credit cards, and eliminate options for fee payment via paper checks and money orders. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through filing fee structuring and lower-cost, easily routable payments through the ACH and debit and credit card payment options. Finally, the Commission is adopting other amendments to enhance the efficiency of the fee process.

Proposed Rules

Per Release No. 33-10998, the SEC (or “Commission”) is reopening the comment period for its proposal to implement the provisions of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The proposed rule and rule amendments would direct the national securities exchanges and national securities associations to establish listing standards that would require each issuer to develop and implement a policy providing for the recovery, under certain circumstances, of incentive-based compensation based on financial information required to be reported under the securities laws that is received by current or former executive officers, and require disclosure of the policy (the “Proposed Rules”). The Proposed Rules were set forth in a release published in the Federal Register on July 14, 2015 (Release No. 34-75342) (the “Proposing Release”), and the related comment period ended on September 14, 2015. The reopening of this comment period is intended to allow interested persons further opportunity to analyze and comment upon the Proposed Rules in light of developments since the publication of the Proposing Release and the Commission’s further consideration of the Section 954 mandate.

Interim Final Rules

There were no interim final rules in October.

Interpretive Releases

There were no interpretive releases in October.

Policy Statements

There were no policy statements in October.

NFA

Notices to Members

Per Notice I-21-33:

NFA has received a number of requests from swap dealers (SD) to extend NFA's approval of its IM model to include security-based swaps (SBS) in initial margin (IM) calculations on a net portfolio basis. NFA will extend its IM Model approval to include SBS under the conditions outlined below.

Starting November 1, 2021, SDs may include SBS in IM model calculations on a net portfolio basis subject to the following three conditions:

The SD notifies NFA in writing via email at SwapsMarginModel@nfa.futures.org that it meets the requirements outlined in CFTC No Action Letter 16-71 (PDF download) or the SEC Margin Rules (PDF) and intends both to post and collect margin on a net portfolio basis for swaps and SBS and include SBS in the IM Model calculation;
The SD's Model Risk Management (MRM) team has issued either an approval, a preliminary positive opinion, or a waiver on the inclusion of SBS in the IM model, which may include establishing effective compensating controls or an enhanced monitoring framework to ensure the conservativeness of the IM calculated on a net portfolio basis using an IM Model; and
If the SD's MRM team authorizes the inclusion of SBS in IM portfolios via waiver, the MRM team must establish, and the SD must communicate to NFA, the timeframe (no longer than six months after its implementation in production) for conducting its in-depth review of the product types introduced in the IM model.

To ensure SBS exposure is properly treated when calculating IM using an IM model, the SD's MRM team must adequately validate the inclusion of SBS exposure in the SD's portfolios. As part of its validation activities, the MRM team must, at a minimum:

Identify the products to be added and the expected volumes;
Assess the model assumptions and limitations specifically relating to SBS and on a net portfolio basis;
Complete an impact analysis on the compositions and risk profiles of the existing portfolios due to the introduction of SBS;
Perform an assessment of material proxies and approximations introduced by SBS into the IM model framework, including remediation and compensating controls for material proxies and approximations; and
Assess testing results for SBS at the product level as well as the overall impact of the introduction of SBS on the quarterly model performance testing results of the current portfolios approved to be margined on the IM model. The assessment must cover, at a minimum:
- Backtesting (covering a minimum period of three months);
- Benchmarking to relevant internal and external data sources or estimation techniques (including a corporate risk measure integrated into the SD's risk management systems, such as corporate VaR, and observable margin standards such as a derivatives' clearing organization); and
- Risks not in the IM model.

In order to ensure the conservativeness of IM model calculations, the MRM team must also assess whether compensating controls, thresholds and/or an enhanced monitoring framework should be added. Any compensating controls previously established should also be reviewed by the MRM team.

NFA will review each SD's implementation of SBS in its IM model at a later date, which will focus on the MRM team's validation activities.

News Releases

October 28, 2021

NFA orders London, U.K. introducing broker Freight Investor Services Limited to pay a $140,000 fine

October 28, Chicago—NFA has ordered Freight Investor Services Limited (Freight), an NFA Member introducing broker located in London, U.K., to pay a $140,000 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 Freight, in which it neither admitted nor denied the allegations. The Committee found that Freight failed to keep full, complete and systematic records of all transactions relating to Freight's business of dealing in commodity interests. The Committee also found that Freight allowed an unregistered individual to act as an associated person without being registered in such capacity and an NFA Associate.

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

Hot Issues

CyberCrime

Regulatory Exam Preparedness

Our Perspective

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

Sources:

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

The post Monthly Regulatory Summary (October 2021) 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 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

Regulatory Exam Preparedness

Our Perspective

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

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.

News Update: FINRA to Sweep BDs on Use of Social Media Influencers to Refer Clients

CRC — Tue, 28 Sep 2021 14:36:22 +0000

September 2021

Overview & Summary

FINRA announced that it is conducting a review of firm practices related to the acquisition of customers through social media channels and how firms manage their obligations related to information collected from those customers and other individuals that may provide data to firms. Sweep effort review periods will begin (unless otherwise noted) starting January 1, 2020 and will likely carry through the date of examination (or most recent quarter end). Note that this sweep effort was announced following a request for comment by the SEC regarding “digital engagement practices” of advisers and broker dealers. View this request in full, here.

Our Take

As always, CRC reminds firms that the best compliance program is a proactive one. As such, we suggest that firms (whether registered with FINRA as a BD or with the SEC as an RIA) who are utilizing social media, as well as social media influencers, often known as finfluencers, review their current policies and procedures to ensure that recordkeeping, data tracking and protection, and disclosure requirements relative to investments, investment advice, and solicitation agreements are all addressed properly. In addition, CRC recommends that key personnel involved in such processes are well trained, and that such training is specific and documented.

Some Key Takeaways:

FINRA is instituting this initial sweep effort, but investment advisory firms should prepare themselves as well for a similar initiative from the SEC.
FINRA appears to be focused on determining whether firms have adequate written policies and procedures in place to ensure that obligations are met where finfluencers and social media are used to refer clients, as well as whether procedures are followed.
The SEC’s request for comment also notes “gamification” as an area of interest with respect to the collection of and engagement with client and prospect data.
The full FINRA sweep exam scope is available here.

Opportunities for CRC to Assist Your Firm (list not exhaustive):

CRC can proactively conduct a review of your current compliance program and digital engagement activities to identify opportunities to potentially implement enhancements in preparation for sweep examinations.
CRC is available to assist with sweep exam responses.
CRC is available for outsourced support with respect to social media marketing in general, as well as where the use of finfluencers is applicable.
CRC can produce written social media marketing/ influencer referral policies and procedures designed to comply with relevant regulatory implications.
CRC can provide best practices to firms looking to expand into this area or to ensure current program compliance.
CRC can perform a program analysis to ensure compliance with Reg SP relative to social media referral programs.

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com or (646) 346-2468

The post News Update: FINRA to Sweep BDs on Use of Social Media Influencers to Refer Clients appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (August 2021)

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

Monthly Regulatory Summary

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.

Hot Issues

CyberCrime

Regulatory Exam Preparedness

Our Perspective

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

Sources:

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

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

Breaking News Update SR-FINRA-2020-041 Approval

Amir Lahoud — Fri, 20 Aug 2021 14:16:41 +0000

News Update: SEC Approves FINRA Rules Change

August 18, 2021

Overview & Summary

From the SEC’s approval order:

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Our Take

As always, CRC reminds firms that the best compliance program is a proactive one. As such, we suggest that firms review their programs to identify areas where updates relative to Rule 4111 are necessary, and implement such updates prior to the effective date, which will formally be determined as 180 days following the publication of a Regulatory Notice noting approval of this Rule.

