Last week, a broker-dealer settled Securities and Exchange Commission and New York Attorney General charges that its marketing of an order routing system was misleading when it did not disclose to its clients and prospective clients that, because of a data coding error, the system failed automatically to evaluate different dark-pool trading venues for optimal execution of orders, as promised. Meanwhile, the Commodity Futures Trading Commission obtained a summary judgment decision that a trader’s prearranged trades to transfer profits from her employer’s trading account to an account of a company owned by her mom violated applicable federal law and a CFTC regulation. As a result, the following matters are covered in this week’s edition of Bridging the Week – the last regular edition for 2016:
The next regular edition of Bridging the Week will be on January 9, 2017. Happy holidays and New Year!
Compliance Weeds: Many futures exchanges have express prohibitions against executing transactions designed to pass money between accounts. (Click here for example, to access CME Rule 432.G and here to access ICE Futures U.S. Rule 4.02(f).) Because futures transactions used to achieve money passes are typically executed noncompetitively to ensure achievement of their objective, such transactions may additionally violate exchange rules prohibiting noncompetitive transactions in addition to running afoul of applicable federal law and CFTC regulation under which Ms. Li and Kering were sanctioned. (Click here to access the relevant CME Group Market Regulatory Advisory Notice.)
Compliance Weeds: Under Reg SHO, a broker-dealer accepting a short sale of an equity security from a customer (or engaging in a short sale in its own proprietary account) must first borrow the security, enter into a bona fide arrangement to borrow the security, or have reasonable grounds to believe the security can be borrowed before the delivery date. Broker-dealers comply with this so-called “locate requirement” by maintaining so-called “easy to borrow” lists, which set forth equity securities they reasonably believe they can borrow. (Click here for background regarding Reg SHO in an SEC publication, Key Points About Regulation SHO.) Reg MAR generally requires brokers and dealers with access (or providing access) to trade securities directly on an exchange or alternative trading system to have procedures and processes to control market access so as not to jeopardize “their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system,” as well as to ensure compliance with all applicable regulatory requirements. (Click here for background regarding Reg MAR in an SEC publication, Responses to Frequently Asked Questions Concerning Risk Management Controls for Brokers or Dealers with Market Access.) By comparison, the Commodity Futures Trading Commission currently requires certain pre-trade risk controls by all clearing future commission merchants for all orders they receive for automated and non-automated execution, where they provide electronic market access, and when they authorize third-party brokers to execute orders to be given-in for customers (click here to access CFTC Regulation 1.73). The CFTC is proposing additional risk control requirements for executing FCMs. (Click here to access background on the CFTC's most recent proposal in the article, "Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons" in November 6, 2016 edition of Bridging the Week.)
Compliance Weeds: Iceberg orders are authorized orders on CME Group exchange and ICE Futures U.S. where a trader can submit large volume orders to the marketplace in increments while only publicly displaying a small portion of the total order size. Both ICE Futures U.S. and CME Group, in guidance, warn that it may be a violation of their disruptive trading prohibitions for iceberg orders to be used as part of a scheme to mislead other participants. According to ICE Futures U.S., for example, it would be a violation of its rules “if a market participant pre-positions an iceberg on the bid and then layers larger displayed quantities on the offer to crease artificial downward pressure that results in the iceberg being partially or completely filled." (Click here to access Q/A 8 in the ICE Futures U.S. January 2015 guidance, Disruptive Trading Practices. Click here to also see Q/A 9 in the relevant CME Group Market Regulation Advisory Notice entitled Disruptive Practices Prohibited.)
And more briefly:
For more information, see:
Alleged Manipulative Stock Scheme Crux of Department of Justice and SEC Action Against Two Traders:
Broker-Dealer Settles SEC and NYS Charges Regarding Disclosures of Dark Pool Order Routing Arrangements:
CEO and Head Trader Settle SEC Charges for Alleged Reg SHO and MAR Violations; Action Against Broker-Dealer Pending:
Byron Barkley and Paul Davis:
Wilson-Davis Company, Inc.:
CME Group Member Firms Settle Disciplinary Actions for Alleged EFRP and Position Limits Violations:
Defendants in Linked ICE Future U.S. Disciplinary Actions Agree to Pay Collective Sanctions in Excess of US $1.15 Million to Resolve Diverse Charges:
Don’t Forget to Perfect Your Independent Account Controller Exemption:
ESMA Provides Additional Input on MiFID II:
Mom’s Company Was Beneficiary of Illicit Money Pass Using Noncompetitive Trades Rules Court in CFTC Lawsuit:
Introducing Broker Settles NFA Charges Regarding Its AML Program:
SEC OCIE Commences Investment Adviser Multi-Branch Sweep:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of December 17, 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.
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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Bridging the Week by Gary DeWaal: December 12 to 16 and December 19, 2016 (Broken Order Router; Trading Illicitly for Mom; Manipulation: Reg SHO; Reg MAR)Jump to: AML and Bribery Block Trades and EFRPs Bridging the Week Compliance Weeds Dark Pools and Internalization EMEA Regulation (sans Capital and Liquidity and UK after March 1, 2019) Follow-Up Introducing Brokers Investment Advisers Managed Money Manipulation Position Limits Reg SHO Regulation MAR Systems and Controls Trade Practices (including Disruptive Trading)