Archives: NFA Enforcement

This week, the CFTC approved a NFA Interpretative Notice that prohibits a Member from accepting credit card payments from customers to fund retail forex accounts.  The NFA recently reviewed how customers fund their retail forex accounts and found that customers overwhelmingly funded their trading accounts using a credit card.  The NFA noted that credit cards permit easy access to borrowed funds and the highly volatile nature of the forex and futures markets create a significant risk of substantial loss in a short period of time.  The NFA cautioned that it is not prohibiting other forms of electronic funding so long as the funds come directly from a customer’s bank account.  Members will be permitted to accept debit card transactions assuming that Members are able to distinguish between a debit card and a credit card transaction.  Member firms must comply with the interpretative notice by January 31, 2015.

For some Members, the new guidance will cause a substantial change in the way they accept customer funds and will add to the long list of regulatory compliance requirements.  Members that want to allow customers to fund their accounts using debit cards will likely have to retain a third party vendor to help in differentiating between debit card and credit card transactions.  Also, Members will have to ensure that they do not accept funds from electronic payment facilitators (i.e. Paypal) that commonly draw funds from a customer’s credit cards.  Certain customers may also ask why the NFA is no longer allowing them to get frequent flyer miles before they start forex and futures trading.

confusion.jpgLawyers have often been the brunt of cruel jokes. But now, a recent study reported on by the Bureau of National Affairs shows, lawyers are the target of securities regulators. Why the sudden interest?

For one, cooperation initiatives between regulators and those caught violating securities law convince these people to turn on their lawyer who may have been involved in the offering. After all, clients do not owe their lawyers a fiduciary duty.

Second, lawyers may have malpractice insurance that cover their actions. As such, there is a financial incentive for regulators to target lawyers.

So what can securities lawyers do to protect themselves? Unfortunately, there is no sure fire way to protect yourself as regulators will look in the direction of anyone associated with an offering that results in a securities violation.

The best protection for lawyers is to be vigilant when it comes to client selection. Also, be certain that you are comfortable with the content of the offering to avoid being accused in promulgating a fraudulent statement.

Be diligent and careful if you are a securities lawyer, and avoid being a trophy on a regulators’ mantle.

 

* photo from freedigitalphoto.net

In September 2009, the NFA adopted Rule 2-45, which prohibits CPOs from making any direct or indirect loans or advances of pool assets to the CPO or any affiliated person or entity.  The NFA adopted the rule in response to several complaints where a CPO’s principal used loan proceeds to purchase luxury items or the proceeds went to related entities that did not have sufficient assets to pay back the loans.

As I have written about before, last year, the CFTC adopted changes to the exemptions for CPOs and a number of previously exempt CPOs are now required to register.  Some of these previously exempt CPOs engage in transactions that have characteristics similar to a loan.  The NFA analyzed these transactions and revised Rule 2-45 to exclude certain transactions.  The excluded transactions include engaging in certain short sales, loaning the value of idle securities, making indirect or direct debt or equity investments in a subsidiary through guarantees secured by the pool’s assets or entering into repurchase or reverse repurchase agreements.

This rule change is another example of the NFA revising its rules in response to the comments made by newly registered CPOs that were exempt from registration last year.  We can expect that the NFA will modify additional rule changes before the end of the year. 

You may remember that I previously wrote about the NFA’s proposals earlier this year to better monitor customer segregated funds after some high profile monitoring failures.  The NFA recently began implementing its proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated funds, including banks, clearing FCMs, broker-dealers and money market accounts, to file daily reports reflecting the funds held in segregated accounts.  Initially, the NFA intended to manually monitor compliance through direct, view only online access.  However, after discussions with vendors, the NFA determined that it could quickly implement an automated system via a third party vendor.

The NFA will require FCMs to instruct their depositories holding segregated, secured amount and cleared swaps customer collateral to report the balances in the FCM’s accounts to a third party designated by the NFA.  The rule also provides that in order for a depository to be deemed acceptable, it must make the daily reports to the third party designated by the NFA.   

The daily confirmation system is still under implementation, but the first phase, beginning with banks, was implemented on January 1, 2012.  Other categories of depositories will be added in 2013. 