Some Key Takeaways:

This appears to be intended to be a fast-moving process once it starts (e.g., FINRA must issue a written decision within 30 days of the date of the letter scheduling the “Consultation,” and in the case of alleged non-compliance with obligations under Rule 4111, there is a seven-day window from service of notice under Rule 9561 that can result in a suspension or cancellation of membership).
FINRA may still determine that a firm has met its preliminary criteria for identification even after the firm engages in a “staffing reduction” as a part of the Rule 4111 process.
It is designed to provide an opportunity for the firm to affect the outcome through the “Consultation” process – e.g., by demonstrating to FINRA why the firm should not be a Restricted Firm or why it should not be subject to the maximum Restricted Deposit Requirement.

Opportunities for CRC to Assist Your Firm:

CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with our resources to address concern areas.

Please contact Mitch Avnet for more information.

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

^[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post Breaking News Update SR-FINRA-2020-041 Approval appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (July 2021)

Amir Lahoud — Wed, 04 Aug 2021 13:23:01 +0000

FINRA

Regulatory Notices

Per Notice 21-24, FINRA announces, effective immediately, clarifications of interpretations of the FINRA margin rule regarding minimum equity requirements in FINRA Rule 4210(b). FINRA Rule 4210 (Margin Requirements) specifies the margin requirements applicable to securities held in margin accounts, including both strategy-based margin accounts and portfolio margin accounts. FINRA maintains interpretations regarding FINRA Rule 4210, available on the Interpretations of FINRA’s Margin Rule web page, where the interpretations immediately follow the section of the rule to which they relate.

Per Notice 21-25, FINRA appreciates members’ cooperation with its request to keep their risk monitoring analyst informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. FINRA is encouraging firms to continue to keep their risk monitoring analyst abreast of their activities related to digital assets on an ongoing basis.

Per Notice 21-26, FINRA has adopted changes to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) to require members to file retail communications that promote or recommend private placement offerings that are subject to those rules’ filing requirements. The new filing requirements become effective on October 1, 2021. The amended text of the rules is set forth in Attachment A.

Per Notice 21-27, FINRA is making available updates to interpretations in the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC’s Division of Trading and Markets (SEC staff). The updated interpretations are with respect to Securities Exchange Act (SEA) Rules 15c3-1 and 15c3-3.

Special Notices

There were no Special Notices in July.

SEC

Final Rule

There were no final rules in July.

Proposed Rules

There were no proposed rules in July.

Interim Final Rules

There were no interim final rules in July.

Interpretive Releases

There were no interpretive releases in July.

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

News Update: SEC Fines 27 Firms for Form CRS Failures

Amir Lahoud — Thu, 29 Jul 2021 15:28:48 +0000

The Securities and Exchange Commission announced on July 26^th that 21 investment advisers and 6 broker-dealers have agreed to settle charges that they failed to timely file and deliver their client or customer relationship summaries to their retail investors. In the release the SEC’s Director of Enforcement, Gurbir Grewal, notes:

“Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”

The penalties ranged from $10,000 to $97,523.

The Cost of Non-Compliance

Appropriate implementation, maintenance, and distribution of a two-page document could have saved these firms the hassle and embarrassment of fines and reputational damage. At CRC, we firmly believe that the best compliance program is a proactive one; the fines above demonstrate that regulators agree.

Our Take

Regulators have continued to display heightened focus on transparent communication and disclosure when interacting with retail investors. Recent examinations of both SEC-registered investment advisers and broker-dealers have shown a sharp emphasis on Regulation Best Interest (Reg BI) related policies and procedures, particularly regarding the content and distribution (and subsequent evidence of delivery) of Form CRS. As such, firms should ensure that the Form CRS includes all mandated language and meets formatting requirements as specified by Reg BI. A firm’s compliance policies and procedures should also accurately reflect the processes implicated by Reg BI, including the delivery of Form CRS; firms should consider testing such procedures to ensure efficacy. If you have concerns regarding your firm’s Reg BI policies and procedures, please contact your Compliance Professional at CRC, or contact CRC using the method’s listed below so that we can connect you with a member of our team.

For more information:

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

Kate Gibbs at kgibbs@compliance-risk.com or (781) 742.4688

The post News Update: SEC Fines 27 Firms for Form CRS Failures appeared first on Compliance Risk Concepts.

News Update: SEC Issues Statement Regarding Digital Assets

Kaitlyn Gibbs — Thu, 25 Jul 2019 17:23:41 +0000

Background & Summary

On July 8, 2019, the US Securities and Exchange Commission (SEC) issued a joint statement in conjunction with FINRA’s general counsel addressing various elements of digital currency amid request for clarity on whether broker-dealers can hold digital assets under federal securities laws. The regulator reiterated its growing concerns relative to investor protection and clarified the fact that entities seeking to participate in digital currency markets must comply with relevant securities laws. The release placed specific emphasis on compliance with the customer protection rule. While recounting the success and importance of the customer protection rule, the SEC added, "[t]his record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cyber theft, and underscores the need to ensure broker-dealers robust protection of customer assets, including digital asset securities."

With respect to custody and digital securities, the SEC’s statement would seem to indicate that the regulator seeks to regulate such assets as uncertificated securities (i.e. ownership is confirmed via electronic certificate rather than a physical one). As such, broker-dealers would likely need to establish custody through the use of an SEC registered transfer agent, who would also maintain applicable records relating to security ownership. The statement also seems to allude to the fact that custodying digital assets through the use of digital wallets and maintaining private keys that would be controlled by the broker dealer are unlikely to be looked upon favorably, or ultimately approved by regulators. While the tone of the statement seems to be geared towards preparing digital securities for more mainstream access (i.e., gearing it towards retail investors), the bottom line for regulators, as evidenced by this release, is customer protection. As the industry navigates the nuances of digital securities markets, it should do so through the lens of protecting against fraud, theft, or misappropriation of client funds and/or information.

Our Take

As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also and bringing a sense of legitimacy and scrupulousness to digital currency operations. If you would like to speak with one of our Compliance Specialists about custody implications or have any other questions regarding digital currency, please do not hesitate to contact us.

Contact Mitch Avnet at mavnet@compliance-risk.com or (646)346-2468 for more information.

The post News Update: SEC Issues Statement Regarding Digital Assets appeared first on Compliance Risk Concepts.

The Impact of Reg BI with Mitch Avnet: CEO and Managing Partner of Compliance Risk Concepts.

CRC — Tue, 23 Jul 2019 18:22:43 +0000

On June 5, 2019 the Securities and Exchange Commission (“SEC”) voted to enhance the regulatory framework standard of conduct for broker-dealers (or “firms”) and provide an interpretation of the fiduciary duty for investment advisers by issuing Regulation Best Interest (“Reg BI”). Hearsay recently reached out to Mitch Avnet of Compliance Risk Concepts (“CRC”) to discuss the impacts of the new regulation.

Transition period, comparison to DOL Fiduciary Rule and overview of Reg BI

Chris Fernandes: What does the transition period look like for compliance with Reg BI?

Mitch Avnet: The SEC is allowing firms a transition period until the June 30, 2020 compliance date.

Chris: How does this new regulation compare to the long-anticipated Department of Labor (“DOL”) Fiduciary Rule?

Mitch: The Reg BI framework is more expansive than the vacated DOL Fiduciary Rule, as it covers all securities investment recommendations to retail customers rather than just those for retirement accounts. By setting out specific obligations of broker-dealers and investment advisers, the SEC is seeking to tailor requirements to the different types of products and services each provide in order to preserve customer choice in the industry.

Chris: So, it is more complex. Does it place an increased burden on firms?

Mitch: Reg BI sets out new rules which will increase compliance efforts for firms but provides a more uniform standard and does not include many of the onerous aspects of the DOL rule such as a private right of action.

Chris: Could you give a high-level overview of the framework of the rule?

Mitch: Absolutely. The regulation has five principal areas, and can be broken down as follows:

A “best interest” standard comprising four obligations for broker-dealers when providing recommendations to retail customers (Regulation Best Interest or Reg BI);
A required client relationship summary disclosure (Form CRS) for both broker-dealers and investment advisers;
An interpretation of the federal fiduciary standard for investment advisers that would reaffirm their fiduciary obligations; and
An interpretation clarifying that broker-dealers that provide advisory services are not considered to be investment advisors when such services are “solely incidental” to the conduct of their business.
Reg BI and Form CRS have a compliance date of June 30, 2020 while the interpretations will become effective upon publication in the Federal Register.

Requirements, disclosures and compliance for broker-dealers, under Reg BI

Chris: Let’s dig a bit deeper into what is required of broker-dealers under the rule.

Mitch: Reg BI consist of four obligations for broker-dealers when providing recommendations to retail customers. However, Reg BI does not expressly define “best interest.” Instead, it states that broker-dealers must act “without placing the financial or other interest of the broker ahead of the interest of the retail customer.” The SEC has made clear that the term does not create a fiduciary obligation and explains that it will determine whether a broker-dealer has acted in their customers’ best interest based on the four obligations: (1) disclosure, (2) care, (3) conflict of interest and (4) compliance.

Chris: Reg BI imposes an obligation to provide a 2-page relationship summary to clients. Can you provide additional details on what firms can expect this to entail?

Mitch: Broker-dealers are required to provide Form CRS, which is in a question and answer format, to clients. Disclosures must contain a summary of fees, costs, conflicts, and standards of conduct along with a link to the SEC’s Investor.gov site.

Chris: When are these disclosures supposed to go out?

Mitch: The timing of the disclosure varies. For broker dealers, firms should be distributing these to clients before a recommendation of an account type, a securities transaction, or an investment strategy involving securities or placing an order for the retail investor. These disclosures should also go out prior to the opening of a brokerage account for the retail investor. For investment advisers, the disclosures should be distributed prior to or at the time of entering into the advisory contract. Dual registrants should use the earliest of the deadlines imposed under requirements for BDs and RIAs.

Chris: Are there any other times throughout the client relationship when firms need to provide additional disclosures under the rule?

Mitch: Yes; firms must provide additional disclosures when they: open a new account that is different from the retail investor’s existing account(s); recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account (e.g., securities sold through a “check and application” process).

Chris: What should firms be doing to comply with this part of the rule?

Mitch: CRC recommends firms review their current customer agreements and disclosures to determine what changes will need to be made and involve technology teams to consider potential digital solutions. We also recommend a cross-functional team of business, compliance and operational employees work together to confirm disclosure of all material facts pertinent to a conflict of interest associated with the recommendation that are “full and fair.”

Chris: Let’s talk about the duty of care.

Mitch: Firms will have an obligation to provide reasonable “diligence, care, and skill” to satisfy three obligations: reasonable-basis, customer-specific and quantitative. Additionally, firms must evaluate reasonably available alternatives, however broker-dealers will not have to evidence review of all alternatives. Similar to the DOL fiduciary rule, Reg BI’s care obligation covers recommendations concerning rollovers and account choice (e.g., brokerage or advisory), as well as those to take a retirement plan distribution for purposes of opening a securities trading account.

Chris: What should firms be doing to start on the path to compliance relative to this aspect of the rule?

Mitch: Our team recommends that firms dust off work done during their DOL Fiduciary Rule prep. Because the rule is not prescriptive, there is no “one size fits all” model for compliance. The compliance obligation requires firms to maintain policies and procedures to ensure compliance with Reg BI. It’s important to note, this obligation provides an opportunity for the SEC and FINRA to bring enforcement actions for compliance failures without the existence of underlying violations of Reg BI. Therefore, firms should carefully develop Reg BI policies and procedures with a view towards how they will demonstrate that they have met the best interest standard – including documenting all written and oral disclosures to clients.

Conflicts of Interest

Chris: What specific conflicts of interest should firms focus on when attempting to comply with that obligation?

Mitch: Reg BI does not explicitly define material conflicts of interest. In contrast to the DOL rule, Reg BI allows firms to sell proprietary products, including initial public offerings, and continue to receive payments from third parties for shelf space – as long as they disclose conflicts of interest. For example, in instances where a registered representative holds a limited license (e.g., only to sell mutual funds), but the firm offers a full suite of products, the representative may need to disclose this to their customers. However, the final rule makes clear that there are certain conflicts of interest that cannot be cured through disclosure, specifically prohibiting certain types of sales contests and quotas within defined parameters (e.g., for specific security types in short time periods).

Chris: Where would you recommend that firms focus their energies relative to this aspect?

Mitch: Our team at CRC recommends that firms review their range of products and services they offer along with their payout grid in order to identify potential conflicts and determine whether they will need to be mitigated, eliminated, or disclosed. The final rule also instructs firms to develop a penalty system for any representatives that do not adequately manage or disclose their conflicts of interest. Firms will need to establish, maintain, and enforce written policies and procedures reasonably designed to:

Identify and at a minimum disclose (in accordance with the Disclosure Obligation) or eliminate all conflicts of interest associated with the recommendation
Identify and mitigate conflicts of interest that create an incentive for a broker-dealer’s financial professionals to place either their interests or the broker-dealer’s interest ahead of the retail customer’s interest
Identify and disclose any material limitations on offerings (e.g., proprietary or other limited range of products) and any conflicts associated with the limitations, and prevent the limitations and associated conflicts from causing the broker-dealer or its financial professionals to place their interests ahead of the retail customer’s interests
Eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities or specific types of securities within a limited period of time

SEC expectations and compliance

Chris: Can you map out the SEC’s expectation for compliance procedures relative to the rule?

Mitch: Reg BI requires firms to develop policies and procedures in order to demonstrate that they have met the best interest standard – including documenting all written and oral disclosures to clients. The SEC has made changes to Rules 17a-3 and 17a-4, which require broker-dealers to maintain records of all information collected and provided to retail customers pursuant to Reg BI for six years, including the identity of each natural person who is an associated person of the broker-dealer responsible for the customer accounts. Firms that fail to maintain adequate policies and procedures may face enforcement actions from the SEC and FINRA for compliance failures.

Chris: How should firms seek to comply?

Mitch: CRC advises firms to review and enhance their policies and procedures that address: Product and Pricing; Operations; Technology; and Communications. Additionally, firms should put in place processes to capture and retain disclosures, provide training on the new requirements and ensure that there is a supervisory structure to oversee compliance.

Is Reg BI different for Investment Advisors?

Chris: Are there any specific issues that investment advisers should consider? Are they impacted differently than broker-dealers?

