A week ago Friday, a federal court refused to dismiss a lawsuit brought by the plan administrator for MF Global against the firm’s former accounting and auditing firm for its alleged wrongdoing in providing advice that the plan administrator claims substantially led to MF Global’s collapse. In addition, over a vehement objection by one commissioner, staff of the Commodity Futures Trading Commission restricted futures commission merchants from investing customer funds in certain money market funds beginning October 14, except for their own funds in segregation in excess of a required buffer. As a result, the following matters are covered in this week’s edition of Bridging the Week:
My View: Although it appears that CFTC staff has clear authority to restrict investment of customer funds by FCMs in Prime or electing Government MMFs because of the express language of the relevant CFTC regulation, this authority is less evident for the action CFTC staff took regarding DCOs last week. In restricting the ability of DCOs to accept from FCMs on behalf of their customers as initial margin, or invest customer funds in, Prime or electing Government MMFs, CFTC staff applied definitions of the words “minimal” and “minimize” to interpret existing CFTC rules that broadly enumerate DCOs’ risk management, financial resources and customer protection obligations. (Click here to access CFTC Regulation 39.13(g)(10); here for CFTC Regulation 39.11(e)(1)(i); here for CFTC Regulations 39.15(c) and 39.15(e); and here for CFTC Regulation 39.36(f).) Although the outcome of the staff's guidance seems reasonable in light of the new SEC requirements, staff’s actions might have been more appropriately implemented through CFTC rulemaking – including considering public comment and conducting a cost/benefit analysis – given the widespread impact of staff's interpretation. On the other hand, it is not clear why Commissioner Bowen is so outraged by staff’s granting permission to FCMs to continue to invest their own funds in Prime and electing Government MMFs in their customer-segregated accounts in excess of their targeted residual amount (i.e., not changing the status quo). Whatever the potential limitations on FCMs recovering the full value of their MMF investment on the next business day following a request for redemption, having any FCM’s excess capital in customer-segregated accounts is preferable to having no FCM excess capital in such protected accounts. As Chairman Timothy Massad wrote in supporting staff’s initiative, “the system as a whole [is] better off if [an FCM’s] excess funds are on deposit, and we do not wish to incentivize FCMs to withdraw such excess funds from the segregated account.”
Legal Weeds: Both the Commodity Futures Trading Commission and the Securities and Exchange Commission have express rules that prohibit the waiver of the right of any person to file a whistleblower complaint with the agencies and receive a monetary award. (Click here to access CFTC Rule 165.19 and here to access SEC Rule 240.21F-17) Employees also may not be retaliated against for whistleblowing (Click here, e.g., to access Section 23(h)(1) of the Commodity Exchange Act, 7 USC §26(h)(1) and here for Part A to Part 165 of the CFTC Rules.) SEC and CFTC 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 and ex-employee whistleblower rights.
And more briefly:
For more information, see:
Appellate Court Says SEC Administrative Forums Constitutionally Okay for Enforcement Actions:
CFTC Addresses Filing Deadlines for FCM and Swap Dealer CCO Annual Reports:
CFTC Staff Restricts FCM Investment of Customer Funds in Money Market Funds; Grants Exception to House Money in Segregation in Excess of Regulatory Requirements:
Commissioner Bowen Dissent:
Chairman Massad Statement
Court Refuses to Dismiss Malpractice Claim Against MF Global Accountant:
FINRA Proposes to Update Gifts, Gratuities and Non-Cash Compensation Rules; Recommends Gift Threshold Increase:
FINRA Reminds Members to Accurately Report Time of Execution on TRACE Reports:
Investment Bank Agrees to FINRA Settlement for Internal Hoots That Allegedly Risked Leakage of Confidential Information:
NFA to Amend Rules to Encompass New FinCEN Beneficial Owner Requirements:
Revised FINRA Reporting Requirements for NMS Stocks for ATSs Effective on November 7:
SEC Sanctions Publicly Traded Company for Restricting Whistleblowing Claims in Employee Severance Agreements:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of August 13, 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.
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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Bridging the Week by Gary DeWaal: August 8 to 12 and August 15, 2016 (MF Global; Customer Funds Investments; Whistleblowing; It’s Constitutional)Jump to: AML and Bribery Bridging the Week Chief Compliance Officers Customer Protection Exchanges and Clearing Houses Forum Selection Legal Weeds MF Global My View Position and Trade Reporting Supervision Whistleblowing