Weekly RoundUp
September 2, 2015

Financial Services Weekly News

CFTC Approves NFA Rule Changes for Forex Dealers in Response to Swiss Franc Exchange Rate Event. On January 15, 2015, the Swiss National Bank abandoned attempts to cap the Swiss franc’s exchange rate against the Euro, without prior notice to the markets. The decision sent the value of the Swiss franc much higher, at the same time that the value of the country’s stocks, especially the shares of exporters, plummeted. The move had a sudden negative effect on some currency traders, like FXCM, an online currency house based in New York City, which said at the time that it had experienced a negative equity balance of about $225 million. In May, the National Futures Association (NFA) submitted a rule proposal to the CFTC for amendments to Rule 2-36 regarding Requirements for Forex Transactions and to Financial Requirements Sections 11 and 12, and for the adoption of the Interpretive Notice entitled “NFA Compliance Rule 2-36: Risk Management Program for Forex Dealers.” Forex Dealer Managers (FDMs) are dealers who engage in certain foreign currency transactions not executed on a contract market, transaction execution facility or securities exchange and in which the counterparty is not an eligible contract participant (ECP). The amendments to Rule 2-36 and adoption of the related interpretive notice are intended to subject FDM’s to the requirement, already applicable to Futures Commission Merchants (FCMs), to adopt a risk management program designed to monitor and manage the risks associated with its Forex activities. Financial Requirement Section 11 requires FDMs to maintain adjusted net capital equal to $20 million plus 5% of all liabilities owed to retail customers, but not ECPs, that exceed $10 million. The amendment to Section 11 will require FDMs to include liabilities owed to ECPs. In its Explanation of Proposed Amendments, the NFA noted the case of an unnamed FDM with a UK affiliate dealer that had a huge exposure to its own customers. Because the UK affiliate was an ECP, the FDM had not been required to take exposure to the UK affiliate and, indirectly, the affiliate’s customers, into account in calculating its minimum net capital requirement. The NFA pointed out that if the FDM had filed for bankruptcy, its customers would have been treated as general creditors with no preference in bankruptcy, and customer losses would have been significant, illustrating the need for net capital requirements taking into account liabilities to ECPs as well as retail customers. Finally, the amendment to Financial Requirement Section 12 will require FDMs to obtain security deposits from ECPs as they currently do with retail customers. The CFTC approved the rule changes on Aug. 27. In Notice I-15-21, the NFA announced that the effective date of the rule changes will be Jan. 4, 2016.

Regulatory Developments

California Department of Business Oversight Permits Money Transmitter to Treat Customer Funds in Designated Custodial Account as “Eligible Securities”

The California Department of Business Oversight (DBO) has released a redacted letter in which it advised a licensed money transmitter that funds held by the money transmitter in a custodial capacity at a bank would qualify as “eligible securities” for purposes of the California Money Transmission Law. By way of background, the Money Transmission Law requires a licensed money transmitter in California to hold “eligible securities,” including cash, in an amount not less than the amount of all outstanding money received for transmission in California. In 2013, the statute was amended to permit a licensee to hold the funds in a custodial capacity as an agent of its customers in a pooled account titled in the name of the licensee for the benefit of its customers. However, application of this rule to a particular licensee is subject to a determination by the DBO based on the amount, nature, quality and liquidity of the licensee’s assets, the amount of the licensee’s liabilities and the history of the licensee’s compliance with applicable federal and state law. The recently released letter constitutes such a determination and may be helpful to licensees that wish to use similar arrangements.

FINRA Issues Regulatory Notice on Equity Research Reports

As previously reported, the SEC approved the consolidation of NASD Rule 2711 and NYSE Rule 472 as FINRA Rule 2241 (Research Analysts and Research Reports), addressing conflicts of interest relating to the publication and distribution of equity research reports. FINRA recently released Regulatory Notice 15-30 which provides background and discussion of the rule, and announces that certain provisions of the rule become effective on September 25, 2015, with the rest effective on Dec. 24, 2015.

FINRA Issues Regulatory Notice on Debt Research Reports

As previously reported, the SEC approved the adoption of FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports) to address conflicts of interest relating to the publication and distribution of debt research reports. FINRA recently released Regulatory Notice 15-31 which provides background and discussion of the rule, and announces that the rule will become effective on Feb. 22, 2016.

Client Alert: FinCEN Proposes AML Program Rule for Investment Advisers

As reported in last week’s Roundup, FinCEN has issued a proposed rule that would treat certain investment advisers as financial institutions for purposes of its anti-money laundering (AML) regulations. Bill Stern, partner in Goodwin’s Financial Institutions Group, has prepared a client alert providing a detailed overview of the proposed rule.

Enforcement & Litigation

Federal Court Issues Preliminary Injunction Preventing FinCEN Special Measure Against FBME Bank, Ltd. from Taking Effect

A federal district court has issued a preliminary injunction preventing a final rule issued by FinCEN from taking effect as scheduled on Aug. 28, 2015. Section 311 of the USA PATRIOT Act authorizes the Secretary of the Treasury to require U.S. financial institutions and financial agencies to take one or more special measures against any foreign financial institution determined to be “of primary money laundering concern.” Last year, FinCEN, a bureau of the U.S. Treasury Department, issued a notice of finding in which it determined that reasonable grounds exist to conclude that FBME Bank, Ltd. (FBME) is a financial institution of primary money laundering concern, and FinCEN followed up earlier this summer by issuing the final rule prohibiting financial institutions from maintaining any correspondent account that is established, maintained, administered or managed in the United States for or on behalf of FBME, effectively cutting off access to the U.S. financial system to FBME. The final rule also requires each financial institution to apply special due diligence to its foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving FBME. In response to the issuance of the final rule, FBME filed suit in federal court, alleging that FinCEN did not comply with the Administrative Procedures Act and acted in an arbitrary and capricious manner in issuing the final rule and further claiming that the final rule violates FBME’s due process rights. While the court indicated that it would not “second guess” FinCEN’s determination that FBME is of primary money laundering concern or its determination to impose the special measure, the court granted the preliminary injunction because it found that FinCEN had not appeared to satisfy certain requirements of the Administrative Procedures Act. While the court’s action is unusual and may force FinCEN to take additional steps in this and other cases to demonstrate compliance with the Administration Procedures Act, the case does not appear likely to meaningfully limit FinCEN’s authority to make determinations or impose special measures under Section 311 of the USA PATRIOT Act.