Mitch: While investment advisers have an existing fiduciary obligation, the SEC’s investment adviser interpretation of Reg BI makes these obligations explicit:

Provide advice in the best interest of the client
A duty of loyalty
Best execution for client transactions
Disclosure of conflicts of interest

Because the final rule did not include enhancements contained in the proposal, investment advisor are not likely to require significant analysis or operational changes as those for broker-dealers, e.g. – licensing and continuing education requirements, provision of account statements to clients and similar financial responsibility requirements.

Exemptions

Chris: How would a broker-dealer qualify for an exemption under the rule?

Mitch: To qualify for an exemption from the Advisers Act (“the Act”), broker-dealers must satisfy 2 conditions: they must not receive any special compensation (i.e., only commissions and not asset-based fees, and must provide only “solely incidental” advice.

Chris: How should firms identify whether advice provided to retail clients is incidental?

Mitch: Determining whether advice provided to retail clients is “solely incidental” will be determined by 2 criteria: level of investment discretion and account monitoring. Unlimited investment discretion is not solely incidental advice and the broker-dealer would be subject to the Act. If investment discretion is limited in time, scope, or some other way the advice provided may be deemed solely incidental. In addition, continuous, previously agreed-upon account monitoring would likely not be considered solely incidental, while periodic account monitoring or voluntary account monitoring likely would be.

The SEC also clarified the solely incidental exception under the Advisers Act: broker-dealers do not have a fiduciary duty to a retail investor unless that broker-dealer is exercising unlimited investment discretion with respect to the account, or the broker-dealer has agreed to continuous monitoring of the account.

State regulations

Chris: What about state regulators? How do they factor into this rule?

Mitch: After the DOL rule was vacated, a number of states began to introduce their own fiduciary or best interest standards. These rules vary across states – some states like Nevada, are contemplating a private right of action and a largely ongoing obligation. Others states like New York would only apply a best interest standard to the sale of life insurance annuities. These differences will make it operationally challenging for firms to adhere to each state’s specific requirements.

Chris: Has the SEC commented on this issue?

Mitch: Currently, the SEC declined to provide any opinion on whether its rules would preempt state standards and left the question to “future judicial proceedings.”

The industry can likely expect litigation on this issue as states continue to move forward with their rulemakings and attempt to retain control over standards in their jurisdictions. Meanwhile, the DOL has stated that it will issue an updated version of its fiduciary rule later this year. While there have not been any explicit assurances, it is likely that the concepts and requirements from the DOL will align with Reg BI.

Client behavior

Chris: Finally, do you have any insight into concerns that firms have regarding broker-dealers’ responsibilities under this rule, particularly with respect to client behavior?

Mitch: It is important to remember that Reg BI does not render a BD or IA responsible for a client’s behavior or choices, provided that all above mentioned criteria are satisfied. Reg BI does not extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor. The rule also doesn’t require the broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation or apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not the customer also receives separate recommendations from the broker-dealer.

Chris: Thank you for taking the time to answer our questions and provide insight on some of the key components of Reg BI.

Mitch: My pleasure, as always. The CRC team is readily available to discuss relevant regulatory issues with our clients and colleagues in the industry, and we make it our top priority to keep our thumb on the pulse of the ever-evolving regulatory landscape so that we can provide accurate, up-to-date advice.

The post The Impact of Reg BI with Mitch Avnet: CEO and Managing Partner of Compliance Risk Concepts. appeared first on Compliance Risk Concepts.

Regulation Best Interest

CRC — Mon, 15 Jul 2019 16:18:35 +0000

On June 5, 2019 the Securities and Exchange Commission (“SEC”) voted to enhance the regulatory framework standard of conduct for broker-dealers (or “firms”) and provide an interpretation of the fiduciary duty for investment advisers by issuing Regulation Best Interest (“Reg BI”). The SEC is giving firms a transition period until June 30, 2020.

Reg BI framework is more expansive than the vacated Department of Labor (“DOL”) fiduciary rule as it covers all securities investment recommendations to retail customers rather than just those for retirement accounts. By setting out specific obligations of broker-dealers and investment advisers, the SEC is seeking to tailor requirements to the different types of products and services each provide in order to preserve customer choice in the industry. Reg BI sets out new rules which will increase compliance efforts for firms but provides a more uniform standard and does not include many of the onerous aspects of the DOL rule such as a private right of action.

The framework includes:

A “best interest” standard comprising four obligations for broker-dealers when providing recommendations to retail customers (Regulation Best Interest or Reg BI);
A required client relationship summary disclosure (Form CRS) for both broker-dealers and investment advisers;
An interpretation of the federal fiduciary standard for investment advisers that would reaffirm their fiduciary obligations; and
An interpretation clarifying that broker-dealers that provide advisory services are not considered to be investment advisors when such services are “solely incidental” to the conduct of their business.
Reg BI and Form CRS have a compliance date of June 30, 2020 while the interpretations will become effective upon publication in the Federal Register.

Reg BI consist of four obligations for broker-dealers when providing recommendations to retail customers. Reg BI does not expressly define “best interest,” instead stating that broker-dealers must act “without placing the financial or other interest of the broker ahead of the interest of the retail customer.” However, the SEC makes clear that the term does not create a fiduciary obligation and explains that it will determine whether a broker-dealer has acted in their customers’ best interest based on the four obligations: (1) disclosure, (2) care, (3) conflict of interest and (4) compliance.

Disclosure – Reg BI imposes an obligation on to provide a 2-page relationship summary (Form CRS) to clients in a question and answer format. Disclosures must contain a summary of fees, costs, conflicts, and standards of conduct along with alink to the SEC’s Investor.gov site.

The timing of the disclosure varies as following:

Broker-dealer: before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities, (ii) placing an order for the retail investor, or (iii) the opening of a brokerage account for the retail investor
Investment adviser: before or at the time of entering into an advisory contract
Dual registrant: at earlier of investment adviser or broker-dealer delivery requirement

In addition, firms must provide additional disclosures when they:

Open a new account that is different from the retail investor’s existing account(s)
Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment
Recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account (e.g., securities sold through a “check and application” process)

So what does this mean: CRC recommends firms review their current customer agreements and disclosures to determine what changes will need to be made and involve technology teams to consider potential digital solutions. CRC also recommends a cross-functional team of business, compliance and operational employees work together to confirm disclosure of all material facts pertinent to a conflict of interest associated with the recommendation that are “full and fair”.

Care – Firms will have an obligation to provide reasonable “diligence, care, and skill” to satisfy three obligations: reasonable-basis, customer-specific and quantitative. Additionally, firms must evaluate reasonably available alternatives, however broker-dealers will not have to evidence review of all alternatives. Similar to the DOL fiduciary rule, Reg BI's care obligation covers recommendations concerning rollovers and account choice (e.g., brokerage or advisory), as well as those to take a retirement plan distribution for purposes of opening a securities trading account.

So what does this mean: We recommend firms dust off work done during their DoL fiduciary rule prep. Because the rule is not prescriptive, there is no “one size fits all” model for compliance. The compliance obligation requires firms to maintain policies and procedures to ensure compliance with Reg BI. Notably, this obligation provides an opportunity for the SEC and FINRA to bring enforcement actions for compliance failures without the existence of underlying violations of Reg BI. Therefore, firms should carefully develop Reg BI policies and procedures with a view towards how they will demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients.

