Bridging the Week by Gary DeWaal: July 10 to 14 and July 17, 2017 (Regulators Kumbaya; Reviewing Swap Data Reporting; Recordkeeping; Insider Trading)

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Published Date: July 16, 2017

In an inaugural-type speech last week, Jay Clayton, newly appointed Chairman of the Securities and Exchange Commission, advocated for kumbaya with other regulators, particularly with the Commodity Futures Trading Commission. Mr. Clayton singled out working with the CFTC in order to achieve greater harmonization of rules required under Dodd-Frank, as well as to reduce unwarranted complexity and costs to both market participants and the two agencies. Separately, the Financial Industry Regulatory Authority settled more disciplinary actions for the alleged failure of  broker-dealers to fully comply with the SEC’s current recordkeeping requirements related to electronic brokerage records. The requirements are the same obligations that the CFTC is eliminating effective August 28 for being antiquated and not accommodating new technologies. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Article Version:


My View: Just as in 1981 when the SEC and CFTC voluntarily proposed a rationalization of the then contentious regulation of options and futures on securities – known as the “Johnson-Shad Accord” (click here for background) – that was subsequently enacted into law, there is opportunity now for the SEC and CFTC to rationalize the regulation of security-based swaps and investment management regulation.  In general, deference should be given to the CFTC in connection with all trading rules related to transactions in derivatives of any kind, including security-based swaps. This is because of the Commission’s expertise and long-time experience in protecting the public and market participants from fraud, manipulation and abusive practices related to derivatives on all commodities (except onions and motion picture box office receipts), including financial instruments. Contrariwise, deference should be given to the SEC when it comes to the registration of commodity pool operators of private commodity pools for CPOs that are registered as investment advisers with the SEC or affiliated with SEC-registered IAs. Prior to 2012, the CFTC maintained a rule that was then rescinded that exempted such CPOs from CFTC registration. (Click here for background on former CFTC Rule 4.13(a)(4) in the February 14, 2012 advisory entitled “CFTC Adopts Significant Changes to CPO and CTA Registration and Compliance Requirements” by Katten Muchin Rosenman LLP.) No compelling rationale was provided at the time for such action. Accordingly, that rule rescindment should now be reversed. (Click here for advocacy of this position in a letter by the Managed Futures Association to CFTC Acting Chairman J. Christopher Giancarlo, dated June 6, 2017.) Of course, I still wonder about the efficacy of maintaining multiple regulatory agencies to oversee US markets' regulation in the first place. (Click here to access the section My View to the article “US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation” in the June 18, 2017 edition of Bridging the Week.)

Correction: An earlier version of Bridging the Week incorrectly noted that the Johnson-Shad Accord was proposed in 2000; it was 1981 (the proposal was enacted into law in 1982). In 2000 revisions to the Johnson-Shad accord were proposed by then CFTC and SEC charimen, William Rainer and Arthur Levitt, respectively (click here for details).

My View: Just two weeks ago, HSBC Securities (USA), Inc. agreed to pay a fine of US $1.5 million to settle FINRA charges that, from May 2003 through the present, it did not maintain order records related to approximately 12.36 million transactions in required WORM format, as well as for related recordkeeping violations. This followed FINRA’s assessment of a total of US $14.4 million in fines against 12 other firms for “significant deficiencies” in their retention of required books and records on electronic storage media at the end of 2016. These actions, which are based on an existing SEC requirement grounded in outdated technology, may be justified as a matter of law, but seem unwarranted as a matter of policy. Recently, the Commodity Futures Trading Commission approved a revised records retention rule that eliminated many of its existing antiquated recordkeeping requirements and aims to be “technology neutral” in order to accommodate future advances in recordkeeping technology. Among other things, the revised rule eliminates the CFTC requirement that electronic records be kept in WORM format. Instead, the CFTC’s revised rule is more principles-based and solely requires that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations. The CFTC’s new recordkeeping requirement is effective August 28. The SEC should quickly consider amending its current recordkeeping requirements to conform to the CFTC’s new amended rule.

Legal Weeds: Two recent enforcement actions by the Commodity Futures Trading Commission also charged persons with insider trading for misappropriating trading information. In the first action brought in 2015, the CFTC alleged that Arya Motazedi, a gasoline trader for an unnamed large, publicly traded corporation, misappropriated trading information of his employer for his own benefit. In the second action, CFTC brought and settled charges against Jon Ruggles, a former trader for Delta Airlines, for trading accounts in his wife’s name based on his knowledge of trades he anticipated placing for his employer. Both actions were grounded in a provision of law under the Dodd-Frank Wall Street Reform and Consumer Protection Act and a CFTC rule that prohibit use of a manipulative or deceptive device or contrivance in connection with futures or swaps trading. (Click here to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1. Click here for background on these CFTC enforcement actions in the article “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.)

Hard to Believe: If the allegations in these cases are proven true, it will demonstrate that studying too hard may sometimes not be such a great thing!

More briefly:

For further information:

CFTC’s Division of Market Oversight Initiates Review of Swap Reporting Rules:

FINRA Issues FAQs for Broker-Dealers to Comply With New Fixed Income Disclosure Requirements to Retail Clients:

Industry Generally Supports CFTC’s Proposed CCO Amended Obligations; Some Argue Proposal Does Not Go Far Enough, While Another Says It Strays Too Far:

New SEC Chairman Previews Governing Principles; Stresses Commitment to Working With CFTC:

President Nominates Rostin Behnam as CFTC Commissioner and Intends to Have Kevin McIntyre Serve As Chairman of FERC:

Researching How SEC Detects Unusual Trading Does Not Help Alleged Insider Trader Avoid Criminal and Civil Government Prosecution:

Two More Broker-Dealers Sanctioned by FINRA for Recordkeeping Violations:

Acorns Securities:
State Street Global Markets:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 15, 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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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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