The Financial Report - Volume 3, No. 1 • January 2014 (Global)

by DLA Piper



Discussion and Analysis

News from the Americas

News from Asia and the Pacific

News from Europe

Global Regulators

US Securities and Exchange Commission Developments

US Commodity Futures Trading Commission Developments

US Banking and Treasury Developments

US Judicial Developments

US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

Invariably, the end of a calendar year brings “year-in-review” retrospectives on topics both major and mundane. Similarly, the start of a new calendar year is always accompanied by predictions and forecasts for the ensuing 12 months. Last week, two of our colleagues in our Securities Enforcement Litigation practice wrote an article published in describing the securities enforcement trends they anticipate seeing in 2014. (See the article here. ).

The article notes that casual observers of Securities and Exchange Commission trends might reasonably conclude that the SEC has lost interest in pursuing enforcement of financial reporting regulations. Our colleagues, Nicolas Morgan and Jennifer Feldman, believe, however, that the Commission is intent on bringing a record number of such cases in the new year and has some new tools and resources for doing so.

In 2013, the SEC brought fewer enforcement actions involving financial fraud and issuer disclosure, “only” 68, than during any year in the previous decade. Ninety-four cases were brought the previous year and the 2013 totals are far down from the high-water mark of 219 in 2007. Morgan and Feldman believe, however, that recent developments suggest that the downward trend will turn, possibly dramatically, in 2014.

For one thing, the Dodd-Frank whistleblower bounty program is gaining steam. Under the program, informants who provide the SEC with original information may ultimately receive a percentage of any monetary recoveries as a result of enforcement action. On October 1, the SEC awarded its largest bounty to date: US$14 million, which may drive the number of tips still higher in 2014. It seems likely that as these tips work their way through the SEC, more enforcement actions will result.

In July, the SEC’s Enforcement Division announced the formation of the Financial Reporting and Audit Task Force, a group of enforcement attorneys and accountants from across the country who will be tasked with identifying financial-statement, issuer-reporting and disclosure violations. The task force will work with the Enforcement Division’s Office of the Chief Accountant, the SEC’s Office of the Chief Accountant, the Division of Corporation Finance and the Division of Economic and Risk Analysis.

One weapon in the task force arsenal is the much-discussed Accounting Quality Model (AQM), colloquially known as RoboCop. The SEC describes AQM as a quantitative analytic “model that allows us to discern whether a registrant’s financial statements stick out from the pack.” AQM produces a score for each filing and compares it with the filer’s industry peer group, assessing the likelihood that fraud is occurring.

In recent comments, a task force official touted recent enforcement actions as evidence that the SEC’s stepped-up efforts in the financial-reporting area are beginning to pay off.

With the new resources and tools the SEC is devoting to detecting financial-reporting violations, and emboldened by its perceived mandate, the Commission has created an expectation that it will bring more enforcement actions. Such heightened expectations may create an incentive for the Enforcement Division to bring marginal cases not well supported by the facts or law. Compounding that troubling incentive, in June SEC Chair Mary Jo White announced that in certain cases, the SEC would not settle unless the defendants admitted wrongdoing. As a result, it’s likely that more companies, officers and directors will test the SEC’s allegations and legal positions by litigating and going to trial.

The downward trend in SEC enforcement actions against public companies for alleged financial-reporting violations will reverse in 2014. As part of that reversal, the SEC will be making more inquiries, analyzing more periodic reports and financial statements, and ultimately filing more lawsuits. Because the SEC is likely to take an aggressive posture in bringing and litigating cases, 2014 will also see more trials involving financial reporting issues.

If recent experience is any guide, the SEC will not be successful in all of those trials, meaning that some defendants will be put to the expense, reputational damage and emotional turmoil necessary to defend against accusations not supported by the law or facts.

News from the Americas

US agencies to clarify portion of Volcker rule regulations. The Federal Reserve Board, FDIC, OCC, and SEC announced a review of whether it would be appropriate and consistent with the Dodd-Frank Act to exempt collateralized debt obligations backed by trust preferred securities (TruPS CDOs) from the Volcker rule’s prohibition against the ownership of “covered funds” by depository banks. The agencies will address the matter by January 15, 2014. The agencies’ accounting staffs believe that, consistent with US GAAP, any actions by banks in January 2014 concerning TruPS CDOs that occur before the issuance of a bank’s December 31, 2013, financial reports should be considered when preparing those financial reports. (12/27/2013) Joint agency press release.

