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. Global Markets Advisory Committee Recommendations. On March 7, 2024, CFTC advanced three new recommendations: 1) to expand the universe of liquid assets that can be posted as uncleared margin, specifically to include U.S. Treasury ETFs; 2) to publish a resource document to support market participants making the transfer to T+1; and 3) to continue collaboration between industry, standard-setting bodies, and the regulatory community in the creation of a consensus-driven approach to classifying assets and the functions they serve

Enforcement and Litigation

• Department of Justice. Bitcoin Money Laundering Conspiracy. On March 12, 2024, a federal jury convicted a dual Russian-Swedish national for operating the longest-running bitcoin money laundering service on the darknet. Over the course of its decade-long operation, Bitcoin Fog moved over 1.2 million bitcoin, which was valued at approximately $400 million at the time of the transactions. The bulk of this cryptocurrency came from darknet marketplaces and was tied to illegal narcotics, computer crimes, identity theft, and child sexual abuse material.
• Securities and Exchange Commission. Crypto Asset Ponzi Scheme. On March 15, 2024, SEC charged 17 individuals for their roles in a $300 million Ponzi scheme that involved Houston, Texas-based CryptoFX LLC and targeted more than 40,000 predominantly Latino investors. The complaint alleges that CryptoFX raised $300 million from investors but did not use most of the funds for its claimed trading purposes. Instead, the defendants allegedly used investor funds to pay supposed returns to other investors, to pay commissions and bonuses to themselves and investors, and to fund their own lifestyles.

Rulemaking Updates

• Securities and Exchange Commission. Disclosure of Order Execution Information. On March 6, 2024, SEC adopted amendments to Rule 605 of Regulation NMS updating the disclosure required for order executions in national market system stocks (NMS stocks). Among many changes, the final amendments expand the scope of entities subject to Rule 605, modify the categorization and content of order information required to be reported under the rule, and require reporting entities to produce a summary report of execution quality. The amendments also expand the scope of entities that must produce monthly execution quality reports to include broker dealers with a larger number of customer accounts and single dealer platforms. These amendments were first proposed in December 2022.
• Securities and Exchange Commission. Climate-Related Disclosures. On March 6, 2024, SEC adopted new rules requiring that climate risk disclosures be included in SEC filings. These disclosures include: climate-related risks that have had or are reasonably likely to have a material impact on the registrant's business strategy, results of operations, or financial condition; the actual and potential material impacts of any identified climate-related risks on the registrant's strategy, business model, and outlook; and the capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, among many other disclosure requirements. On March 15, 2024, the United States Court of Appeals for the Fifth Circuit granted an administrative stay of the new rules, which also face challenges in the Sixth, Eighth, