Editor’s Note
Spotlight on FINRA Retrospective Rule Review: On December 9, FINRA announced it had issued reports on its retrospective review of two groups of rules – a report on the rules on communications with the public and a report on the rules on gifts, gratuities and non-cash compensation. The reports are unusual, and admirable, in the degree to which they provide transparency to the rulemaking process. In preparing the reports, FINRA requested and obtained comments on the current rules, held meetings with stakeholders and conducted surveys of member firms and subject matter experts. The reports discuss provisions of the rules that commenters and survey participants thought were burdensome or otherwise needed amendment, and other provisions of the rules that commenters and participants thought were effective. The reports conclude with recommendations by the FINRA staff of elements of the rules to be considered for amendment by the FINRA Board.
Regulatory Developments
NACHA Releases Request for Comment on Same Day ACH
The National Automated Clearing House Association released a Request for Comment (RFC) on Same Day ACH on December 9. The RFC outlines a proposal for new clearing and settlement options designed to move ACH payments more quickly. Under the proposal, financial institutions receiving ACH files (RDFIs) will be mandated to receive “Same Day” ACH files and make funds available to customers by the end of the business day. RDFIs will receive fees paid by originating institutions, designed to help them recover the costs associated with implementation and support of Same Day ACH transactions and insure ubiquity of the service. Comments on the RFC are due by February 6, 2015.
CFTC Approves NFA's Prohibition on Customer Use of Credit Cards and Other Electronic Methods to Fund Retail Forex Accounts
The National Futures Association (NFA) announced that the CFTC approved the NFA's Interpretive Notice entitled “NFA Compliance Rules 2-4 and 2-36: Prohibition on the Use of Certain Electronic Funding Mechanisms.” The Interpretive Notice prohibits NFA Members from allowing customers to fund their futures or forex accounts with a credit card or other electronic methods tied to a credit card (e.g., using a payment facilitator such as PayPal that draws funds from a credit card) while still allowing customers to use other methods of electronic funding, such as a debit card, which draw funds directly from the customer's account at a financial institution, subject to certain conditions. The prohibition becomes effective January 31, 2015.
NFA Provides Guidance on Annual Affirmation Process for CPO and CTA Registration Exemptions and Exclusions
The National Futures Association (NFA) issued Notice to Members I-14-34, which reminds persons relying on (1) an exemption or exclusion from commodity pool operator (CPO) registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5), or (2) an exemption from commodity trading advisor (CTA) registration under CFTC Regulation 4.14(a)(8), that they must annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year-end. The deadline is March 2, 2015 for the current affirmation cycle. The Notice includes an FAQ on exemption affirmation and related matters, including how to verify that an entity has properly affirmed its exemption for purposes of satisfying NFA Bylaw 1101 requirements for doing business with the entity. Failure to affirm an exemption or exclusion by March 2, 2015 will result in the automatic withdrawal of the exemption or exclusion on March 2, 2015. Starting December 3, 2014, the affirmation process may be completed using the NFA's Exemption System.
FFIEC Releases Updated BSA/AML Examination Manual
The Federal Financial Institutions Examination Council (“FFIEC”) has released an updatedBank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The BSA/AML Examination Manual details the procedures that the federal banking agencies use to conduct examinations of the institutions they supervise. The FFIEC made revisions throughout the manual. Of particular note, the revised manual includes additional guidance on risk mitigation in connection with foreign correspondent accounts, additional guidance related to international ACH transactions, an expanded discussion of risk factors and risk-mitigation related to prepaid access, an updated discussion of third party payment processors that reflects guidance issued since 2010 and other changes. The agencies comprised by the FFIEC consulted with FinCEN and OFAC with respect to sections of the manual that address compliance with programs that FinCEN and OFAC administer and enforce.
