Bridging the Week by Gary DeWaal: April 11 - 15, and 18, 2016 (Business Conduct; CCOs; HFTs; Suspense Accounts; Customer Reserve Accounts; More Money)

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Published Date: April 17, 2016

Substantially after the Commodity Futures Trading Commission adopted and implemented similar rules, the Securities and Exchange Commission finally approved business conduct rules as well as requirements related to chief compliance officers of security-based swap dealers and major security-based swap participants. However, the two agencies’ rules are not fully aligned. In addition, the UK Financial Conduct Authority issued a report concluding that, at least in London, there is no evidence that high-frequency traders are front running other market participants because of speed advantages in receiving order information. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:

SEC Adopts Swaps Business Conduct Rules Different From Comparable CFTC Requirements:

Last week the Securities and Exchange Commission adopted final rules imposing business conduct standards on registered security-based swap dealers (“SBS Dealer”) and major security-based swap participants (“MSBSP”; collectively, “SBS Entities”), and requirements related to the chief compliance officers of such firms. The vote for approval was 2-1 with Commissioner Michael Piwowar dissenting.

These requirements, which generally parallel (but are not identical to) similar obligations imposed on registered swap dealers and major swap participants by the Commodity Futures Trading Commission, obligate SBS Entities to:

The SEC’s final rules also addressed the application of its business conduct standards in connection with cross-border transactions. In general, US SBS Dealers must comply with all transaction-level business conduct requirements in connection with all of their security-based swap transactions, except for certain transactions conducted through their foreign branches. Likewise, a foreign SBS Dealer must comply with all transaction-level requirements in connection with all of its security-based swap transactions with a US person (except for transactions conducted through foreign branches of such US persons) and all transactions that the SBS Dealer “arranges, negotiates or executes using personnel located in the United States.” Foreign SBS Entities may be able to comply with local requirements to satisfy certain of their SEC requirements if the agency has determined that the parallel local requirements are comparable and the SEC has entered into an agreement with the relevant local regulator regarding supervisory and enforcement cooperation and information sharing.

According to the SEC, in adopting its final rules, the agency endeavored to “harmonize with CFTC requirements to create efficiencies for entities that already established infrastructures for compliance with analogous CFTC requirements.” That being said, there are some additional requirements in the SEC regulations that were not mandated by the CFTC, as well as subtle differences in language even where there is an effort to align requirements. For example, the supervisory obligation of SDS Dealers and MSBSPs appears more granular under the SEC’s requirements than the comparable CFTC rules (click here to access the relevant CFTC rules). It was the failure of the SEC to better align its rules with those of the CFTC that apparently was the basis of Mr. Piwowar’s dissent.

Similarly, the SEC’s expectations of CCOs are subtlety different from corresponding requirements by the CFTC (click here to access CFTC regulations regarding CCOs). Under the SEC’s rules, for example, the CCO must

[t]ake reasonable steps to ensure that the registrant establishes, maintains and reviews written policies and procedures reasonably designed to achieve compliance with [relevant laws and rules] relating to its business as a security-based swap dealer or major security-based swap participant…. (Emphasis added.)

Under the CFTC’s requirements, a CCO’s duties include

[t]aking reasonable steps to ensure compliance with [relevant laws] related to the swap dealer’s or major swap participant’s swaps activities…. (Emphasis added.)

Likewise, under the relevant SEC rule, a CCO must,

[i]n consultation with the board of directors or the senior officer of the security-based swap dealer or major security-based swap participant, take reasonable steps to resolve any material conflicts of interest that may arise. (Emphasis added.)

Under the relevant CFTC rule, a CCO is responsible for,

[i]n consultation with the board of directors or the senior officer, resolving any conflicts of interest that may arise. (Emphasis added.)

Under the CFTC’s rules, the CCO of a swap dealer or major swap participant can only be appointed by the entity’s board of directors or senior officer. Likewise, only the board of directors or the senior officer may approve the compensation of the CCO or terminate the CCO. Under the SEC’s rules, there is no restriction on who can appoint the SBS Dealer’s or MSBSP’s CCO but only the board of directors may approve the CCO’s compensation or remove the CCO.

CCOs under the SEC regime must also prepare and sign an annual report, as well as perform other enumerated tasks.

The SEC’s business conduct standards and CCO requirements will be effective 60 days after publication of the SEC’s rule in the Federal Register. The compliance date for most of the SEC’s rules will not occur until entities are required to register as SBS Entities.

The CFTC adopted its business conduct standards for swap dealers and major swap participants in February 2012.

My View: Although the SEC endeavored to harmonize its business conduct and CCO requirements with those of the CFTC, there are subtle but important differences. It is a shame that the SEC and CFTC could not adopt more identical rules. This decision of the SEC, at this late stage, to issue rules that are subtly different from those of the CFTC, addressing mostly the same topics, helps to validate the recent conclusion of the US Government Accountability Office that the US financial regulatory system “appears to be ill-suited to meet the nation’s needs in the 21st century” because of its high level of complexity and overlap. (Click here for details regarding the GAO study in the article, “GAO Claims US Financial Services Regulation Still Complex and Fragmented” in the April 3, 2016 edition of Bridging the Week.)


And more briefly:

And finally:

For more information, see:

Broker-Dealer Agrees to Pay FINRA US $750,000 for Allegedly Deficient Customer Reserve Account Calculation Practices:

CFTC Commissioner Giancarlo Again Stresses Need for Do No Harm Approach to Distributed Ledger Technology Regulation:

CME Group Revises Rule and Issues MRAN Related to the Use of Suspense Accounts:

FCA Researchers Say No Evidence That HFTs Systematically Front Run Based on Information Advantages:

Five of Eight Top Banks Flunk FRB and FDIC Resolution Plan Assessments:

NFA Describes Approval Process for Swaps Initial Margin Models:

SEC Adopts Swaps Business Conduct Rules Different From Comparable CFTC Requirements:

SEC and CFTC Chairpersons Tell the Senate Appropriations Committee: Show Me More Money:

CFTC Chairman:
SEC Chairperson:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of April 16, 2016. 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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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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Gary DeWaal
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