Bridging the Weeks by Gary DeWaal: June 27 to July 8 and July 11, 2016 (Spoofing; Business Continuity; Blue Sheets; Large Trader Reporting; Transaction Monitoring; Reg AT)

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Published Date: July 10, 2016

Michael Coscia, the first trader convicted of spoofing under new provisions of law, now awaits sentencing following a request for a tough sentence by the US Attorney’s Office in Chicago and for leniency by Mr. Coscia’s counsel. Meanwhile, a broker-dealer agreed to pay US $6 million to resolve charges by the Financial Industry Regulatory Authority related to alleged filing of “thousands” of deficient blue sheets over a seven-year period, while the Securities and Exchange Commission proposed that investment advisers adopt formal business continuity and transition plans to guard against material disruptions. In addition, the House Committee on Agriculture will hold a hearing this week on the Commodity Futures Trading Commission’s proposed Regulation Automated Trading. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

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My View: On first blush, the Securities and Exchange Commission’s proposed rule requiring investment advisers to adopt business continuity and transition plans appears reasonably drafted without imposing overly prescriptive requirements. It establishes the elements of what the SEC perceives to be acceptable programs but permits specific measures to be tailored to reflect each firm’s actual business. The rule also requires an investment adviser to review the adequacy of its existing business continuity and transition plan no less than annually. This all seems quite reasonable.

Compliance Weeds: Macquarie Capital (USA) Inc. also recently agreed to pay a substantial fine (US $2.95 million) to FINRA to resolve charges that, between 2012 and 2015, it produced to the SEC and it a substantial number of blue sheets that were inaccurate and did not have an adequate audit system to ensure the reliability of its blue sheet submissions. FINRA alleged that Macquarie’s errors included reversing buy/sell codes on allocations of certain customer trades; miscalculating the net amount of allocations on certain customer trades; and failing to provide any or complete customer information on certain transactions. (Click here for details of FINRA’s prior action in the article, “Broker-Dealer Agrees to FINRA Sanction of US $2.95 Million for Alleged Blue Sheet Failures” in the June 2, 2016 edition of Bridging the Week.) If reporting firms have not done so already, it may be advisable sooner not later (and periodically afterwards) to review both the logic of any system designed to produce blue sheets, as well as the sources (and integrity) of the data received by the system. Sample output should also be reviewed carefully to ensure it matches regulatory requirements and tests should be conducted comparing expected with actual output. Indeed, this type of periodic testing should be considered for all systems that generate regulatory reporting.

Compliance Weeds 1: Previously, the CFTC filed charges against the Australia and New Zealand Banking Group Ltd. for also violating regulatory requirements related to the reporting of large swap positions involving physical commodities. The CFTC alleged that, from at least March 1, 2013, to November 20, 2014, ANZ failed on certain days to submit any reports of its large positions, while at other times it “routinely” submitted required reports that included errors. ANZ settled the CFTC’s charges by agreeing to pay a fine of US $150,000 (Click here for background regarding this matter and a discussion of LTR requirements generally in the article, “Australian-Based Swap Dealer Sanctioned by CFTC in First Case for Violations of Large Trader Reporting Requirements for Physical Commodity Swap Positions” in the September 20, 2015 edition of Bridging the Week.) The CFTC considers accurate LTRs critical for its oversight of markets and market activity and appears to prioritizing enforcement actions involving allegedly deficient LTRs.

Compliance Weeds 2: Certain large trader reporting requirements that were adopted by the Commodity Futures Trading Commission during November 2013 and subsequently postponed will soon be mandatory. Specifically, it will soon be required to electronically submit certain large traders’ and position holders’ data regarding their futures and swaps holdings on updated forms as follows:

Under the CFTC’s latest revised schedule, new requirements related to the electronic reporting of:

Compliance Weeds: BIS’s and IOSCO’s issuance of its guidance to FMIs provides a timely reminder to members of the National Futures Association that they were required by March 1 to have adopted and begun enforcing formal written policies regarding cybersecurity. These policies must be “reasonably designed by members to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” (Click here for further details on NFA’s requirements in the article, “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week.)

