Note to Clients – Weekend Reading
September 29, 2023
Weekend Reading – A selection of regulatory and other relevant developments across the trading and markets industry
SEC and CFTC Announce Several Enforcement Matter Resolutions as Government Fiscal Year Closes. Each of the SEC (LINK) and CFTC (LINK) announced dozens of fiscal year end enforcement resolutions. On the SEC side, amongst a long list of settlements, there were a handful of insider trading matters, at least two Foreign Corrupt Practices Act (FCAP) resolutions (for $103M and $26M, respectively), and more than a dozen settlements related to either recordkeeping and.or reporting failures. The CFTC’s enforcement resolutions included a settlement with a futures commission merchant (FCM) for $20M in connection with supervision failures and widespread use of unapproved communication methods, a fraud case based on the CFTC’s misappropriation theory (see below), and a whistleblower award announcement that included several factors that the CFTC viewed as supporting the success of the whistleblower’s assistance provided to the CFTC (see below).
SEC Brings Insider Trading Charges Generated from its Market Abuse Unit’s Analysis and Detection Center. In a press release (LINK), the SEC announced that it had brought insider trading charges against a former financial industry analyst and three others. Notably, the press release indicated that, “The case originated from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns.” The facts of the case were relatively straightforward and involved an employee that learned of upcoming M&A deals through his employer and tipped off his acquaintance (a childhood friend), who then traded on the knowledge and shared profits with the employee. The interesting element of the case (as also highlighted by Bloomberg columnist Matt Levine) is the observation that the SEC’s ability, using its data analysis tools, to identify these trading patterns is increasingly powerful.
CFTC “Insider Trading” Developments and a Commissioner’s Dissent; Discussions on the Misappropriation Theory of Liability Under Section 6(c)(1) of the Commodity Exchange Act and CFTC Rule 180.1. The CFTC announced a consent order (LINK) in which a quantitative trader at a large, multinational corporation, agreed ot pay a fine of $250,000 after having been found to have misappropriated material, non-public information from his employer to fraudulently and deceptively enter into trades of feeder cattle futures and options for his personal benefit (and against the employer). Of note, the CFTC’s Press Release stated that the trader “used material, non-public information to execute transactions on feeder cattle futures and options through his personal trading account as a counterparty to his employer.” CFTC Commissioner Pham issued a dissenting statement centered around the “material non-public information” phrasing the CFTC and the order used to describe the misconduct. Commissioner Pham’s statement said: “I believe that it is most appropriate to allege ‘misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information,’ and not use the term ‘material non-public information,’ which is a term of art under U.S. securities laws and regulations.” Commissioner Pham also discussed court precedent that had addressed the special characteristics of the derivatives markets, where end users necessarily trade on the basis of their own proprietary information in order to hedge their risks, and the difference between that activity and improper trading using “confidential information in breach of a pre-existing duty of trust and confidence to the source of the information.”
CFTC Issues $300,000 Whistleblower Award; Describes Elements of a Successful Whistleblower. In the press release (LINK), the CFTC highlighted several aspects of the whistleblower’s engagement that it viewed favorably – (1) the whistleblower has a particularly informative tip that caused the Division of Enforcement (DOE) to open an investigation, (2) the investigation led to an underlying enforcement action, (3) the tip had precisely and accurately described the misconduct at issue, ad (4) the whistleblower assisted DOE staff multiple times during the investigation, provided additional evidence, interpreted it for DOE staff, and conserved substantial resources for the CFTC. Consistent with all whistleblower awards, the CFTC did not allude to the specific facts of the underlying matter to which the whistleblower award related.
Some Financial Firms Reported to be Evaluating Challenges to Overbroad Agency Enforcement Efforts on Messaging Use; Separately, Firms Reported to be Opting for Litigation Rather than to Settle Agency Enforcement Matters at Excessive Fine Levels. SEC and CFTC enforcement around improper business use of private or non-approved messaging applications (in the context of certain recordkeeping requirements that apply to a broad scope of business communications and/or, in some cases, company policies prohibiting such use) by traders and other financial services personnel continues to result in meaningful fines. Against this backdrop, some firms are reported (various media articles) to be taking a deeper and more critical look at the specific scope and nature of their communications based recordkeeping obligations under relevant agency rules, and where the boundaries might be, as regulators reportedly continue their aggressive message use and retention based enforcement inquiries. As an example, the recordkeeping requirements that might apply to a bank, swap dealer, or broker dealer are often higher or more broad than that which might technically apply to certain other types of registrants. In parallel, some firms are reported to be opting to litigate with regulators rather than settling matters with proposed fines that are viewed as high and excessive. Taken together (and with the media reports on these matters getting more attention), this could be seen as a moderate trend towards engaging more publicly on disputed agency enforcement matters.