Canada’s OSC to hold seminar on new derivatives reporting rules. The Ontario Securities Commission announced the details for its January 15, 2014 information seminar on the reporting requirements for the new Derivatives Trade Repositories and Data Reporting rule. The reporting obligations for the OSC rule begin July 2, 2014. The seminar will cover four key areas: how to report transactions, end user obligations, tips for ensuring dealer compliance and reporting fields. (1/7/2014) OSC press release.

Canadian regulators propose rules for central clearing of derivatives. The Canadian Securities Administrators published for comment “CSA Staff Notice 91-303 - Proposed Model Provincial Rule on Mandatory Central Counterparty Clearing of Derivatives.” The proposed rule describes requirements for central counterparty clearing of over-the-counter derivatives transactions. Comments should be submitted by March 19, 2014. (12/19/2013) CSA press release.

OSC Investor Advisory Panel. The Ontario Securities Commission’s Investor Advisory Panel published its Annual Report 2012-13. The report summarizes the Panel’s current activities and priorities as well as its recommendations to the Commission on proposals of importance for investor protection. (12/18/2013) OSC press release.

OSC reviews electronic trading risks. The Ontario Securities Commission published an update on its ongoing review of the risks associated with electronic trading, including a review of National Instrument 23-103, which came into effect on March 1, 2013, and established the regulatory framework that oversees and manages risks associated with the use of electronic trading in Canadian marketplaces. (12/12/2013) OSC press release.

News from Asia and the Pacific

Australia provides relief for mFund service. The Australian Securities & Investment Commission issued a Class Order that will facilitate retail clients’ redemption requests in unlisted managed investment schemes through mFund Settlement Service. (1/7/2014) ASIC press release.

China to adopt new delisting rules. Xinhua reported that the China Securities Regulatory Commission will adopt new delisting rules that will address the treatment of issuers accused of major legal violations. (1/6/2014) Delisting.

China adopts shadow banking rules. The Financial Times discussed new shadow banking rules adopted by China which include a prohibition against off-balance sheet interbank loans. (1/6/2014) Shadow banking.

Australia provides relief from new super disclosure requirements. The Australian Securities & Investments Commission has issued a class order and taken a no-action position to assist with the introduction of recent superannuation reforms. The ASIC has changed the start date for compliance with new fees and costs disclosure arrangements by class order to July 1, 2014 provided conditional interim relief by class order so that RSE licensees do not have to provide a hard copy of the product dashboard with the periodic statement, and provided a no-action position for RSE licensees so that information about accrued default amounts do not need to be included in an exit statement. (12/16/2013) ASIC press release.

Australia reports on mid-year review of financial statements. The Australian Securities & Investments Commission announced the results from a review of the June 30, 2013 financial reports, which covered 280 listed and other public interest entities. (12/16/2013) ASIC press release.

Japan’s financial market recommendations. Japan’s Financial Services Agency published the recommendations of The Panel for Vitalizing Financial and Capital Markets. (12/13/2013)

News from Europe

UK Prudential Regulation Authority developments. The UK’s Prudential Regulation Authority published:

• Supervisory Statement SS20/13, Third country equivalence aspects of the credit risk provisions in the CCR, and recognized exchanges. (12/30/2013)

• Supervisory Statement SS12/13, Counterparty credit risk. (12/19/2013)

• Supervisory Statement SS7/13, CRD IV and capital. (12/19/2013)

• Supervisory Statement SS11/13, Internal ratings based approaches. (12/19/2013)

• Supervisory Statement SS9/13, Securitization. (12/19/2013)

• Supervisory Statement SS10/13, Standardized approach. (12/19/2013)

• Supervisory Statement SS17/13, Credit risk mitigation. (12/19/2013)

• Supervisory Statement SS15/13, Groups. (12/19/2013)

• Supervisory Statement SS16/13, Large exposures. (12/19/2013)

• Supervisory Statement SS13/13, Market risk. (12/19/2013)

• Supervisory Statement SS14/13, Operational risk. (12/19/2013)

• Policy Statement PS7/13, Strengthening capital standards: implementing CRD IV, feedback and final rules. (12/19/2013)

• Supervisory Statement SS6/13, Stress testing, scenario analysis and capital planning. (12/19/2013)

