June 21, 2021

Volume XI, Number 172


June 18, 2021

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Bridging the Week: August 15 to 19 and August 22, 2016 -Whistleblowing; President Banned; Bad Reports; CCP Risk; De Minimis [VIDEO]

Last week another publicly traded company was sanctioned by the Securities and Exchange Commission for using a standard severance agreement that the Agency claimed potentially impeded employees from exercising their whistleblowing rights. Also, the SEC recently upheld the banning of the president of a broker-dealer from acting in any officer or manager position for 31 days because of his supervisory failures, while a swap dealer was sued by the Commodity Futures Trading Commission in federal court for allegedly committing new reporting violations that were a type that were also the subject of a prior enforcement action. As a result, the following matters are covered this week:

  • Another Publicly Traded Firm Sanctioned by SEC for Allegedly Undercutting Whistleblower Protections Through Severance Agreements;

  • SEC Upholds FINRA Registration Suspension of Broker-Dealer President for Failure to Supervise;

  • Swap Dealer Sued in Federal Court by CFTC for Recidivist Reporting Violations; Acknowledges Bank’s Cooperation;

  • International Regulators Find Fault With Derivatives CCPs’ Recovery Planning and Credit and Liquidity Risk Management;

  • CFTC Staff Issue Another Report but Commission Takes No Action Regarding Swap Dealer De Minimis Threshold;

  • …And Don’t Forget ICE Clear Europe’s Individual Segregation Through Sponsored Principal Account Offering  and more.

Video Version:

Article Version:


  • Another Publicly Traded Firm Sanctioned by SEC For Allegedly Undercutting Whistleblower Protections Through Severance Agreements: Health Net, Inc., a formerly publicly traded company whose securities were registered with the Securities and Exchange Commission until earlier this year, agreed to pay a fine of US $340,000 to the SEC to resolve charges that its standard severance agreement violated the whistleblower protections of ex-employees under applicable law. According to the SEC, from August 12, 2011, when the relevant SEC rules governing whistleblowing became effective, through June 2013, Health Net required employees receiving voluntary severance payments to enter into a contract under which they were expressly prohibited from filing an application for, or accepting, a whistleblowing award from the SEC. This restriction, said the SEC, violated its rule that prohibits companies from taking “any action” to impede an employee “from communicating directly with the Commission staff about a securities law violation, including enforcing, or threatening to enforce a confidentiality agreement … with respect to such communications” (click here to access SEC Rule 21F-17). Health Net amended its standard severance agreement in June 2013 to better comport with applicable law. However, it still retained a requirement that employees receiving voluntary severance payments waive any right to receive “any individual monetary payment” as a result of any proceeding brought by a government agency or department as a result of any employee communication. In addition to agreeing to pay a fine, Health Net agreed to revise its standard severance agreement to better comply with the SEC’s reading of applicable law. In its order of settlement with Health Net, the SEC acknowledged that it was not aware of any circumstance where a former company employee avoided talking to the Commission about any potential securities law violation, or where Health Net sought to enforce the allegedly problematic provisions of its standard severance agreements.

Compliance Weeds: This is the second action the SEC has brought and settled within two weeks where firms included in their standard severance agreements language that the Commission determined potentially impeded an employee from disclosing to the SEC a possible securities law violation. (Click here for background on the prior SEC enforcement action in the article, “SEC Sanctions Publicly Traded Company for Restricting Whistleblowing Claims in Employee Severance Agreements” in the August 14, 2016 edition of Bridging the Week.) It is clear that the SEC reads its anti-retaliation clause broadly. SEC and Commodity Futures Trading Commission registrants and SEC-regulated publicly traded companies should review their form employment and severance agreements to ensure they are consistent with regulatory requirements regarding employee whistleblower rights. (Click here for a more comprehensive discussion of this development in the August 17, 2016 advisory “Public Company Sanctioned by SEC for Including Illegal Anti-Whistleblower Provisions in Severance Agreements” by Katten Muchin Rosenman LLP.)

