Broker Dealer Regulatory Digest

Editor's Note

The following newsletter provides a roundup summarizing enforcement actions, guidance, rulemakings, and other public statements taken by a federal and/or state financial services regulatory agency, specifically focusing on: (1) the source of the development (regulator, legislative body, etc.), (2) the subject matter (consumer lending, money transmission, capital markets, etc.), and (3) the general issue covered.

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Regulatory Developments

• Commodity Futures Trading Commission. Extended Public Comment Period. On February 2,2024, CFTC announced that the public comment deadline for a proposed rule to ensure that clearing member funds and assets receive proper treatment in the event the derivatives clearing organization (DCO) enters bankruptcy. The comment period was extended from February 16 until March 18, 2024.
• Commodity Futures Trading Commission. Global Markets Advisory Committee Recommendations. On February 8, 2024, CFTC's Global Markets Advisory Committee (GMAC) formally advanced eight recommendations to CFTC to enhance the resiliency and efficiency of global markets, including U.S. Treasury markets, repo and funding markets, and commodity markets. These recommendations include: appropriately calibrated block and cap sizes under CFTC Part 43 swap data reporting rules to enhance market liquidity and financial stability; harmonization of the treatment of money market funds as eligible collateral to improve market liquidity; and best practices for exchange volatility control mechanisms to address market stress and market dislocation during periods of high volatility, among other topics.
• Financial Crimes Enforcement Network. Proposed Rule to Combat Illicit Finance. On February 13, 2024, FinCEN issued a Notice of Proposed Rulemaking that would require both registered investment advisors and exempt reporting advisors to apply AML/CFT requirements pursuant to the Bank Secrecy Act (BSA), including: implementing risk-based AML/CFT programs; reporting suspicious activity to FinCEN; and fulfilling recordkeeping requirements. The proposed rule would add investment advisers to the list of businesses classified as "financial institutions" under the BSA. FinCEN is accepting comments on the proposed rule until April 15, 2024.
• Securities and Exchange Commission. New Rules Change Definitions of Dealer and Government Securities Dealer. On February 6, 2024, SEC adopted new rules requiring market participants who engage in certain dealer roles, in particular those who take on significant liquidity-providing roles in the markets, to: register with SEC under Section 15(a) or Section 15C, as applicable; become members of a self-regulatory organization (SRO); and comply with federal securities laws and regulatory obligations and applicable SRO and Treasury rules and requirements.
• Securities and Exchange Commission. Private Fund Reporting. On February 8, 2024, SEC and CFTC concurrently adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with CFTC as commodity pool operators or commodity trading advisers. The amendments enhance how large hedge fund advisors report a wide range of data and require additional basic information about advisers and the private funds they advise.
• Securities and Exchange Commission. Updated Definition of Qualifying Venture Capital Funds. On February 14, 2024, SEC proposed a rule that would update the dollar threshold for a fund to qualify as a "qualifying venture capital fund" for purposes of the Investment Company Act of 1940. The rule would update the dollar threshold to $12 million aggregate capital contributions and uncalled committed capital, up from the current standard of $10 million.

Enforcement and Litigation

• Department of Justice. Cryptocurrency Conspiracy. On February 7, 2024, DOJ announced the conviction of a Pennsylvania man for manipulating the price of a security and scheming to defraud investors in connection with the purchase of Hydrogen Technology's cryptocurrency, HYDRO. The co-conspirators hired an outside firm, Moonwalkers Trading Limited of South Africa, to run an automated trading system or "bot" to manipulate the price of HYDRO on a cryptocurrency exchange in the United States. The jury convicted the man of conspiracy to commit securities price manipulation and conspiracy to commit wire fraud.
• Securities and Exchange Commission. Accounting Fraud. On February 6, 2024, SEC announced the settlement of accounting fraud charges against Cloopen Group Holding Limited, a China-based provider of cloud communications products and services whose American depositary shares formerly traded on NYSE. The order found that two senior managers directed their employees to improperly recognize revenue on numerous contracts for which Cloopen had either not completed or not started work. As a result of this misconduct and other accounting errors, Cloopen overstated its unaudited financial results for the second and third quarters of 2021 and its announced revenue guidance for the fourth quarter of 2021. SEC did not impose a civil penalty because Cloopen self-reported the violations after conducting an internal investigation. Without admitting or denying the SEC's findings, Cloopen agreed to cease and desist from further violations of the charged securities laws.
• Securities and Exchange Commission. Failure to Register a Crypto Lending Product. On February 7, 2024, SEC announced charges against TradeStation Crypto, Inc., based in Plantation, Florida, for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets in a TradeStation account in exchange for the company's promise to pay interest. The order finds TradeStation did not qualify for a registration exemption and was required to register its offer and sale but failed to do so. The firm reached a separate, multi-state settlement of the same charges.
• Securities and Exchange Commission. Recordkeeping Failures. On February 9, 2024, SEC announced charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. SEC's investigations uncovered pervasive and longstanding uses of unapproved communication methods at all 16 firms. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of federal securities law. The firms will pay combined civil penalties of more than $81 million. One investment company self-reported and was ordered to pay a lower civil penalty.

Research and Analysis

• Bank for International Settlements. Streamlining Variation Margin in Centrally Cleared Markets. On February 14, 2024, BIS' Committee on Payments and Market Infrastructures (CPMI) and IOSCO published a discussion paper and call for interested parties to comment on eight effective practices that address CCPs' and clearing members' variation margin (VM) processes and transparency. The effective practices cover: intraday VM call scheduling and frequency; treatment of excess collateral; the pass-through of VM by CCPs; and transparency between CCPs, clearing members and their clients. Input on the report will be accepted until April 14, 2024.

Other News of Note

• Commodity Futures Trading Commission. Financial Romance Fraud. On February 7, 2024, CFTC issued a customer advisory alerting dating/messaging app and social media users to a scam asking for financial support or giving investment advice using the platforms. Criminal organizations trick victims into investing money in cryptocurrency or foreign currency scams only to defraud them. CFTC reports that financial romance and grooming gangs stole more than $3.5 billion in 2023 by convincing people they were starting a friendship or romantic relationship with an actual person.

Jonathan Cristol is a regulatory analyst with Davis Wright Tremaine LLP.