Bridging the Week by Gary DeWaal: August 15 to 19 and August 22, 2016 (Whistleblowing; President Banned; Bad Reports; CCP Risk; De Minimis)

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Published Date: August 21, 2016

Last week another publicly traded company was sanctioned by the Securities and Exchange Commission for using a standard severance agreement that the Agency claimed potentially impeded employees from exercising their whistleblowing rights. Also, the SEC recently upheld the banning of the president of a broker-dealer from acting in any officer or manager position for 31 days because of his supervisory failures, while a swap dealer was sued by the Commodity Futures Trading Commission in federal court for allegedly committing new reporting violations that were a type that were also the subject of a prior enforcement action. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Article Version:


Compliance Weeds: This is the second action the SEC has brought and settled within two weeks where firms included in their standard severance agreements language that the Commission determined potentially impeded an employee from disclosing to the SEC a possible securities law violation. (Click here for background on the prior SEC enforcement action in the article, “SEC Sanctions Publicly Traded Company for Restricting Whistleblowing Claims in Employee Severance Agreements” in the August 14, 2016 edition of Bridging the Week.) It is clear that the SEC reads its anti-retaliation clause broadly. SEC and Commodity Futures Trading Commission 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 whistleblower rights. (Click here for a more comprehensive discussion of this development in the August 17, 2016 advisory “Public Company Sanctioned by SEC for Including Illegal Anti-Whistleblower Provisions in Severance Agreements” by Katten Muchin Rosenman LLP.)

Compliance Weeds: In this matter, the SEC appeared to acknowledge that Wedbush Securities’ written supervisory procedures appeared “reasonably designed” to achieve compliance with applicable securities laws and FINRA requirements. However, its implementation was lacking, claimed the SEC. Thus, said the Commission, its overall supervisory system was lacking. The SEC noted that, as president of Wedbush Securities, Mr. Wedbush had ultimate responsibility for the firm’s “compliance with all applicable requirements ‘unless and until he reasonably delegates particular functions to another person in that firm, and neither knows or has reason to know that such person’s performance is deficient.’” However, here, said the SEC, Mr. Wedbush was on notice, in part because he was himself in charge of the relevant department during part of the time, and took no material action to improve the situation. According to the SEC, “While Wedbush stressed the importance of regulatory reporting at periodic management meetings and instructed managers to cooperate in the reporting process, he knew that the filing violations had continued despite his instructions, and that his instructions had not resolved the Firm’s noncompliance.” Mr. Wedbush should have ensured the appointment of more qualified personnel in the business conduct department and perhaps authorized the BCD to penalize or even fire non-cooperating personnel, as examples of appropriate material action, suggested the SEC. This SEC decision suggests that the Commission expects that its registrants, to evidence an appropriate supervisory system, must – to paraphrase former US president Theodore Roosevelt – not only empower its managers to speak softly but to carry a big stick.

And more briefly:

My View: Label me paranoid, but the SEC Inspector General’s decision not to share with the public the bottom line of its assessment of the SEC’s cybersecurity effectiveness included in a report provided to Congress – even in some sanitized form – may suggest that something is terribly wrong. But if there are material deficiencies in the SEC’s protection of personally identifiable information that it collects and maintains, the public has the right to know! This is particularly the case as the SEC progresses to implement its plan to create a single consolidated audit trail (known as “CAT”) to track all equities and options trading on US markets. (Click here to access background on the SEC’s CAT initiative, in the article, “SEC Seeks Views on Whether Proposal for Single Consolidated Audit Trail of All Equity and Equity Options Trading Is CAT’s Meow” in the May 1, 2016 edition of Bridging the Week.)

Compliance Weeds: Both RFEDs and futures commission merchants have numerous ongoing reporting and ad hoc notification requirements to the CFTC and their designated self-regulatory organization. Events triggering notice requirements typically require filings within very short time periods. For example, FCMs are required to provide immediate notice to the CFTC and the firm’s DSRO if they do not meet their minimum capital requirement; when a carried omnibus account must be liquidated or transferred due to its failure to meet a margin call; if an account is under margined by an amount greater than the FCM’s net capital; when customer funds held by the FCM are less than the amounts required to be held; and various other circumstances. Notification requirements for certain other events are on the same day, within 24 hours or within two business days. RFEDs and FCMs must be aware of all events requiring notice filings with the CFTC and their SRO as well as the timing requirement for any necessary follow-up. Although sometimes firms only discover an event requiring an immediate or prompt notice filing after a notice-filing deadline, a bad situation should not be made worse by unnecessarily delaying a required filing following a late discovery. (Click here for a chart of FCM ongoing and notice requirements, and here for a chart of RFED ongoing and notice requirements.)


My View: It is not clear at this time what the appetite is by clients or clearing members to participate in the innovative sponsored client direct clearing programs of ICE Clear Europe and Eurex Clearing, let alone the proposed program of CME Group. However, all three proposals are interesting ideas designed to help end clients better protect themselves against fellow customer risk at their clearing brokers. Moreover, all three proposals either affirmatively or at least implicitly try to address Basel capital issues of bank clearing members. Time will tell whether end clients pursue these options or whether clearing members offer them. However, as I have said before, they are worth studying. "The times they are a-changin'," to quote Bob Dylan.

For more information, see:

…And Don’t Forget ICE Clear Europe’s Individual Segregation Through Sponsored Principal Account Offering:

Another Publicly Traded Firm Sanctioned by SEC for Allegedly Undercutting Whistleblower Protections Through Severance Agreements:

CFTC Staff Issue Another Report but Commission Takes No Action Regarding Swap Dealer De Minimis Threshold:

See also, Statement of Commissioner J. Christopher Giancarlo:

CME Group Delays Rollout of Proposed New Suspense Accounts Requirements:

Don’t Ask, Don’t Tell: SEC Issues Secret Report on Its Cybersecurity:

Et Tu, CFTC? CFTC Follows SEC in Restricting Registration of Former Hedge Fund Operator Chairman:

Four CME Group Traders Fail to Answer Charges and Have Default Judgments Entered Against Them for Prohibited Trading Activities:

KMJ Capital:
Stephen Lake:
George Robb:
John Tone:

ICE Futures Europe Amends Sugar Rules to Prohibit Deliveries From Touching Blocked Countries:

International Regulators Find Fault With Derivatives CCPs’ Recovery Planning and Credit and Liquidity Risk Management:

NFA Updates Self-Examination Questionnaire for Registrants:

Retail FX Dealer Charged by CFTC With Not Meeting Minimum Capital Requirements and Guaranteeing Customers Against Losses:

SEC Upholds FINRA Registration Suspension of Broker-Dealer President for Failure to Supervise:

Swap Dealer Sued in Federal Court by CFTC for Recidivist Reporting Violations; Acknowledges Bank’s Cooperation:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of August 20, 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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Gary DeWaal
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