• Supervisory Tools: Recovery and resolution plans. (12/19/2013)

• Supervisory Statement SS8/13, The Basel I floor. (12/19/2013)

• Supervisory Statement SS5/13, The internal capital adequacy assessment process and the supervisory review and evaluation process. (12/19/2013)

• Supervisory Statement SS4/13, Solvency II: applying EIOPA’s preparatory guidelines to PRA-authorized firms. (12/19/2013)

European Banking Authority developments. The European Banking Authority published:

• Final draft Regulatory Technical Standards (RTS) on the definition of market risk, and its final draft RTS on Credit Valuation Adjustment risk (CVA risk). The latter is supplemented by an Opinion on CVA risk which further elaborates on the approach taken by the EBA in determining a proxy spread. (12/20/2013)

• Final Guidelines on capital measures for FX lending to unhedged borrowers under the Supervisory Review and Evaluation Process. (12/20/2013)

• Final draft Implementing Technical Standards (ITS) on the reporting of the hypothetical capital of a central counterparty (CCP). (12/19/2013)

• Draft RTS and ITS related to market risk. (12/17/2013)

• Draft RTS on securitization retention rules and related requirements, as well as final draft ITS on the convergence of supervisory practices related to the implementation of additional risk weights in the case of non-compliance with the retention rules. (12/17/2013)

• A public consultation on draft guidance to both originator institutions and competent authorities when assessing significant risk transfer for securitization transactions. Comments should be submitted by March 17, 2014. (12/17/2013)

• Final draft RTS and ITS on information exchange between home and host competent authorities regarding branches and service providers. (12/16/2013)

• Final draft ITS on joint decisions on institution-specific prudential requirements. (12/13/2013)

• Final draft RTS on own funds ’Part three,’ which set out criteria to deduct indirect and synthetic holdings, to define broad market indices and to calculate minority interest. (12/13/2013)

• Final draft RTS and ITS on passport notifications. These RTS and ITS aim to specify the information that needs to be notified to competent authorities, as well as forms, templates and procedures underlying the submission of passport notifications. (12/13/2013)

• Final draft RTS on criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile. These identified staff will be subject to provisions related, in particular, to the payment of variable remuneration.

• A public consultation on the methodology for identifying Global Systemically Important Institutions. Comments should be submitted by February 28, 2014. (12/12/2013)

ESMA report on proposed MiFID standards. The European Securities and Markets Authority published a final report on proposed technical standards under Article 10a(8) of the Markets in Financial Instruments Directive. The report presents the European Commission with proposals on the information companies should provide their competent authorities when seeking to acquire another firm. (1/7/2014) ESMA notice.

EU proprietary trading proposal. Reuters summarized a European Union proposal that would impose restrictions on the proprietary trading activities of banks. The proposal is not as strict as the US “Volcker rule,” which prohibits deposit-taking banks from engaging in proprietary trading. The EU contains a narrow definition of what constitutes proprietary trading and would apply only to the largest EU banks. (1/6/2014) Proprietary trading.

EU members approve criminal sanctions for market abuse. The European Commission, European Parliament and the Council of Ministers reached agreement on the EC’s proposal for a Directive on criminal sanctions for market abuse. Among other things, the agreement defines insider dealing, unlawful disclosure of information and market manipulation; sets forth a common set of criminal sanctions; and makes companies potentially liable for market abuses. (12/20/2013) EC press release.

ESMA proposes revisions to collateral requirements. The European Securities and Markets Authority published a consultation paper on proposed revisions to its provisions on diversification of collateral for ETFs and other UCITS issues. Comments should be submitted by January 31, 2014. (12/20/2013) ESMA notice.

ESMA guidance on exchange-traded derivatives reporting. The European Securities and Markets Authority issued updated guidance in the form of Question & Answers on the implementation of the European Markets Infrastructure Regulation. The guidance clarifies how exchange-traded derivatives should be reported to trade repositories. (12/20/2013) ESMA notice.

ESMA guidance on CRA Regulation. The European Securities and Markets Authority published updated guidance on the application of the CRA Regulation and in particular, the CRA 3 Regulation (Regulation (EU) No 462/2013). The guidance is in the form of answers to questions posed by credit rating agencies and market participants regarding the practical application of the CRA Regulation. (12/17/2013) ESMA notice.