Conflict – Reg BI does not explicitly define material conflicts of interest. In contrast to the DOL rule, Reg BI allows firms to sell proprietary products, including initial public offerings, and continue to receive payments from third parties for shelf space – as long as they disclose conflicts of interest. For example, in instances where a registered representative holds a limited license (e.g., only to sell mutual funds), but the firm offers a full suite of products, the representative may need to disclose this to their customers. However, the final rule makes clear that there are certain conflicts of interest that cannot be cured through disclosure, specifically prohibiting certain types of sales contests and quotas within defined parameters (e.g., for specific security types in short time periods).

So what does this mean: CRC recommends firms review their range of products and services they offer along with their payout grid in order to identify potential conflicts and determine whether they will need to be mitigated, eliminated or disclosed^[1]. The final rule also instructs firms to develop a penalty system for any representatives that do not adequately manage or disclose their conflicts of interest. Firms will need to establish, maintain, and enforce written policies and procedures reasonably designed to:

Identify and at a minimum disclose (in accordance with the Disclosure Obligation) or eliminate all conflicts of interest associated with the recommendation
Identify and mitigate conflicts of interest that create an incentive for a broker-dealer’s financial professionals to place either their interests or the broker-dealer’s interest ahead of the retail customer’s interest
Identify and disclose any material limitations on offerings (e.g., proprietary or other limited range of products) and any conflicts associated with the limitations, and prevent the limitations and associated conflicts from causing the broker-dealer or its financial professionals to place their interests ahead of the retail customer’s interests
Eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities or specific types of securities within a limited period of time

Compliance – Reg BI requires firms to develop policies and procedures in order to demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients. The SEC has made changes to Rules 17a-3 and 17a-4, which require broker-dealers to maintain records of all information collected and provided to retail customers pursuant to Reg BI for six years, including the identity of each natural person who is an associated person of the broker-dealer responsible for the customer accounts. Firms that fail to maintain adequate policies and procedures may face enforcement actions from the SEC and FINRA for compliance failures.

So what does this mean: CRC advises firms to review and enhance their policies and procedures that address: Product and Pricing; Operations; Technology; and Communications. Additionally, firms should put in place processes to capture and retain disclosures, provide training on the new requirements and ensure that there is a supervisory structure to oversee compliance.

Investment Advisers – While investment advisers have an existing fiduciary obligation, the SEC’s investment adviser interpretation of Reg BI makes these obligations explicit:

Provide advice in the best interest of the client
A duty of loyalty
Best execution for client transactions
Disclosure of conflicts of interest

Because the final rule did not include enhancements contained in the proposal, investment advisor are not likely to require significant analysis or operational changes as those for broker-dealers, e.g. - licensing and continuing education requirements, provision of account statements to clients and similar financial responsibility requirements.

Determining whether broker-dealers’ advice provided to retail clients is “solely incidental” will be determined by 2 criteria:

Level of investment discretion
Unlimited investment discretion is not solely incidental advice and the broker-dealer would be subject to the Act
If investment discretion is limited in time, scope, or some other way the advice provided may be deemed solely incidental
Account monitoring
Continuous, previously agreed-upon account monitoring would likely not be considered solely incidental
Periodic account monitoring or voluntary account monitoring would likely be considered solely incidental

So what does this mean: Investment advisers should be aware that the SEC is continuing to evaluate these enhancements and may add them in the future. The SEC also clarified the solely incidental exception under the Advisers Act: broker-dealers do not have a fiduciary duty to a retail investor unless that broker-dealer is exercising unlimited investment discretion with respect to the account, or the broker-dealer has agreed to continuous monitoring of the account

To qualify for an exemption from the Advisers Act (“the Act”), broker-dealers must satisfy 2 conditions:

Receive no special compensation (i.e., only commissions and not asset-based fees)
Provide only “solely incidental” advice

DoL and States – After the DOL rule was vacated, a number of states began to introduce their own fiduciary or best interest standards. These rules vary across states – some states like Nevada, are contemplating a private right of action and a largely ongoing obligation. Others states like New York would only apply a best interest standard to the sale of life insurance annuities. These differences will make it challenging operationally for firms to adhere to each state’s specific requirements. The SEC declined to provide any opinion on whether its rules would preempt state standards and left the question to “future judicial proceedings.”

So what does this mean: The industry can likely expect litigation on this issue as states continue to move forward with their rulemakings and attempt to retain control over standards in their jurisdictions. Meanwhile, the DOL has stated that it will issue an updated version of its fiduciary rule later this year. While there have not been any explicit assurances, it is likely that the concepts and requirements from the DOL will align with Reg BI.

Not applicable – Equally as important, Reg BI will not:

Extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor^[2];
Require the broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation; or
Apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not the customer also receives separate recommendations from the broker-dealer.

^[1] Firms can use the FINRA Report on Conflicts of Interest as guidance in managing, mitigating and eliminating conflicts of interest in their businesses.

^[2] It is the SEC’s position that when a broker-dealer agrees with a retail customer to provide account monitoring services: (1) the broker-dealer would be required to disclose the material facts, scope and frequency of those services pursuant to the Disclosure Obligation, and (2) such agreed-upon account monitoring services involve an implicit recommendation to hold (i.e., an implicit recommendation not to buy, sell, or exchange assets pursuant to that securities account review) at the time agreed-upon monitoring occurs, which is a recommendation “of any securities transaction or investment strategy involving securities” covered by Reg BI.

The post Regulation Best Interest appeared first on Compliance Risk Concepts.

SEC Asks for Public Comments on How Characteristics of Digital Assets Impact the Custody Rule

CRC — Tue, 23 Apr 2019 21:28:20 +0000

President and Chief Executive Officer of the Investment Adviser Association, Paul Cellupica, has posted a letter to President & Chief Executive Officer of the Investment Adviser Association, Karen Barr, on behalf of the division’s staff, asking investment advisers for public comments and input on the Custody Rule as it applies to the emerging landscape of digital assets.

Issues have been raised about the regulatory status of the trading practices involving digital assets. Cellupica inquired about the Custody Rule as it applies to the Investment Advisers Act of 1940, and the role it serves with the growth of digital assets. The SEC is asking for input amid the possibility they could be reconsidering existing custody rules in specific cases of digital asset trading and settlement.

The current Custody Rule (Rule 206(4)-2) protects investors who delegate custody of their funds or securities to investment advisers or firms under the Advisers Act. The custodial authority given to professional investment advisers provides an ”increased risk of misappropriation or misuse of [investors’] assets” when it comes to going digital, as Cellupica wrote in the letter.

One of the specific points the SEC wants to clear up is how the Custody Rule applies to digital assets - specifically the issue of “non-DVP arrangements,” or delivery versus payment. The types of digital assets that trade on a non-DVP basis and what role investment advisers will play in non-DVP digital asset trading are a few examples of questions raised in the letter. The SEC’s goal in reaching out for public input is to reinforce compliance for investment advisers in trading digital assets, which is relatively new to the investment adviser industry.

All in all, the SEC wants to lay groundwork for how characteristics particular to digital assets will impact compliance with the Custody Rule going forward.

Call us today to schedule a complimentary CryptoConsult to speak with a qualified member of our team who can help determine your unique risk areas and assess where we can provide necessary support to your digital currency program. Whether you are an adviser looking to expand your investment strategy to include digital assets, or you are looking to participate in ICOs or build out a platform for trading cryptocurrency as a broker-dealer, it is wise to consider partnering with an established compliance team who can help you navigate imminent regulation and provide assistance from initial registration to regulatory examination.