Last year, I blogged about the newly adopted Part 165 of the CFTC regulations, which implements the CFTC’s whistleblower program under the Dodd-Frank Act.  Last week, the NFA issued a notice reminding its members that CFTC Regulation 165.19 specifically provides that a pre-dispute arbitration agreement arising under the whistleblower rules is invalid.  As a result, the NFA recommends that its members ensure that employment agreements specifically exclude claims arising under Part 165 of the CFTC Rules. 

Further, the NFA informed its members that, although NFA’s arbitration rules are mandatory at the election of the person filing a claim, the NFA would not honor any pre-dispute arbitration agreements that purport to require an associate to file a claim that arises under the whistleblower rules.  However, a member would still be obligated to arbitrate the dispute if the associate voluntarily elects to file the claim against the member firm.

Late last week, one of my colleagues sent me an e-mail where he copied 8 other people, half of them I could not identify if my life depended upon it.  I then heard about the person who had a Twitter account with over 17,000 follwers, and was now being sued by his former employer over ownership of the account– really, does anyone think the person knows 17,000 people?  Firms and persons working in financial services industries generate trillions of e-mails every year, encompassing the mundane to the critical. 

These firms and their employees also seem to be involved in numerous civil, regulatory and criminal investigations and litigations.  Much of the vast amount of money in legal fees paid to defend these firms and their employees (sums that sometimes greatly exceed the GDP of several developing countries) often relate to e-mail review and production.  General counsels and firm management looking for ways to save money on these bills should, initially, read my article that was published in the New Jersey Law Journal, outlining the “CC” problem and ways of clamping down on this terrible plague afflicting our society, http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294970187.

Once read, please do your part in stopping this madness because the dollar you save maybe your own!!

The CFTC recently adopted the NFA’s interpretative notice to NFA Compliance Rule 2-36 regarding price slippage and price re-quoting.  Rule 2-36(b)(1) prohibits a Forex Dealer Member (“FDM”) from engaging in a forex transaction that cheats, defrauds or deceives any other person.  Similarly, Rule 2-36(b)(4) prohibits an FDM from engaging in any manipulative acts or practices regarding the price of any foreign transaction.

When a customer’s order reaches an FDM’s trading system, the price being offered on the system may be different than the price offered at the time the customer first submitted the order.  The difference between these two prices is commonly referred to as slippage.  Because the FDM takes the other side of an order, if the market movement is unfavorable to the customer, it will be favorable to the FDM and vice versa. 

In order to prevent re-quoting the current price to the customer to confirm whether the customer wants to still place the order, FDMs have built in and clearly disclosed slippage parameters to customers that permit the execution of the order if slippage is within the established parameters.  As a result, some FDMs have set asymmetrical parameters that makes it more likely that the customer’s order would be filled when the market move is unfavorable, which benefits the FDM.

The NFA’s interpretative guidance does not prevent FDMs from setting symmetrical parameters. However, in order to avoid violating NFA Compliance Rule 2-36 when addressing these price changes, FDMs must adhere to the following:

  • FDMs must apply the slippage setting uniformly regardless of the direction the market has moved; 
  • If the FDM re-quotes prices when the market moves against it, it must re-quote prices when the market moves in its favor;  
  • FDMs must ensure that the customer is aware of how the FDM handles these price change circumstances prior to trading with the FDM by providing full written disclosure of its policy, including the information outlined in the interpretive notice. For existing customers, FDMs must provide written disclosure prior to the effective date of this interpretive notice. 
  • FDMs must have written procedures that outline the manner it handles price changes; and 
  • FDMs must ensure that its promotional material does not include information that is misleading with respect to its price slippage and re-quoting practices.

The NFA’s position is that, although the interpretive notice becomes effective on March 12, 2012, any practices outlined in the notice are currently violations of Rule 2-36. 

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

Thought you might be interested in a recent podcast I did concerning my securities law practice.  http://web.me.com/cordpar/Client_Development_Tips/Law_Consulting_Coaching_Podcast/Entries/2011/10/28_Developing_a_Securities%2C_White_Collar_and_Complex_Litigation_Practice.html