Corporate & Financial Weekly Digest

Corporate & Financial Weekly Digest

CFTC Suspends Need of Formal Notice for Position Disaggregation Relief

Posted in CFTC

On August 10, the Commodity Futures Trading Commission (the CFTC) issued no-action relief, eliminating the need for certain persons otherwise required to aggregate positions with certain other persons for CFTC position limit purposes to pro-actively file with the CFTC, beginning August 14, formal written notices supporting disaggregation of positions with such other persons relying on the CFTC’s owned-entity exemption, independent account controller exemption and certain other exemptions from aggregation available under CFTC Rule 150.4(b)(1). Upon request by the CFTC or a designated contract market (DCM), however, such persons will have to file such a formal written notice with the CFTC or DCM, as requested, within five business days. However, this is an after-the-fact obligation, not a pro-active obligation. This relief will be in effect through at least August 12, 2019.

There is other helpful relief provided in the no-action relief, including a revision of definitional conditions for purposes of complying with the aggregation requirements for eligible entities, independent account controllers and commodity trading advisors, and that a notice filing, when requested, needs to include information only related to the account or person expressly identified by the CFTC or DCM in the request. Information related to other persons need not be included.

The CFTC’s No-Action letter is available here.

SEC Issues Risk Alert on Observations From Cybersecurity Examinations

Posted in Investment Companies and Investment Advisers

On August 7, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert summarizing observations of its second round of cybersecurity focused examinations (Cybersecurity 2 Initiative) to assess financial services firms’ practices and legal and compliance issues related to cybersecurity preparedness. The Cybersecurity 2 Initiative is built upon OCIE’s prior round of cybersecurity examinations of broker-dealers and investment advisers, which was initiated in 2014 (Cybersecurity 1 Initiative). In the Cybersecurity 2 Initiative, the OCIE staff examined 75 firms, including broker-dealers, investment advisers and registered investment companies, between September 2015 and June 2016 focusing on the firms’ written cybersecurity policies and procedures, as well as testing the implementation of those policies and procedures. In addition, the staff reviewed the following areas: (1) governance and risk assessment; (2) access rights and controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response.

While the staff reported a general improvement in cybersecurity preparedness since the Cybersecurity 1 Initiative, the staff also noted areas where compliance and oversight could be improved. The Risk Alert indicates that all broker-dealers and funds, and nearly all advisers maintained written cybersecurity policies and procedures, but that a majority of those policies and procedures appeared to have deficiencies. Examples of these deficiencies include: (1) policies and procedures not being reasonably tailored to the firm; (2) firms not adhering to or enforcing their policies and procedures; and (3) policies and procedures not reflecting firms’ actual practices. In addition, the staff found Regulation S-P-related issues among firms that did not appear to adequately conduct system maintenance to protect customer records and information. The Risk Alert also sets forth elements that the OCIE staff considers indicative of robust policies and procedures, which may be helpful to firms in assessing and improving their current policies and procedures.

The Risk Alert is available here.

SEC Staff Issues Information Update for Advisers Filing Certain Form ADV Amendments

Posted in Investment Companies and Investment Advisers

The staff of the Securities and Exchange Commission’s Division of Investment Management (Staff) has issued an Information Update regarding the SEC’s recently adopted amendments to Form ADV, which will go into effect on October 1. After this date, any adviser filing an initial Form ADV or an amendment to an existing Form ADV must provide responses to the revised form. The Staff has received questions involving situations in which an adviser must file an other-than-annual amendment to Form ADV in the time between October 1 and the adviser’s next annual amendment. In particular, advisers questioned how to respond to new or amended questions in Item 5 and the related Schedule D sections, which require information as of the end of the adviser’s fiscal year, if the adviser did not maintain such information as of the end its last fiscal year. In the Information Update, the Staff determined not to recommend enforcement action if, during the period from October 1 through the adviser’s next annual amendment, the adviser responds “0” as a placeholder for new or amended questions in Item 5 or the related Schedule D sections for which the adviser does not have enough data to respond. Additionally, the Staff provided that in these circumstances advisers should include an entry in the Miscellaneous section of Schedule D, noting that a placeholder value was entered.

The Information Update is available here.

Cybersecurity: UK Government Consults on Implementing Network and Information Security Directive

Posted in UK Developments

On August 8, the UK’s Department for Digital, Culture, Media & Sport (DCMS) published a consultation paper (CP) on implementing the EU’s Network and Information Security Directive (NIS Directive) (also known as the Cybersecurity Directive).