  • SEC Upholds FINRA Registration Suspension of Broker-Dealer President for Failure to Supervise: The Securities and Exchange Commission upheld a determination by the Financial Industry Regulatory Authority to fine Edward Wedbush, the founder and president of Wedbush Securities, Inc., a registered broker-dealer, US $50,000, and to suspend him from acting in any principal capacities for 31 days for allegedly failing to supervise certain mandated regulatory filings. (Generally, under SEC and FINRA requirements, principals of a broker-dealer include officers and other management and supervisory personnel involved in the day-to-day management or operation of the firm that are obligated to take a special examination as part of their qualification, typically the Series 24.) According to the SEC, from January 2005 through July 2010, while Mr. Wedbush was president, Wedbush Securities filed 158 required reports with FINRA related to judgments and settlements; arbitrations, civil litigations or regulatory actions; employee terminations; and statistical information on customer complaints late, with inaccurate information, or not at all. During part of this time, Mr. Wedbush also served as the firm’s chief compliance officer and business conduct manager. It was the firm’s business conduct department (BCD) that was responsible for the firm’s compliance systems and all regulatory filings. In upholding FINRA’s sanctions against Mr. Wedbush, the SEC noted that because of various FINRA and other regulatory organization reviews of Wedbush Securities, the company was “put on notice” that it was failing to file regulatory reports as required. However, “despite this notice, the Firm failed effectively to modify its procedures (or the implementation of those procedures) to address its numerous regulatory reporting deficiencies.” Principal among the firm’s implementation deficiencies, observed the SEC, was that the BCD “had not ability or leverage to enforce compliance with [the firm’s] procedures” that required the firm’s managers and registered representatives to advise the BCD of reportable events. Mr. Wedbush, claimed the SEC, was expressly on notice of the firm’s regulatory reporting issues, but “took no meaningful action” to improve matters other than “to remind his staff of its regulatory responsibilities.” According to the SEC, “[r]eminding managers of their obligations, even if done repeatedly, was an inadequate response to systemic failures as recurrent and long-standing as those at the Firm.” The SEC also upheld FINRA’s fine of US $300,ooo against Wedbush Securities for its allegedly problematic filings and supervisory breakdowns. (Click here to access the 2014 decision of the FINRA National Adjudicatory Council regarding Mr. Wedbush and Wedbush Securities.)

Compliance Weeds: In this matter, the SEC appeared to acknowledge that Wedbush Securities’ written supervisory procedures appeared “reasonably designed” to achieve compliance with applicable securities laws and FINRA requirements. However, its implementation was lacking, claimed the SEC. Thus, said the Commission, its overall supervisory system was lacking. The SEC noted that, as president of Wedbush Securities, Mr. Wedbush had ultimate responsibility for the firm’s “compliance with all applicable requirements ‘unless and until he reasonably delegates particular functions to another person in that firm, and neither knows or has reason to know that such person’s performance is deficient.’” However, here, said the SEC, Mr. Wedbush was on notice, in part because he was himself in charge of the relevant department during part of the time, and took no material action to improve the situation. According to the SEC, “While Wedbush stressed the importance of regulatory reporting at periodic management meetings and instructed managers to cooperate in the reporting process, he knew that the filing violations had continued despite his instructions, and that his instructions had not resolved the Firm’s noncompliance.” Mr. Wedbush should have ensured the appointment of more qualified personnel in the business conduct department and perhaps authorized the BCD to penalize or even fire non-cooperating personnel, as examples of appropriate material action, suggested the SEC. This SEC decision suggests that the Commission expects that its registrants, to evidence an appropriate supervisory system, must – to paraphrase former US president Theodore Roosevelt – not only empower its managers to speak softly but to carry a big stick.

