Bridging the Weeks - May 2018

by Katten Muchin Rosenman LLP
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Two trading firms within a group structure were fined US $2 million in aggregate by the Commodity Futures Trading Commission for alleged violations of various provisions of law and CFTC rules related to their cotton futures transactions, including purported speculative limit violations. Separately, the conviction of a former programmer for a major investment bank for misappropriating his former employer’s algorithmic trading system source code was upheld by New York's top appellate court, while a class action lawsuit was filed against Ripple and its chief executive officer, claiming the defendants were engaging in a continuous, unlawful offering of an unregistered security – the XRP digital token. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • Commodity Trading Firm Sanctioned US $2 Million by CFTC for Various Offenses Related to Cotton Trading Including Violating Speculative Position Limits (includes Compliance Weeds); 
  • Investment Bank Ex-Employee’s Conviction Upheld for Theft of High-Frequency Trading Algorithmic Code (includes Compliance Weeds);
  • Class Action Lawsuit Filed Against Ripple Labs for Unregistered Sales of Securities (includes My View); 
  • Follow-up: California Federal Court Dismissal of CFTC Monex Enforcement Action Upsets Stable Legal Theories (includes My View); and more.

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Article Version

Briefly:

  • Commodity Trading Firm Sanctioned US $2 Million by CFTC for Various Offenses Related to Cotton Trading Including Violating Speculative Position Limits: Glencore Grain B.V. and Glencore Ltd. collectively agreed to pay a fine of US $2 million to settle charges by the Commodity Futures Trading Commission that, from January 2013 through November 2015, they violated various laws and Commission regulations related to their trading of cotton futures on ICE Futures U.S. 

In particular, the Commission alleged that the firm violated speculative position limits on “multiple days” in May and June 2013 and May and June 2014; entered into exchange for related position transactions with each other contrary to IFUS rules, and thus prohibited by law and CFTC rule; and failed to file two reports with it of their physical cotton positions that were accurate as of the last day of May 2013 and May 30, 2014, as required.

The Commission alleged that the Glencore entities violated position limits on the applicable occasions when looking at their positions on an aggregate basis, excluding any bona fide hedging positions which would not be included in a calculation of speculative positions. (Click here to access Commodity Exchange Act § 4a(b), 7 U.SC. § 6a(b) and here for CFTC Rules 150.2 through 150.4.) The Commission said that, because one person – Glencore’s Head of Cotton – directly or indirectly controlled the trading at both entities, positions of the two entities were required to be aggregated.

The Commission also said that, under applicable law, wash sales are prohibited, and futures contracts must be executed openly and competitively unless transacted pursuant to an exchange rule it approved. (Click here to access CEA § 4c(a), 7 U.S.C. § 6c(a) and here to access CFTC Rule 1.38(a).) During the relevant time, noted the Commission, IFUS only authorized EFRPs – a potentially approved form of off-exchange transaction – through independently controlled accounts. (Click here to access ICE Futures Rule 4.06(b)(iv).) Since Glencore Grain and Glencore Ltd. were part of the Glencore plc organization and controlled by the same Head of Cotton, EFRPs between the two entities were not for independently controlled accounts and were thus impermissible, alleged the CFTC.

Finally, persons holding or controlling futures and options positions in cotton that are deemed “reportable” under CFTC regulation are required to file a Form 304 report with it showing the persons’ fixed price cotton positions as of the end of each month it has reportable futures positions and options positions. (Click here to access CFTC Rule 19.00(a)(1).) The CFTC alleged that two Form 304 reports filed by Glencore Grain overstated the quantities of its fixed price cotton cash positions.

In March 2016, Glencore Grain agreed to pay a fine of US $200,000 to settle charges by ICE Futures U.S. that, on May 30, 2014 – a day within the time period identified in the CFTC settlement – the firm may have violated position limits in the July 2014 Cotton futures contract. In addition, alleged the exchange, the firm may have caused “price movement” in the relevant futures contract and a corresponding July/December 2014 futures spread when the firm “waited until the final 20 minutes of trading to execute a high proportion of their transactions on the day prior to first notice day.” (Click here for background on the relevant IFUS disciplinary action and Compliance Weeds in the article “IFUS Charges Trader With Possible Spoofing and Market Disruption While Another Entity Is Charged With Allegedly Liquidating Positions in a Disorderly Fashion to Avoid Speculative Limits Issues” in the March 13, 2016 edition of Bridging the Week.)

