Editor’s Note
CFTC Commissioner Giancarlo Proposes “Pro-Reform Reconsideration” of the Swaps Trading Rules. On January 29, CFTC Commissioner J. Christopher Giancarlo published a whitepaper titled “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank.” The same day, he gave the keynote address at the TabbFORUM meeting in New York City, addressing the proposals in his whitepaper. The whitepaper is significant because, while he has, by his own admission, been a long-time proponent of reform of the swaps market in the United States and a supporter of greater counterparty clearing of swaps, he is also critical of the form that CFTC regulation has taken in response to the mandates of the Dodd-Frank Act. He states that the swaps rules, among other things, do not accord with Title VII of the Dodd-Frank Act, and that they drive global market participants away from transacting with entities subject to CFTC swaps regulation, fragment swaps trading into numerous artificial market segments, increase market liquidity risk, make it expensive and burdensome to operate swaps execution facilities and hinder swaps market technological innovation. His critique includes not only the substantive requirements of the rules but the way in which the requirements of the rules have been conveyed. For example, he notes that as of January 13, 2015, CFTC staff have had to issue 250 no-action letters, 42 exemptive letters and 42 statements of guidance, interpretation and advice to implement its Dodd-Frank mandates, totaling 334 miscellaneous communications without formal Commission rule-making, and proposes that the scope of regulatory coverage of swaps trading activity should be fully set forth in clear and definitive rule text. Reasonable people may disagree with Commissioner Giancarlo’s conclusions and proposals, and many no doubt will, but what makes the speech and whitepaper so interesting to read is that it is grounded in a belief, not just in regulation, but in the right regulation
Regulatory Developments
SEC Advisory Committee on Small and Emerging Companies Plans to Vote on “Accredited Investor” Definition Recommendations at February 17 Meeting
The SEC announced that its Advisory Committee on Small and Emerging Companies will hold an open, public telephone meeting on Tuesday, February 17, 2015, beginning at 2 p.m. EST, at which the Committee plans to vote on recommendations to the SEC regarding the definition of an “accredited investor.” The public is invited to submit written statements for the meeting, which must be received on or before Friday, February 13, 2015.
SEC Staff Issues Summary of Cybersecurity Examination Sweep Findings and Provides Investor Bulletin on Cybersecurity
The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert that highlights risks and issues that OCIE identified in the course of examining 57 registered broker‑dealers and 49 registered investment advisers regarding cybersecurity risks and preparedness. The Risk Alert describes factors that firms may want to consider in (1) assessing their supervisory, compliance, and other risk management systems related to cybersecurity risks, and (2) determining what changes, if any, may be appropriate to strengthen those systems. Separately, the SEC’s Office of Investor Education and Advocacy (OIEA) provided an Investor Bulletin with tips to help investors safeguard their online investment accounts.
FINRA Issues Report on Cybersecurity Practices and Cybersecurity Investor Alert
The Financial Industry Regulatory Authority (FINRA) announced the issuance of a new report on cybersecurity that details practices that member firms can tailor to their business models to strengthen their cybersecurity efforts and a new Investor Alert designed to help investors understand their firms’ cybersecurity activities and policies and safeguard their brokerage accounts and personal financial information. The 46-page report on cybersecurity, which draws on a 2014 sweep examination and a 2011 survey of member firms, focuses on the following topics: cybersecurity governance and risk management; cybersecurity risk assessment; technical controls; incident response planning; vendor management; staff training; cyber intelligence and information sharing; and cyber insurance.