  • Swap Dealer Sued in Federal Court by CFTC for Recidivist Reporting Violations; Acknowledges Bank’s Cooperation: The Commodity Futures Trading Commission filed charges in federal court against Deutsche Bank AG, a registered swap dealer, for its alleged failure to accurately report information regarding its swap transactions, as required by law, from April 16, 2016, through the current time. Under applicable CFTC rules, swap dealers are obligated to report “timely and accurately” certain information regarding their swap transactions to a registered swap data repository, including “messages that constitute real-time publicly reportable swap transactions” and certain swap creation and continuation data. Swap dealers are also obligated to correct previously reported data that is incorrect. According to the CFTC, because of a system outage at Deutsche Bank on April 16, the bank did not report any swap data for approximately five days, and has experienced a number of persisting reporting errors. Moreover, claimed the CFTC, Deutsche Bank’s alleged failures violated the terms of a recent settlement order that followed a prior enforcement action that also alleged swaps reporting problems. (Click here for background regarding this prior CFTC enforcement action in the article, “Swaps Dealer Agrees to US $2.5 Million Fine to Resolve Charges by CFTC That It Misreported Certain Swap Transactions” in the October 4, 2015 edition of Bridging the Week.) In its complaint, the CFTC sought a permanent injunction and a civil fine, among other remedies, against Deutsche Bank. In conjunction with the CFTC’s enforcement action, the CFTC and Deutsche Bank filed a joint motion seeking the appointment of a monitor to help ensure the bank’s ongoing compliance with its swaps reporting requirements. In its press release announcing its enforcement action, the CFTC expressly “recognize[d] Deutsche Bank’s cooperation.”

  • International Regulators Find Fault With Derivatives CCPs’ Recovery Planning and Credit and Liquidity Risk Management: Two major international regulatory organizations issued a report noting that derivatives clearinghouses (types of central counterparties known as "CCPs") have made “important and meaningful” progress in implementing financial markets best practices regarding financial risk management and recovery standards since 2012. However, the same regulatory organizations – the Committee on Payments and Market Infrastructures of the Bank for International Settlements and the International Organization of Securities Commissions – reported that CCPs have failed to implement best practices as set forth in the Principles for Financial Markets Infrastructures published in April 2012 in the areas of recovery rules and procedures and credit and liquidity risk management. According to the two organizations, the failure of CCPs “to put in place the full set of recovery rules and procedures envisaged by the PFMI [is] a serious issue of concern that should be addressed with the highest priority.” Similarly, the two organizations noted that the failure of CCPs to implement “sufficient policies and procedures to ensure that they maintain the required level of financial resources on an ongoing basis” is also a deficiency that should be “addressed with the highest priority.” (The PFMIs are high-level best practices for key financial market infrastructures, including financial exchanges, trade repositories, and clearinghouses and clearing agencies, that set forth standards for organization; credit and liquidity risk management; settlement; default management; general business and risk management; and other topics.) The two regulatory organizations based their conclusion on information provided by 10 major derivatives CCPs. They evaluated the CCPs’ governance of risk management, credit risk management, liquidity risk management, margin systems, collateral policy and investments, and default management and recovery planning. Simultaneously, with issuing its report of findings, the two regulatory organizations issued a request for comment on detailed guidance to be followed by CCPs on certain principles and key considerations in the PFMIs related to financial risk management, while the Financial Stability Board sought comments on a discussion note regarding CCP resolution planning. Comments are due on CPMI’s and IOSCO’s proposed guidance by October 18 and on FSB’s discussion note by October 17.

  • CFTC Staff Issue Another Report but Commission Takes No Action Regarding Swap Dealer De Minimis Threshold: Staff of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight issued a final report evaluating the CFTC’s current requirement that a person is not to be considered a swap dealer unless its swap dealing activities for the prior 12-month period exceed a gross notional threshold amount of US $3 billion after a phase-in requirement of US $8 billion. The phase-in period expires on December 31, 2017, unless the CFTC extends it, or modifies what is known as the “de minimis” exception. In its final report, staff makes no recommendation on what action the CFTC should take, but instead projects what impact lowering or increasing the de minimis threshold might have on the interest rate and credit default swap activity (insignificant, says staff, absent a “substantial” increase or decrease). Staff also estimates that if the de minimis threshold were lowered to US $3 billion, 84 additional entities trading IRS and CDS would have to register as swap dealers. In a statement on the staff’s final report, Commissioner J. Christopher Giancarlo indicated that the Commission would now seek public comment on a CFTC rule proposal regarding the de minimis threshold. However, he bemoaned that the delayed process leaves market participants “no practical choice” but to prepare for the scheduled lower threshold that could turn out to be “a waste of time and energy if the Commission ultimately decides a different outcome.” Staff of the CFTC issued a preliminary report on the de minimis threshold in November 2015.

