Bridging the Week - February 2018 #2

by Katten Muchin Rosenman LLP
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Last week, the chairmen of the Commodity Futures Trading Commission and the Securities and Exchange Commission provided their insight into the risks of cryptocurrency activities before a Senate committee. During his testimony, CFTC Chairman J. Christopher Giancarlo suggested it might be appropriate to extend federal oversight to spot virtual currencies and exchanges to avoid gaps in current regulation. Additionally, the first trader convicted of spoofing under a Dodd-Frank amendment to existing law expressly designed to prohibit such activity appealed his conviction to the Supreme Court, claiming the law change was unconstitutionally vague. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • SEC and CFTC Chairs Warn Senate Banking Committee of Cryptocurrency Risks; CFTC Chair Suggests Federal Oversight of Spot Virtual Currency Activities (includes My View);
  • First Trader Criminally Convicted for Spoofing Requests Supreme Court Overturn Decision, Claims Applicable Statute Is Unconstitutionally Vague (includes My View and Compliance Weeds);
  • SEC Examinations Unit Announces 2018 Examination Priorities; Protecting Main Street Investors Is Key (includes Compliance Weeds);
  • NYS Financial Services Regulator Ups the Obligations of State-Licensed Virtual Currency Entities (includes Legal Weeds); and more.

Bridging the Week will not be published on February 19, 2018, because of the Presidents' Day holiday in the United States.

Please click here to view the video version of this Newsletter.

  • SEC and CFTC Chairs Warn Senate Banking Committee of Cryptocurrency Risks; CFTC Chair Suggests Federal Oversight of Spot Virtual Currency Activities: J. Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission, posited that additional federal regulation may be appropriate to eliminate “gaps” in the current oversight of spot transactions in virtual currencies and trading platforms, during an appearance last week before the Senate Banking Committee. Mr. Giancarlo appeared before the Committee jointly with Jay Clayton, Chairman of the Securities and Exchange Commission.

Mr. Giancarlo stated that “[a]ppropriate federal oversight” could include data reporting and capital requirements, cyber security standards, and measures to prevent fraud and price manipulation, as well as anti-money laundering and “know your customer” protections. He said that “a rationalized federal framework” may be preferable to the current quilt of state-by-state money transmitter regulations. Mr. Clayton observed during his testimony that both he and Mr. Giancarlo had previously noted their openness to considering “whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate.”

Although Mr. Giancarlo indicated that the CFTC’s regulatory approach of “do no harm” is the right approach in connection with distributed ledger technology, virtual currencies likely require “more attentive regulatory oversight” because of the involvement of retail investors. He added that any augmentation of the CFTC’s regulatory oversight regarding virtual currencies would constitute a “dramatic extension” of the CFTC’s mission and require an amendment to applicable law.

During his testimony, Mr. Clayton cautioned “Main Street investors” to be mindful when investing in cryptocurrencies of any type, particularly those issued as part of initial coin offerings that should be registered as securities and are not or that are not lawfully exempt. Like Mr. Giancarlo, Mr. Clayton questioned whether “our historic approach to the regulation of sovereign currency transactions is appropriate for these new markets” in virtual currencies.

My View: As I indicated in this blog last week, it may be appropriate for Congress to give the CFTC jurisdiction over the purchase and sale of cryptocurrencies in interstate commerce, to the extent such instruments are not securities (i.e., virtual currencies such as Bitcoin, Ether and Litecoin). However, this jurisdiction should be exclusive so as to avoid overlap and inconsistency in approach with the multiple state regulators and the SEC. (Click here to access My View to the article “Senate Ag Committee Asks Questions About Bitcoin Oversight; Senate Finance Committee Schedules Hearing” in the February 4, 2018 edition of Bridging the Week.)

