June 19, 2021

Volume XI, Number 170


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Bridging the Week: April 3-7 and 10, 2017 (Advancing Nominee; Third Party Funds’ Transfers; Record Retention) [VIDEO]

The Senate Banking Committee approved Jay Clayton’s nomination as chairman of the Securities and Exchange Commission, and he now awaits a final vote by the full Senate. Meanwhile, the Hong Kong Securities and Futures Commission sanctioned another broker for undetected and unreported third party transfers to and from clients’ accounts. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • SEC Chairman Nominee Advances;

  • Another Broker Sanctioned by HK SFC for AML Violations Related to Money Transfers Between Clients and Third Parties (includes Compliance Weeds);

  • NASDAQ Futures Issues Audit Trail Guidance and Amends Some Requirements (includes Legal Weeds); and more.

Very Briefly

  • SEC Chairman Nominee Advances: Jay Clayton took another step to becoming chairman of the Securities and Exchange Commission when the US Senate Committee on Banking, Housing and Urban Affairs approved his nomination for the position last Tuesday. In supporting Mr. Clayton’s nomination, committee chairman Sen. Mike Crappo said, “Mr. Clayton is eminently qualified to serve as the chairman of the US Securities and Exchange Commission.” Contrariwise, Sen. Sherrod Brown, ranking minority member of the committee, said he declined to support Mr. Clayton because “[w]hat American investors and markets need is a responsible, fully engaged SEC Chair who will understand what is important to Main Street investors and companies, and not just focus on what Wall Street needs and wants.” Mr. Clayton’s nomination was supported by the Committee by a vote of 15 – 8.

  • Another Broker Sanctioned by HK SFC for AML Violations Related to Money Transfers Between Clients and Third Parties: The Hong Kong Securities and Futures Commission fined Guoyuan Securities Brokerage (Hong Kong) Limited HK $4.5 million (approximately US $590,000) for not identifying and conducting adequate due diligence to assess whether “a large number of frequent and unusual transfers” between the firms’ clients and third parties were suspicious transactions warranting follow-up. The SFC noted there were instances where money from third parties was wired into clients’ accounts followed by a wire out of the account in an almost equivalent amount to other third parties. The SFC has recently sanctioned a number of brokers for not detecting and reporting third party funds transfers. (Click here for background.)

Compliance Weeds: Third party funds transfers are always potential red flags. Some are warranted – e.g., routine payments to third party advisers in a discretionary account. But all non-approved third party receipts and payments not explained and approved in advance should be investigated if not outright prohibited as well as considered for suspicious account reporting.

  • NASDAQ Futures Issues Audit Trail Guidance and Amends Some Requirements: NASDAQ Futures Inc. issued a revised Futures Regulatory Alert reminding participants of their requirement to maintain or cause to be maintained an audit trail for all orders entered into the exchange’s trading system. Participants must produce such audit trails upon request by NFX or the National Futures Association, which provides regulatory services for NFX. In addition, NFX amended some fields that must be included in the required audit trail. The new requirements are effective July 3.

Legal Weeds: There is a tension between typical language in designated contract rules that require sponsoring clearing members to maintain or cause to be maintained required audit trails for their customers’ electronic orders. (Click here to access Ch. 5, Sec. 1(f)(v) of NFX Rules) and the relevant records rule of the Commodity Futures Trading Commission, which speaks in terms of the need to “keep” such records (emphasis added). Click here to access and contrast CFTC Rule 1.35(a)(1).) This potential conflict was highlighted in 2015 when CME Group amended its audit trail retention requirements and added the following caveat: “Nothing herein relieves any of the above-referenced firms from compliance with the applicable recordkeeping provisions of CFTC Regulations.” (Click here to access CME Group Market Regulation Advisory Notice: Order Routing/Front-End Audit Trail Requirements (December 14, 2015).)

  • Two Traders Acquitted in UK LIBOR Criminal Trial: Two former Barclays bank traders – Stylianos Contogoulas and Ryan Michael Reich – were acquitted by a UK jury of criminal charges related to an investigation by the Serious Fraud Office into the manipulation of LIBOR benchmark interest rates by the bank from 2005 to early 2009. Barclays previously agreed to pay fines totaling US $360 million to the Commodity Futures Trading Commission and the US Department of Justice, and GBP 59.5 million (approximately US $73 million) to the UK Financial Services Authority (predecessor to the Financial Conduct Authority). SFO has brought criminal cases against 19 individuals for their roles in the manipulation of LIBOR and EURIBOR. To date, one has pleaded guilty, four were convicted and eight were acquitted.