Compliance Weeds:CFTC Form 204 (Statement of Cash Positions in Grains, Soybeans, Soybean Oil and Soybean Meal) and Parts I and II of Form 304 (Statement of Cash Position in Cotton – Fixed Price Cash Positions) must be filed by any person that holds or controls a position in excess of relevant federal speculative position limits that constitutes a bonafide hedging position under CFTC rules (the speculative limits are the reportable levels for these purposes). These documents must be made as of the close of business on the last Friday of the relevant month. Form 204 must be received by the CFTC in Chicago by no later than the third business day following the date of the report, while Form 304 must be received by the Commission in New York by no later than the second business day following the date of the report. 

Part III of Form 304 (Unfixed Price Cotton “On-Call”) must be filed by any cotton merchant or dealer that holds a so-called reportable position in cotton (i.e., pursuant to large trader reportable levels; click here to access CFTC Rule 15.03) regardless of whether or not it constitutes a bona fide hedge. Form 304 (Part III) must be made as of the close of business on Friday every week and received by the CFTC in New York by no later than the second business day following the date of the report. (Click here for additional guidance regarding the Form 304 related to “On-Call” cotton in a 2013 CFTC Guidance.)

(Click here for a copy of CFTC Form 204 and here for a copy of CFTC Form 304.)

  • Investment Bank Ex-Employee’s Conviction Upheld for Theft of High-Frequency Trading Algorithmic Code: New York’s highest court – the NY Court of Appeals – upheld the conviction of Sergey Aleynikov, a former computer programmer for Goldman Sachs & Co., who was charged in a state court in 2012 with illicitly copying and using for a new employer, Teza Technologies LLC, Goldman’s proprietary computer code for a high-frequency trading system. 

Mr. Aleynikov was initially charged by a federal grand jury for violation of a federal law – the National Stolen Property Act – in February 2010 related to his alleged misappropriation and found guilty in December 2010. (Click here to access the relevant law at 18 U.S.C. § 2314.)  However, the federal appeals court in New York overturned Mr. Aleynikov’s conviction in April 2012, concluding that source code was intangible property and not a good, and thus a theft of computer code could not involve the “taking of a physical thing” – a necessary requirement for a violation under the relevant law. (Click here for a copy of the relevant court decision.)

Mr. Aleynikov was subsequently criminally charged in September 2012 and convicted by a NY court jury for violating a provision of NY law that prohibits a person from making an unauthorized “tangible reproduction” of secret scientific material. (Click here to access NY Penal Law § 165.07.) However, the New York trial court set aside the jury’s verdict, claiming that source code is not tangible when it is only stored on a computer.

In January 2017, an intermediate appellate court in New York reversed the trial court’s order and remanded the case for sentencing. (Click here to access the relevant court decision.) Acting on Mr. Aleynikov’s appeal, the NY Court of Appeals upheld the defendant’s conviction.

According to the NY Court of Appeals, Mr. Aleynikov, without Goldman’s permission, transferred his then employer’s proprietary source code using his work computer to an unauthorized computer server in Germany on June 5, 2009, his last day of employment at Goldman. This action was expressly prohibited by Goldman policy which precluded employees from removing a copy of source code from the company’s network. Later, Mr. Aleynikov downloaded the source code to his home computer from the Germany-based server. Subsequently, he placed the source code in a Teza website repository for use by Teza.

The NY Court of Appeals said that a “rational jury” could have concluded that the copy of the source code made by Mr. Aleynikov “was tangible in the sense of ‘material’ or ‘having physical form’.” This is because the jury heard evidence that, since source code stored on a computer takes up space on a drive, it is physical in nature. As a result, the court upheld Mr. Aleynikov’s conviction.