Certainly, virtual currencies are not the same as fiat currencies. Most critically, unlike fiat currencies, virtual currencies have no government backing. Moreover, although virtual currencies may be intended to be a medium of exchange, unit of account and/or a store of value – the traditional characteristics of money –, because of high transaction costs, systems' limitations on capacity, and the reluctance of many merchants to accept virtual currencies for payment, virtual currencies today may be more analogous to precious metals than fiat currencies. Notwithstanding, many regard the potential for virtual currencies to serve as a supplement to government-backed money as huge because of their association with decentralized distributed ledger technologies.

As a result, today, it is likely that most exchanges of virtual currencies between persons reflect investment decisions, rather than traditional currency conversions or transmissions of money, and intermediaries facilitating such transactions act more like traditional exchanges and brokerage firms in the derivatives or securities space, rather than money transmitters. However, such intermediaries are today more often than not regulated as money transmitters by state authorities as well as by the Financial Crimes Enforcement Network of the US Department of Treasury, and the regulation of such intermediaries often does not address types of conduct (e.g., trading practices) routinely addressed by the CFTC in its oversight activities of registered exchanges and brokerage entities.  (Click here to access a relevant FinCEN guidance. Click here, however, to access an article about the New York State Department of Financial Services' recent efforts to oversee market conduct by Bitlicense holders.) Accordingly, it appears preferable to have the CFTC, not the states, regulate such entities in order to promote a uniform standard.

Moreover, virtual currencies may have initially been created during a so-called "mining" process to reward persons who maintain the integrity of the relevant blockchain system (i.e., proof of work), or they may have been created as part of an ICO and used to remunerate system administrators through fees. In some cases, virtual currencies may have been derived both ways. Issuance of a virtual currency through an ICO might implicate SEC oversight.

Today the SEC takes a very broad view of what constitutes a security. This view is principally premised on the agency's interpretation of the landmark Supreme Court 1946 decision of SEC v. W.J. Howey (click here to access) that labeled as an investment contract (and thus, as a security) any (1) investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) to be derived solely from the entrepreneurial or managerial efforts of others. The SEC argues that an investment contract could also exist when persons invest money in a project and expect profits through the appreciation in value of their investment attributable to the entrepreneurial or managerial efforts of others, even if such "profits" can be realized solely by investors reselling their investments. As a result, the SEC argues that an investment contract could include instruments that convey no traditional ownership rights on its holders or any direct rights to revenue – such as many digital tokens issued as part of ICOs. (Click here for background regarding the SEC’s view of Howey in the article “SEC Declines to Prosecute Issuer of Digital Tokens That It Deems Securities Not Issued in Accordance With US Securities Laws” in the July 26, 2017 edition of Between Bridges. Click here for additional insight into the SEC’s view in the article “Non-Registered Cryptocurrency Based on Munchee Food App Fails to Satisfy SEC’s Appetite for Non-Security” in the December 17, 2017 edition of Bridging the Week.) 

However, under this approach, privately issued gold coins promoted by their issuers could potentially be deemed investment contracts by the SEC, as well as special edition automobiles hyped by their manufacturers and similarly promoted assets. In these instances, purchasers would reasonably expect to realize a premium to ordinary market value if they resell their asset because of the entrepreneurial or managerial efforts of others designed to create buzz around their asset. This seems like an attenuated view of what should be considered a security, but it appears consistent with the SEC’s current reasoning. This view could potentially capture some virtual currencies within the definition of a security as well. (Click here to see this possibility raised in Question 9 in the CFTC's request for comment in connection with its proposed guidance on "actual delivery" for retail commodity transactions involving virtual currencies (December 20, 2017) – at page 60341.)

Therefore, Congress should consider amending applicable law to give the CFTC exclusive authority over the purchase and sale of cryptocurrencies in interstate commerce other than securities. However, in doing so, Congress must make clear that virtual currencies meeting some minimum criteria are not securities and empower the CFTC and SEC to define rules to address jurisdiction where there still may be overlapping authority.

  • First Trader Criminally Convicted for Spoofing Requests Supreme Court Overturn Decision, Claims Applicable Statute Is Unconstitutionally Vague: Michael Coscia, the first individual convicted of spoofing under an amendment to applicable law adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, requested the US Supreme Court overturn his conviction.

