Note to Clients – Weekend Reading
October 20, 2023
Weekend Reading – A selection of regulatory and other relevant developments across the trading and markets industry
SEC Announces 2024 Examination Priorities. The highly anticipated annual release from the SEC’s Examinations team (LINK) addresses Investment Advisers, Investment Companies, Broker Dealers, Self-Regulatory Organizations, Clearing Agencies, Municipal Advisors, Security-Based Swap Dealers, and Transfer Agents. In a general issues list, the release highlighted four priority themes – (1) Information Security and Operational Resiliency; (2) Crypto Assets and Emerging Financial Technology; (3) Regulation Systems Compliance and Integrity; and (4) Anti-Money Laundering. The release concluded by observing that: “The Division welcomes comments and suggestions regarding how it can better fulfill its mission to promote compliance, prevent fraud, identify and monitor risk, and inform Commission policy.”
SEC Adopts New Short Selling “Transparency” and Data Collection Rules. The new provisions (LINK) include new Rule 13f-2, designed to provide greater transparency to investors and other market participants by increasing the public availability of short sale related data. The rule requires certain managers to report on Form SHO specified short position data and short activity data for equity securities. In parallel, the SEC adopted an amendment to the National Market System Plan (NMS Plan) governing the consolidated audit trail (CAT) that will require each CAT reporting firm that is reporting short sales to indicate when it is asserting use of the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO. The SEC indicated that the effective date for the new rules and the plan amendment would be 60 days after publication in the federal register. However, the compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date of the adopting release, with public aggregated reporting to follow three months later, and the compliance date for the amendment to the CAT NMS Plan to be 18 months after the effective date of the adopting release.
CFTC Releases Enforcement Advisory on Increasing Penalties, More Compliance Monitors and Consultants, and Admitting Wrongdoing as a Condition of Settlement. The release is meant to reflect the Enforcement Division’s “focus on achieving accountability and minimizing future misconduct when negotiating a proposed resolution.” At the highest level, the report underscores the observation that compliance departments and compliance staff are being further elevated as a critical front line defense mechanism for regulators, and the perceived strength of compliance programs (and the extent to which compliance departments are effective) are critical components in shaping the terms of settlements. The advisory (LINK) provides updated guidance to its enforcement staff on three themes – (1) penalties need to be higher, particularly for repeat offenders, where low penalties are seen as a cost of doing business rather than as a deterrent for misconduct; (2) settlements of severe and widespread misconduct should continue to impose the requirement of compliance monitors (which will require Division of Enforcement approval) and consultants (which will not require specific approval), and the monitor and/or consultant should be broadly empowered to test policies, procedures, and controls; make recommendations for improvements; and test the effectiveness of those improvements; and (3) staff should always consider requiring an admission of wrongdoing in settlements, and only two factors were identified that could weigh against admissions – the possibility of an admission jeopardizing a respondent’s ability to defined a related criminal action, and where there is a legitimate factual dispute relating to the conduct at issue and there is litigation risk for the CFTC on those facts. Commissioner Christy Goldsmith Romero issued a formal statement in support of the advisory (LINK).
CFTC Commissioners Mersinger and Pham Oppose Staff Intention to Sunset Swap Block Trade Size No-Relief in 2024. CFTC staff extended no-action relief that provides relief from certain CFTC swap data reporting rules concerning block trades and post-initial cap sizes. However, staff indicated that it does not currently intend to renew the relief past the current extension of July 1, 2024. The two Commissioners supported the current relief but opposed the hard subset deadline, emphasizing the complexity of these markets and products. Their statement urged the Commission to undertake an appropriate data-driven study and review towards re-calibrating the relevant rules and threshold levels prior to sunsetting any existing no-action relief. (LINK)
Selected Summary of Major Digital Asset Regulatory Developments:
- California’s Digital Financial Assets Law. California’s governor has signed into law legislation to create a BitLicense-type registration requirement under their Department of Financial Protection and Innovation. The stated effective date of the law is July 1, 2025, and the law provides DFPI with rulemaking authority along with an “18 months implementing period.”
- FDIC Inspector General Issues Critical Report on Agency’s Approach to Crypto Risks and Guidance. The FDIC’s Office of the Inspector General issued a report (LINK) that observed, amongst other items, that “the FDIC has not yet completed a risk assessment to determine whether the Agency can sufficiently address crypto-asset related risks through actions such as issuing guidance to supervised institutions.” And “ In addition, the FDIC’s process for providing supervisory feedback on FDIC-supervised institutions’ crypto-related activities is unclear.” The report concludes with recommendations for improvement and a January 30, 2024 deadline for completing corrective actions.
- UK Financial Promotions Rules Update. The UK Financial Conduct Authority continues to encourage and compel compliance with its October 8, 2023 financial promotions (or “Fin Prom”) rules as applicable to cryptocurrency businesses. In parallel, see here (LINK) for the FCA’s often updated consumer warning list of unauthorised firms.
- ESMA Update on MICA Implementation Timelines. On October 17, 2023, ESMA published (LINK) a letter and statement encouraging preparation for a smooth transition by firms into MiCA – the EU’s broad reaching cryptocurrency law. The implementation phase of MiCA, culminating in its “full application, is currently expected to complete by December 2024. However, EU member states may provide an additional MiCA compliance transition period of up to 18 months (to July 2026).
- CFTC Enforcement Complaint Pursues an Aggressive Interpretation of Commodity Pool Operator Definition in Connection with Loans Made to a Hedge Fund. On October 12, 2023, the CFTC charged the former CEO of a digital assets platform with fraud and failing to register his entity as commodity pool operator, amongst other related charges (LINK). In describing the facts, the CFTC indicated that the entity, in efforts to generate returns, pooled customer funds and made loans to, amongst others, a high risk hedge fund that traded commodity interests – and this fact was the basis for the unregistered CPO charges against the CEO of the lending entity. Commissioner Pham released this statement, in parallel: “I caution that the CFTC’s interpretation of a commodity pool operator in this enforcement action would seem to include commonplace lending activity—like taking deposits and providing loans. Such an interpretation is an overreach beyond our statutory authority and would disrupt well-established legal and regulatory frameworks for lending to institutions and consumer finance.”
- FinCEN Proposes Transparency Rules Related to Crypto “Mixers”. A FinCEN proposed rule, published October 19, 2023 (LINK), if finalized, would require in scope financial institutions to categorize convertible crypto currency “mixers” as “a class of transactions of primary money laundering concern.” This would impose an exceptional increase in reporting and other similar requirements to transactions related to mixers. Early criticism of the proposal has centered around a broad proposed definition to be used in connection with identifying “mixers.” A key concern (beyond general objections to overbroad reporting rules) is that an inappropriately calibrated “mixer” definition could sweep in a material swath of the decentralized finance ecosystem.
About us:
Miller Strategic Partners LLP is a law firm headquartered in New York City. We advise clients on trading and markets regulatory and commercial matters, investigations, and crisis management scenarios.
Key Contacts:
Ryne Miller, Partner (New York)
William Schroeder, Partner (New York)