Compliance Weeds: The long tortuous prosecution of Mr. Aleynikov may now be headed to a sentencing phase, but it provides a reminder that companies’ cybersecurity procedures should address not only possible unauthorized penetration of systems by external sources and persons, but internal theft. Indeed it has been estimated that 60 percent of all cyber breaches are from internal sources. (Click here for a September 19, 2016 article from the Harvard Business Review regarding this.) 

Last month, the National Institute of Standards and Technology updated its Framework for Improving Critical Infrastructure Cybersecurity. (Click here to access.)

Generally, the Framework sets forth the industry-standard risk-based approach to manage cybersecurity vulnerability. The objective of the Framework is to provide all firms a common means to describe their current cybersecurity approach; describe their target state; identify and prioritize opportunities for improvement; assess progress towards achieving the target state; and communicate about cybersecurity risk to internal and external stakeholders.

Persons in charge of cybersecurity programs at financial services firms might use the opportunity of the revised NIST framework to review their firm’s own approach to assessing, managing and communicating about cybersecurity risk to ensure, among other things, it adequately identifies and mitigates against internal risks.

(Click here for dated but still helpful guidance on proactive measures to minimize to the likelihood of a cyber-attack and to mitigate the consequences of a breach in the article “Cyber-Attacks: Threats, Regulatory Reaction and Practical Proactive Measures to Help Avoid Risks” in the June 25, 2015 edition of Financial Services Advisory by Katten Muchin Rosenman LLP.)

  • Class Action Lawsuit Filed Against Ripple Labs for Unregistered Sales of Securities: A purported class action lawsuit was filed in a California court against Ripple Labs, Inc. and other defendants for offering and selling unlicensed securities, namely the Ripple digital token – XRP. The named plaintiff, Ryan Coffey, seeks rescission and punitive damages against all the defendants, who also include XRP II, LLC and Bradley Garlinghouse, the chief executive officer of Ripple. 

According to the complaint filed in this action, all 100 billion XRP tokens currently in existence were created by Ripple Labs in 2013. Twenty percent of these were allegedly given to individual Ripple Lab founders, while 80 percent were retained by Ripple Labs. The complaint alleges that the defendants have steadily sold off their XRP over time “in what is essentially a never-ending initial coin offering” and XRP tokens offered and sold by defendants “have all the traditional hallmarks of a security.” This is because purchases of XRP tokens represent investments in a common enterprise with profits expected through the efforts of Ripple Labs. Because of the restrictive governance of Ripple Labs, the XRP distributed ledger is also a centralized ledger controlled by a few persons, as opposed to a decentralized ledger like Bitcoin or Ethereum, claims the lawsuit

Ripple Labs and XRP II were collectively fined US $700,000 by the Financial Crimes Enforcement Network of the US Department of Treasury in May 2015 for facilitating transfers of virtual currency and providing virtual currency exchange transactions services in connection with XRP without registering as a money service business and not complying with anti-money laundering requirements. FinCEN noted that XRP II became registered as an MSB in September 2013, but claimed it did not have an effective, written AML program until early 2014. (Click here for background on the FinCEN legal action against Ripple in the article “Money Service Businesses for Second Largest Virtual Currency Fined for AML Deficiencies; Bitcoin Exchange Gets First NY License as Trust Company” in the May 10, 2015 edition of Bridging the Week.)

Ripple represents itself as a “digital asset for payments,” claiming it is “the fastest and most scalable digital asset, enabling real-time global payments anywhere in the world.” (Click here to access the Ripple website.) The defendants have not yet filed an answer to the complaint and this lawsuit has not been approved by the court for class action status.

My View: According to published reports, the Commodity Futures Trading Commission and the Securities and Exchange Commission may meet this week to discuss whether Ether, the digital token associated with the Ethereum blockchain, and XRP are securities potentially subject to regulation by the SEC. (Click here, for example, to access a recent article in The Wall Street Journal.) The CFTC has previously suggested that both Ether and XRP are virtual currencies. (Click here to access the October 17, 2015 LabCFTC primer on Virtual Currencies; see footnote, page 5.) FinCEN in its lawsuit against Ripple Labs and XRP 2 also referenced XRP as a virtual currency and, in fact, grounded its lawsuit on the defendants’ exchange activities involving their virtual currency.