And more briefly:

  • Et Tu, CFTC? CFTC Follows SEC in Restricting Registration of Former Hedge Fund Operator Chairman: The Commodity Futures Trading Commission issued a Notice of Intent and a simultaneous Opinion and Order that prohibits Steven A. Cohen from engaging in any activity that requires registration with the Commission or acting as an officer or person of any person that is registered or required to be registered with the Commission until at least December 31, 2017, or such later date that the Securities and Exchange Commission might extend its equivalent prohibition that expires on the same day.(Click here for details regarding the SEC action against Mr. Cohen in the article, “Steven A. Cohen Barred by SEC From Serving as Hedge Fund Supervisor for Two Years for Alleged Supervisory Failures; No Fine Assessed” in the January 10, 2016 edition of Bridging the Week.) Mr. Cohen is the principal and indirect owner and controller of S.A.C. Capital Advisors, LLC, and S.A.C. Capital Advisors L.P., entities formerly registered unconditionally with the Commission as commodity trading advisors and commodity pool operators. In the case of SAC Capital LLC, these registrations were revoked by the CFTC in September 2014, while the registrations of SAC Capital LP were severely limited.

  • Don’t Ask, Don’t Tell: SEC Issues Secret Report on Its Cybersecurity: Last week the Inspector General of the Securities and Exchange Commission announced that it issued a report to Congress related to the security of confidential personally identifiable information collected and retained by the Commission. However, because “this report contains sensitive information about the SEC’s security program” the Inspector General declined to publicly release the report or even a high-level summary.

My View: Label me paranoid, but the SEC Inspector General’s decision not to share with the public the bottom line of its assessment of the SEC’s cybersecurity effectiveness included in a report provided to Congress – even in some sanitized form – may suggest that something is terribly wrong. But if there are material deficiencies in the SEC’s protection of personally identifiable information that it collects and maintains, the public has the right to know! This is particularly the case as the SEC progresses to implement its plan to create a single consolidated audit trail (known as “CAT”) to track all equities and options trading on US markets. (Click here to access background on the SEC’s CAT initiative, in the article, “SEC Seeks Views on Whether Proposal for Single Consolidated Audit Trail of All Equity and Equity Options Trading Is CAT’s Meow” in the May 1, 2016 edition of Bridging the Week.)

  • Retail FX Dealer Charged by CFTC With Not Meeting Minimum Capital Requirements and Guaranteeing Customers Against Losses: The Commodity Futures Trading Commission filed a civil complaint against Forex Capital Markets, LLC for being undercapitalized by approximately US $175 million on January 15, 2015, and not immediately reporting its alleged regulatory breach to the Commission. The CFTC also claimed that the firm guaranteed customers against losses, also in violation of CFTC rules. Forex Capital Markets’ net capital deficiencies were precipitated by the unexpected decision of the Swiss National Bank to no longer maintain the Swiss franc at a fixed exchange rate with the Euro on January 15, 2015, and the subsequent collapse in value of the Swiss franc. Forex Capital satisfied its capital requirements by obtaining a loan from an undisclosed “large conglomerate holding company” on January 16, said the CFTC.

Compliance Weeds: Both RFEDs and futures commission merchants have numerous ongoing reporting and ad hoc notification requirements to the CFTC and their designated self-regulatory organization. Events triggering notice requirements typically require filings within very short time periods. For example, FCMs are required to provide immediate notice to the CFTC and the firm’s DSRO if they do not meet their minimum capital requirement; when a carried omnibus account must be liquidated or transferred due to its failure to meet a margin call; if an account is under margined by an amount greater than the FCM’s net capital; when customer funds held by the FCM are less than the amounts required to be held; and various other circumstances. Notification requirements for certain other events are on the same day, within 24 hours or within two business days. RFEDs and FCMs must be aware of all events requiring notice filings with the CFTC and their SRO as well as the timing requirement for any necessary follow-up. Although sometimes firms only discover an event requiring an immediate or prompt notice filing after a notice-filing deadline, a bad situation should not be made worse by unnecessarily delaying a required filing following a late discovery. (Click here for a chart of FCM ongoing and notice requirements, and here for a chart of RFED ongoing and notice requirements.)