UK FCA mortgage market data collection. The UK Financial Conduct Authority issued a policy statement and final rules on data it collects from the mortgage market. The rules are effective January 1, 2015. (12/16/2013) FCA press release.

UK listing rules. The UK Financial Conduct Authority published final rules amending the Listing Rules. The new rules are intended to reduce unnecessary administrative burdens for a premium listed company incorporated in the UK. (12/13/2013) FCA press release.

UK Capital Requirements Directive changes. The UK Financial Conduct Authority published a Policy Statement on the changes it is making in accordance with the Capital Requirements Directive (CRD). CRD IV, consisting of Directive 2013/36/EU and Regulation (EU) 575/2013, is the EU implementation of Basel III for banks, and also applies to investment firms. (12/13/2013) FCA press release.

Global Regulators

Questions to consider when responding to FSB proposed guidance. The Financial Stability Board published questions commenters should consider when responding to the FSB’s proposed guidance on supervisory interaction with financial institutions on risk culture. (12/23/2013) FSB press release.

FSB publishes responses to shadow banking proposal. The Financial Stability Board published the comments it received in response to its August 2013 report entitled “Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos.” The report proposed minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions and a framework of numerical haircut floors. (12/20/2013) FSB press release.

Regulation of retail structured products. The International Organization of Securities Commissions published the final report on “Regulation of Retail Structured Products,” which outlines regulatory options for securities regulators to consider in their oversight of retail structured products. (12/20/2013) IOSCO press release.

Longevity risk. The Joint Forum released its final report on “Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks.” (12/20/2013) IOSCO press release.

Proposed revisions to securitization framework. The Basel Committee on Banking Supervision published for comment draft standards on the treatment of securitizations within the risk-based capital framework. Comments should be submitted by March 21, 2014. (12/19/2013) BIS press release.

Proposed methodology for assessing FMIs. The Committee on Payment and Settlement Systems and the International Organization of Securities Commissions published for comment a consultative document on the assessment methodology for the oversight expectations applicable to critical service providers. The document provides guidance for authorities in assessing a financial market infrastructure’s critical service providers against oversight expectations. Comments should be submitted by February 20, 2014. (12/18/2013) IOSCO press release.

Basel Committee reports on risk-weighted assets. The Basel Committee on Banking Supervision published its second report on the regulatory consistency of risk-weighted assets (RWAs) for market risk in the trading book. The report follows up on an initial study published in January 2013. The analysis confirms that differences in modeling choices are the most significant drivers of variation in market risk RWAs across banks. (12/17/2013) BIS press release.

Basel Committee policy framework for bank investment in funds. The Basel Committee on Banking Supervision published a final standard that revises the prudential treatment of banks’ investments in the equity of funds within the Basel risk-based capital framework. The revised framework applies to banks’ equity investments in all funds (hedge funds, managed funds and investment funds) that are not held for trading purposes. The revised framework includes three approaches for setting capital requirements for banks’ equity investments in funds. This hierarchy of approaches provides varying degrees of risk sensitivity and has been adopted to incentivize due diligence by banks and transparent reporting by the funds in which they invest. The revised policy framework is scheduled to take effect on January 1, 2017. (12/13/2013) BIS press release.

IOSCO market structure report. The International Organization of Securities Commissions published its final report on regulatory issues raised by changes in market structure. The report makes four recommendations intended to promote market liquidity and efficiency, price transparency, and investors’ execution quality. The report also identifies possible outstanding issues and risks posed by existing or developing market structures and it describes how these risks should be addressed. Finally, it recommends that regulators monitor the impact of fragmentation on market quality. (12/13/2013) IOSCO press release.

IOSCO report on trading fees. The International Organization of Securities Commissions published its final report on trading fee models and their impact on trading behavior. The report provides a comprehensive overview of trading fees and trading fee models around the globe and how they influence trading behavior. (12/13/2013) IOSCO press release.

US Securities and Exchange Commission Developments

New Final Rules

Responsibilities of SEC General Counsel. The SEC amended its rules to reflect that the Commission’s General Counsel is responsible for providing advice to Commission attorneys on professional responsibility issues relating to their official duties investigating allegations of professional misconduct by Commission staff and, where appropriate, making referrals to state professional boards or societies. The amendments are effective immediately. (1/6/2014) SEC Release No. 34-71238.

