Bridging the Week - April 2017 #2

by Katten Muchin Rosenman LLP
Contact

Very Briefly:

  • SEC Chairman Nominee Advances: Jay Clayton took another step to becoming chairman of the Securities and Exchange Commission when the US Senate Committee on Banking, Housing and Urban Affairs approved his nomination for the position last Tuesday. In supporting Mr. Clayton’s nomination, committee chairman Sen. Mike Crappo said, “Mr. Clayton is eminently qualified to serve as the chairman of the US Securities and Exchange Commission.” Contrariwise, Sen. Sherrod Brown, ranking minority member of the committee, said he declined to support Mr. Clayton because “what American investors and markets need is a responsible, fully engaged SEC Chair who will understand what is important to Main Street investors and companies, and not just focus on what Wall Street needs and wants.” Mr. Clayton’s nomination was supported by the Committee by a vote of 15 – 8.
  • Another Broker Sanctioned by HK SFC for AML Violations Related to Money Transfers Between Clients and Third Parties: The Hong Kong Securities and Futures Commission fined Guoyuan Securities Brokerage (Hong Kong) Limited HK $4.5 million (approximately US $590,000) for not identifying and conducting adequate due diligence to assess whether “a large number of frequent and unusual transfers” between the firms’ clients and third parties were suspicious transactions warranting follow-up. The SFC noted there were instances where money from third parties was wired into clients’ accounts followed by a wire out of the account in an almost equivalent amount to other third parties. The SFC has recently sanctioned a number of brokers for not detecting and reporting third party funds transfers. (Click here for background in the article “HK SFC Sanctions Second Brokerage Company for Third-Party Deposits and Individual Manager at a Previously Fined Broker” in the March 19, 2017 edition of Bridging the Week.)

Compliance Weeds: Third party funds transfers are always potential red flags. Some are warranted – e.g., routine payments to third party advisers in a discretionary account. But all non-approved third party receipts and payments not explained and approved in advance should be investigated if not outright prohibited as well as considered for suspicious account reporting.

  • NASDAQ Futures Issues Audit Trail Guidance and Amends Some Requirements: NASDAQ Futures Inc. issued a revised Futures Regulatory Alert reminding participants of their requirement to maintain or cause to be maintained an audit trail for all orders entered into the exchange’s trading system. Participants must produce such audit trails upon request by NFX or the National Futures Association, which provides regulatory services for NFX. In addition, NFX amended some fields that must be included in the required audit trail. The new requirements are effective July 3.

Legal Weeds: There is a tension between typical language in designated contract rules that require sponsoring clearing members to maintain or cause to be maintained required audit trails for their customers’ electronic orders. (Click here to access Ch. 5, Sec. 1(f)(v) of NFX Rules) and the relevant records rule of the Commodity Futures Trading Commission, which speaks in terms of the need to “keep” such records (emphasis added). Click here to access and contrast CFTC Rule 1.35(a)(1).) This potential conflict was highlighted in 2015 when CME Group amended its audit trail retention requirements and added the following caveat: “Nothing herein relieves any of the above-referenced firms from compliance with the applicable recordkeeping provisions of CFTC Regulations.” (Click here to access CME Group Market Regulation Advisory Notice: Order Routing/Front-End Audit Trail Requirements (December 14, 2015).)