Recently there have been suggestions – most notably by former CFTC Chairman Gary Gensler – that digital tokens issued as part of initial coin offerings or subject to limited governance might be regarded as securities as investors purchase them with the expectation of profits through the activities of others, in one case those of the Ethereum Foundation and in the other case, Ripple Labs. (Click here for access to a purported transcript of a speech by Mr. Gensler at MIT on April 24 as provided by Coindesk.)

The SEC and CFTC have long dealt with products that have characteristics of futures and securities – instruments known as security futures – and have worked out rules for the exercise of their jurisdiction over such products. (Click here for a general background.)

To me, a discussion over when a digital token might be a security as opposed to a virtual currency would be very helpful, particularly if it is followed by the issuance of clear guidance and an opportunity to cure for cryptocurrencies that might be forced to change their existing, popular characterization. However, no guidance should be issued without public input. CFTC Commissioner Brian Quintenz indicated that a subcommittee of the Technology Advisory Committee might be formed to consider this issue (Click here for Mr. Quintenz’s opening remarks before the February 14, 2018 Technology Advisory Committee.) This would be a great forum to initiate such conversations.

Notwithstanding the class action lawsuit filed in California, the more common view is that Ether and Ripple are virtual currencies. Ether clearly is the payment mechanism for transactions on the Ethereum blockchain requiring “gas” and is used in some real-world transactions. Ripple likewise was designed and is used as a payment vehicle. Moreover, Ripple was not issued as part of an ICO, and while 60 million Ether tokens were issued as part of the Ether ICO in July 2014 (valued at approximately US $18.4 million), today Ether tokens are exclusively created through mining – just like Bitcoin. Ripple was previously criticized by some for having too few validators to approve blockchain transactions. However, the amount of so-called "validator nodes" was increased to 55 last year.

Today, when I analyze whether a particular digital token is likely a security or a virtual currency, I consider a number of factors:

1. What was the initial stated purpose for the digital token?

2. How is the digital token promoted today?

3.  Is the digital token generally regarded as a currency, currency substitute or payment substitute, serving as a medium of exchange, store of value or unit of account?

4. Do merchants or any third parties accept the digital token for payment? If yes, how widespread? Is the digital token used for payment on a blockchain? If yes, how?

5.  Was the digital token initially issued as part of an ICO or a type of continuous offering? If not, how are new digital tokens currently issued and what is the percentage of ICO and non-ICO derived digital tokens? Was there a pre-sale associated with the ICO (e.g., SAFT)?

6.  What is the governance regarding the blockchain associated with the digital token? Is there a different governance for the token itself? If yes, what is it? 

7.  Is the blockchain associated with the digital token centralized or decentralized?

8.  How are transactions involving the digital token validated and recorded on the associated blockchain?

9.  Do holders of digital tokens directly or indirectly have any rights to income? Are there any other rights associated with ownership of the digital token? If yes, what are they?

No one or two answers are definitive for me. But when thinking about all the answers it more often than not becomes clearer to me how the digital token should likely be classified. To me collectible cars and private-minted gold coins are not securities even if they behave somewhat like investment contracts. Likewise, a virtual currency is not a security even if it has some characteristics of an investment contract. Moreover, the nature of a digital asset may morph over time. As divisions of the SEC have seemingly acknowledged on multiple occasions, just because something has some qualities of an investment contract – like a baseball stadium's seat leases – and trade on secondary markets – like eBay – doesn’t mean they should be regulated as securities. (Click here, e.g., for a request for no action by the San Francisco Baseball Associates L.P related to seat leases and here for the grant of no-action relief by the Office of Chief Counsel of the Division of Corporate Finance on February 24, 2006.)

