October 3, 2022

Volume XII, Number 276

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October 03, 2022

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Katten Financial Markets and Funds Quick Take: June 2022

Regulatory Alert! A Joint Audit Committee Reminder to FCM Legal and Compliance Personnel

The Joint Audit Committee (JAC) is a club of futures exchanges, in their capacities as self-regulatory organizations (SROs). Under a delegation of authority from the Commodity Futures Trading Commission (CFTC), the JAC monitors and examines member futures commission merchants (FCMs) for compliance with financial, reporting and risk management requirements (including rules relating to segregation of customer funds) adopted by member SROs and the CFTC. The JAC has issued a Regulatory Alert, 22-02, reminding member FCMs of their obligations under CFTC Regulation 1.11. It’s safe to infer that the Alert is based on compliance gaps detected in recent FCM regulatory exams by member SROs.

CFTC Regulation 1.11 requires an FCM to establish, maintain and enforce a system of risk management policies and procedures designed to monitor and manage the risks associated with the activities of the FCM. JAC Alert 22-02 identifies several requirements that FCM Legal and Compliance personnel will want to confirm are adequately addressed in reviewing their Regulation 1.11 Risk Management Programs. Read about the requirements included in JAC Alert 22-02.

SEC Proposes Rules Concerning Investment Adviser and Investment Company ESG Disclosure

On May 25, the Securities and Exchange Commission (SEC) proposed amendments to various rules relating to fund and advisers incorporating environmental, social and governance (ESG) factors in disclosure. The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in prospectuses, annual reports and adviser brochures based on the ESG strategies they pursue. For example, a fund that seeks to achieve an ESG-related objective would be required to disclose how it measures progress toward that objective. If adopted, the amendments would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies and business development companies.

The comment period for the proposed amendments will remain open for 60 days after publication in the Federal RegisterRead about the SEC's proposal.

SEC Proposes Changes to Investment Company Act “Names Rule”

The SEC has proposed amendments to Rule 35d-1 under the Investment Company Act of 1940 (the “names rule”). The names rule currently requires a registered investment company or business development company (BDC) whose name suggests either a focus on a specific type of investment, a focus in investments in a specific industry or a geographic focus, to adopt a policy to invest at least 80 percent of the value of its assets in those investments suggested by its name.

The amendments propose to, among other things: (i) expand the 80 percent investment policy requirement to apply to any registered investment company or BDC name with terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics (including, for example, "growth" or "value"); (ii) narrow the circumstances in which a registered investment company or BDC is permitted to depart from its 80 percent investment policy; (iii) require that any unlisted registered investment company or BDC obtain a shareholder vote before changing its 80 percent investment policy; (iv) impose specific guidelines on the use of environmental, social and governance (ESG) terms in registered investment company or BDC names; and (v) implement related reporting, notice and recordkeeping requirements. Read about the names rule.

FINRA Proposes Changes to Enhance TRACE Reporting Obligations

The Financial Industry Regulatory Authority, Inc. (FINRA) filed with the Securities and Exchange Commission (SEC) a proposed rule change to amend FINRA Rule 6730 to:

(i)                require members to report electronically executed transactions in US Treasury Securities to FINRA’s Trade Reporting and Compliance Engine (TRACE) in the finest increment captured by the system used to execute the transaction, subject to an exception for members with limited trading volume in US Treasury Securities; and

(ii)              reduce the trade reporting timeframe for transactions in US Treasury Securities to generally require reporting to TRACE as soon as practicable but no later than 60 minutes.

Read FINRA's proposed rule change.

CME Derived Blocks – A New Way to Price Block Trades on Certain CME and CBOT Security Index Futures

On May 23, the Chicago Mercantile Exchange (CME) implemented new functionality under its block trade rule permitting dealers to trade “derived blocks” in certain equity index futures contracts. A derived block trade is a block trade the price and quantity of which depends on hedging transactions by the dealer that take place after the block trade has been agreed, but prior to its being submitted to the exchange. Derived block trades are available solely in CME E-mini Select Sector futures and CBOT Dow Jones US Real Estate Index futures, at the existing block trade minimum thresholds applicable to those contracts. Read about the CME's derived blocks functionality.

The LME's Consultation on OTC Position Reporting

The London Metal Exchange (LME) announced a consultation with members on a proposal to require reporting of all “over-the-counter (OTC) positions” in certain physically deliverable metal contracts. The proposal was prompted in response to a spike in nickel prices on March 8 when the LME suspended trading in all nickel contracts (which did not resume until March 16) and cancelled all trades executed after midnight on that day. The LME’s “independent review” into those events and their aftermath is ongoing (as are regulatory reviews by the Financial Conduct Authority (FCA) and the Bank of England), but the exchange has already identified one salient contributory factor: “sizable positions in the OTC market and the LME's lack of direct visibility of such activity.”

Under the proposal, members would be required to submit, on a weekly basis, details of all OTC positions (that is, positions in LME contracts not cleared by LME Clear) in aluminum and aluminum alloy, cobalt, copper, lead, nickel, tin and zinc, including all OTC contracts that are financially settled against an LME reference price or physically deliverable with LME warrants or warehouse receipts.  OTC baskets and index trades referencing the specified LME contracts would also be reportable where the LME constituents represent at least 20 percent of the underlying. No minimum threshold would apply; all positions, regardless of size, would be reportable. Read about LME consultation.

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume XII, Number 165
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About this Author

Wendy E. Cohen, Financial Services Lawyer, Katten Muchin Law firm
Partner

Wendy E. Cohen represents investment managers and other sponsors of domestic and offshore securities and commodities hedge funds, funds of funds and other public and private pooled investment vehicles, as well as their service providers, including their managers, brokers, financial intermediaries and other financial institutions, and investment professionals. She provides advice on all corporate and related matters facing investment funds, including structure and organization, ongoing operations, restructuring and dissolution.

Having practiced for...

212-940-3846
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...

212-940-6558
Christopher T. Shannon Financial Transactions Attorney Katten Chicago
Partner and Chair, Financial Transactions and Trading

Christopher Shannon represents private equity funds, hedge funds, proprietary trading firms and broker-dealers in a broad range of transactional and corporate matters.

Advising on acquisitions, investments and financings

Chris advises both public and private companies in complex transactions including M&A, divestitures, leveraged buyouts, private equity and venture capital investments, recapitalizations, and private financings. He also guides clients through complex transactions involving broker-dealers and proprietary trading firms.

In addition to his...

312-902-5322
Robert Weiss, Katten Muchin, Hedge Fund lawyer,
Partner

Robert Weiss focuses his practice on a variety of hedge fund, fund-of-funds and corporate-related matters. He regularly advises banks, financial institutions and investment funds with respect to hedge fund and other lending and leverage transactions, including those involving total return swaps, call options and other structured products. He also counsels and represents numerous domestic and offshore hedge funds, fund-of-funds, managed account platforms, commodity pools, family offices and investment managers on an ongoing basis.

Robert has...

212-940-8584
Allison C. Yacker, Katten Muchin, Corporate regulatory Matters Lawyer, Offshore Hedge Funds Attorney
Partner

Allison Yacker, co-chair of the New York Financial Services group, represents domestic and offshore hedge funds, including fund of funds, private equity funds, commodity pools, investment managers, managed account platforms, banks and broker-dealers on a broad range of corporate, securities, finance and other regulatory matters. She provides structuring, organization and ongoing advice related to hedge funds and private equity funds that employ a broad range of investment strategies and regularly counsels investment managers with respect to state and federal registration...

212.940.6328
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