  • Two Traders Acquitted in UK LIBOR Criminal Trial: Two former Barclays bank traders – Stylianos Contogoulas and Ryan Michael Reich – were acquitted by a UK jury of criminal charges related to an investigation by the Serious Fraud Office into the manipulation of LIBOR benchmark interest rates by the bank from 2005 to early 2009. Barclays previously agreed to pay fines totaling US $360 million to the Commodity Futures Trading Commission and the US Department of Justice, and GBP 59.5 million (approximately US $73 million) to the UK Financial Services Authority (predecessor to the Financial Conduct Authority). SFO has brought criminal cases against 19 individuals for their roles in the manipulation of LIBOR and EURIBOR. To date, one has pleaded guilty, four were convicted and eight were acquitted.
  • Warehouse Settles Disciplinary Proceeding Brought by LME for Falsifying Documents for USD $1.4 Million Fine: Access World (USA) LLC agreed to pay a fine of US $1.4 million for creating false records in connection with metal held for customers to mislead the exchange into thinking the metal had been physically moved from the New Orleans delivery point when in fact it had not been moved or moved on a date different than set forth in inventory records. According to LME, AW USA explained it engaged in such conduct when it experienced unspecified “logistical issues.” In issuing the settlement, LME said it “expects listed Warehouses to incorporate appropriate checks into its processes and procedures so that any potential acts of misconduct undertaken by individuals within the organization can be promptly discovered and acted upon.”
  • In Search of Market Intelligence – Acting CFTC Chairman Appoints First Chief Market Intelligence Officer: Andrew Busch was appointed as the first Chief Market Intelligence Officer of the Commodity Futures Trading Commission. The objective of the role, according to a statement issued by Acting Chairman J. Christopher Giancarlo, is to “help activate the CFTC’s latent capability for market intelligence, giving us better insight into the needs of participants in the futures and swaps we oversee.” Mr. Giancarlo had initially previewed the creation of the CMIO role during a speech before an FIA conference in March. (Click here for details in the article “CFTC Chairman Nominee Warns of Tough Love to Come: KISS But Also Aggressive and Assertive Enforcement” in the March 19, 2017 edition of Bridging the Week.)
  • CME Group Clearing House Risk Committee Charges Two Clearing Members With Violating Exchange Rules: Wedbush Securities Inc. agreed to a sanction of US $500,000 by the Clearing House Risk Committee for breaches of various Chicago Board of Trade financial and recordkeeping rules. However, the Committee agreed to waive US $250,000 of the sanction based “on the firm’s compliance with industry rules, regulations and requirements through the completion of the next risk based examination.” Separately, HSBC Securities (USA) Inc. agreed to pay a fine of US $50,000 related to alleged breaches in calling for performance bond and financial requirements of the Chicago Mercantile Exchange. Nothing in either public order provided any substantive facts regarding the nature of the Risk Committee’s allegations.
  • CFTC Staff Excuses University Management Company and Fund Directors From CPO Registration as Interests Aligned With Investors: Staff of the Division of Swap Dealer and Intermediary Oversight exempted a state university organized investment management company and individual directors from having to register as commodity pool operators in connection with their roles ultimately overseeing multiple funds operated for university affiliates, supporting organizations and foundations that currently or may in the future invest in commodity interests. Staff indicated that relief was warranted because the management company and directors “share an aligned interest and common goal with the Fund participants.” Also, neither the management company nor the directors market any of the funds to the public, and the universe of possible funds participants is sufficiently small due to the funds being limited to persons affiliated with the university. (Click here for further details in the article “CFTC Grants No-Action Relief From CPO Registration for Managers of Endowment Assets” in the April 7, 2017 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
  • Broker-Dealer Agrees to Pay US $380,000 to Resolve FINRA TRACE Reporting Deficiency and Supervisory Breakdown Allegations: Cantor Fitzgerald & Co. agreed to pay a fine of US $380,000 to the Financial Industry Regulatory Authority to resolve charges that, on various occasions from July 2014 through September 2016, it violated reporting requirements involving secondary market transactions in eligible fixed income securities through its Trade Reporting and Compliance Engine (TRACE). In connection with the matter it settled, Cantor Fitzgerald was also charged with supervisory deficiencies related to its alleged TRACE violations.
  • Independent Introducing Broker Settles NFA Charges Regarding Capital Deficiency and Notification Failure: Option Financial LLC, an independent introducing broker registered with Commodity Futures Trading Commission, consented to pay US $10,000 to settle charges that it failed to satisfy its minimum capital requirement on 42 days between January and June 2016. NFA claimed that OFL also failed to timely file a notice of its capital deficiencies, as required, until August 2016 after it was advised to do so by NFA.
  • ESMA Issues Guidance on Market Structure Under MiFID II: The European Securities and Markets Authority issued guidance related to the operation of two types of trading venues under the Markets in Investment Directive II – Organized Trading Facilities and Systematic Internalizers. In its guidance, ESMA clarified the type of arrangements that would require authorization as an OTF and when a Systematic Internalizer may engage in activities that would also require authorization. OTFs are trading facilities for bonds, structured finance products and emission allowances where orders are executed on a discretionary basis. Systematic Internalizers are investment firms that deal for their own account, providing bilateral liquidity. (Click here for further details in the article “ESMA Updates MiFID II Q&As on Market Structures, Commodity Derivatives and Transparency” in the April 7, 2017 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
  • Canadian Securities Regulators Seek Guidance for Business Conduct Rules for Derivatives Dealers and Advisers: The Canadian Securities Administrators proposed various customer protection proposals for over-the-counter transactions. The provisions address fair dealing, conflicts of interest, know your customer requirements, suitability, pre-trade disclosures, reporting, compliance, senior management duties, recordkeeping and protection of assets. Comments will be accepted through September 1, 2017.

For further information:

Another Broker Sanctioned by HK SFC for AML Violations Related to Money Transfers Between Clients and Third Parties:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=17PR43&appendix=0

Broker-Dealer Agrees to Pay US $380,000 to Resolve FINRA TRACE Reporting Deficiency and Supervisory Breakdown Allegations:
/ckfinder/userfiles/files/FINRA%20Cantor%20Fitzgerald%20Trace.pdf

Canadian Securities Regulators Seek Guidance for Business Conduct Rules for Derivatives Dealers and Advisers:
http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20170404_93-101_rfc-derivatives.pdf

CFTC Staff Excuses University Management Company and Fund Directors From CPO Registration as Interests Aligned With Investors:
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-19.pdf

ESMA Issues Guidance on Market Structure Under MiFID II:
https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-38_qas_markets_structures_issues.pdf

Independent Introducing Broker Settles NFA Charges Regarding Capital Deficiency and Notification Failure:
https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4435
https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4419

In Search of Market Intelligence – Acting CFTC Chairman Appoints First Chief Market Intelligence Officer:
http://www.cftc.gov/PressRoom/PressReleases/pr7543-17#PrRoWMBL

NASDAQ Futures Issues Audit Trail Guidance and Amends Some Requirements:
http://nasdaqphlx.cchwallstreet.com/NASDAQPHLX/pdf/nfx-filings/2017/SR-NFX-2017-15.pdf

CME Group Clearing House Risk Committee Charges Two Clearing Members With Violating Exchange Rules:

SEC Chairman Nominee Advances:
http://www.corporatefinancialweeklydigest.com/2017/04/articles/eu-developments/esma-updates-mifid-ii-qas-on-market-structures-commodity-derivatives-and-transparency/

Two Traders Acquitted in UK LIBOR Criminal Trial:
https://www.sfo.gov.uk/2017/04/06/two-acquitted-libor-trial/

Warehouse Settles Disciplinary Proceeding Brought by LME for Falsifying Documents for USD $1.4 Million Fine:
https://www.lme.com/~/media/files/notices/2017/03/17%20111%20disciplinary%20procedures%20handbook%20%20settlement%20in%20relation%20to%20access%20world%20usa%20llc.pdf

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Katten Muchin Rosenman LLP | Attorney Advertising

Written by:

Katten Muchin Rosenman LLP
Contact
more
less

Katten Muchin Rosenman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.