  • Follow-up: California Federal Court Dismissal of CFTC Monex Enforcement Action Upsets Stable Legal Theories: The California federal court judge who, at the end of March, tentatively dismissed the enforcement action by the Commodity Futures Trading Commission against Monex Deposit Company and other defendants for alleged fraud in connection with their financed sale of precious metals to retail persons issued a final order confirming the dismissal on May 1.

In his ruling, the judge – the Hon. James V. Selna – emphasized the two basic tenets of his tentative order, that: 

1.  actual delivery of precious metals in financed transactions to retail persons falls outside the CFTC’s authority when ownership of real metals is legally transferred to such persons within 28 days – the so-called “Actual Delivery Exception” – even if the seller retains control over the commodities because of the financing beyond 28 days; and 

2.  the CFTC cannot use the prohibition against persons engaging in any manipulative or deceptive device or contrivance in connection with the sale of any commodity in interstate commerce enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prosecute acts of purported fraud except in instances of fraud‑based market manipulation.

The CFTC had argued that Monex’s practices did not result in actual delivery and were a “sham.” The CFTC said, “Customer positions can be liquidated at any time and in Monex’s sole discretion, without notice to customers.” Moreover, “the terms [of the relevant] agreements… deprive customers of all control and authority over any metals that underlie their trading positions.”

However, said the judge, “the legislative history of Dodd-Frank supports the Court’s conclusion that Congress did not intend to exclude the sort of conduct that CFTC alleges Monex engaged in from the ambit of the Actual Delivery Exception.” The judge claimed that if he was to follow the CFTC’s position, every financed transaction would violate Dodd-Frank, and the Actual Delivery Exception under law would be nullified.

The CFTC had also argued that it has broad authority to prosecute fraud under its new Dodd-Frank authority – not just fraud-based market manipulation. However, the judge said he did not see this authority in the relevant law or Congressional dialogue leading to the adoption of the relevant statute. Moreover, he claimed that the Commission itself seemed to concede this point in a July 2011 discussion related to the law and Commission Regulation 180.1 which the CFTC issued when finalizing the regulation. (Click here to access this guidance.) According to the Commission (as quoted by the judge),

“although CEA section 6(c)(1) and final Rule 180.1 give the Commission broad enforcement authority to prohibit fraud and manipulation in connection with a contract of sale for any commodity in interstate commerce, the Commission expects to exercise its authority under 6(c)(1) to cover transactions related to the futures or swaps markets, or prices of commodities in interstate commerce, or where the fraud or manipulation has the potential to affect cash commodity, futures, or swaps markets or participants in these markets.” (Emphasis added by the court. Click here to access Commodity Exchange Act § 6(c)(1), 7 U.S.C § 9(1) and here for CFTC Rule 180.1.) 

According to the judge, the CFTC has three basic anti-fraud authorities, and each has a distinct purpose and limitations: § 4b, that solely prohibits fraud and deceptive conduct (click here to access 7 U.S.C. § 6b(a)(2)), § 6(c)(1), that prohibits fraud-based manipulation and § 6(c)(3), that prohibits market manipulation when there is no fraud (click here to access 7 U.S.C § 9(3)).

(Click here for background on the CFTC enforcement action and an overview of the tentative order in the article “California Federal Court Potentially Poised to Limit CFTC’s Dodd-Frank Fraud-Based Anti-Manipulation Authority in Monex Enforcement Action” in the April 22, 2018 edition of Bridging the Week.)

My View: The court’s ruling on the Actual Delivery Exception appears to make perfect sense. If actual delivery within 28 days of the sale of a commodity excludes from CFTC oversight any commodity sold to a retail person on a leveraged or financed basis except where the seller/grantor of financing is not willing to release all liens or control on the financed commodity – even if the financing or leverage is not paid off – the Actual Delivery Exception is meaningless. This is because, realistically, no lender will release its lien or control on collateral supporting financing until a debt is repaid. It seems improbable that Congress would have drafted a law to create a carve-out from CFTC jurisdiction that realistically would never occur.

