Commentaries

Bridging the Weeks by Gary DeWaal: December 19, 2016 to January 6, and January 9, 2017 (Jon Corzine; Infiltrating E-Mails; ATS Gone Bad; Whistleblower Infractions)

Jump to: Bridging the Week    Compliance Weeds    Trade Practices (including Disruptive Trading)    Position Limits    Cybersecurity    Systems and Controls    Insider Trading    Manipulation    Legal Weeds    Forum Selection    Whistleblowing    MF Global    Books and Records   
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Published Date: January 08, 2017

More than five years after the collapse of MF Global Inc. delayed the repayment to its customers of 100 percent of their funds for approximately two and one-half years, Jon Corzine, the firm’s former chief executive officer, settled an enforcement action brought by the Commodity Futures Trading Commission for his role in the firm’s demise. He did this by agreeing to pay a US $5 million fine and to be subject to a CFTC-registration prohibition. Although Mr. Corzine agreed to pay this fine out of his own pocket and not through insurance, he was not required to admit to any of the substantive allegations in the CFTC’s original 2013 complaint against him, or in the consent order that formally resolved the enforcement action. Separately, three non-US persons were criminally indicted and sued by the Securities and Exchange Commission at the end of 2016 for allegedly illicitly infiltrating the email of two unnamed prominent law firms, obtaining nonpublic information regarding pending mergers and acquisitions, and trading for their advantage on such information. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

Because of the Martin Luther King, Jr. Day holiday in the United States on Monday, January 16, the next edition of Bridging the Week will be on Tuesday, January 17.

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Briefly:

Compliance Weeds: Not just financial services firms, but all businesses of every kind should maintain a robust cybersecurity program that includes regular risk assessments, installation and upgrades of anti-malware, antivirus and other protections, vulnerability and internal and external penetration testing, and training. Unfortunately, more and more there seems to be only two types of businesses: those that have been subject to cyber-attacks and are aware of it, and those that have been subject to cyber-attacks and are not aware of it. Help ensure your business is not in the latter category. There is a plethora of literature publicly available on what should be the elements of a robust cybersecurity program; click here for an excellent succinct summary published by the Securities and Exchange Commission’s Division of Investment Management that is intended for use by registered investment companies and investment advisers, but is sufficiently generic to be useful to all. Click here to access other generic and detailed information provided by the National Institute of Standards and Technology of the US Department of Commerce, including a brochure entitled “Framework for Improving Critical Infrastructure Cybersecurity.”

Compliance Weeds: TAS transactions permit trades to be executed during the trading day at the current day’s settlement price or in prescribed price increments above or below such price. Basis Trade at Index Close and Trade at Market transactions are analogous trades that permit executions at currently unknown prices. Each type of transaction, when available, is limited to certain products and times, and is subject to ordinary prohibitions against price manipulation or attempted price manipulation, disruptive trading, wash trading, and other violative conduct. (Click here for background in a relevant CME Group Market Regulation Advisory Notice and here for an ICE Futures U.S. TAS Frequently Asked Questions.)

Legal Weeds: In 2016, the SEC brought and settled a number of enforcement actions against firms that included in their standard severance agreements language that the Commission determined potentially impeded an employee from disclosing to the SEC a possible securities law violation. (Click here for background in the article “Firm Sanctioned by SEC for Firing Whistleblower Who Allegedly Made False Allegations” in the October 2, 2016 edition of Bridging the Week.) It is clear that the SEC reads its anti-retaliation clause broadly. SEC and Commodity Futures Trading Commission registrants and SEC-regulated publicly traded companies should review their form employment and severance agreements to ensure they are consistent with regulatory requirements regarding employee whistleblower rights. (Click here to access existing CFTC whistleblower protections in Part 165 of its rules.) In 2016 the CFTC proposed to amend its whistleblower program to more closely emulate that of the SEC. Among other things, the CFTC proposed (1) new procedures to review whistleblower claims; (2) to clarify that the CFTC may bring enforcement actions against any employer that violates its anti-retaliation provisions; and (3) to prohibit any agreement or condition of employment, including a confidentiality or pre-dispute arbitration agreement, from containing a provision that might “impede” an individual from communicating a possible violation of law to CFTC staff. No final action on this rule has been taken since the comment period closed on September 29, 2016. (Click here to access the CFTC proposal.)

Compliance Weeds: All principal international regulators have rules related to the generation and retention of records by registrants in the futures and securities industry. These rules typically describe the type of records that must be prepared in the first instance; how long and in what format such records must be retained; and to whom and in what time period such records must be produced when requested by an authorized regulator. Unfortunately, given the large number of records that even a small size registrant generates in a given day, it is easy for a firm to run afoul of applicable requirements. This is why each registrant should (1) ensure it is fully familiar with applicable requirements, (2) design a comprehensive system that ensures compliance with these requirements in the first instance (including the development and implementation of written supervisory procedures), and most importantly, (3) routinely test that all required records are being retained and in the correct format. This testing should be two-fold: (1) from front to back, to ensure that the system is set up and functions according to requirements; and (2) back to front, to ensure that a wide variety sampling of documents (and with electronic communications, include attachments and so-called “bcc’s”) generated from different sources can be produced completely (and within time periods) as expected by regulators. Firms should periodically also ensure (1) that documents stored in electronic media are in non-rewritable and non-erasable format in accordance with local requirements and (2) that internal systems designed to capture electronic communications from different sources, capture and retain all aspects of those communications including attachments and bcc’s, as well as prior drafts. The Commodity Futures Trading Commission has similar rules as the SEC regarding the maintenance of required books and records on electronic storage media (click here to access CFTC Rule 1.31(b)).

And more briefly:

Follow-up:

For more information, see:

CFTC Re-Proposed Position Limit Rules Published in Federal Register; Comments Due February 28; Meaningful After Chairman Massad Resignation?:

Euro Stoxx 50 Index Dividend Futures Available for Trading by US Persons:
https://www.eurexchange.com/blob/2861718/bb330f69b42e36a067497f72dbb33e6e/data/er17002e.pdf

FINRA Sanctions 12 Member Firms for Failure to Maintain Electronic Records in Required Format:

Representative Actions:

Firm Fined by ICE Futures US for ATS Gone Bad; NYMEX Summarily Limits TAS Access to Member for Knowingly Submitting Inaccurate TAS Orders:

Individual FX Dealer Pleads Guilty to Currency Prices Manipulation:
https://www.justice.gov/opa/press-release/file/922556/download

Investment Bank Agrees to Pay US $120 Million to Resolve Charges That It Attempted to Manipulate IRS Benchmark:
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfgoldmansachsorder122116.pdf

Jon Corzine Agrees to US $5 Million Fine and Registration Ban to Settle CFTC Charges Related to Collapse of MF Global; Edith O’Brien to Pay US $500,000:

Non-US Traders Criminally and Civilly Charged With Trading on Nonpublic Information Cyber-Hacked From Law Firms:

Tenth Circuit Holds SEC Administrative Tribunals Unconstitutional:
https://www.ca10.uscourts.gov/opinions/15/15-9586.pdf

Two Companies Charged by SEC for Whistleblower Infractions:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 7, 2017. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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ABOUT GARY DEWAAL

Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.


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