Bridging the Week by Gary DeWaal: May 19 to 23 and 27, 2014 (MiFID, Gold Fixing, Broker-Dealer CCO Sued; Gambling Troubles)

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Published Date: May 26, 2014

There was no one theme last week in regulatory initiatives or enforcement matters involving the financial services industry worldwide. From a regulator’s assessment of reforms related to dark venue trading in Australia, to enforcement matters in the UK involving the London gold fixing (not to mention ESMA in Paris beginning its consultation process for the implementation of MiFID II and MiFIR), and to another regulator’s help for certain end users in the United States, the issues addressed were diverse and wide. However one matter stood out: an SEC enforcement action in the US that named a chief compliance officer for allegedly supporting his employer’s non-compliance with certain rules and for concealing violations from the regulator.

As a result, the following matters are covered in this week’s Bridging the Week:

By the way, this week I am serving as guest editor of The John Lothian News, which you can always sign up to receive by clicking here. If you enjoy my comments once a week, imagine your pleasure when you receive them four times this week!

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ESMA Seeks Views on MiFID Reforms

The European Securities and Markets Authority has issued a consultation paper regarding the recently amended Markets in Financial Instruments Directive (MiFID II) and related regulation (MiFIR). It did this in anticipation of delivering technical advice to the European Commission by December 2014 on how to adopt and implement these provisions through “practically applicable rules and regulations.”

MiFID II and MiFIR are comprehensive measures that once finally implemented, will greatly increase regulation of European financial markets by (1) requiring the trading of certain financial and commodity instruments on regulated venues “whenever appropriate;” (2) increasing obligations on certain algorithmic traders; and (3) obligating speculative traders to limit the size of their net position in commodity derivatives. (For more details on the broad reach of MiFID II and MiFIR) see an article that previously appeared on this website by clicking here.)

In its 311-page consultation paper, ESMA sets forth the specific advice it proposes to provide the EC on a host of topics, gives insight into its rationale, and asks questions regarding aspects of its proposed advice (ESMA specifically asks answers to 245 questions). Among the broad areas ESMA addresses are investor protection (including proposed requirements regarding the compliance function, record-keeping including recording of telephone conversations, safeguarding client assets, remuneration and best execution); pre- and post-trade transparency (including certain trade execution obligations); data publication; algorithmic trading and direct electronic access; and commodity derivatives (including position reporting and management).

Among its stated views, ESMA appears to recognize that the role of compliance is to "advise and assist the relevant persons for carrying out investment services and activities," and not more. The Authority proposes to elevate the stature of the compliance function and what in the US is known as the chief compliance officer, but does not appear to require the preparation of an annual report to file with any regulator. Instead, the compliance function must report annually to the management body "on the implementation and effectiveness of the overall control environment for investment services." 

ESMA also expressly enumerates the specific documents it proposes that investment firms retain on an ongoing basis. Like many other regulators, it proposes to mandate the recording and retention of recordings of certain conversations related to orders. However firms are solely required "to take all reasonable steps to record conversations and communications." In addition, ESMA proposes to require investment firms to "record in written minutes" certain face-to-face conversations with clients (in connection with this proposed requirement ESMA asks "[s]hould clients be required to sign these minutes or notes").

The European authority proposes to restrict the amount of customer funds investment firms can place with affiliates (20%), as well as to require investment firms to appoint a dedicated officer or the CCO to have "operational oversight" over a firm's obligation to safeguard client assets. ESMA defines high frequency trading as a subset of algorithmic trading and proposes alternative tests to determine whether a firm engages in HFT and thus subject to registration as an investment firm. Finally, ESMA proposes certain governance around the development of new products, including scenario testing to assess their potential risks.