The post SEC Asks for Public Comments on How Characteristics of Digital Assets Impact the Custody Rule appeared first on Compliance Risk Concepts.

Part 1 of 3: It's 2017, What Are The SEC’s Priorities?

portia — Fri, 27 Jan 2017 20:45:54 +0000

Examining matters of importance to retail investors

Spotlight On Talent: Portia Amato, Compliance Officer

By now, every CCO and their team have asked themselves this question, and if you have not already, this is the time to do so, especially if you have not been the lucky host to a SEC Audit in some time.

The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) has released their list of priorities for the year and it is covering a lot of ground. They did break it down into three focus areas:

1) Examining matters of importance to retail investors
2) Focusing on risks specific to elderly and retiring investors
3) Assessing market-wide risks

In this first part of a three-part series, Portia Amato reviews the first focus area, Examining Matters of Importance to Retail Investors, including the subtopics and how Registered Investment Advisors (RIA’s) and Broker Dealers (BD’s) alike can tackle these matters should the SEC pay a visit.

Download Compliance Bulletin: It's 2017, What Are The SEC’s Priorities?

Enter your information below to download your complimentary copy of Portia Amato's Compliance Bulletin: It's 2017, What Are The SEC’s Priorities?

Click Only Once Please! Processing may take up to 90 seconds

ABOUT PORTIA AMATO
Portia Amato is a seasoned Compliance Officer, having over 18 years of investment management experience. Over the course of her career, Portia has specialized in compliance, operations and client services for investment advisors and top tier investment banks. Portia also successfully helped to launched two wrap-fee programs for New York Life Investment Management and US Trust

The post Part 1 of 3: It's 2017, What Are The SEC’s Priorities? appeared first on Compliance Risk Concepts.

BlackRock Charged By SEC With Failing to Disclose Conflict of Interest

CRC — Wed, 22 Apr 2015 01:00:28 +0000

Washington D.C., April 20,
2015 — The Securities and Exchange Commission today charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.

BlackRock agreed to settle the charges and pay a $12 million penalty. The firm also must engage an independent compliance consultant to conduct an internal review.

According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company. Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company. Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10 percent) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund. The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.
Click here to read the SEC Press Release in its entirety

The post BlackRock Charged By SEC With Failing to Disclose Conflict of Interest appeared first on Compliance Risk Concepts.

Cybersecurity: High Profile Exam Priority for FINRA and the SEC

Mitch Avnet — Tue, 20 Jan 2015 17:52:39 +0000

Earlier this month, FINRA and the SEC issued their exam priorities for 2015. Both agencies continue to pinpoint cybersecurity as a top priority for 2015. Although these priority letters serve as a “roadmap” highlighting areas of regulatory focus during the coming year, most firms continue to struggle in terms of how they should conduct their internal Cybersecurity Risk Assessments and evidence their diligence and vigilance with respect to this high profile industry risk.

In the wake of the many highly publicized data-breaches in 2014, our clients have reached out to us for advice and guidance in an effort to increase the overall awareness of Cybersecurity risk within their respective organizations. Many of these clients are seeking comprehensive training and a robust framework and methodology to conduct Cybersecurity Risk Assessments on a targeted and/or enterprise basis.

Based on the risks and costs (both financial and reputational) that can result from a Cybersecurity breach, all financial services organizations, large and small must assess the following attributes:

Identification: Can your organization identify the critical processes and the data that supports your business end-to-end? Can you recognize the difference between a “breach” and an “attack”?
Protection: What is your company doing to protect its critical data and the infrastructure and devices it rides on? How quickly after an incident can your company realize that something is amiss?
Detection: What mechanisms does your organization have in place to detect if something is going on with critical data, and how is that detection escalated throughout the firm?
Response: How is your organization prepared to respond when Cyber incidents are detected?
Recovery: How will your organization recover from a Cyber incident? How will your company keep its great name in tact at reduced risk and quickly on the mend?

Vendors and Business Partners

In addition to the items discussed above, organizations must consider the impact of their vendors and business partners in their Cybersecurity awareness efforts. When we look at many of the high profile breaches that occurred in 2014 – service providers to the companies we do business with were the targets of a significant portion of these attacks. With that said, here are some of the important questions firms must ask themselves when assessing vendor / service provider Cybersecurity risk:

Do our business partners have good Cyber-business practices in place? How do we know?
Do our contracts with partners and vendors require a legal level of Cyber-diligence to get and keep our business?
Are your business units, vendors, partners, and processes compliant with ever changing regulations, reporting requirements, and industry standards?
Does their critical data and our critical data ever co-mingle?
- Does our firm have on-boarding contracts, processes and training to ensure appropriate governance over our Cybersecurity risk?
- How does our firm keep a non-tech savvy workforce well trained and ever-vigilant against Cyber threats?
- What if you have a potential whistle-blower situation? What are our processes to handle and escalate?

The Year Ahead….

With the knowledge that FINRA and the SEC have made Cybersecurity an exam priority for the coming year, Firms should operate under the following premises:

Assume that the criminals are already in your networks. With this in mind, organizations should respond by proactively assessing their respective risks and creating the appropriate mitigation strategies to ensure your firm is appropriately protected.
Multiple studies are showing that in 2014 +40% of all businesses were hacked, exploited or denied service, mainly from overseas non-state actors. Due to the rise in the number of “network citizens” outside of the United States, this trend is only expected to continue.

According to J.R. Helmig, Founder of Leveraged Outcomes, LLC, a financial and national security consultancy, the primary point is for firms to implement solutions to meet future threats and regulations.
________________________________________________________________________________

“Too often firms spend time and resources to meet yesterday’s compliance obligation or risks. Instead, look at what the requirements and risks are going to be for the time frame when you will be implementing the solution set, otherwise you will be outdated and outgunned before the start”.
________________________________________________________________________________

How Do We “Attack” the “Attacks”?

Through our ongoing efforts to provide thought leadership and impactful guidance to our clients, we have spent a significant amount of time and resources contemplating the best ways for firms to assess Cybersecurity threats within their respective organizations. Based on our research, we have determined one of the most comprehensive and current Cyber Frameworks to apply is the National Institutes of Standards and Technology (“NIST”) Critical Infrastructure and Cybersecurity (“CICS”) Framework. NIST CICS addresses all of the FINRA and SEC Sweep letter requirements.

Incremental Tactical Wins Lead to Long Term Strategic Success

The NIST CICS Framework is very modular and can be applied incrementally as firms deem necessary and appropriate. This allows firms to “leg-in” to a Cybersecurity framework over time with a careful, thoughtful and pragmatic approach toward addressing their risk based on the risk profile of the organization and with sensitivity to internal budgetary constraints.

Buyer Beware!

Firms must be mindful of partnering with third-party vendors / service providers that cannot show some acceptable "criteria-based" framework to assess Cybersecurity risk like NIST CICS. Companies need the ability to look across their entire enterprise, from the board room to the shop floor, when considering Cybersecurity. Almost all we do today has some sort of Information Technology component associated with it. The NIST CICS framework helps companies recognize the scope and breadth of the task at hand.

How Can Compliance Risk Concepts Help?

CRC has the capability to assess all or a part of your enterprise that will meet or exceed the spirit and intent of the FINRA Sweep letter. Based on our understanding and utilization of the NIST CICS framework, we can offer your organization a best-in-class, cost effective assessment, training, and technological suite of solutions that can be tailored to meet your company’s specific needs, requirements and budgetary constraints.

