Bridging the Week by Gary DeWaal


Bridging the Week by Gary DeWaal: September 23 – 27, and September 30, 2019 (Speculative Limits; Twice Is Not Necessarily Better; Anonymous ATS; Let the Sunshine In)

Alternative Trading Systems    Bitcoin Ecosystem    Bridging the Week    Compliance Weeds    Initial Public Offerings Including Private Placements    Managed Money    Manipulation    My View    Policy and Politics    Position Limits    Whistleblowing   
Published Date: September 29, 2019

Both the Commodity Futures Trading Commission and the Chicago Board of Trade settled related disciplinary actions for speculative position limits violations. The CFTC sanctioned the trading firm while the CBOT sanctioned the firm’s trader. The CFTC’s action was based on two incidents, including one event that was addressed by a CBOT disciplinary action over two years ago. Separately, the Securities and Exchange Commission penalized an alternative trading system operator that promised anonymity but allegedly disclosed subscribers’ names. And there is a new twist in the ongoing fallout from the CFTC’s enforcement settlement with two food giants. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version

Briefly:

According to the CFTC, ARMKAT violated the spot month limit (1) for December 2016 soybean oil futures by 360 contracts beginning the first day the relevant spot month limits went into effect at the close of business on November 29, 2016, and (2) for August 2018 soybean meal futures by 155 contracts on the second day the applicable spot month limits were in effect on July 31, 2018. On each occasion, ARMKAT liquidated its violative positions the next trading day. The firm resolved the CFTC’s charges by agreeing to pay a fine of US $140,000.

Separately, the CBOT resolved a disciplinary action against E. Davison Massey, the trader for ARMKAT, for the firm’s purported soybean meal futures speculative position limit violation on July 31, 2018. Mr. Massey consented to pay a fine of US $40,000 and disgorge US $16,560.05 that purportedly represented the amount of profit he realized when liquidating his violative positions. Mr. Massey also agreed to a 10-day all CME Group exchanges’ access ban. 

In June 2017, Mr. Massey settled a separate disciplinary action with the CBOT related to ARMKAT’s alleged November 2016 speculative position limit violation involving soybean oil futures contracts. In connection with that matter, Mr. Massey agreed to pay a fine of US $30,000 and serve a 10-day all CME Group exchanges’ access prohibition. (Click here for details in the article “CME Clearing Member Settles Charges for Allegedly Not Retaining Required Audit Trail of Direct Access Client; Two CBOT Members Settle Charges Related to Purported Position Limit Violations” in the June 11, 2017 edition of Bridging the Week.)

My View: Although the CFTC named the trading firm, while the CBOT named the firm’s trader, it is not clear what is the societal benefit for parallel civil enforcement actions emanating from the identical fact patterns – particularly where one-half of the CFTC action is based on an incident addressed by the CBOT in a disciplinary action over two years ago.

Although speculative position limits are a very important tool under applicable law to help ensure competitive markets, these matters involving ARMKAT and Mr. Massey appear to be discrete incidents that were quickly addressed. It is not clear how the public interest is served by the CFTC employing scarce resources to bring and resolve a “pile-on” enforcement action.

The SEC claimed that, during the relevant time, TMC’s marketing and operating procedures generally noted that its subscribers’ identities would remain confidential. However, alleged the SEC, on approximately 2,600 occasions, TMC employees disclosed identities of certain firms attempting to trade on the firm’s platform; these firms were large retail broker-dealers. The SEC said that, in most cases, disclosure of the retail broker-dealer was made when the opposite side failed to confirm a transaction timely. TMC purportedly disclosed the names to facilitate confirmation because other platform subscribers “were generally more willing to trade with retail brokerage firms than other professional traders.”

The SEC charged that TMC failed to notify its subscribers that its platform was not totally anonymous, and failed to amend filings with it to correct prior disclosure that its ATS was anonymous. The SEC also claimed that TMC’s written supervisory procedures only addressed anonymity and subscriber confidentially in general terms, and the firm’s training on the matter was also deficient.

TMC agreed to pay a fine of US $2.1 million to resolve the SEC’s enforcement action. In accepting this settlement, the SEC acknowledged the firm’s numerous remedial measures, including upgrading its procedures and providing compliance training regarding the firm’s anonymity policy, and its cooperation with the SEC’s investigation.

Compliance Weeds: To be effective, a registrant’s policies and procedures should reflect the precise businesses conducted by the firm. Generic procedures are typically not useful. The more specific procedures are, the more likely they will be helpful. Moreover, training too should be aligned with the actual business conducted by a firm. An effective tool for training is using interactive techniques that engage participants based on fact patterns that employees have or may realistically address that amplify important legal or regulatory principles. The challenge is always conveying useful information in a manner that is actually absorbed by the intended audience.