Separately, ESMA issued a 533-page discussion paper on a number of related but “more innovative and technically complex topics” to begin the process that ultimately will lead to the adoption of rules and regulations too. The topics often parallel the areas covered in ESMA’s consultation paper, but address a far greater level of detail (e.g., regarding algorithmic traders, there are specific discussions regarding market making strategies, market making arrangements and market making schemes; order to transaction ratios, and co-location). There are no specific requirements proposed here, but ESMA provides its preliminary views regarding what potential new rules should address and requests advice on its initial analysis (it specifically requests answers to 615 questions).

The closing date for responding both to ESMA’s consultation and discussion papers is August 1. ESMA anticipates having three public hearings on secondary markets, investor protection and commodity derivatives.

My View: There is a lot of reading to be done here, but this is an important opportunity for potentially impacted industry participants to help shape what could be rules that, once implemented, will materially effect their livelihood. Moreover, now is the time to comment on and help get right rules that may disrupt certain international transactions.

UK FCA Fines Barclays and Former Trader Related to London Gold Fixing

The UK Financial Conduct Authority last week brought and settled enforcement actions against Barclays Bank Plc and James Plunkett, a former director on its precious metal desk related to the firm’s participation in the London daily gold fixing between June 2004 and March 2013.

During this time, claims the FCA, Barclays failed to maintain adequate risk management systems to manage and oversee its traders’ participation in the London daily gold fixing, and did not adequately manage conflicts of interest between itself and its customers. As a consequence, on June 28, 2012, Mr. Plunkett “exploited the weaknesses in Barclay’s systems and controls” to avoid the bank making a required payment to a customer of US $3.9 million (although the bank later paid the customer in full). At the same time, Mr. Plunkett was able to increase the value of his own trading book by US $1.75 million.

In connection with this customer, Barclays would have been required to pay the customer had the gold price for the day been fixed above a certain level. During the time of the gold price fixing on June 28, Mr. Plunkett is alleged by the FCA to have placed certain orders with the intent of increasing the probability that the gold price for the day would settle below this requisite threshold.

The FCA suggests that Barclay’s issues regarding the London gold fixing were “particularly serious” because of the firm’s prior self-investigation into LIBOR and EURIBOR rate setting issues. According to the FCA,

“Although there are differences between the LIBOR and EURIBOR processes and the Gold Fixing process, the Authority considers Barclays’ failures to be particularly serious because Barclays’ investigation into LIBOR and EURIBOR should have caused Barclays to have reviewed its systems and controls with respect to other price-setting mechanisms, including the Gold Fixing, prior to 28 June 2012. Indeed, this incident involving Mr. Plunkett, which occurred the day after the Authority published its Final Notice to Barclays in relation to LIBOR and EURIBOR, may have been avoided had Barclays done so.”

Barclays agreed to pay a fine of more than GB £26 million (approximately US $43.8 million), while Mr. Plunkett agreed to pay a fine of GB £95,600 (approximately US $161,000) and be banned from performing any role in connection with activity regulated by the Authority.

In a published statement regarding this matter, Antony Jenkins, CEO of Barclays expressed the bank’s regret for its involvement in this matter:

“We very much regret the situation that led to this settlement. Barclays has undertaken a significant amount of work to enhance our systems and controls and is committed to the highest standards across all of our operations… These situations strengthen our resolve to improve.”

The daily London Gold fixing is a price-setting mechanism that permits market users to buy or sell gold at a single quoted price. FCA acknowledged that Barclays brought Mr. Plunkett’s wrongful conduct promptly to its attention and cooperated with the Authority’s investigation.

Culture and Ethics: Imparting a compliance culture among a firm’s employees is so extremely difficult in the competitive environment of the financial services industry, yet so important. A reputation solidly built over decades can be tarnished in minutes. It takes a combination of financial incentives as well as constant training to develop and maintain this culture. To me, the message that needs to be conveyed is so simple: do not engage in any action that you would not be proud to defend to your grandmother when she inquires after reading about it in the morning tabloid. If you wouldn’t be proud, don’t engage in the act!