Have Questions?

Use the form below to request an exploratory conversation or in-person meeting to discuss your organizations discrete needs.

Only 1 Click Required Processing may take up to 90 seconds

The post Cybersecurity: High Profile Exam Priority for FINRA and the SEC appeared first on Compliance Risk Concepts.

Just in Time For The Holidays – The Gift of Cybersecurity Awareness

Mitch Avnet — Mon, 03 Nov 2014 00:26:12 +0000

The Gift That Keeps on Giving…..

In early 2014, FINRA and SEC regulated firms caught a glimpse of regulatory focus in the form of targeted examination “sweep” letters focused on Cybersecurity. Although these letters raised awareness of regulatory focus and concern regarding Cybersecurity within the Broker-Dealer and Investment Adviser communities – most firms are still “in the dark” in terms of how they should conduct internal Cybersecurity Risk Assessments, ensuring they are meeting regulatory expectations if / when tasked by the FINRA or the SEC to evidence their diligence in this high profile area.

Based on the risks and costs (both financial and reputational) that can result from a Cybersecurity breach, all financial services organizations, large and small must assess the following attributes:

Identification: Can your organization identify the critical processes and the data that supports your business end-to-end? Can you recognize the difference between a “breach” and an “attack”?
Protection: What is your company doing to protect its critical data and the infrastructure and devices it rides on? How quickly after an incident can your company realize that something is amiss?
Detection: What mechanisms does your organization have in place to detect if something is going on with critical data, and how is that detection escalated throughout the firm?
Response: How is your organization prepared to respond when Cyber incidents are detected?
Recovery: How will your organization recover from a Cyber incident? How will your company keep its great name in tact at reduced risk and quickly on the mend?

Vendors and Business Partners

Do our business partners have good Cyber-business practices in place? How do we know?
Do our contracts with partners and vendors require a legal level of Cyber-diligence to get and keep our business?
Are your business units, vendors, partners, and processes compliant with ever changing regulations, reporting requirements, and industry standards?
Does their critical data and our critical data ever co-mingle?
- Does our firm have on-boarding contracts, processes and training to ensure appropriate governance over our Cybersecurity risk?
- How does our firm keep a non-tech savvy workforce well trained and ever-vigilant against Cyber threats?
- What if you have a potential whistle-blower situation? What are our processes to handle and escalate?

The Year Ahead….

As we all contemplate our priorities for 2015, we can be rest assured that Cybersecurity will continue to be a focus area for FINRA, the SEC and other regulators in the coming year. Based on this, firms should understand the following:

Assume that the criminals are already in your networks. With this in mind, organizations should respond by proactively assessing their respective risks and creating the appropriate mitigation strategies to ensure your firm is appropriately protected.
Multiple studies are showing that in 2014 +40% of all businesses were hacked, exploited or denied service, mainly from overseas non-state actors. Due to the rise in the number of “network citizens” outside of the United States, this trend is only expected to continue.
Change is coming. FINRA, The SEC and other regulators are expected to require the entire Financial Services sector to assess Cyber Risk and maturity.

How Do We “Attack” the “Attacks”?

Incremental Tactical Wins Lead to Long Term Strategic Success

Buyer Beware!

How Can Compliance Risk Concepts Help?

Have Questions?

Use the form below to request an exploratory conversation or in-person meeting to discuss your organizations discrete needs.

Only 1 Click Required Processing may take up to 90 seconds

The post Just in Time For The Holidays – The Gift of Cybersecurity Awareness appeared first on Compliance Risk Concepts.

Faulty Broker Dealer Gatekeeping Leads To SEC Enforcement Action

CRC — Fri, 17 Oct 2014 18:47:30 +0000

The Securities and Exchange Commission (“SEC”) recently announced an enforcement action against two broker-dealers that apparently failed in their “gatekeeper roles” and improperly engaged in unregistered sales of microcap stocks on behalf of their customers.

This action, along with issuance of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) National Exam Program Risk Alert (“Risk Alert”) and the Division of Trading and Markets’ “Responses to Frequently Asked Questions about a Broker-Dealer's Duties When Relying on the Securities Act Section 4(a)(4) Exemption to Execute Customer Orders” (“FAQ”) will certainly have impact to broker-dealers policies and procedures, as well as other controls related to suspicious activity reports and related areas.

Red Flags Ignored
The SEC investigation found that the firms sold billions of shares in microcap companies for customers during a four-year period while ignoring “red flags” that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws. Red Flags ignored included:

a customer opens a new account and delivers physical certificates representing a large block of thinly traded or low-priced securities;
a customer has a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the resale;
a customer deposits share certificates that are recently issued or represent a large percentage of the float for the security;
share certificates reference a company or customer name that has been changed or that does not match the name on the account;
the lack of a restrictive legend on deposited shares seems inconsistent with the date the customer acquired the securities or the nature of the transaction in which the securities were acquired;
there is a sudden spike in investor demand for, coupled with a rising prince in, a thinly traded or low-priced security;
the company was a shell company when it issued the shares;
a customer with limited or no other assets under management at the firm receives an electronic transfer or journal transactions of large amounts of low-priced, unlisted securities;
the issuer has been thought several recent name changes business combinations or recapitalizations, or the company’s officers are also officers of numerous similar companies; and
the issuer’s SEC filings are not current, are incomplete, or non-existent.

Section 4(a)(4) of the Securities Act of 1933 provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act.

In addition to a combined penalty of $1 million, the two firms agreed to settle the SEC’s charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales. See SEC Press Release 2014-225.

The Risk Alert and the FAQ
OCIE staff, during their targeted sweep of 22 broker-dealers, identified the following concerns in the Risk Alert:

Insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales.
Inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration.
Failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities.

As per the Risk Alert, of the 22 firms examined, 80% were issued letters of deficiency for material control weaknesses and/or potential violations of law, with the majority of the firms examined were also referred to the Division of Enforcement or another regulatory agency for further consideration of whether violations of law occurred.

OCIE concluded “most of the examined broker-dealers have policies and procedures requiring the firm to conduct a reasonable inquiry into the facts surrounding a proposed unregistered sale to determine if the customer is an underwriter.” However, the OCIE examinations “illuminated control weaknesses in the design or implementation of those policies and procedures.” The Risk Alert presented examples of certain situations where these control weaknesses have resulted in the broker-dealers failing to conduct a reasonable inquiry and/or failing to file SARs regarding suspicious sales activity. Control weaknesses identified included:

Some firms’ policies and procedures did not contain sufficient detail to assist the firms’ employees in their efforts to effectively monitor and identify situations where facts and circumstances suggest the customer may not have had a claimed exemption. For example, some firms’ policies and procedures merely stated that a reasonable inquiry should be conducted, without providing any additional discussion of potential red flags that could indicate a possible Section 5 violation, protocols that the staff should follow when encountering red flags, or supervisory reviews that should be conducted to determine whether the securities were resold in compliance with an available exemption;
Some firms relied, without further inquiry, on the absence of restrictive legends on stock certificates to conclude that the securities could be resold in unregistered transactions.
Some firms relied, without further inquiry, on the delivery of the shares into a customer’s account in electronic form through a transfer from the Depository Trust and Clearing Corporation (“DTCC”) or the issuer’s transfer agent as a basis for believing either that the shares were not restricted securities or that no further inquiry regarding the customer was necessary; and
Some firms did not collect information from the customer about how large blocks of shares, deposited into the customer’s account that the customer requested the broker-dealer to sell, had been acquired, despite the fact that the firms did not know how the customer had acquired the shares.

