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Volume XII, Number 145


May 25, 2022

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Cadwalader Cabinet: What Should We Do?

Agriculture Committees Request CFTC Regulatory Guidance on Digital Assets

In a joint letter, leaders of the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition and Forestry asked CFTC Chair Rostin Behnam to issue regulatory guidance on digital asset markets.

The letter highlighted the CFTC's existing authority over certain digital assets (e.g., Bitcoin and Ether) under the Commodity Exchange Act, including the CFTC's (i) regulatory authority over all commodity derivatives, and (ii) antifraud authority as to physical transactions. The letter noted the very substantial benefits that can result from digital assets and decentralized finance (such as lower transaction costs and reduced settlement times), but also highlighted the potential for fraud and manipulation without the presence of responsible regulatory oversight.

The leadership requested that the CFTC provide comparisons between digital asset marketplaces and other financial markets with regard to: (i) size; (ii) participation; (iii) scope of retail investor involvement; and (iv) financial intermediaries. The leaders also requested responses detailing:

  • the proportion of the digital asset market being traded by U.S. persons;

  • the types of misconduct observed in the digital asset marketplace and whether such misconduct presents unique risks when compared to misconduct found in traditional financial markets;

  • how the CFTC has been working with stakeholders to support market growth, while ensuring consumer protection and market integrity;

  • the CFTC's collaborative work with other federal regulators in this space; and

  • any shortcomings in the CFTC's regulatory authorities to adequately regulate the digital asset space as the market continues to grow.

Commentary by Steven Lofchie

The questions asked are perfectly reasonable, but they are not the most important questions and they are not directed to the most important regulator. The letter begins with the assumptions that the digital asset markets are growing and that there is some level of fraud in those markets (both of which assumptions are certainly true) and essentially asks what the CFTC is going to do about it. While many digital assets may be "commodities," and therefore the CFTC has antifraud jurisdiction, the CFTC is not particularly well positioned or staffed to chase every incident of commodity fraud across the United States - at least if the CFTC wants to keep doing its day job as well.

The more important step is for the SEC (or for Congress to push the SEC) to revisit the Securities Law Treatment of Utility Tokens. Until the SEC modifies its securities law treatment of utility tokens in light of the special characteristics of the product, the digital asset industry is to a good extent forced to go underground. There is no upside for market participants to attempt to conform to a regulatory scheme that makes it impossible for them to do business. As a result, digital asset firms either move outside the United States or they take their chances with the regulators. A modified regulatory scheme, such as that proposed by SEC Commissioner Hester M. Peirce, could allow well-intended creators of digital assets to come forward, which would in turn assist the federal regulators in focusing their efforts on the genuine bad guys.

(Note: the Agriculture Committee has authority over the CFTC, but not over the SEC, and thus is not itself the Committee that can push the SEC.)

NCUA Highlights Supervisory Priorities for 2022 Exams

The National Credit Union Administration ("NCUA") highlighted supervisory priorities for the 2022 examination program.

In a letter to its members, the NCUA stated that, due to ongoing COVID-19 concerns, credit union examinations will continue to be conducted primarily offsite, and its "flexible examination scheduling policy" remains in place for 2022.

NCUA stated that its examiners will focus on, among other things:

  • credit risk management - adjustments made to lending programs that address financial hardships, and policies related to loan workout strategies, risk-management practices, and programs for distressed borrowers under the CARES Act and the Consolidated Appropriations Act;

  • information security - ensuring cybersecurity preparedness, as well as evaluating risks from electronic payment platforms;

  • Bank Secrecy Act (or "BSA") and Anti-Money Laundering Act (or "AML") - compliance with updated requirements;

  • capital adequacy and risk-based capital rule implementation;

  • loan loss reserving - verifying the Allowance for Loan and Lease Losses calculation;

  • consumer financial protection - compliance related to COVID-19 issues, fair lending, the Servicemembers Civil Relief Act, the Fair Credit Reporting Act, and overdraft programs;

  • loan participations - confirming that loan participation transaction risks have been correctly evaluated;

  • LIBOR - ensuring that credit unions are properly transitioning away from LIBOR; and

  • CAMELS - compliance with the new "S" component for sensitivity to market risk in the existing CAMEL rating system, effective as of April 1, 2022.

GAO Examines Federal Response to Cybersecurity Incidents

In a new report, the GAO examined federal responses to two cybersecurity breaches: the hack of SolarWinds and the exploitation of a vulnerability in Microsoft Exchange.

The GAO stated that both incidents were caused by foreign government actors: the SolarWinds breach was by the Russian Foreign Intelligence Service and the Microsoft Exchange breach was by the Chinese Ministry of State Security. The report (1) provided a summary of the incidents, (2) described steps that federal agencies have taken in response to these incidents, and (3) identified lessons learned by federal agencies from these incidents.

GAO noted that federal agencies (i) formed two Cyber Unified Coordinated Groups (or "UCGs"), one for each incident, whose efforts included issuing directives and providing guidance and tools to agencies, and (ii) reported to the Cybersecurity and Infrastructure Security Agency the actions they took to mitigate the threats from these incidents. GAO said that federal agency officials believed that coordinating with private sector partners and other agencies led to more desirable outcomes in the responses to these incidents.

GAO also cited the National Security Council's review of the SolarWinds incident, which identified ways to address challenges that federal agencies faced during their response to the incident. These include:

  1. aligning technology investments with operational priorities;

  2. improving public/private engagement; and

  3. improving threat intelligence acquisition, sharing and use among federal agencies.

