OATS Reporting Violations and FINRA Enforcement.
FINRA’s Order Audit Trail System (OATS), is an integrated audit trail of order, quote and trade information for all NMS stocks and OTC equity securities, under FINRA Rules 7410-7470, adopted in 1998 and rolled out in phases. NMS (national market system or exchange-traded) and OTC (over-the-counter or off-exchange) stocks comprise virtually all registered equity securities traded in the U.S. FINRA member firms are required to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders, including recording all times of these events in hours, minutes, and seconds, and to synchronize their business clocks. FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms. The FINRA enforcement staff regularly investigates violations of OATS reporting rules; in 2005 FINRA published guidance on OATS Compliance Sweeps
, describing the tools and strategies it uses to identify OATS reporting violations. A search of the FINRA website indicates that, just between January 1, 2015 and July 31, 2016, FINRA has obtained approximately 80 letters of acceptance, waiver and consent (AWCs) in settlement of claims based in whole or part on OATS reporting violations. On August 3, FINRA announced
that it had accepted an AWC
from Barclays Capital, Inc. based on findings of OATS reporting violations relating to 15 systems issues. Those systems issues illustrate the increasing technological challenges for compliance officers in the 21st century. According to the AWC, systems failures were caused by, among other things, programming issues, configuration issues, coding errors, use by the credit desk of an order management system not connected to the firm’s data warehouse and use by the structured capital markets desk of a third-party vendor system that did not generate accurate and complete OATS reports on behalf of the firm. Compliance officers usually don’t program software themselves, but they must be able to work with internal and external software developers and third-party system providers to ensure that OATS reporting is being made properly. Then they need to look periodically at records of OATS reporting already made to see if there are any system flaws causing errors. And finally, they need a map of every system that could or should generate OATS reports, to make sure there are no wayward horses grazing wild in the grass that ought to be on OATS.
CFPB Outlines Guiding Principles for Foreclosure Prevention
On August 2, the Consumer Financial Protection Bureau (CFPB) outlined consumer protection principles to guide mortgage servicers, investors, government housing agencies and policymakers to develop new foreclosure relief solutions. Motivated by the expiration of the Department of Treasury’s Home Affordable Modification Program, the CFPB intends the proposed principles to inform the discussion of potential options to help prevent avoidable foreclosures. The proposed principles call for assistance to consumers facing foreclosure that is accessible, affordable, sustainable and transparent. These principles span the spectrum of home-retention options such as forbearance, repayment plans and modifications, and home-disposition options such as short sales and deeds-in-lieu.
CFPB Expands Foreclosure Protections
On August 4, the CFPB finalized the updated mortgage servicing rule intended to offer greater protection to “homeowners and struggling borrowers.” The updated rule requires servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan and helps ensure that surviving family members and others who inherit or receive property have the same protections as the original borrower. In addition, the updated rule provides the following new consumer protections: (1) providing more information to borrowers in bankruptcy; (2) requiring servicers to notify borrowers when loss mitigation applications are complete; (3) protecting struggling borrowers during servicing transfers; (4) clarifying servicers’ obligations to avoid dual-tracking and prevent wrongful foreclosures; and (5) clarifying when a borrower becomes delinquent.
Shorter Call Report Proposed for Small Banks
On August 5, the Federal Financial Institutions Examination Council (FFIEC) announced a joint proposal from the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation (together, the Agencies) that would allow eligible small institutions (those with less than $1 billion in assets and domestic offices only) to file streamlined quarterly consolidated reports of condition and income (a.k.a., call reports), effective March 31, 2017. The proposal responds to industry concerns about the costs and burdens of the current reporting regime and supports an FFIEC initiative to reduce regulatory burdens imposed upon small institutions. The proposal would benefit such institutions by reducing reports from 85 to 61 pages through the removal of approximately 950 (about 40%) of the nearly 2,400 data items currently required pursuant to FFIEC 041. Recognizing that small institutions operate under widely varying business models, a supplemental schedule, to the extent applicable, would be used to collect data on complex and specialized activities. The comments on the proposal will be accepted for 60 days following the proposal’s publication in the Federal Register.
Federal Reserve Seeks Comments on Interim Rule Adjusting Civil Money Penalties
On August 1, the Board of Governors of the Federal Reserve System (the Board) solicited public comments on an interim final rule adjusting the Board’s maximum civil money penalties to effect a “catch-up” adjustment for inflation, as required by the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The Board’s notice contains a schedule of the maximum civil money penalties to be imposed under the interim final rule, which is effective as of August 1, 2016. The Board is accepting comments until August 30, 2016.
Regulated Institutions to Submit Self-Assessments of Diversity Policies and Practices
On August 2, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued Frequently Asked Questions (FAQs) providing information on how financial institutions may begin to submit self-assessments of their diversity policies and practices as required by Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Final Policy Statement Regarding Standards for Assessing Diversity Policies and Practices (the Final Policy Statement), which became effective on June 10, 2015. Details regarding the Final Policy Statement were discussed in the June 10, 2015, edition of the Roundup.
Enforcement & Litigation
SEC Wins First Appellate Ruling on Constitutionality of In-House Administrative Law Judges
On August 9, the U.S. Court of Appeals for the District of Columbia Circuit denied a petition for review filed by an investment adviser that had been sanctioned by the Securities and Exchange Commission (SEC) for violations of the Investment Advisers Act of 1940 and the rule against misleading advertising. The investment adviser had challenged the constitutionality of the findings of the administrative law judge (ALJ) who had presided over the enforcement action on the grounds that ALJ was a constitutional officer who must be appointed by the President pursuant to the Appointments Clause set forth in Article II, Section 2, clause 2 of the U.S. Constitution. In doing so, the D.C. Circuit Court became the first appellate court to affirmatively rule that the SEC’s administrative courts are constitutionally sound.