In addition, OCIE discussed in the Risk Alert their observations that certain types of accounts as being frequently associated with “dumping” of microcap securities.

The Division of Trading and Markets issued an FAQ in effort to remind broker-dealers of their obligation to conduct a reasonable inquiry when selling securities in an unregistered transaction in reliance on Section 4(a)(4) of the Securities Act of 1933.

The post Faulty Broker Dealer Gatekeeping Leads To SEC Enforcement Action appeared first on Compliance Risk Concepts.

Compliance Bulletin 04-14

Mitch Avnet — Tue, 14 Oct 2014 21:11:45 +0000

YOU BETTER CHECK YOURSELF - BEFORE YOU WRECK YOURSELF
End of Year Compliance Requirements For Broker Dealers

As the end of 2014 quickly approaches, this Compliance Bulletin serves as a notice and reminder to Broker-Dealers regarding year-end responsibilities that must be executed in accordance with FINRA / SEC regulatory requirements. Reconciling your current “state of compliance” is the most effective way to ascertain your program’s status and ensure your firm continues to meet its ongoing regulatory requirements.

Compliance Bulletin 04-14 includes information on:

FINRA 3012 / 3130 Testing and Certification – Identifying Hot Topic Issues
SEC Rule 17a-5 – Annual Compliance Report
Independent Anti-Money Laundering (“AML”) Test / Review
Written Supervisory Procedures (“WSPs”) Review
Continuing Education and Branch Office Reviews
Annual Compliance Meeting, Registrations and Renewals

Fill out the form below to download your complimentary Compliance Bulletin titled You Better Check Yourself- Before You Wreck Yourself.

Click Only Once Please! Processing may take up to 90 seconds

The post Compliance Bulletin 04-14 appeared first on Compliance Risk Concepts.

Compliance Bulletin 03-14

Kristy Wright — Mon, 02 Jun 2014 18:22:57 +0000

INVESTMENT ADVISER BULLETIN

With the recent SEC enforcement actions taking place, greater emphasis is being put on compliance rules. Valerie Pierrat examines the regulatory landscape and identifies three compliance mandates for advisers to recognize within four recent SEC enforcement actions including: best execution practices and disclosures, valuation of securities, and oversight of sub-advisers.

Fill out the form below to download your complimentary Investment Adviser Compliance Bulletin.

The Compliance Bulletin Service

The monthly Compliance Bulletin Service provides the information your organization needs- at the speed it can handle it. Let the trusted Compliance professionals at CRC do the hunting, gathering and data-mining for you.

Thank you again for your interest in Compliance Risk Concepts. We strive to continually evidence our overall credibility as a “go to” resource – and create long term value for our clients.

The post Compliance Bulletin 03-14 appeared first on Compliance Risk Concepts.

Mitch Avnet Moderates FINRA and SEC Exam Trends Panel at RCA2014

Mitch Avnet — Thu, 10 Apr 2014 17:37:55 +0000

2014 Compliance Alliance Conference Hosted by RegEd
Mitch Avnet had the honor of moderating this year's RCA panel on recent FINRA and SEC exam trends. This is RegEd's 3rd year of hosting the spectacular event, that brings over 100 compliance professionals, industry experts, regulators and industry consultants together under one roof.

The post Mitch Avnet Moderates FINRA and SEC Exam Trends Panel at RCA2014 appeared first on Compliance Risk Concepts.

2014 National Examination Priorities

Mitch Avnet — Fri, 10 Jan 2014 18:21:24 +0000

On January 9th, the SEC published it's National Examination Priorities for 2014. On the top of their list - Fraud Detection and Prevention, Corporate Governance, Conflicts of Interest, Enterprise Risk Management, Technology and issues specific to Dual Registrants.

Now is a good time to review these priorities vs. your organization's current control environment, policies and procedures and discrete risk management activities. Read more: http://ow.ly/sLwgd

The post 2014 National Examination Priorities appeared first on Compliance Risk Concepts.

SEC Archives - Compliance Risk Concepts

Regulatory News Update: SEC Marketing Rule Risk Alert

Regulatory News Update: Proposed Amendment to FINRA 3240 (Borrowing From or Lending to Customers)

Monthly Regulatory Summary (December 2023)

FINRA

SEC

NFA

Hot Issue

Our Perspective

Regulatory News Update: SEC Adopts New Rule Enhancing Short Sale Disclosure

SEC Adopts Amendments to Names Rule

Principal Elements

Expands Scope

Temporary Departures from the 80% Investment Requirement

Derivatives

Unlisted Registered Closed-End Funds and BDCs

Enhanced Prospectus Disclosure

Plain English Requirements for Terms Used in Fund Names

Form N-PORT Reporting Requirements

Recordkeeping

Compliance Date

Tiered Compliance Period

Compliance Cost Estimates

Regulatory News Update: SEC Sweep Initiative Targeting AI-Driven Investment Advisers

Regulatory News Update: New FINRA “Residential Supervisory Location” (RSL) Approved by SEC

Regulatory News Update: FINRA Voluntary Remote Inspection Pilot Program Approved by the SEC

Monthly Regulatory Summary (October 2023)

FINRA

SEC

NFA

Hot Issue

Our Perspective

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

Regulatory News Update: SEC Publishes 2024 Exam Priorities

Monthly Regulatory Summary (September 2023)

FINRA

SEC

NFA

Hot Issue

Our Perspective

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

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

Regulatory News Update: SEC Probes Investment Adviser Electronic Communications

Monthly Regulatory Summary (August 2023)

FINRA

SEC

NFA

Hot Issue

Our Perspective

Monthly Regulatory Summary (July 2023)

FINRA

SEC

NFA

Hot Issue

Our Perspective

SEC Recordkeeping Enforcement Continues to Result in Large Penalties for Off-Channel Communications

Monthly Regulatory Summary (June 2023)

Monthly Regulatory Summary (May 2023)

Monthly Regulatory Summary (April 2023)

Monthly Regulatory Summary (February 2023)

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

Monthly Regulatory Summary (January 2023)

Monthly Regulatory Summary (December 2022)

Monthly Regulatory Summary (November 2022)

Monthly Regulatory Summary (October 2022)

Broker-Dealer Regulatory Update: Amended Electronic Recordkeeping Requirements

Monthly Regulatory Summary (September 2022)

SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures￼

Monthly Regulatory Summary (August 2022)￼

News Update: SEC Approves FINRA Rules Change￼

Monthly Regulatory Summary (July 2022)￼

Monthly Regulatory Summary (April 2022)￼

News Update: Biden Takes Step to Regulate Cryptocurrencies

Monthly Regulatory Summary (February 2022)

Monthly Regulatory Summary (January 2022)

SEC Offers Guidance on Form CRS

News Reminder: SEC Approves FINRA Rules Change

News Update: JP Morgan to pay $200M for Electronic Recordkeeping Lapses

Monthly Regulatory Summary (December 2021)

Monthly Regulatory Summary (November 2021)

SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures

Monthly Regulatory Summary (August 2022)

News Update: SEC Approves FINRA Rules Change

Monthly Regulatory Summary (July 2022)

Monthly Regulatory Summary (April 2022)