Removal of credit rating agency references. As required by the Dodd-Frank Act, the SEC published amendments eliminating references in certain of its rules and forms to credit ratings by nationally recognized statistical rating organizations. The amendments are effective 180 days after publication in the Federal Register, which is expected soon. (12/26/2013) SEC press release.

Securities Act and Investment Company Act technical amendments. Technical amendments to correct outdated cross-references in Rule 602 under the Securities Act of 1933 and Rule 12b-1 under the Investment Company Act of 1940, and correcting an inadvertent error in Rule 17d-1 under the Investment Company Act, have been published. The amendments are effective immediately. (12/24/2013) SEC Release No. 33-9503.

Proposed Rules and Requests for Comment

Amendments to Regulation A. The SEC proposed for comment amendments to Regulation A that would implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Section 401 directs the agency to adopt rules exempting offerings of up to US$50 million of securities annually from the registration requirements of the Securities Act. The proposed rules include issuer eligibility requirements, content and filing requirements for offering statements and ongoing reporting requirements for issuers. Comments should be submitted within 60 days after publication in the Federal Register, which is expected soon. (12/18/2013) SEC press release.

Agencies extend comment period for proposed policy statement on diversity. The Federal Reserve Board, the Consumer Financial Protection Bureau, the FDIC, the National Credit Union Administration, the OCC, and the SEC extended to February 7, 2014, the period in which comments may be submitted on their proposed policy statement for assessing diversity policies and practices of the institutions they regulate.(12/19/2013) Joint press release.

Selected Enforcement Actions

Broker-dealer made improper soft dollar payments. The SEC instituted settled administrative proceedings against Instinet LLC for making soft dollar payments to investment advisory firm J.S. Oliver Capital Management despite clear signs that J.S. Oliver had failed to adequately disclose the payments to customers. Among other things, the SEC alleged that Instinet approved soft dollar payments to J.S. Oliver even though J.S. Oliver gave Instinet inconsistent reasons for a payment of more than US$329,000 to the ex-wife of J.S. Oliver’s president, Ian Mausner. Without admitting or denying the allegations, Instinet agreed to pay more than US$800,000 to settle the SEC’s charges. (12/26/2013) SEC press release.

Microsoft portfolio manager charged with insider trading. The SEC charged a senior portfolio manager at Microsoft Corporation, and his friend and business partner, with insider trading ahead of Microsoft announcements. The SEC alleges that Brian D. Jorgenson obtained confidential information about upcoming company news through his work in Microsoft’s corporate finance and investments division and tipped Sean T. Stokke, who then traded on the information, with the two splitting the profits. Related criminal charges have also been filed. (12/19/2013) SEC press release.

Brokerage and its employees deceived customers about commissions. The SEC instituted settled administrative proceedings against three brokerage subsidiaries and two former employees of a global trading services provider that caused many institutional clients to pay substantially higher amounts than disclosed for the execution of trading orders. The subsidiaries of ConvergEx Group agreed to pay more than US$107 million and admit wrongdoing to settle the SEC’s charges. The former employees, Jonathan Daspin and Thomas Lekargeren, also agreed to admit and settle charges against them. The US Department of Justice announced criminal charges against ConvergEx Group, a brokerage subsidiary, and the two former employees. To resolve those charges, ConvergEx Group has agreed to pay US$43.8 million in criminal penalties and restitution. (12/18/2013) SEC press release.

Other Developments

New Compliance and Disclosure Interpretations. The Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DI) concerning the “bad actor” provisions of Securities Act Rule 506 and the beneficial ownership regulations of the Securities Exchange Act. The new bad actor C&DIs can be found at Questions 260.28 through 260.32. The beneficial ownership C&DI change can be found at Question 105.06. (1/3/2013) New Rule 506 C&DIs. New beneficial ownership C&DIs.

Co-Enforcement Division Director to depart. George S. Canellos, the SEC’s co-director of the Enforcement Division, will leave the agency later this month. (1/3/2014) SEC press release. DealBook reported that SEC Chairman Mary Jo White is unlikely to name another co-director for the Division, leaving Andrew J. Ceresney solely in charge of the unit. Director.

Enforcement priorities. In, DLA Piper attorneys Nicolas Morgan and Jennifer Feldman discussed the SEC’s 2014 enforcement priorities. Although the number of financial reporting cases brought by the Commission dropped in 2013, that trend will likely reverse this year. (1/2/2014) Priorities.