Floor Broker Settles NYSE Arca Charges for Disadvantaging Option Market Makers

A broker-dealer settled NYSE Arca, Inc. ("NYSE Arca") charges for "failure to properly announce a customer order" and related supervision failures. NYSE Arca alleged that the broker-dealer allowed its customer to hedge an option in the cash market before informing the trading crowd on the floor of the option order.

In a Letter of Acceptance, Waiver and Consent, NYSE Arca found that, on January 26, 2021, the firm's phone clerk informed a customer that its option transaction had been announced, although the option order's size and price were not announced to the trading crowd. The customer conveyed this information to the counterparty party for the option, who was then able to hedge the option before the order was conveyed to the trading crowd on the exchange floor. As a result, the trading crowd was not given the opportunity to participate in the option trade under the same conditions as the counterparty party.

NYSE Arca found that the firm's supervisory system was not reasonably designed to ensure that its customers would only be informed of an order's announcement after all of the order's material terms have been conveyed to the trading crowd.

As a result, NYSE Arca found that the firm allegedly violated NYSE Arca Rules 11.1(b) ("Adherence to Law and Good Business Practice") and 11.18(b) ("Supervision").

To settle the charges, the broker-dealer agreed to (i) a censure, and (ii) a $20,000 fine.

Student Loan Servicer Settles Predatory Lending Claims

A student loan servicer reached a settlement with 39 state attorneys general, resolving claims of unfair and predatory lending practices allegedly affecting hundreds of thousands of borrowers.

The Office of the NY Attorney General stated that the firm allegedly directed borrowers into costly and burdensome loan arrangements instead of more affordable repayment plans. The agreement includes canceling roughly $1.7 billion in loans and paying $95 million in restitution. In addition, the firm is adopting a series of servicing reforms for future loans.

Chair of the U.S. House Committee on Financial Services Maxine Waters (D-CA) stated that the this settlement is a "good start," but that more must be done to hold servicers accountable for "misdeeds." She also supported the continuation of CFPB's lawsuit against the firm.

Firm Settles NYSE Arca and NYSE American Charges for Supervisory Failures Concerning Partial Tender Offers

A broker-dealer settled NYSE Arca, Inc. and NYSE American LLC ("Exchanges") charges for supervisory failures in connection with partial tender offers.

In separate Letters of Acceptance, Waiver and Consent, the Exchanges found that the firm did not reasonably supervise the calculation of its net long position for the purpose of participating in the partial tender offer. The Exchanges alleged that the firm miscalculated its net long position by (i) missing a short position held in another system, and (ii) incorrectly treating its options positions. The Exchanges found that the firm failed to include a supervisory review regarding compliance with SEA Rule 14e-4 ("Prohibited Transactions in Connection with Partial Tender Offers").

As a result of these findings, NYSE Arca, Inc. determined that the firm violated SEA Rule 14e-4 and NYSE Arca Rule 11.18 ("Supervision") and NYSE American LLC determined that the firm violated SEA Rule 14e-4 and NYSE American Rule 320 ("Offices - Approval, Supervision and Control").

To settle the charges, the firm agreed to (i) a censure, (ii) a $100,000 fine, and (iii) a $218,803.52 disgorgement.

OCC Requests Comment on Renewal of "LIBOR Self-Assessment" Tool

The Office of the Comptroller of the Currency solicited comments on the renewal of its "LIBOR Self-Assessment" tool.

In a notice and request for comments published in the Federal Register, the OCC stated that the self-assessment tool was developed for banks to review their ongoing uses of LIBOR. (See also, here). The tool aims to assist banks in identifying and mitigating their LIBOR-related transition risks by assessing "the appropriateness of a bank's LIBOR transition plan, the execution of the plan by its management, and related matters."

Comments on the proposed renewal are due by February 17, 2022.

Primary Sources

  1. House Committee on Agriculture Press Release: Bipartisan Letter from AG Committees Calls for CFTC Guidance on Digital Assets

  2. Senate Committee on Agriculture, Nutrition and Forestry Press Release: Bipartisan and Bicameral Letter from Ag Committees Calls for CFTC Guidance on Digital Assets

  3. House Committee on Agriculture and Senate Committee on Agriculture, Nutrition and Forestry: Digital Assets Joint Letter (January 12, 2022)

  4. NCUA's 2022 Supervisory Priorities

  5. GAO: Cybersecurity - Federal Response to SolarWinds and Microsoft Exchange Incidents (PDF)

  6. GAO: Cybersecurity - Federal Response to SolarWinds and Microsoft Exchange Incidents

  7. NYSE Arca, Inc. AWC: Student Options, LLC

  8. House Financial Services Committee Chair Maxine Waters Press Release: Waters Statement on $1.85 Billion, Multistate Navient Settlement

  9. NYAG Press Release: Attorney General James Secures $1.85 Billion from Deceptive Student Loan Servicer Navient

  10. NYAG Settlement Agreement: Navient Corporation, Navient Solutions, LCC, Pioneer Credit Recovery, Inc., and General Revenue Corporation

  11. NYSE Arca, Inc. AWC: Barclays Capital Inc.

  12. NYSE American LLC AWC: Barclays Capital Inc.

  13. Federal Register: Agency Information Collection Activities - Information Collection Renewal; Submission for OMB Review; Libor Self-Assessment

  14. Federal Register: Agency Information Collection Activities - Information Collection Renewal; Submission for OMB Review; Libor Self-Assessment (PDF)

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 19

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