The DCMS explains that the NIS Directive will compel essential service operators to make sure they are taking the necessary action to protect their IT systems. In particular, operators will be required to develop a strategy and policies to understand and manage their risk, to implement security measures to prevent attacks or system failures, to report incidents as soon as they happen, and to have systems in place to ensure they can recover quickly after any event. Continue Reading

FCA Updates Commodity Derivatives Website With Q&A

Posted in UK Developments

On August 8, the UK Financial Conduct Authority (FCA) updated a section of its website relating to the treatment of commodity derivatives under the revised Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) by adding a question and answer document (Q&A).
The Q&A contains 34 questions and answers relating to the following topics:

• ancillary activities notification;
• position limits;
• position limit exemption applications; and
• reporting.

The FCA’s disclaimer to the Q&A states that while it is published as a working draft, and may be subject to further amendment going forward, it reflects the content of the FCA’s recently published Policy Statement 17/14 on the implementation of MiFID II (for further information see the July 7 Corporate Financial Weekly Digest).

The website and Q&A are available here and here, respectively.

ESMA Updates MiFID II and MiFIR Transaction Reporting Guidelines

Posted in EU Developments

On August 8, European Securities and Markets Authority (ESMA) published an updated version of its guidelines (Guidelines) on transaction reporting, order recordkeeping and clock synchronisation under the revised Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR), which were originally published in October 2016 (for further information see the October 14, 2016 Corporate Financial Weekly Digest).

ESMA states that the changes made to the Guidelines correct some unintended factual mistakes, typos and inconsistencies. ESMA advises that none of the corrections aim to alter the substance or policy provisions of the Guidelines. Continue Reading

FINRA and SIPC Agree To Streamline the Annual Report Filing Process for Broker-Dealers

Posted in Broker-Dealer

On August 1, the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation (SIPC) announced a services agreement designed to streamline the annual report filing process for member firms. Effective September 1, member firms that currently file separate annual reports with SIPC and FINRA will be able to make a single filing using FINRA’s existing reporting portal. This arrangement is intended to (1) ease reporting burdens and compliance costs for member firms, and (2) reduce the number of inconsistent or incomplete annual audited financial statements and supplementary reports being filed.

The press release announcing the services agreement is available here.


CFTC Releases Rule Enforcement Review of the North American Derivatives Exchange

Posted in CFTC

The Commodity Futures Trading Commission Division of Market Oversight (DMO) recently released the results of a rule enforcement review of the North American Derivatives Exchange Inc. (Nadex). The review covered a one-year target period and evaluated Nadex’s compliance with elements of Core Principles 2 (Compliance with Rules) and 12 (Protection of Markets and Market Participants), including compliance with relevant CFTC regulations related to these Core Principles.

DMO found that Nadex allocates staff, information technology and other resources to comply with Core Principles 2 and 12. Nadex also maintains a rulebook and written policies and procedures for its staff. However, DMO identified certain deficiencies relating to Nadex’s trade practice investigations and made recommendations regarding Nadex’s capacity to detect and investigate rule violations. In addition, DMO also identified a deficiency related to Core Principle 7 (Availability of General Information), noting that Nadex had failed to disclose relevant information regarding its market maker programs. Nadex has since cured this deficiency.

For more information, click here.

OCC Seeks Volcker Rule Comments

Posted in Banking

On August 2, the Office of the Comptroller of the Currency provided further evidence that change may be forthcoming for banks subject to the Volcker Rule (Section 13 of the Bank Holding Company Act of 1956) by issuing a notice soliciting suggestions and recommendations for revising the regulations implementing the Volcker Rule to better accomplish the purposes of the statute. All aspects of the implementing regulations are open for discussion, but the notice includes specific questions relating to 1) the scope of entities subject to the regulations; 2) the proprietary trading prohibition; 3) the covered funds prohibition; and 4) compliance programs and metrics reporting requirements.

No changes in the implementing regulations can be made without the concurrence of the Federal Reserve, the Federal Deposit Insurance Corp, the Securities and Exchange Commission and the Commodity Futures Trading Commission. With respect to the notice, Acting Comptroller of the Currency Keith Noreika said, “I look forward to reviewing the comments and to joining the other regulators soon on a Notice of Proposed Rulemaking to amend the regulation.”

The notice requests commenters to respond no later than 45 days after publication of the notice in the Federal Register.

The notice is available here.