And more briefly:

Compliance Weeds: Regulations of the Commodity Futures Trading Commission have equivalent requirements as FINRA regarding accounts of "affiliated persons" of futures commission merchants and introducing brokers (Click here to access CFTC Rule 155.3 and 155.4). In general, an affiliated person of such registrants need to obtain the written authorization of his or her employer to maintain an account with a third-party FCM. Moreover the the third-party FCM must afterwards on a "regular basis" send copies of all account statements related to such an account and "all written records prepared upon receipt of orders for such account." FCMs receiving such orders must prepare immediately upon receipt of an order for such account a written record of such order, including the account identification and order number that includes the date and time to the nearest minute when the order is received. Under relevant rules, "affiliated persons" of FCMs and IBs is broadly defined to include any general partner, director, owner of more than ten percent, registered associated person or employee, any relative or spouse, or any relative of a spouse, who share the same home as the person directly affiliated with the relevant registrant.

Corrected from an earlier version saying I wished the National Futures Association should consider, like FINRA, adopting a similar rule to govern futures accounts opened at futures commission merchants other that a registrant’s own employer. 

Compliance Weeds: FinCEN recently expanded its existing anti-money laundering and customer identification program requirements for FCMs, IBs and other covered financial institutions by finalizing rules requiring them to identify the material beneficial owners of their legal entity customers based on tests of equity ownership and control. Such entities are currently required to know the identity of each of their legal entity customers, but not necessarily their beneficial owners. (Click here for more details in the article, “FinCEN Finalizes Rules Requiring Banks, Broker-Dealers, FCMs, Mutual Funds and IBs to Help Verify Beneficial Owners of Certain Accounts” in the May 8, 2016 edition of Bridging the Week.)

For more information, see:

BIS and IOSCO Provide Guidance on Cybersecurity Measures That Should Be Adopted by Financial Market Infrastructures:

Broker-Dealer Settles FINRA Blue Sheets Violation Allegation by Payment of US $6 Million Fine:

CFTC’s Division of Market Oversight Highlights Compliance Department Resources Concern in CBOE Futures Rule Enforcement Review:

CFTC Staff Reminds FCMs and IBs to Report Suspicious Activities Timely and All Registrants to Comply With OFAC Sanctions Programs:

EC Formally Recognizes US Derivatives Clearing Organizations as Subject to Equivalent Regulation:

FRB Extends Volcker Rule Funds Divestiture Requirements Until July 21, 2017:

Government Seeks Maximum Sentence in Coscia Criminal Action:

House Committee on Agriculture to Hold Hearing on CFTC Proposed Regulation AT This Week:

ICE Futures Europe Revises Block Trade, EFRP and Other Policies to Conform to Market Abuse Regulation:

Block Trades:
Conflicts of Interest:

IFUS Files and Resolves Disciplinary Action Alleging Disruptive Trading:

International Bank Consents to US $560,000 Sanction by CFTC for Not Accurately Reporting Large Trader Reports for Swaps Positions in Physical Commodities:

New FINRA Rule Governing Accounts Opened by Associated Persons at Broker-Dealer Other Than Employer Approved by SEC:

NYS Department of Financial Services Issues Transaction Monitoring and Filtering Requirements for State-Regulated Banks and Other Financial Institutions:

SEC Proposes Investment Advisers Adopt Formal Business Continuity and Transition Plans:

Three UK Traders Convicted for LIBOR Offenses Sentenced to Prison Terms from 2.9 to 6.5 Years:

Trader and Company Agree to Pay a US $250,000 Fine to Resolve CFTC Allegations They Engaged in Fictitious Transactions in Illiquid Single Stock Futures:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 9, 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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