Regulatory Developments

FINRA Issues Comprehensive Automated Risk Data System (CARDS) Proposal for Public Comment

FINRA announced the issuance of Regulatory Notice 14-37 seeking public comment on its proposal for the implementation of the Comprehensive Automated Risk Data System (CARDS), under which firms will submit data in standardized form on an automated basis in an effort to enable FINRA to identify and respond to potential high-risk areas and suspicious activities not currently detected by existing surveillance. Comments are due no later than December 1, 2014.

NFA Issues Reminder Regarding Changes to Form PQR and Filing Deadlines for Form PQR and PR and Pool Annual Reports

The National Futures Association (NFA) issued Notice to Members I-14-26 reminding (1) its commodity pool operator (CPO) members that recent changes to Form PQR become effective in the September 30 quarter‑end filing and (2) its CPO and commodity trading advisor (CTA) members that failure to file, as applicable, Forms PQR and PR and copies of pool annual reports on a timely basis may result in disciplinary action. The NFA noted that in September it had filed two complaints against firms for failure to make timely filings. 

Enforcement & Litigation

Sixth Circuit Affirms Dismissal of Suit Alleging Excessive Securities Lending Fees for ETFs

The Sixth Circuit affirmed the dismissal of a suit under Sections 36(a) and 36(b) of the Investment Company Act (ICA) alleging that the securities lending fees paid by exchange-traded funds (ETFs) to an affiliate of the ETFs’ adviser were excessive.  Because (1) the defendants may rely on an exemptive order under Rule 17d-1 under the ICA with respect to the fees received by the affiliated securities lending agent and (2) Section 36(b)(4) of the ICA excludes from consideration under Section 36(b) compensation in connection with transactions subject to an order under Section 17 of the ICA, the court held the plaintiffs failed to state a claim under Section 36(b).  The court also held that the plaintiffs had failed to state a claim under Section 36(a) because no private right of action exists under that provision. Laborers' Local 265 Pension Fund v. iShares Trust, No. 13-6486 (Sixth Cir. Sept. 30, 2014).

D.C. District Court Finds That Challenge to Advisers Act Pay-to-Play Rule Must Be Heard by D.C. Court of Appeals

Interpreting Section 213 of the Investment Advisers Act to vest exclusive jurisdiction in the D.C. Circuit Court of Appeals, the D.C. District Court dismissed for lack of subject matter jurisdiction a challenge to Rule 206(4)-5 under the Advisers Act, the “pay-to-play” rule that is designed to limit the ability of investment advisers to influence the award of advisory business through political contributions and other similar payments to state and municipal officials.  The challenge, brought by the New York Republican State Committee and the Tennessee Republican Party, sought to enjoin the application of the rule as it relates to state officials running for federal office.  New York Republican State Committee v. SEC, No. 14-01345 (D.D.C. Sept. 30, 2014).

SEC Takes Action Against Individuals Over Tipping and Trading in Advance of Hedge Fund Announcement of Negative View on Issuer

The SEC announced administrative enforcement action against two individuals related to insider trading in advance of a prominent hedge fund manager’s public announcement that his hedge fund had formed a negative view of Herbalife Ltd. and taken a $1 billion short position in the issuer.   The first individual agreed to a settlement with the SEC over findings that he had violated Rule 10b-5 under the Securities Exchange Act by disclosing the negative views of the hedge fund manager, learned from his roommate who worked as an analyst for the hedge fund manager, to the second individual who then traded in Herbalife options on the basis of the information.   The first individual agreed pay a civil penalty of $47,100, the amount of profit the second individual was found to have made on the Herbalife options.  The SEC has commenced administrative proceedings against the second individual who is contesting the Commission’s findings.  In re Filip Szymik, SEC Release No. 34-73262 (September 30, 2014); In re Jordan Peixoto, SEC Release No. 34-73263 (September 30, 2014).

Industry Developments

SEC, FINRA and MSRB to Conduct Municipal Advisor Outreach Seminar

The SEC, FINRA and the MSRB announced the opening of registration for the first Compliance Outreach Program for Municipal Advisors.  The program, which will be held in Chicago on November 3, 2014, will also be webcast.  The agenda for the program includes panels on municipal advisor registration, fiduciary duty and standards of conduct, supervisory responsibilities, books and recordkeeping obligations, and the examination process.

National Cyber Security Awareness Month

The Department of Homeland Security, in conjunction with the National Cyber Security Alliance and the Multi-State Information Sharing and Analysis Center, has designated October as National Cyber Security Awareness Month and has provided a list of events, tips and resources on the DHS website.

Goodwin Procter News

Banks As Technology Companies: “Digital Bank” Author Chris Skinner Speaks at Goodwin Procter

Chris Skinner, the Chair of the Financial Services Club, a European networking forum, and author of several books, spoke on October 2 at a breakfast meeting at Goodwin Procter’s Boston office. Skinner discussed his book, Digital Bank, and the idea that, in order to adapt to a world in which financial services providers will increasingly become technology companies, banks must seek out innovation and partner with smaller technology startups. The talk was covered in the October 6 issue of Banker & Tradesman.