Mr. Coscia claimed that the amendment – which prohibits any trading, practice or conduct on a Commodity Futures Trading Commission-regulated trading facility that “is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution)”– is unconstitutionally vague. (Click here to access Commodity Exchange Act § 6c(a)(5).) Mr. Coscia – who also was convicted of engaging in commodities fraud – additionally argued that intent alone cannot transform bona fide trading activity into fraud.

In 2015, after a seven-day trial in a federal court in Chicago, Mr. Coscia was convicted of commodities fraud and spoofing in connection with his trading activities on CME Group exchanges and ICE Futures Europe from August through October 2011. Mr. Coscia had initially been indicted for such offenses in October 2014. In July 2013, Mr. Coscia settled civil actions related to the same conduct underlying his criminal indictment with the CFTC, the UK Financial Conduct Authority and CME Group exchanges by payments of aggregate fines of approximately US $3.1 million, disgorgement of profits and a one-year trading suspension. 

According to his indictment, during the relevant time, Mr. Coscia utilized two computer-driven algorithmic trading programs that repeatedly placed small buy or sell orders in a market, followed by the rapid placement and retraction of large orders—so-called “quote orders”—on the opposite side of his small orders. He supposedly did this in order to deceive the market and help ensure the execution of his small orders at favorable prices.

After the initial small orders were executed and he cancelled all his quote orders, Mr. Coscia would reverse the process—placing new small orders on the opposite side of the market as his initial filled orders and large quote orders on the opposite side of the new small orders. He allegedly traded this way in order to ensure the fills of the new small orders and profits on the overall transaction.

In July 2016, Mr. Coscia was sentenced to three years’ imprisonment. His conviction was unanimously upheld in August 2017 by a three-judge Federal Court of Appeals panel in Chicago. (Click here for background on this appeal and Mr. Coscia’s prior regulatory actions in the article “Federal Appeals Court Upholds Conviction and Sentencing of First Person Criminally Charged for Spoofing Under Dodd-Frank Prohibition” in the August 7, 2017 edition of Between Bridges.)

My View: As I have previously written, the Dodd-Frank anti-spoofing provision is badly drafted because it uses a term that is assumed to be commonly understood and is followed by a parenthetical that is too broad in scope. The provision fails to reference the totality of the transaction that is potentially problematic – namely the placement of an order with the intent to cancel it prior to its execution to induce the non-bona fide execution of an opposite-side-of-the-market order.

As a result, it may seem clearer now what was intended to be prohibited by this provision solely as a result of numerous exchange disciplinary actions, CFTC enforcement cases, and criminal prosecutions since the relevant provision’s adoption in 2010, but it was not clear in 2011 – at the time of Mr. Coscia’s alleged wrongful conduct and right after the legal provision became effective. Moreover, the plain language of the provision remains fundamentally flawed.

Indeed, through its imprecision, the Dodd-Frank anti-spoofing provision technically makes illegal on its face relatively ordinary trading conduct that no one – not even the CFTC – would likely consider nefarious. The Department of Justice’s own criminal complaints charging spoofing belie that placement of orders and cancelling them alone is problematic – it is that behavior coupled with the intent to execute opposite-side-of-the-market orders initially away from the prevailing best bid and offer that is wrongful. (Click here for background in the article “CFTC Names Four Banking Organization Companies, a Trading Software Design Company and Six Individuals in Spoofing-Related Cases; the Same Six Individuals Criminally Charged Plus Two More” in the February 4, 2018 edition of Bridging the Week.)

For example, when a trader places a stop-loss order, he or she does not intend for the order to be executed, because presumably that would mean the market is trending in a direction opposite his or her view or expectation. However, he or she would accept an execution if the conditions of the stop-loss order was realized. The CFTC, in its May 28, 2013 Antidisruptive Practices Authority guidance (click here to access) seems to acknowledge the ambiguity in the nature of some orders that, when placed, are desired to be cancelled prior to any potential execution. According to the CFTC, “a spoofing violation will not occur when the person’s intent when cancelling a bid or offer before execution was to cancel such bid or offer as part of a legitimate, good-faith attempt to consummate a trade. Thus the Commission interprets the statute to mean that a legitimate, good-faith cancellation or modification of orders (e.g., partially filled orders or properly placed stop-loss orders) would not violate [the spoofing prohibition].”

