Bridging the Week by Gary DeWaal: January 11 – 15 and 19, 2016 (Part 30; Short Sales; Attempted Manipulation; Another Exam; More Capital, Billions)

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Published Date: January 18, 2016

Last week a non-US broker was sanctioned by the Commodity Futures Trading Commission for purportedly dealing with two institutional US customers without being registered as a futures commission merchant or exempt from registration. In the United States, a broker-dealer was sanctioned for alleged breakdowns in its compliance with Securities and Exchange Commission rules regarding short sales. Also, industry organizations tried to help the court in a CFTC enforcement action by pointing out that the CFTC is trying to use an incorrect standard to prove a charge of attempted manipulation. I also review Billions, the new Showtime serial drama about a fictional US Attorney and a highly successful hedge fund manager. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Compliance Weeds: Ordinarily, all entities that solicit orders from US persons or handle funds in connection with futures and options must be registered with the Commodity Futures Trading Commission in some capacity (typically as a futures commission merchant or commodity pool operator if they handle funds, or in those capacities, or as an  introducing broker or commodity trading advisor if they handle orders). Part 30 of the CFTC’s rules provides a number of exemptions for non-US based entities to deal with US persons in connection with foreign futures and options contracts. One exemption – under CFTC Rule 30.5 – applies to any entity other than one that might otherwise be required to register as an FCM, while another – under CFTC rule 30.10 – applies to an entity that would otherwise be required to register as an FCM. A Rule 30.10 exemption typically requires the involvement of a local regulator as part of the exemption request process. (Click here for copies of the relevant regulations, and here for a CFTC-provided summary of applicable requirements.) Another CFTC rule authorizes certain entities outside the United States exempted from registration as an FCM under CFTC Rule 30.10 to execute US futures and options for certain institutional customers to be carried at a registered FCM subject to strict conditions. (Click here to access CFTC Rule 3.10(c)(4).)

Legal Weeds: On its own website, the Commodity Futures Trading Commission defines manipulation as “[a]ny planned operation, transaction, or practice that causes or maintains an artificial price” (emphasis added). (Click here to access CFTC definitions on its website.) As the CFTC recently acknowledged in adopting its new anti-manipulation and anti-fraud rules, one of the cornerstones for proving manipulation or attempted manipulation is “that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand” to wit, an artificial price. (Click here to access CFTC Fact Sheet related to its anti-manipulation and anti-fraud rules, Rule 180.1 and 180.2.)  Setting aside the long established case law as capsulized in the decisions cited in the five organizations’ proposed amici curiae brief, it seems very surprising the CFTC would argue that an attempted manipulation could be an attempt to cause anything less than an artificial price in light of the CFTC’s own published plain words.

Compliance Weeds: It is not new that the Securities and Exchange Commission is checking registrants  cybersecurity programs. Last year, OCIE announced it was conducing cybersecurity exams of SEC registrants to assess, among other things, the effectiveness of registrants’ cybersecurity controls. It said it would focus on registrants’ governance and risk assessment; access rights and controls; data loss prevention; vendor management; training; and incident response. (Click here for details in the article, “SEC Discloses Elements of Cybersecurity Exams” in the September 20,2015 edition of Bridging the Week.) Effective March 1, 2016, members of the National Futures Association must also formally adopt and begin enforcing written policies regarding cybersecurity. (Click here for details in the article “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week.) Both SEC and CFTC registrants – big and small – should ensure they have or are promptly adopting written policies addressing cybersecurity that are appropriate to their business model and that they adhere to their policies.

And more briefly:

And finally:

Totally Irrelevant (But Is It?): Billions: Ambiguity in Control: The January 17, 2016 inaugural episode of Billions, the new Showtime serial drama revolving around the interactions of a fictional US Attorney in New York –Chuck Rhoades (played by Paul Giamatti)– and a highly successful hedge fund manager located in Westport, Connecticut –Bobby “Axe” Axelrod (performed by Damian Lewis) — centered on the theme of domination. From the opening scene (and last one too), where Mr. Rhoades’ wife (played by Maggie Siff) exerts S&M control over her husband, Billions offers multiple occasions where both Mr. Rhoades and Mr. Axelrod each scheme to manipulate the universe of people and events around them to achieve desired outcomes, leaving little to chance.  Indeed, there is even the suggestion that both individuals’ great success in their respective careers might be attributable more to their testosterone-driven efforts at control than solely talent. Future episodes will likely confirm whether Mr. Axelrod’s trading success is attributable to uncanny analysis or the receipt of illegal insider information, and whether Mr. Rhoades perfect record in prosecuting financial crimes is the result of extraordinary legal work, or pursing just easy cases. But nothing will be clear-cut.  Mr. Axelrod my be a megalomaniac, but he seems generous in trying to help the owner of a pizzeria he has patronized since childhood survive when the neighborhood shop is threatened by escalating rents. He also seems magnanimous in awarding children of former employees killed on 9-11 scholarships to college. Likewise, Mr. Rhoades may appear to have a holier than thou approach to prosecution and to be an out-of-control bully when dealing with a fellow regulator from the Securities and Exchange Commission, but his heartfelt soliloquy about the inequality in the way different types of convicted criminals are sentenced seems sincere. This introduction and amplification of ambiguity seems to be a main goal of Billions – to suggest that in the arena of potential white collar crime, it is not clear who the good guys and bad guys are. Just like in a classic Greek drama, there is the forecast that one, if not both, of the lead characters ultimately will fall in the very not-classic Greek drama side story involving the neutering of Mr. Axelrod’s German Shepherd. There is also the suggestion that Mr. Rhoades’ wife –who seems to greatly enjoy her conflicting roles, playing both dominatrix to her husband, as well as personal cheerleader to Mr. Axe in her capacity as staff psychiatrist at Mr. Axe’s hedge fund— is likewise a power-hungry personality likely to sustain some humiliating defeat in the future.  But, so far there has been only one episode of Billions and simply intimations of possible outcomes. More fun, for sure, seems to be in store going forward. Billions, created by Brian Koppelman, David Levien and Andrew Ross Sorkin is scheduled to air on Showtime on Sunday evenings at 10 pm ET. (Click here for a preview of Billions.)

For more information, see:

Another Day, Still More Enhancements to CPO Form PQR by NFA:

Revised Framework for Risk Capital Requirements:

Broker-Dealer Fined US $15 Million for Short Sales Deficiencies:

CFTC Commissioner Bowen Says Position Limits Coming This Year:

CFTC Technology Advisory Committee Meeting January 26 to Address Regulation AT and Blockchain:

Eurex Reminds Trading Participants to Use Market Data in Accordance With Their Agreements — or Else:

Et Tu, SEC? – SEC OCIE Announces 2016 Examination Priorities:

Goldman Sachs Announces Up to US $5 Billion Settlement With Regulators for Its Handling of Residential Mortgage-Backed Securities:

Industry Groups Seek to Help Court Hearing the CFTC Enforcement Action Against DRW Regarding What Constitutes Attempted Manipulation:

NFA Reminds Members to Know Their Exempt CTAs and CPOs and Take Reasonable Steps to Ensure a Claim of Exemption Is Bona Fide:

NFA to Amend Customer Funds Protection Rules to Conform to CFTC Requirements:

Non-US Broker Fined by CFTC for Soliciting Futures Orders and Handling Funds for Two US Customers Without Registration or an Exemption:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 16, 2016. 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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