  • CME Group Delays Rollout of Proposed New Suspense Accounts Requirements: The CME Group has delayed rollout of proposed new guidance related to the use of suspense accounts by futures commission merchants when entering orders on Globex. In April 2016, CME Group had proposed to eliminate an FCM’s ability to enter bunched non-discretionary orders into its Globex electronic platform. The new revised Market Regulation Advisory Notice was scheduled to take effect September 6. (Click here for details of the CME Group’s proposed new rule in the article, “CME Group Revises Rule and Issues MRAN Related to the Use of Suspense Accounts” in the April 17, 2016 edition of Bridging the Week.) Simultaneously, CME Group issued a related new MRAN that indicated that a suspense account cannot be used to represent the customer side of a request for cross order, although a suspense account can be used on the market maker side of the order.

  • NFA Updates Self-Examination Questionnaire for Registrants: The National Futures Association issued a revised Self-Examination Questionnaire for its members. Revisions address the use of foreign exchange electronic trading systems by introducing brokers, and technical clarifications related to financial and reporting obligations of commodity pool operators.

  • ICE Futures Europe Amends Sugar Rules to Prohibit Deliveries From Touching Blocked Countries: ICE Futures Europe amended sugar contract rules to try to ensure that its members do not run afoul of sanctions programs regarding certain designated rogue countries. Under the revised rules, deliveries cannot involve the use of a vessel that is beneficially owned by a person subject to a blocking sanction or includes a destination that is subject to a prohibition.

  • Four CME Group Traders Fail to Answer Charges and Have Default Judgments Entered Against Them for Prohibited Trading Activities: Four unrelated CME Group traders failed to respond to CME Group disciplinary actions and were sanctioned for various offenses, including trading against customers’ orders; dishonorable or uncommercial conduct; and engaging in transitory exchange for related position transactions. The maximum sanctions were fines up to US $85,000, disgorgement of US $126,545 and/or suspension of all CME Group trading privileges for eight years.


  • …And Don’t Forget ICE Clear Europe’s Individual Segregation Through Sponsored Principal Account Offering: At least since July 2015, ICE Clear Europe has offered a direct access clearing model to end clients similar to what has been recently proposed by CME Group (i.e., Direct Funding Participant) and recently rolled out by Eurex Clearing (i.e., ISA Direct). Under ICE Clear’s Europe’s offering, known as “Individual Segregation through Sponsored Principal Account,” clients of clearing members may elect to become a direct counterparty of the clearinghouse in connection with their transactions. Under this arrangement, a client, known as the “sponsored principal,” maintains a separate account at ICE Clear Europe, as joint tenant with its clearing member broker, known as the “sponsor,” and is jointly liable with its sponsor for all positions in such account. Although the sponsored principal remains a technical customer of its broker, in the circumstance of its broker’s insolvency, the client’s positions do not need to be ported to another broker. Instead, another broker simply needs to become the sponsor of the sponsored principal. Depending on how the sponsored principal sets up its banking relationships, it may fund and receive margin payments directly to and from ICE Clear Europe, or it may process its payments through its broker. A sponsored principal is not responsible for a guaranty fund contribution or to pay any special assessment to the clearinghouse. Instead, the client’s sponsor is responsible for such amounts attributable to its sponsored principal’s position. The client’s sponsor may perform facilities management and other functions for its sponsored principals. US persons are not eligible, at this time, to become sponsored principals at ICE Clear Europe. (Click here for details regarding CME Group’s DFP proposal in the article, “CME Group Proposes New Clearing Member Category to Help Customers Avoid Pro Rata Distribution Risk in Case of FCM Insolvency” in the July 24, 2016 edition of Bridging the Week and here to access background regarding Eurex Clearing’s ISA Direct program in the article “Before There Was CME Group’s Direct Funding Participant Clearing Membership Proposal There Was Eurex’s ISA Direct” in the August 7, 2016 edition of Bridging the Week.)

My View: It is not clear at this time what the appetite is by clients or clearing members to participate in the innovative sponsored client direct clearing programs of ICE Clear Europe and Eurex Clearing, let alone the proposed program of CME Group. However, all three proposals are interesting ideas designed to help end clients better protect themselves against fellow customer risk at their clearing brokers. Moreover, all three proposals either affirmatively or at least implicitly try to address Basel capital issues of bank clearing members. Time will tell whether end clients pursue these options or whether clearing members offer them. However, as I have said before, they are worth studying. "The times they are a-changin'," to quote Bob Dylan.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 235



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...