CME Group, in its interpretation of its rule related to market disruption, goes even further by suggesting there is a difference between intent and hope when placing an order. According to CME, “market participants may enter stop orders as a means of minimizing potential losses with the hope that the order will not be triggered. However, it must be the intent of the market participant that the order will be executed if the specified condition is met.” (Click here to access CME Group Advisory, RA-1516-5.)

Potentially, every person that a regulator might seek to prosecute for spoofing will likely hope that most orders are not executed. However, such persons will perform on every transaction that is executed – whether hoped for or not. No enforcement action has ever charged that an alleged spoofer failed to perform on a supposed spoof order when executed.

Moreover, in its Advisory, CME Group also provides a number of other examples where the intent of a trader is not necessarily to have all his or her orders executed at the time of order placement, but the consequence is not deemed impermissible spoofing — e.g., placing a quantity larger than a market participant expects to trade in electronic markets subject to a pro rata matching algorithm and placing orders at various price levels throughout an order book solely to gain queue position, and subsequently cancelling those orders as markets change.

Unfortunately, the Dodd-Frank anti-spoofing provision has it wrong. There is nothing inherently problematic about spoofing as expressly defined. Deception, to some extent, is part of smart trading. No trader knowingly reveals all his or her strategy or intent as part of an order placement. Using exchange-authorized iceberg orders to disguise order volume is expressly legitimate, for example. As CME Group wrote in a comment letter to the CFTC about what should be deemed illegal spoofing, it is not the intent to cancel orders before execution that is necessarily problematic, it’s “the intent to enter non bona fide orders for the purpose of misleading market participants and exploiting that deception for the spoofing entity’s benefit” (emphasis added; click here to access CME letter to CFTC dated January 3, 2011).

The parenthetical in the anti-spoofing provision of law defines spoofing potentially to include too many legitimate and otherwise authorized trading practices, and thus is too vague to be meaningful or constitutional.

Compliance Weeds: Notwithstanding my or anyone else’s negative views regarding the impreciseness of the Dodd-Frank language against spoofing as drafted, traders and other market participants must refrain from engaging in trading activities involving the placement or orders that are not intended to be executed – particularly to induce execution of opposite-side-of-the-market orders away from the prevailing best bid or offer. Moreover, firms employing traders or carrying accounts of traders should have policies and procedures reasonably designed to detect spoofing, and to act promptly upon reports of potentially problematic trading by automated surveillance systems or otherwise. Additionally, software developers and their employers should not assist the development of custom software that appears intended to be used for spoofing or other prohibited conduct. These were the clear messages two weeks ago when the CFTC and the Department of Justice coordinated announcements regarding the filing of civil enforcement actions by the CFTC, naming five corporations and six individuals, and criminal actions by the DOJ against eight individuals – including six of the same persons named in the CFTC actions – for engaging in spoofing activities in connection with the trading of futures contracts on United States markets, as well as prior CFTC actions.

  • SEC Examinations Unit Announces 2018 Examination Priorities; Protecting Main Street Investors Is Key: The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced their examination priorities for 2018. Generally, OCIE will focus its examinations on matters most relevant to retail clients; compliance and risk in so-called “critical market infrastructures” such as clearing agencies, national securities exchanges, transfer agents and certain alternative trading systems; the effectiveness of the Financial Industry Regulatory Authority’s and Municipal Securities Rulemaking Board’s regulatory programs; and the effectiveness of required cybersecurity and anti-money laundering programs. Among matters OCIE considers most important to retail clients are disclosures regarding the costs of investing; compliance programs governing electronic investment advice issued by investment advisers and broker-dealers; the adequacy of disclosures and potential conflicts of interest regarding bundled services fees for investment advisory and brokerage services; and controls, safeguards and disclosures by financial professionals regarding their involvement with cryptocurrency products.