Additionally, the appeals court ordered that all papers filed before it be made public as of October 1 absent an express statute or “recognized privilege” that requires confidentiality. The appeals court also ordered the defendants to file a response by October 7 to a petition for mandamus filed by the CFTC on September 13 and invited the judge in the district court action – the Hon. John Blakey – to provide his own response to the CFTC’s petition “if he so chooses.” (A party may seek a writ of mandamus to compel a government agency or court to correct alleged prior unlawful conduct.) 

In response, the district court cancelled all pending deadlines and hearings, including an evidentiary hearing on October 7 at which three CFTC commissioners, including Chairman Heath Tarbert, and the Director of the Division of Enforcement were instructed to attend.

The defendants claimed that the CFTC violated the gag order included in the settlement order resolving the CFTC's enforcement action charging the two firms with manipulating or attempting to manipulate the price of the December 2011 wheat futures contract traded on the Chicago Board of Trade and cash wheat and their agreement to pay a fine of US $16 million. The defendants claimed the CFTC immediately violated the gag order when it published a press release, a formal statement, and a statement by two commissioners contemporaneously with its August 15 publication of the consent order of settlement. (Click here for details regarding this dispute in the article “Contempt and Sanctions Hearing Against the CFTC Arising From Manipulation Complaint Settlement Delayed to October 2” in the September 2, 2019 edition of Between Bridges.)

My View: It appears we may soon finally gain comprehensive insight into the CFTC’s defense to defendants’ allegations regarding the Commission’s purported breach of the mutual gag order contained in the settlement order. This is how it should be. Pleadings regarding alleged wrongful actions or inactions of government agencies should not be shielded from sunlight absent compelling reason. Partial redaction of documents is preferred to complete secrecy, if necessary.

More Briefly:

Separately, James McDonald, Director of the Division of Enforcement, proclaimed his support for parallel enforcement activities before the Practising Law Institute’s White Collar Crime 2019 program. He particularly noted the “specialized expertise” that CFTC staff can bring to the Department of Justice in connection with potential violations of commodities laws. He indicated that the CFTC has express unique authorities that could supplement DOJ activity, including authority to seek emergency asset freezes and trading and registration bans. He also lauded parallel actions with other civil authorities, like the Securities and Exchange Commission, and with self-regulatory organizations. However, he indicated that the CFTC acting alone will continue to constitute the vast majority of its cases.

(Click here to access a recent Katten publication “A New CFTC Captain at the Helm” focusing on the potential CFTC regulatory and enforcement agenda under new Chairman Heath Tarbert and his mostly new leadership team.)

For further information

Whistleblower to Receive US $7 Million From CFTC for Tip Despite Information Not Being “Particularly Significant”:
https://whistleblower.gov/sites/whistleblower/files/2019-09/19-WB-05.pdf

Appeals Court Delays District Court Consideration of CFTC Contempt Charges and Promises Public Filings Absent Law or Executive Privilege:
/ckfinder/userfiles/files/Scan_2019-09-27%2010_20_58A.pdf

/ckfinder/userfiles/files/Docket%20Entries%20CFTC%20Kraft%20through%20Sept%2027(1).pdf

CFTC Sanctions Trading Firm, CBOT Penalizes Individual Trader for Soybean Products Speculative Position Limits Violations:

Issuance of New ETFs Quicker Under SEC’s Amended New Rules:
https://www.sec.gov/rules/final/2019/33-10695.pdf

ATS Failure to Keep Identities of Subscribers Secret as Promised Results in US $2.1 Million SEC Penalty:
https://www.sec.gov/litigation/admin/2019/34-87074.pdf

New CFTC DSIO Head Promises Stronger Relationship With Enforcement While DOE Chief Lauds Efficacy of Parallel Actions With Other Enforcement Authorities:

NY DFS Enforcement Action Against Crypto Exchange and Related Stablecoin Stayed by NY Appellate Court:
/ckfinder/userfiles/files/BitFinex%20Appellate%20Division%20Order.pdf

Swiss Regulator Publishes Guidance on Stablecoins:
https://finma.ch/en/~/media/finma/dokumente/dokumentencenter/8news/medienmitteilungen/2019/09/20190911-mm-stable-coins.pdf?la=en
https://finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-stable-coins.pdf?la=en

Testing the Waters Approved by SEC for All Issuers:
https://www.sec.gov/rules/final/2019/33-10699.pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of September 28, 2019. 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. Views of the author may not necessarily reflect views of Katten Muchin or any of its partners or employees.


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