Bridging the Weeks by Gary DeWaal: August 29 to September 9 and September 12, 2016 (Financial Ratios; Whistleblowing; Volcker II; Comparable Margin; Layering)

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Published Date: September 11, 2016

The National Futures Association submitted to the Commodity Futures Trading Commission for its approval a new requirement that commodity pool operators and commodity trading advisors provide to the NFA two financial ratios on a quarterly basis. However, NFA said it does not want to impose minimum ratios, but solely to monitor the two ratios to assess how CPOs and CTAs are doing financially. Separately, three banking agencies, including the Board of Governors of the Federal Reserve System, proposed additional restrictions on non-core banking activities of certain banking organizations, while the Securities and Exchange Commission awarded its second largest whistleblower payment, US $22 million. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

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My View: I don’t pretend to be a banking regulation expert, but in fact, my return to the legal side from the business side in 1995, was prompted by my role in helping Fimat USA Inc. gain FRB approval to acquire the assets of my former employer, Brody White & Company, Inc., a futures commission merchant that brokered, among other things, exchange-traded commodity derivatives (I previously served as president of BWC). It is important to note that, in the first instance, bank holding companies and foreign banking organizations must be adjudged to be well-capitalized and well-managed to qualify as an FHC. Only FHCs may engage in certain non-core banking activities including merchant banking activities. However, to engage in merchant banking activities, FHCs are subject to another host of limitations, including restrictions on the holding period of such investments and restrictions on the routine management and operations of an underlying portfolio company, as well as limitations on cross-marketing and affiliate transactions. To engage in merchant banking activities, the FRB also imposes on FHCs requirements related to policies and procedures and risk monitoring systems, among a number of other specially crafted obligations. Notwithstanding, the FRB now concludes its restrictions on such activities and its monitoring of such activities are not good enough, and the only alternative is to ban such activities entirely. This seems as much a condemnation of the merchant banking activities performed by FHCs as well as of the FRB’s own supervisory oversight. Moreover, a very important element missing in the study issued by the three banking agencies is a cost benefit analysis of the implications of banning the proposed enumerated activities by banking entities. If eliminating more permissible activities by banking entities reduces competition in certain commercial activity (thus, potentially increasing prices to consumers), or if substantially less revenue opportunities might threaten the safety and soundness of banking entities, then perhaps the three banking agencies' recommendations should not have been issued “as is.”

Compliance Weeds: Recently, the SEC has sanctioned two publicly traded companies for including in their standard severance agreements language that the Commission determined potentially impeded employees from disclosing to the SEC a possible securities law violation. (Click here for background regarding the most recent SEC enforcement actions in the article, “Another Publicly Traded Firm Sanctioned by SEC for Allegedly Undercutting Whistleblower Protections Through Severance Agreements” in the August 21, 2016 edition of Bridging the Week.) Both the SEC and CFTC 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.) The CFTC's proposed rule amendments are aimed at enhancing its current requirements and streamlining  internally the processing of whistleblower claims. 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.

Compliance Weeds: All members of the National Futures Association were required by March 1 to have adopted and begun enforcing formal written policies regarding cybersecurity. These policies must be “reasonably designed by members to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” (Click here for further details on NFA’s requirements in the article, “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week.)

And more briefly:

For more information, see:

Another Day, Another Large SEC Whistleblower Award; CFTC Proposes to Update Its Whistleblower Rules:

CFTC Staff Grants Swap Dealers Temporary Relief From Holding Swaps Initial Margin With an Unaffiliated Custodian:

CFTC Says Japan’s Uncleared Swaps Margin Rules Comparable to Its Own; Commissioner Bowen Vehemently Objects:

CME Group Files and Settles Disciplinary Actions Alleging Layering, Impermissible Transitory EFRPs and a Transfer Trade:

Frederic Nielsen:
Oz Management:
Ronald Sippel:
Yannix Management:

DCO, DCM, SEF and SDR System Safeguard Rules Approved by CFTC:

Energy Trader Charged by CFTC for Making False Entries in Employer’s Records:

Federal Reserve Bank Seeks US $1.2 Million Fine and Employment Ban Against Former Bank FX Trader for Allegedly Manipulating Benchmarks:

Federal Reserve Recommends Repeal of Financial Holding Company’s Authority to Invest in Commodity Firms:

FinCEN Updates Jurisdictions With Strategic Deficiencies; Also Issues Advisory on Email Fraud Schemes:

HK SFC Designates Four CCPs for OTC Clearing:

NFA Proposes Requiring CTAs and CPOs to File Certain Financial Ratio Information:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of September 10, 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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