Compliance Weeds: Earlier this year, FINRA issued its annual Regulatory and Examinations Priorities Letter setting forth the areas of focus for its inspections of member firms this year. FINRA’s attention will principally be on fraud, high-risk firms and natural person brokers, operational and financial risks, sales practice risks and market integrity. (Click here for details in the article “FINRA Announces 2018 Examination Priorities; Will Review Role of Firms and Salespersons in Facilitating Cryptocurrency Transactions and ICOs” in the January 15, 2018 edition of Bridging the Week.)

As I wrote previously, the beginning of the year provides a natural opportunity for registrants to review their written policies and procedures to ensure they still reflect actual practices. It is easy, over time, for policies and procedures to go stale. Unfortunately, if something goes wrong, it will not be helpful to have actual practices that are inconsistent with written policies, or written policies that are so generic they provide no real basis for actual practices. Both the SEC’s and FINRA’s publication of their 2018 examination priorities also give registrants an opportunity to consider the efficacy of areas of their compliance programs on which they know regulators will focus.

  • NYS Financial Services Regulator Ups the Obligations of State-Licensed Virtual Currency Entities: The New York State Department of Financial Services imposed new requirements on all state-licensed virtual currency businesses to help avoid fraud and market manipulation. Licensed persons will include businesses possessing a so-called NY Bitlicense (click here to access applicable rules) or certain limited purpose trust companies authorized to conduct a virtual currency business.

Specifically, such businesses, including those additionally licensed as money transmitters in the state, must put in place measures “to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing,” including manipulation. According to NYS DFS, “market manipulation is a form of wrongdoing about which VC entities must be especially vigilant, given that such manipulation presents serious risks both to consumers and to the safety and soundness of financial services institutions.”

Acceptable policies, said NYS DFS, must at a minimum identify applicable fraud-related and “similar risk areas,” including manipulation; provide “effective” procedures and controls to protect against identified risks; assign responsibility for monitoring such risks; and provide for periodic evaluation and revision of implemented procedures and controls. Moreover, VC businesses must “immediately upon discovery” notify NYS DFS in writing of any wrongdoing and follow-up “as soon as practicable” with additional information regarding material developments, including actions taken.

Currently, there are only six licensed NY VC businesses: four have so-called BitLicenses (bitFlyer USA, Coinbase, Inc., XRP II and Circle Internet Financial), and two are licensed limited purpose trust companies authorized to conduct a virtual currency business (Gemini Trust Company and itBit Trust Company).

Separately, in other developments regarding cryptocurrencies:

  • The Hong Kong Securities and Futures Commission again alerted investors to be cautious when transacting with cryptocurrency exchanges and participating in initial coin offerings. In a parallel action, the SFC sent letters to seven cryptocurrency exchanges warning them not to trade digital tokens which are securities under applicable law without being licensed to do so. In response, the exchanges either confirmed that they were not engaging in such trading or immediately ceased from offering tokens that are likely securities to HK investors. (Click here for additional information.)
  • The Texas State Securities Board has entered another emergency cease and desist order against an entity offering a lending program involving a cryptocurrency. The respondent in this action is DavorCoin. According to the TSSB, DavorCoin offered persons an opportunity to invest in its lending program and achieve certain minimum guaranteed returns. (Click here for additional information.) The TSSB previously entered an emergency cease and desist order against BitConnect, an entity allegedly offering a similar type of program. (Click here for background in the article “CFTC Issues Explanation of Its Oversight and Approach to Virtual Currency Markets; Texas Securities Board Enjoins Initial Coin Offering” in the January 7, 2018 edition of Bridging the Week.)