Credit rating agencies. Two staff reports on credit rating agencies, an annual examination of each of the 10 NRSROs and the annual report to Congress were published by the SEC. (12/24/2013) SEC press release.

SEC staff report on Regulation S-K. As required by the Jump Start Our Business Startups (JOBS) Act, the SEC published its staff report to Congress on SEC disclosure rules for US public companies. (12/20/2013) SEC press release.

Investment company compliance programs. Registration for the SEC’s compliance outreach program for investment companies and investment advisers has opened. The event is designed to help CCOs and other senior personnel enhance their compliance programs. The national seminar will occur on January 30, 2014. SEC press release.

US Commodity Futures Trading Commission Developments

Requests for Comment

Cross border staff advisory. The CFTC seeks comment on a staff advisory regarding the applicability of certain CFTC regulations to the activity in the US of registered, non-US swap dealers when entering into swaps with non-US persons. Comments should be submitted within 60 days after publication in the Federal Register, which is expected soon. (1/3/2014) CFTC press release.

Joint Regulatory Relief

Transaction-level reporting relief extended. The Divisions of Swap Dealer and Intermediary Oversight (DSIO), Clearing and Risk (DCR) and Market Oversight (DMO) extended to September 15, 2014, relief previously granted to swap dealers registered with the CFTC that are established under the laws of jurisdictions other than the United States, from certain Commodity Exchange Act transaction-level requirements. (1/3/2014) CFTC press release.

Oral recording. DSIO and DMO issued time-limited relief to commodity trading advisors that are members of swap execution facilities. The relief covers the oral recording requirement set forth in Commission Regulation 1.35(a). The relief ends on May 1, 2014. (12/20/2013) CFTC press release.

Relief pending deregistration. DCR, DSIO and DMO provided no-action relief to The Hongkong and Shanghai Banking Corporation Limited (HBAP). Enforcement action will not be recommended for HBAP’s failure to comply with certain swap dealer regulations during the period between the date when HBAP would be required to begin complying with such regulations and when HBAP’s deregistration as a swap dealer is determined. (12/20/2013) CFTC Letter No. 13-83.

Regulatory Relief: Division of Clearing and Risk

FCM registration. For a limited time, and if certain conditions are met, DCR will not recommend enforcement action against Singapore Exchange Derivatives Clearing Limited’s clearing members for failing to comply with the Commodity Exchange Act futures commission merchant registration requirements in carrying existing positions and accepting for clearing offsetting positions in certain commodity swaps for US customers or for engaging in activities related to its clearing members carrying and accepting for clearing such positions for US customers. (12/19/2013) CFTC press release.

DCO registration. DCR extended the time-limited relief it previously granted to Japan Securities Clearing Corporation and its qualifying participants and affiliates with respect to the clearing of yen-denominated interest rate swaps. The extension will last until the earlier of the date on which JSCC registers as a derivatives clearing organization or December 31, 2014, provided that certain conditions are met. (12/19/2013) CFTC press release.

Regulatory Relief: Division of Market Oversight

Swaps registration. DMO issued time-limited relief relating to certain occasional, off-facility, cleared credit default swaps entered into pursuant to a derivatives clearing organization’s rules related to its price submission process for determining end-of-day settlement prices for cleared CDS. The letter also extends the relief previously provided by the Division in connection with the reporting requirements of Part 45, allowing the DCO to fulfill all of the reporting counterparty’s obligations with respect to reporting certain CDS trades executed pursuant to a CDS Settlement Price Process. The relief expires on September 30, 2014. (12/31/2013) CFTC press release.

Risk mitigation services. DMO provided swap execution facilities relief in connection with a SEF’s provision of certain “basis risk mitigation services.” The relief extends through 11:59 pm on December 31, 2014. (12/23/2013) CFTC press release.

SEF registration. DMO provided conditional time-limited relief for Australian-based trading platform Yieldbroker Pty Limited. Enforcement action will not be recommended against Yieldbroker for failure to register as a swap execution facility, or against any market participants for use of, or other relationships with, Yieldbroker, for the period expiring on the earlier of May 15, 2014, or the date upon which Yieldbroker achieves SEF registration status. (12/20/2013) CFTC press release.

