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Weekly RoundUp
September 16, 2015

Financial Services Weekly News


SEC and FINRA Examination Focus on Cybersecurity and Liquidity Risk. An examination by the SEC or FINRA is often a nerve-wracking experience for financial firms, but it can definitely motivate the development of better compliance systems before and after the examination. A positive development in regulatory oversight by both agencies has been the attempt to make the process more transparent, and to educate regulated firms both about what examiners will be looking for and about what they have found in examinations of other firms. Recent statements by the SEC and FINRA illustrate this. On Sept.15, the SEC’s Office of Compliance Inspections and Examinations issued another in a series of National Exam Program Risk Alerts, on OCIE’s 2015 Cybersecurity Examination Initiative. This follows up on the Apr.15, 2014 Risk Alert launching its cybersecurity preparedness initiative. In the Sept.15 Risk Alert, OCIE identifies the following areas for examination: firm governance and risk assessments relating to cybersecurity, controls on access rights, data loss prevention, vendor management, training and incident response. The appendix to the Risk Alert provides sample lists of information OCIE intends to request from firms in each of those examination areas.

Also on September 15, FINRA announced the release of its Guidance on Liquidity Risk Management Practices (Regulatory Notice 15-33), the result of a year-long review of firms’ contingency plans and processes related to managing liquidity needs in a stressed environment. The Notice lists the five stresses that FINRA tested for during the review period, describes the evaluation methodology, and provides observations regarding effective and ineffective practices. According to FINRA, the following are examples of effective controls and practices in place at the reviewed firms: management’s understanding of possible changes in counterparty behavior during a stress period ● designating a group to ensure that systems and reports are available for use by responsible personnel to understand and manage the firm's funding and liquidity process ● the ability to anticipate and measure cash outflows under particular stress scenarios and having reports that enable management to consider the impact of stresses ● having a governance process around stress test results and use of contingency funding plans and ● establishing clear criteria for when a firm should shift from "business as usual" to contingent funding mode.

Certain Mutual Funds Should Consider Waiting to File Form 24F-2 in Light of Substantial Decrease in SEC Registration Fee Rate. As a result of a recently announced SEC order for fiscal year 2016, securities registration fee rates for mutual funds registered under the Investment Company Act of 1940 (the 1940 Act) will decrease more than 13%, effective Oct.1, 2015. Pursuant to Rule 24F-2 under the 1940 Act, a mutual fund is required to file a Form 24F-2 accompanied by the registration fee within 90 days after the completion of its fiscal year. Mutual fund registration fees are calculated using the rate that is in effect on the date that a fund makes its annual fee filing on Form 24F-2 and such fees are based on net sales during the completed fiscal years. Accordingly, mutual funds with net sales that, by virtue of the timing of their fiscal year end, are in a position to wait to file Form 24F-2 and pay their registration fees (in particular, funds with fiscal years ending in July or August that might ordinarily make an early filing in September) should consider making Form 24F-2 filings on or after Oct.1, 2015. Form 24F-2 filings submitted to the SEC before 5:30 p.m. ET on Tuesday, Sept. 30, 2015 will be subject to the current fee rate of $116.20 per million dollars. Filings submitted after that time will be subject to the new fee rate of $100.70 per million dollars. While this note relates specifically to mutual fund filers, other public companies should also consider whether they can achieve cost savings by deferring an upcoming filing.
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Regulatory Developments

CFTC Grants Temporary Registration as SEF to LedgerX Bitcoin Options Exchange and Clearing House

On Sept. 10 the CFTC announced that it had issued an Order of Temporary Registration as a Swap Execution Facility to LedgerX LLC. As a next step, the Commission will undertake a substantive review of LedgerX’s application for full registration. LedgerX says that when it is registered, it will be “the first federally regulated bitcoin options exchange and clearing house to list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.”

NYDFS Reaches Agreements with 4 Major Banks on Record-Keeping and Other Requirements in Connection with Symphony Platform

On Sept. 14, the New York Department of Financial Services (NYDFS) announced agreements with four banks, Goldman Sachs Bank, Deutsche Bank, Credit Suisse and Bank of New York Mellon, on record-keeping and other requirements relating to the Symphony Communications LLC chat and messaging platform. The NYDFS had been concerned about the potential effect of Symphony’s marketed “guaranteed data deletion” service on regulatory investigations. The announcement contains links to the agreements with each of the four banks. The NYFDS regulates banks and insurance companies. Broker-dealers are regulated in New York by the New York State Attorney General.

Conference of State Bank Supervisors Releases Model Regulatory Framework for Virtual Currency Activities

The Conference of State Bank Supervisors (CSBS) has released a Policy Statement on Virtual Currency Activities (Policy Statement). CSBS released a draft of the Policy Statement in Dec. 2014, and the final Policy Statement takes into account comments on the draft Policy Statement that CSBS received from virtual currency trade groups, traditional financial services trade groups and others. The Policy Statement contains a definition of virtual currency and a description of the types of virtual currency related activities that should fall within the ambit of state regulation, and it addresses recommended regulatory practices with respect to licensing, financial strength of virtual currency firms, consumer protection, cybersecurity, anti-money laundering, supervision and other matters.

Enforcement & Litigation

FINRA Sanctions Broker Representatives As a Result of Crackdown on Broker Migration Between Risky Firms

FINRA announced on Sept. 15 that as a result of a 2014 onsite examination, it found securities violations including various misleading sales pitches, customer account churning and other business misconduct at Global Arena Capital Corp. It has barred seven former registered representatives from the securities industry, suspended an eighth person whose bar will become effective in October, and barred two former branch managers from serving in a principal capacity. The actions are a result of FINRA's continued focus on tracking groups of brokers that move from one risky firm to another. FINRA said that it had employed a risk-based approach to identify certain brokers who had moved from HFP Capital Markets LLC – a firm that FINRA later expelled – to Global Arena and were then subject to heightened regulatory scrutiny during a 2014 exam.

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