Legal Weeds: NY’s BitLicense regime, adopted in 2015, established a licensing requirement for all financial intermediaries who engage in a virtual currency business activity from New York or to a NY resident.The regulations impact a wide spectrum of potential businesses, although they exclude merchants and consumers who use virtual currencies in connection with transactions for goods or services, persons chartered under the NY banking law and approved to engage in a virtual currency business activity (including limited purpose trust companies), and persons who engage in the mere “development and dissemination of software in and of itself.”

In general, under NY’s Bitlicense regime, all financial intermediaries engaging in a virtual currency business must apply and obtain a so-called BitLicense, and maintain certain minimum standards and programs to help ensure customer protection, cybersecurity and anti-money laundering compliance.

Under the regulations, what constitutes a virtual currency should be broadly construed and includes any digital unit that is utilized as a medium of exchange or as a form of digitally stored value. However, virtual currencies do not include certain digital units that are used solely with online gaming platforms or as a part of a customer affinity or rewards program (with some restrictions), or that are used as part of prepaid cards.

Likewise, a virtual currency business activity is broadly defined and includes (1) receiving virtual currency for transmission or transmitting virtual currency except where the transaction is for non-financial purposes and only involves a nominal amount; (2) storing or holding virtual currency for others; (3) buying and selling virtual currency as a customer business; (4) engaging as a customer business in the conversion or exchange of (a) fiat currency or other value into virtual currency, (b) virtual currency into fiat currency or other value, or (c) one form of virtual currency into another form of virtual currency; or (5) controlling, administering or issuing a virtual currency.

Applications for a BitLicense require extensive information about the applicant and its principals. Among the required information is a description of the firm’s proposed business activities, all relevant written policies and procedures, and fingerprints and a third-party-prepared background report on each principal. Fingerprints and a photograph will also be required for each employee who may have access to customer funds.

Each virtual currency firm must have and enforce written compliance policies addressing anti-fraud, anti-money laundering, cybersecurity, privacy and information security. Virtual currency firms must maintain at all times “such capital in an amount and form as the superintendent determines is sufficient to ensure the financial integrity of the [l]icensee and its ongoing operations.”

The NYS DFS’s new guidance imposes new obligations on VC businesses in addition to requirements under the existing Bitlicense regime.

(Click here for further background regarding NY’s BitLicense requirements in the article “New York BitLicense Regulations Virtually Certain to Significantly Impact Transactions in Virtual Currencies” in a July 8, 2015 Advisory by Katten Muchin Rosenman, LLP.)

More Briefly:

  • US Broker-Dealer Agrees to US $1.5 Million Fine to Resolve FINRA Charges Related to Capital and Customer Protection: Wedbush Securities Inc. agreed to pay a fine of US $1.5 million to the Financial Industry Regulatory Authority to resolve charges that, at various times from 2009 through 2016, it failed to comply with certain customer protection and net capital requirements. According to FINRA, among other alleged violations, from 2011 to 2016 the firm failed to calculate its customer reserve requirements on multiple occasions causing it to underfund its customer reserve account 73 times in amounts from US$ 2 million to US $77 million and had insufficient net capital in amounts from US $10.5 million to US $59.4 million during a five-month period between 2015 and 2016. In resolving this matter, Wedbush Securities did not admit or deny any charge.
  • Three Affiliated Entities of Worldwide Investment Firm Fined by HK Regulator Over US $5 Million Equivalent for Multiple Securities Rules Breaches: Three Credit Suisse entities – Credit Suisse AG, Credit Suisse (Hong Kong) Limited and Credit Suisse Securities (Hong Kong) Limited – were collectively fined HK $39.3 million (or more than the equivalent of US $5 million) for internal control failures. Among other things, the entities were cited for inadequacies in segregating client securities, not reporting direct business transactions, not fulfilling short-selling obligations and electronic trading requirements; and selling some products that were unsuitable for the recipients. According to SFC, the Credit Suisse entities self-reported their regulatory issues and hired independent persons to conduct investigations. The firms also agreed to reimburse clients sold unsuitable products HK $7.6 million (approximately US $1 million).
  • IFUS Clearing Member Settles Charges of Not Filing Customer Large Trader Reports in Five Instances: ED&F Man Capital Markets Inc. agreed to pay a fine of US $75,000 to resolve a disciplinary action brought by ICE Futures U.S. alleging that, on five instances between January 2016 and July 2017, it failed to file large trader reports as required for a customer that was in violation of positions. The exchange also claimed that the firm failed to have adequate procedures to detect errors in LTR submissions. Separately, IFUS settled a disciplinary action against National Trading II, LLC for the firm’s agreement to pay a fine of US $7,500. IFUS claimed that on one occasion, the firm held an intra-day position in ONEOK Gas Transportation Basis futures contract in excess of the applicable spot month limit.
  • Newest CFTC Commissioner Encourages Movement on Regulation AT: The most recently appointed commissioner of the Commodity Futures Trading Commission, Rostin Behnam, recommended that the agency “prioritize” revitalizing Regulation Automated Trading “and take action before an automated trading system runs amok, causing harm to market participants through a flash crash or other system failure.” Mr. Behnam provided his views last week at the FIA/SIFMA Asset Management Group Asset Management Derivatives Forum 2018. The CFTC initially proposed Regulation AT in November 2015 – a comprehensive set of new rules that, if adopted, potentially would impose many new obligations on certain CFTC registrants that use algorithmic trading systems to trade futures, options or swaps on designated contract markets. A supplemental Regulation AT was issued one year later. (Click here for background in the article “Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons" in the November 6, 2016 edition of Bridging the Week.)
  • ESMA Issues Guidelines to Avoid Conflicts of Interest at CCPs: The European Securities and Markets Authority issued guidelines to prevent or minimize potential conflicts of interest at clearing organizations (CCPs). Among other things, as part of the guidelines, ESMA identified potential conflicts of interest in certain enumerated relationships (e.g., between a CCP and another group entity, between a CCP and a clearing member, and between a CCP and a clearing member’s client, when known); defined when independent board members might be appropriate; indicated that CCPs should adopt arrangements aimed at preventing the “undue exchange or inappropriate use” of confidential information within a CCP; and that CCPs should adopt strict rules to limit or monitor investments by staff. After ESMA’s guidance is translated into the official languages of the European Union, national regulators are required to confirm whether they will comply with the guidelines or not.

For further information:

ESMA Issues Guidelines to Avoid Conflicts of Interest at CCPs:
https://www.esma.europa.eu/sites/default/files/library/esma70-151-1094_final_report_with_guidelines_on_ccps_management_of_conflicts_of_interest.pdf

First Trader Criminally Convicted for Spoofing Requests Supreme Court Overturn Decision, Claims Applicable Statute Is Unconstitutionally Vague:
https://www.supremecourt.gov/DocketPDF/17/17-1099/34287/20180202161844684_Coscia%20Petition%20for%20Writ%20of%20Certiorari.pdf

IFUS Clearing Member Settles Charges of Not Filing Customer Large Trader Reports in Five Instances:

Newest CFTC Commissioner Encourages Movement on Regulation AT:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam2

NYS Financial Services Regulator Ups the Obligations of State-Licensed Virtual Currency Entities:
http://www.dfs.ny.gov/legal/industry/il180207.pdf

SEC and CFTC Chairs Warn Senate Banking Committee of Cryptocurrency Risks; CFTC Chair Suggests Federal Oversight of Spot Virtual Currency Activities:

SEC Examinations Unit Announces 2018 Examination Priorities; Protecting Main Street Investors Is Key:
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2018.pdf

Three Affiliated Entities of Worldwide Investment Firm Fined by HK Regulator Over US $5 Million Equivalent for Multiple Securities Rules Breaches:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=18PR12&appendix=0

US Broker-Dealer Agrees to US $1.5 Million Fine to Resolve FINRA Charges Related to Capital and Customer Protection:
http://www.finra.org/sites/default/files/Wedbush_OAOS_020518.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.

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  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. 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. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our 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 are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy 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 our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

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

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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