Regulatory Relief: Division of Swap Dealer and Intermediary Oversight

Annual reporting for certain CCOs. DSIO issued two no-action letters providing certain futures commission merchants, swap dealers, and major swap participants with limited relief relating to the requirement that chief compliance officers of such firms prepare and submit an annual report. (12/30/2013) CFTC press release.

IB reporting. DSIO provided relief for certain introducing brokers from certain financial reporting and capital computation requirements. (12/23/2013) CFTC press release.

Aggregation. DSIO provided relief from certain conditions of the swap dealer exclusion for registered floor traders (12/23/2013) CFTC press release.

Oral recording. DSIO provided relief for certain branch office operations of CHS Hedging, Inc. and MID-CO Commodities, Inc. with regard to the oral recording requirements of CFTC Regulation 1.35(a)(1). (12/18/2013) CFTC Letter No. 13-72.

Other Developments

CFTC and FERC sign jurisdictional agreements. The Federal Energy Regulatory Commission and the CFTC signed agreements to address their overlapping jurisdiction and to share information. The agencies’ Chairmen also agreed to share appropriate data relating to financial markets for gas and electricity on an ongoing basis. (1/2/2014) CFTC press release.

Chairman Gensler. Gary Gensler’s service as Chairman of the CFTC was analyzed by DealBook, which also speculated on what may happen at the agency in the future. (1/2/2014) Tenure.

DCO registration approved for Singapore Exchange. Singapore Exchange Derivatives Clearing Limited’s application for registration as a derivatives clearing organization has been approved. Subject to certain conditions, the CFTC has authorized SGX-DC to provide clearing services for swaps that SGX-DC currently clears and such other swaps that the CFTC may determine SGX-DC is eligible to clear. (12/27/2013) CFTC press release.

CFTC and Singapore agree to share information. The CFTC and the Monetary Authority of Singapore signed cooperation and information sharing agreements regarding the supervision and oversight of regulated entities operating on a cross-border basis in the US and Singapore. (12/27/2013) CFTC press release.

Registration requirements for CTAs. DSIO provided guidance regarding the requirements imposed on commodity trading advisors by the Dodd-Frank Act. The Act amended the definition of CTA to include any person who engages in the business of advising others on swaps. Moreover, certain CTAs previously exempted from CFTC registration must now register. (12/23/2013) CFTC press release.

Substituted swap compliance. The CFTC will permit substituted compliance with foreign regulatory regimes for certain swap dealers and swap transactions. Comparability determinations for entity-level requirements for Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland were made by the agency. Substituted compliance for a number of key transaction-level requirements for the EU and Japan were made as well. (12/20/2013) Comparability press release. DMO also provided time-limited reporting relief to CFTC-registered swap dealers and major swap participants that are established under the laws of Australia, Canada, the European Union, Japan or Switzerland, and that are not part of an US-affiliated group. (12/20/2013) Reporting relief press release. DSIO provided time-limited relief to non-US Swap Dealers and non-US Major Swap Participants established in Australia, Canada, the European Union, Japan, and Switzerland from compliance with certain entity-level internal business conduct standards. This relief expires on March 3, 2014. (12/20/2013) Entity level press release.

SD designation. State Street Bank and Trust Company received a limited purpose swap dealer designation with respect to its activities in foreign exchange products that are swaps. (12/20/2013) CFTC press release.

Nomination. President Obama will nominate Sharon Y. Bowen, a securities lawyer, to the CFTC. (12/19/2013) White House statement.

Acting Chairman. Commissioner Mark P. Wetjen will serve as Acting CFTC Chairman until the confirmation of a new Chairman. (12/16/2013) CFTC press release.

DCO registration. Banque Centrale de Compensation, doing business as LCH.Clearnet SA, has been approved as a derivatives clearing organization. (12/17/2013) CFTC press release.

US Banking and Treasury Developments

Treasury Department report on financial stability. The Treasury Department’s Office of Financial Research published its 2013 analysis of the financial stability risks facing the United States. Vulnerabilities in the markets for securities financing transactions and credit continue to persist as do vulnerabilities to interest rate volatility and operational risks. The analysis includes a description of the tools being developed to monitor and assess these risks. (12/17/2013) Treasury Department press release.

Treasury Department report on insurance regulation. The Treasury Department’s Federal Insurance Office issued a report on how to modernize and improve the US system of insurance regulation. (12/12/2013) Treasury Department press release.