The difficulty of the CFTC’s position is highlighted in its proposed interpretive guidance on retail commodity transactions involving virtual currencies issued in December 2017, which parallels the CFTC’s 2013 guidance regarding actual delivery of tangible commodities. (Click here to access a copy of the CFTC’s 2013 guidance and here for a copy of the CFTC’s proposed 2017 guidance.) Both proposed examples 1 and 2 suggest situations where actual delivery might only be deemed to have occurred in financed transactions involving virtual currency for retail persons where the financed virtual currencies were delivered to a wallet not controlled in whole or in part by the seller. However, not being able to exercise control would leave the seller with no effective security interest over collateral it financed even when it has not been repaid. This would render the theoretical ability to sell virtual currencies to buyers on finance subject to actual delivery within 28 days a meaningless option.

However, while the court’s view that the CFTC’s ability to prosecute fraud under its new Dodd-Frank authority is limited to fraud-based manipulation might be compelling, it is not as clear to me. This outcome requires a reading of the word “or” in the applicable prohibition to mean “and.” 

As drafted, the applicable provision of law reads, 

“It shall be unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Commission shall promulgate…” (Emphasis added.)

If “or” means “or,” the plain reading of the law suggests that either manipulative or deceptive devices are prohibited, not solely deceptive devices that are manipulative.

The judge insisted that, despite this plain language, a holistic view of this statutory provision considering other sections of law, as well as a review of legislative history, leaves no doubt that the use of “or” was likely careless, and the “or” should be read as an “and.” This analysis is well reasoned and sensible, and it is the basis for his view that only fraud-based manipulation may be prosecuted under this provision. Moreover, I believe the CFTC has unfairly used this statutory provision as the wild junkyard dog of its enforcement arsenal without any leash or other restraint. However, I’m intuitively not so sure about the federal judge’s reasoning. Still thinking about this one!

More Briefly:

  • Global Investment Bank Fined US $110 Million for FX Trading by Federal and NY Regulators: The Goldman Sachs Group Inc. agreed to pay a combined fine of US $110 million to the Federal Reserve Board and the New York Department of Financial Services related to allegations that, from 2008 through early 2013, firm traders shared confidential customer information to coordinate with others trading activity in foreign exchange that could improperly affect prices detrimentally for customers for the benefit of traders. Goldman Sachs also agreed to enhance its internal controls for foreign exchange trading as part of its settlement. Both the FRB and DFS acknowledged Goldman Sachs’ full cooperation with their investigation, and that the firm has already instituted improvements in internal controls, compliance, risk management and audit programs related to its foreign exchange business.
  • Federal Court Rejects States' Challenge to Potential OCC Fintech Charter: A second federal court has rejected a challenge to a proposed Fintech charter being considered by the Office of the Comptroller of the Currency. Under the proposal, a financial services business – such as a cryptocurrency exchange – could potentially apply for a national nonbank charter provided it did not accept deposits. With such a charter, a financial services business would be exempt from state obligations. In response, the Conference of State Bank Supervisors challenged the authority of OCC to grant such nonbank charters in a federal court in Washington, DC. The court rejected CSBS's challenge, however, claiming that the plaintiff had suffered no injury at this time, and that the lawsuit was premature as OCC has not yet taken any final decision on granting the relevant nonbank charter. A federal court in New York reached a similar conclusion in December 2017 in response to a lawsuit by the head of the New York Department of Financial Services, Maria Vullo. (Click here for details in the article, "Challenges to NY BitLicense and Potential OCC Fintech Charter Quashed" in the January 7, 2018 edition of Bridging the Week.)
  • CFTC Staff Clarifies Aggregation Requirements of Investor in Commodity Fund: The Division of Market Oversight of the Commodity Futures Trading Commission stated in an Interpretation that an institutional investor in a commodity pool that is not required to aggregate the pool’s futures positions with its own because the investor is a passive investor does not have to aggregate futures positions of a portfolio company the pool is invested in. This is the case even where the institutional investor’s investment in the pool causes it to have a 10 percent or more indirect interest in the portfolio company. The institutional investor that sought Division relief represented that it did not control the pool’s operations or its investment decisions, and did not know “or want to know” if a prospective portfolio company intended to trade futures.
  • NFA Reminds FCM and IB Members to Comply With OFAC FAQs Regarding Virtual Currencies: The National Futures Association reminded futures commission merchants and introducing brokers to comply with the US Department of Treasury’s Office of Foreign Asset Control’s recent guidance for virtual currency transactions. Recently, OFAC addressed virtual currencies in its Frequently Asked Questions and said that persons that identify digital currency identifiers or addresses associated with prohibited persons on blockchains "should take the necessary steps to block the relevant digital currency and file a report with OFAC that includes information about the wallet or address's ownership, and any other relevant details.” (Click here for further details in the article “OFAC Warns Prohibited Persons Using Virtual Currencies Are Still Prohibited Persons” in the March 25, 2018 edition of Bridging the Week.) Separately, CFTC Commissioner Rostin Behnam indicated during a speech before the 40th annual FIA Law and Compliance conference held last week that NFA staff had proposed an interpretive notice to enhance disclosure requirements for members trading underlying/spot virtual currencies and virtual currency derivatives. (Click here to access Mr. Behnam’s speech.)
  • FINRA Revises Sanctions Guidelines: The Financial Industry Regulatory Authority updated its Sanction Guidelines to instruct adjudicators to consider customer-initiated arbitrations that result in adverse results in assessing sanctions. FinCEN also updated its anti-money laundering rule to reflect new requirements for identifying beneficial ownership of legal entity customer accounts that go into effect this week. (Click here to access FINRA Rule 3310; click hereto access information on FinCEN’s new requirements in the article “FINRA Provides AML Guidance to Members” in the December 3, 2017 edition of Bridging the Week.)
  • IOSCO and BIS Criticize Some CCPs for Lacking on Risk Management and Recovery Planning: The International Organization of Securities Commissions and the Committee on Payments and Infrastructures of the Bank for International Settlements issued a report noting that some global central counterparties have not yet implemented a number of recommended risk management and recovery planning measures. Among other things, some CCPs only employ one loss allocation tool (i.e., special assessments) as opposed to multiple tools to address uncovered credit losses, as recommended, and some derivatives CCPs and most cash CCPs “continue to lack mandatory rule-based recovery tools to re-establish a matched book (or to otherwise close out a defaulter’s outstanding obligations) and rely only on voluntary, market-based tools.” The regulatory organizations believes CCPs need a “range of tools” to ensure a CCP can establish a matched book.

For further information:

California Federal Court Dismissal of CFTC Monex Enforcement Action Upsets Stable Legal Theories:
https://bridgingtheweek.com/ckfinder/userfiles/files/Monex%20Motion%20to%20Dismiss%20Granted.pdf

CFTC Staff Clarifies Aggregation Requirements of Investor in Commodity Fund:
https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-12.pdf

Class Action Lawsuit Filed Against Ripple Labs for Unregistered Sales of Securities:
https://static1.squarespace.com/static/5938711a9de4bb74f63b4059/t/5aebc4112b6a28e0ef4a0381/1525400594617/Coffey+v+Ripple+Labs+Complaint.pdf

Commodity Trading Firm Sanctioned US $2 Million by CFTC for Various Offenses Related to Cotton Trading Including Violating Speculative Position Limits:
https://www.cftc.gov/sites/default/files/2018-04/enfglencoreorder04302018.pdf

Federal Court Rejects States' Challenge to Potential OCC Fintech Charter:
https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2017cv0763-19

FINRA Revises Sanctions Guidelines:

Global Investment Bank Fined US $110 Million for FX Trading by Federal and NY Regulators:

Investment Bank Ex-Employee’s Conviction Upheld for Theft of High-Frequency Trading Algorithmic Code:
https://www.nycourts.gov/ctapps/Decisions/2018/May18/47opn18-Decision.pdf

IOSCO and BIS Criticize Some CCPs for Lacking on Risk Management and Recovery Planning:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD601.pdf

NFA Reminds FCM and IB Members to Comply With OFAC FAQs Regarding Virtual Currencies:
https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5003

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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Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • 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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