Litigation & Enforcement
SEC Fines Broker-Dealer $10 Million for Executing Transactions for Offshore Broker Falsely Claiming to Act for Its Own Account and for Executing Unregistered Sales of Penny Stocks for Customer
The SEC announced that it had settled administrative proceedings against Oppenheimer & Co., Inc., a registered broker-dealer, based on the SEC’s findings that (1) the firm aided and abetted a customer, Gibraltar Global Securities, a Bahamian broker not registered with the SEC, in executing sales of billions of shares of penny stocks for Gibraltar’s customers, some of whom were in the United States, without complying with U.S. broker-dealer registration and related recordkeeping requirements and (2) the firm improperly executed for a customer sales of penny stocks that were not subject to a registration statement under the Securities Act of 1933 or eligible for an offering exemption. In the first instance, the SEC found that Oppenheimer had relied on a false Form W-8BEN submitted by Gibraltar and ignored other indicators that Gibraltar was acting not for its own account, but for those of its customers. In the second instance, the SEC found that although the customer represented that the penny stocks sales in question qualified for the Rule 144 safe harbor, Oppenheimer was aware, or should have been aware based on various red flags, that the customer’s representations were false, and that the customer was in fact engaging in an illegal unregistered distribution of securities, there being no other basis for complying with applicable registration requirements under the federal securities laws, by exemption or otherwise. Oppenheimer agreed to pay a total of $10 million in disgorgement, prejudgment interest and civil penalties. Contingent on Oppenheimer’s payment of an additional $10 million to resolve a parallel action by the Financial Crimes Enforcement Network (FinCEN), discussed below, the SEC elected not to levy an additional $10 million penalty. In the Matter of Oppenheimer & Co., Inc., SEC Release No. 33-9711 (Jan. 27, 2015).
FinCEN Assesses $20 Million Fine Against Broker-Dealer for Failing to Flag Suspicious Penny Stock Trading and for Allowing Foreign Correspondent Customer to Conduct Prohibited Activity
FinCEN announced that, following cooperation with the SEC, which reached a separate settlement with the respondent, FinCEN had assessed a $20 million civil money penalty against Oppenheimer & Co., Inc., a registered broker-dealer, for violations of the Bank Secrecy Act (BSA), with $10 million of FinCEN’s assessment to be satisfied by the amounts paid by Oppenheimer in its settlement with the SEC. Oppenheimer admitted that it failed to establish and implement an adequate anti-money laundering (AML) program, failed to conduct adequate due diligence on a foreign correspondent account, and failed to comply with requirements under Section 311 of the USA PATRIOT Act. FinCEN found that from 2008 through May 2014, Oppenheimer conducted business without adequate policies, procedures, and internal controls reasonably designed to detect and report suspicious activity. FinCEN identified 16 customers who engaged in patterns of suspicious trading of penny stocks, which represent a heightened AML risk, through branch offices in five states. Oppenheimer failed to report patterns of activity in which these customers deposited large blocks of unregistered or illiquid penny stocks, moved large volumes of penny stocks among accounts with no apparent purpose, or immediately liquidated those securities and wired the proceeds out of the account. FinCEN also found that Oppenheimer designated a customer foreign financial institution as “high risk” but failed to assess the institution’s specific risks as a foreign financial institution or conduct adequate due diligence. Oppenheimer inadequately monitored the foreign financial institution’s transactions and consequently did not detect or investigate numerous suspicious transactions conducted through the account, including prohibited third‑party activity and illegal penny stock trading. The settlement also notes a civil money penalty of $2.8 million assessed by FinCEN and the NYSE against Oppenheimer in 2005 for similar violations and a $1.4 million fine paid to FINRA by Oppenheimer in August 2013 relating to violations of securities laws and AML failures. In the Matter of Oppenheimer & Co., Inc., FinCEN Enforcement Matter No. 2015-1 (Jan. 27, 2015).
Industry Developments
SIFMA Reminds Firms of Escheatment Duties
The Securities Industry and Financial Markets Association (SIFMA) announced the issuance of its white paper titled “Unclaimed Property Compliance Obligations and Challenges for Broker-Dealers.” The white paper addresses topics such as: (1) current issues in unclaimed property resulting from evolutions in business models and practices; (2) risks posed by the static nature of unclaimed property laws; (3) means of addressing these issues and modernizing/improving the regulatory and compliance landscape; and (4) discussing unclaimed property issues with customers and clients.
IMF Issues Study on Securitization
The IMF announced the release of a study on the securitization market conducted by its economists that suggests how the securitization process can be reformed to maximize benefits and minimize risks, discusses how to strengthen the chain of financial intermediation, and identifies steps that can be taken to spur demand.
IOSCO Releases Final Report on Risk Mitigation Standards for OTC Derivatives
The International Organization of Securities Commissions (IOSCO) announced the publication of its final report titled “Risk Mitigation Standards for Non-Centrally Cleared OTC Derivatives.” The report presents nine standards for the mitigation of the risks present in the non-centrally cleared OTC derivatives markets. The standards address: trading relationship documentation and trade confirmation; process and/or methodology for determining valuation; portfolio reconciliation; portfolio compression; and dispute resolution.