FDIC SIFI resolution proposal. The FDIC published for comment the Single Point of Entry strategy for the resolution of Systemically Important Financial Institutions. Comments should be submitted by February 18, 2014. (12/10/2013) FDIC press release.

US Judicial Developments

Commodity Pool Operator to be resentenced. The US Court of Appeals for the Seventh Circuit vacated and remanded the sentence of a commodity pool operator convicted of money laundering and mail fraud charges stemming from his Ponzi scheme. Defendant sought resentencing because the district court improperly added an abuse of trust sentencing enhancement to the already imposed CPO enhancement. Because the sentencing was totally “botched,” the Seventh Circuit granted the appeal. However, the Court noted, provided that resentencing is not vindictive, the district court may order a longer sentence. When calculated correctly, defendant could be subject to a 97-121 months sentencing range, not the 96-month sentence previously imposed. (12/26/2013) US v. Rushton.

US Exchanges and Self-Regulatory Organizations

NFA reporting requirements for certain FCMs. The National Futures Association announced new reporting requirements effective January 14, 2014, for futures commission merchants for which NFA is the DSRO. (1/6/2014) NFA Notice I-14-01.

FINRA examining best execution practices. According to Bloomberg, the Financial Industry Regulatory Authority is examining broker routing practices to determine whether brokers are putting their own interests ahead of the best execution interests of customers. (1/3/2014) Best execution.

FINRA examination priorities. The Financial Industry Regulatory Authority released its 2014 Regulatory and Examination Priorities letter. (1/2/2014) Letter.

NFA reminder on reporting requirements. The National Futures Association issued a reminder concerning new CFTC reporting and filing requirements for customer funds held by futures commission merchants and derivatives clearing organizations. The new rules are effective January 13, 2014. (12/31/2013) NFA Notice to Members I-13-46.

IRA rollovers. The Financial Industry Regulatory Authority issued a reminder regarding member responsibilities when recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an Individual Retirement Account or marketing IRAs and associated services. (12/30/2013) FINRA Regulatory Notice 13-45.

SEC interpretations of financial operational rules. The Financial Industry Regulatory Authority announced the availability of updated Interpretations of Financial and Operational Rules that the staff of the SEC’s Division of Trading and Markets have communicated to FINRA. (12/23/2013) FINRA Regulatory Notice 13-44.

New issue allocations and distributions. The Financial Industry Regulatory Authority announced SEC approval of amendments to FINRA Supplementary Material .02 (Written Representations) to Rule 5131 (New Issue Allocations and Distributions). The amendments provide a limited exception to facilitate firm compliance when allocating shares of a new issue to the accounts of certain unaffiliated private funds. The amendments are effective February 3, 2014. (12/23/2013) FINRA Regulatory Notice 13-43.

Automated risk system proposal. The Financial Industry Regulatory Authority requested comment on a concept proposal to develop a new Comprehensive Automated Risk Data System, a rule-based program that would allow FINRA to collect, on a standardized, automated and regular basis, account information and account activity and security identification information that a firm maintains as part of its books and records. Comments should be submitted by February 21, 2014. (12/23/2013) FINRA Regulatory Notice 13-42.

CPO annual and quarterly reports. The National Futures Association provided guidance on the CFTC’s no-action relief which allows a commodity pool operator of a SEC-registered investment company (RIC) that trades commodity interests through a wholly owned subsidiary to report for that RIC and the wholly owned subsidiary on a consolidated basis when complying with financial reporting requirements under CFTC Regulations 4.22(c) and 4.27(c). (12/20/2013) NFA Notice to Members I-13-44.

NFA swaps compliance rule. The National Futures Association announced CFTC approval of NFA Compliance Rule 2-49: Swap Dealers and Major Swap Participants Regulations, which permits the NFA to meet its oversight responsibilities and enforce the requirements of the CFTC’s 4s Implementing Regulations with respect to swap dealers or major swap participants. The new rule is effective immediately. (12/19/2013) NFA Notice to Members I-13-42.

FOCUS Reports. The Financial Industry Regulatory Authority announced that, beginning with the February 26, 2014 monthly FOCUS Report, FINRA is updating specified reporting schedules under the eFOCUS system to incorporate several of the new financial reporting requirements the CFTC has adopted. (12/19/2013) FINRA Regulatory Notice 13-41.


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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