Bridging the Week by Gary DeWaal: January 9 to 13 and January 17, 2017 (Record Retention; Position Limits-Setting Authority; Overcharging Fees; Misstating Regulatory Capital)

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Published Date: January 16, 2017

The Commodity Futures Trading Commission proposed a new records retention rule that attempts to be technology neutral and eliminates many current requirements that are mostly vestiges of a more paper-oriented age. In addition, the House of Representatives passed a bill early in its newest term that, if enacted, would repeal the Commodity Futures Trading Commission’s controversial authority granted under Dodd-Frank to set certain position limits without an express finding of necessity and prohibit the CFTC from requesting algorithmic source code other than through subpoena. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Because of scheduling issues, the next edition of Bridging the Week will be January 30, 2017.

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Compliance Weeds: Just prior to the end of 2016, the Financial Industry Regulatory Authority assessed a total of US $14.4 million in fines against 12 firms for “significant deficiencies” in their retention of required books and records on electronic storage media. FINRA claimed that the sanctioned firms typically did not retain electronic records in WORM format, failed to have a required audit system regarding such records, did not obtain or maintain a required attestation from a third-party vendor regarding their ability to provide data to the Securities and Exchange Commission, FINRA or any other regulator if a firm could not, and did not have adequate written supervisory procedures reasonably designed to ensure compliance with applicable requirements. (Click here for details regarding FINRA’s actions in the article “FINRA Sanctions 12 Member Firms for Failure to Maintain Electronic Records in Required Format” in the January 8, 2017 edition of Bridging the Week.) Current CFTC requirements regarding electronic records are roughly equivalent to those of the SEC applicable to broker-dealers. (Click here to access CFTC Rule 1.31(b) and here to access the relevant SEC Rule, 17 CFR 240.17a-4(f).) Although the CFTC’s proposed revised record retention rule is more principles-based and technology neutral than its existing requirement, it still imposes comprehensive creation and retention requirements including rigorous controls. As the notice of proposed rule-making makes clear in referencing the ongoing training requirement under the revised rule, “[t]he obligation to remain current on the legal requirements regarding compliance with §1.31 is one that a records entity ignores at its peril. The Commission takes a similar view towards the proposed obligation for each records entity to monitor compliance with the entities policies and procedures on a ‘regular’ basis.”

My View: Last summer, Barclays Capital, Inc. agreed to pay a fine of US $800,000 to the CFTC to resolve charges that it failed to supervise it staff’s handling of exchange fees charged to customers from 2012 through 2014. According to the CFTC, after Barclays engaged an independent service provider to enhance its exchange fee reconciliation process in 2012, the provider, in August 2012, identified that the firm had failed in July 2012 to pass along to its customers discounts to ordinary fees from one exchange for one exchange-traded product. Apparently, afterwards, the firm accrued for overcharges to its customers “but failed to timely pay out $1.1 million in exchange fee rebates with respect to the discount program for this particular exchange-traded product.” The CFTC claimed that this breakdown occurred because, during the relevant time, the firm failed to implement and maintain adequate systems for reconciling invoices from exchange clearinghouses with the amount of fees actually charged to its customers. In 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated also agreed to pay a fine of US $1.2 million to the CFTC related to the CFTC’s allegation that, from at least January 1, 2010, through April 2013, the firm failed to employ “an adequate supervisory system” related to the processing of exchange and clearinghouse fees charged to the firm’s customers. Although the CFTC acknowledged in both its Barclays and JPMS settlement orders that the process related to the assessment of exchange and clearing fees is “typically complicated because of the myriad applicable rates, surcharges and fee structures,” it sanctioned both firms because of their failure to catch their mistakes through a reconciliation process. Rather than bring enforcement actions against FCMs for managing the best they can with a very broken process, the CFTC should encourage exchanges to institute less complicated fee and discount structures and implement tools to help firms conduct reconciliations more easily and reliably. (Click here for background on the CFTC’s enforcement actions against Barclays and Merrill Lynch in the article “FCM Agrees to Pay US $800,000 Fine to CFTC Because of US $1.1 Million in Erroneous Customer Exchange Fees Charges” in the August 7, 2016 edition of Bridging the Week.)

And more briefly:


For more information, see:

Alleged Improper ADR Handling Results in SEC Charges and Settlement:

Broker-Dealer Resolves SEC Charges That It Misled Broker-Dealer Clients Regarding How It Would Price Their Retail Customers' Orders:

CFTC Proposes Housekeeping Rules Related to Sharing Swap Data With Other Regulators and Publication of Final Disciplinary Actions by SEFs and DCMs:

CME Group Delays Until May 1 the Compliance Date of Certain Reporting Obligations Under Its New OCR Rules:

FIA Publishes Due Diligence Questionnaire for IT Outsourcing:

FCM Agrees to Settle With CFTC Related to Purported Exchange Fees Overcharges:

FINRA to Be Target of Enhanced SEC Inspection Focus in 2017:

House of Representatives Passes CFTC Reauthorization Bill That Restricts CFTC Position Limits Establishment Authority and Prohibits Access to Source Code Except Through Subpoena:

LCH.Clearnet Ltd. Granted Authority to Commingle Funds to Margin Swaps, Futures and Foreign Futures in a Swaps Account for Portfolio Margining:

New Records Retention Regime for 21st Century Proposed by CFTC:

NFA Members Warned to Apply Caution When Dealing With Exempt CTAs and CPOs:

No Registration Required by CFTC Staff for Non-US CPO Where Investment Management Authority Delegated to Non-Affiliated CPO:

SEC Charges Publicly Traded Global Financial Services Firm With Miscomputing Regulatory Capital:

Singapore MAS Proposes Amendments to Security and Futures to Enhance OTC Regulation and Implement Market Misconduct Prohibitions:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 14, 2017. 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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