SEC Files Charges Against Four Former BD Officials, Including Former CCO, Related to Reg SHO Violations:

The US Securities and Exchange Commission brought charges against the former chief executive officer, the chief compliance officer, and two lending officials at defunct Penson Financial Services for their role in the broker-dealer’s violations of Reg SHO.

According to an SEC complaint, Penson systematically violated Reg SHO “thousands of times” from October 2008 to November 2011 when it failed to close-out within the required time (by the beginning of the day six days after trade date), shares of stock sold by its customers which the customers previously had purchased on margin and that Penson had loaned out to the street for its own purposes. Apparently, says the SEC, Penson did not purchase or borrow sufficient shares of the relevant stock to cover its long sales of loaned equities within mandated time frames because of the potential impact on its bottom line.

The SEC charges that Thomas Delaney, the company’s former CCO, was aware of and supported Penson’s non-compliance when the firm was “required to absorb the cost of compliance” and intentionally concealed the violations from regulators. The SEC also alleges that Charles Yancey, Penson’s former president and CEO aided and abetted the firm’s violations by, among other things, “turning a blind eye to red flags indicating that Delaney was aware of and substantially assisted [the] violations.”

Among other things, Penson's annual compliance report prepared for Penson's fiscal year ending March 31, 2010, as required under rules of the Financial Industry Regulatory Authority, failed to contain any references to the firm's buy-in issues, says the SEC. This was despite internal written supervisory procedures (WSPs) that required Penson to identify all "key compliance issues." The annual report was prepared by Mr. Delaney and certified by Mr. Yancey. According to the SEC,

"Consistent with the WSPs' requirement that the report discuss "key compliance issues," the March 31, 2010 Annual Report contained a section titled 'identification of significant compliance problems.' But the section of the report was silent about Penson's [buy in procedures'] deficiencies... In fact there was not one word anywhere in the Annual Report about these issues ...The Annual Report's omission of any discussion relating to [these issues] was glaring..."

The SEC brought its action again Mr. Delaney and Mr. Yancey through its own administrative process.

Separately, the Agency filed two additional actions against Michael Johnson, a former supervisor, and Lindsey Wetzig, a former manager in in Penson’s security lending department for their roles in this matter.  Both settled their actions without admitting the SEC findings, with Mr. Johnson agreeing to pay a fine of US $125,000 and be barred from the securities industry for at least five years, and Mr. Wetzig agreeing to a censure, among other sanctions.

Reg SHO is an SEC regulation initially adopted in 2005 that establishes uniform locate and close-out requirements to address problems with failure to deliver, particularly with naked short selling. (For a general overview of Reg SHO, click here.)

And briefly:

And even more briefly

For more information, see:

Australia Regulator Expresses Satisfaction with Measures Taken to Curb Certain Dark Trading Practices:$file/rep394-published-19-May-2014.pdf.

CFTC End User Help:

CME Group Delays Implementation of Revised EFRP Rule and Related Guidance until August 4, 2014:

CME Group Disciplinary Actions:

Barclays (Block Trades):
Goldman Sachs (Electronic Trade Records):
RBS Securities (Block Trades):

ESMA EMIR Q&A Amendment:


Consultation Paper:
Discussion Paper:

UK FCA Fines Barclays and Former Trader Related to London Gold Fixings:

James Plunkett:

Joint Audit Committee Issues Margin Booking Guidance:

NFA Fees for Late Registration Update Amendments:

OCC and US Options Exchanges Adopt New Pre and Post Trade Risk Control Principles:

SEC Charges Former CPA with Auditor Independence Rule Violation for Accepting Gratuities from Audit Firm Client:

SEC Files Charges Against Four Former BD Officials, Including Former CCO, Related to Reg SHO Violations:

Delaney and Yancey:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of May 24, 2014. 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 and/or Gary DeWaal may represent one or more entities mentioned in this article. 

Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained in this article is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.


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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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