FDIC Issues Guidance Suggesting State Banks Should Document Permissibility of Activities
The FDIC has issued a Financial Institution Letter in which it advises that state banks that engage directly or through a subsidiary in activities that are permissible for a national bank should maintain documentation that the activity is permissible for a national bank. In general, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prohibits an FDIC insured state bank from engaging directly or through a subsidiary, as principal, in any activity that is not permissible for a national bank and from making any equity investment of a type that would not be permissible for a national bank. The statute permits a state bank to engage in an activity that is not permissible for a national bank if the state bank is and continues to be in compliance with applicable capital requirements and if the FDIC has determined that the activity would not pose a significant risk to the Deposit Insurance Fund. The statute and the FDIC’s implementing regulations provide certain other exceptions. If a state bank is engaged, as principal, in an activity to which the FDICIA limitation is applicable, the guidance suggests that the bank should maintain documentation, which may consist of a copy of the relevant statute, regulation, guidance provided by the Office of the Comptroller of the Currency, or other documentation establishing that the activity is permissible for a national bank and that the state bank is complying with any limitations on the activity applicable to a national bank. The guidance implies but does not directly state that state banks should maintain documentation demonstrating that other activities are permissible because they are conducted in an agency capacity or are otherwise not subject to the FDICIA limitation.
SEC Approves MSRB Best-Execution Rule for Municipal Securities Dealers
The MSRB announced, in Regulatory Notice 2014-22, that the SEC had approved MSRB Rule G-18 (Best Execution), which requires municipal securities dealers to seek the most favorable terms reasonably available for their retail customers’ transactions. The rule is generally harmonized with FINRA’s corresponding rule for best execution in the equity and corporate debt markets, but is tailored to the characteristics of the municipal securities market. Changes were also made to Rules G-48 and D-15 to provide an exemption from the requirements of the best-execution rule for all transactions with sophisticated municipal market professionals, a category of customers with assets of at least $50 million. The rule change will become effective next year on December 7, 2015.
Enforcement & Litigation
Court Orders More than $1.3M in Sanctions Against Gold and Silver Distributor
On December 5, the CFTC announced that the U.S. District Court for the Southern District of Florida entered an Order of default judgment against Gold Distributors, Inc., and its sole owner Jordan Cain, requiring the defendants to pay restitution in the amount of $337,266 and a civil money penalty of $1,011,800, for engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis. Section 2(c)(2)(D) of the CEA, cited by the CFTC in its complaint as the basis for its jurisdiction, was added by the Dodd-Frank Act and applies to any agreement, contract, or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged, margined, or financed basis. The Section requires such agreements, contracts, and transactions to be conducted on a regulated exchange unless “actual delivery” of the commodity is made within 28 days. U.S. Commodity Futures Trading Commission v. Gold Distributors, Inc. and Jordan Cain, No. 10:14-cv-60695 Doc. 14 (S.D. Fl. Nov. 24, 2014).
Industry Developments
Comptroller Discusses the Supervision of Federal Branches and Agencies of Foreign Banks
Comptroller of the Currency Thomas J. Curry last week discussed the approach followed by the OCC with respect to supervision of federal branches and agencies of foreign banks. He made his remarks during an event hosted by the International Bankers Association of California and the National Association of Chinese American Bankers. Comptroller Curry noted that the OCC applies a “supervision-by-risk approach” to overseeing the activities of all of the institutions it supervises, including federally licensed branch and agency offices, but he particularly emphasized in his remarks that the OCC remains very concerned about risks related to cyber security and compliance with the Bank Secrecy Act and anti-money laundering laws. The Comptroller’s remarks come shortly following the release by the OCC in October of an updated “Federal Branches and Agencies” booklet, which is part of the Comptroller’s Licensing Manual series of booklets. Among other things, the updated booklet reflects amendments in 2003 to the International Banking Act and the OCC’s corresponding revisions to the OCC’s implementing regulation and adds a discussion of activities and operations permitted for federal branches and agencies, including loan production offices, operating subsidiaries, and noncontrolling investments.
ABI Releases Ch. 11 Improvement Recommendations
On December 8, 2014, a Commission established by the American Bankruptcy Institute (ABI) dating back to 2012 for purposes of evaluating Chapter 11 bankruptcy code, released its final report of recommendations to improve Chapter 11 of the Bankruptcy Code for financially distressed businesses. The Commission’s report, which sets forth 241 discrete recommendations to improve the Bankruptcy Code, was adopted unanimously by its voting members.