  • Warehouse Settles Disciplinary Proceeding Brought by LME for Falsifying Documents for USD $1.4 Million Fine: Access World (USA) LLC agreed to pay a fine of US $1.4 million for creating false records in connection with metal held for customers to mislead the exchange into thinking the metal had been physically moved from the New Orleans delivery point when in fact it had not been moved or moved on a date different than set forth in inventory records. According to LME, AW USA explained it engaged in such conduct when it experienced unspecified “logistical issues.” In issuing the settlement, LME said it “expects listed Warehouses to incorporate appropriate checks into its processes and procedures so that any potential acts of misconduct undertaken by individuals within the organization can be promptly discovered and acted upon.”

  • In Search of Market Intelligence – Acting CFTC Chairman Appoints First Chief Market Intelligence Officer: Andrew Busch was appointed as the first Chief Market Intelligence Officer of the Commodity Futures Trading Commission. The objective of the role, according to a statement issued by Acting Chairman J. Christopher Giancarlo, is to “help activate the CFTC’s latent capability for market intelligence, giving us better insight into the needs of participants in the futures and swaps we oversee.” Mr. Giancarlo had initially previewed the creation of the CMIO role during a speech before an FIA conference in March. (Click here for details.)

  • CME Group Clearing House Risk Committee Charges Two Clearing Members With Violating Exchange Rules: Wedbush Securities Inc. agreed to a sanction of US $500,000 by the Clearing House Risk Committee for breaches of various Chicago Board of Trade financial and recordkeeping rules. However, the Committee agreed to waive US $250,000 of the sanction based “on the firm’s compliance with industry rules, regulations and requirements through the completion of the next risk based examination.” Separately, HSBC Securities (USA) Inc. agreed to pay a fine of US $50,000 related to alleged breaches in calling for performance bond and financial requirements of the Chicago Mercantile Exchange. Nothing in either public order provided any substantive facts regarding the nature of the Risk Committee’s allegations.

  • CFTC Staff Excuses University Management Company and Fund Directors From CPO Registration as Interests Aligned With Investors: Staff of the Division of Swap Dealer and Intermediary Oversight exempted a state university organized investment management company and individual directors from having to register as commodity pool operators in connection with their roles ultimately overseeing multiple funds operated for university affiliates, supporting organizations and foundations that currently or may in the future invest in commodity interests. Staff indicated that relief was warranted because the management company and directors “share an aligned interest and common goal with the Fund participants.” Also, neither the management company nor the directors market any of the funds to the public, and the universe of possible funds participants is sufficiently small due to the funds being limited to persons affiliated with the university. (Click here for further details.)

  • Broker-Dealer Agrees to Pay US $380,000 to Resolve FINRA TRACE Reporting Deficiency and Supervisory Breakdown Allegations: Cantor Fitzgerald & Co. agreed to pay a fine of US $380,000 to the Financial Industry Regulatory Authority to resolve charges that, on various occasions from July 2014 through September 2016, it violated reporting requirements involving secondary market transactions in eligible fixed income securities through its Trade Reporting and Compliance Engine (TRACE). In connection with the matter it settled, Cantor Fitzgerald was also charged with supervisory deficiencies related to its alleged TRACE violations.

  • Independent Introducing Broker Settles NFA Charges Regarding Capital Deficiency and Notification Failure: Option Financial LLC, an independent introducing broker registered with Commodity Futures Trading Commission, consented to pay US $10,000 to settle charges that it failed to satisfy its minimum capital requirement on 42 days between January and June 2016. NFA claimed that OFL also failed to timely file a notice of its capital deficiencies, as required, until August 2016 after it was advised to do so by NFA.

  • ESMA Issues Guidance on Market Structure Under MiFID II: The European Securities and Markets Authority issued guidance related to the operation of two types of trading venues under the Markets in Investment Directive II – Organized Trading Facilities and Systematic Internalizers. In its guidance, ESMA clarified the type of arrangements that would require authorization as an OTF and when a Systematic Internalizer may engage in activities that would also require authorization. OTFs are trading facilities for bonds, structured finance products and emission allowances where orders are executed on a discretionary basis. Systematic Internalizers are investment firms that deal for their own account, providing bilateral liquidity.

  • Canadian Securities Regulators Seek Guidance for Business Conduct Rules for Derivatives Dealers and Advisers: The Canadian Securities Administrators proposed various customer protection proposals for over-the-counter transactions. The provisions address fair dealing, conflicts of interest, know your customer requirements, suitability, pre-trade disclosures, reporting, compliance, senior management duties, recordkeeping and protection of assets. Comments will be accepted through September 1, 2017.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VII, Number 100



About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...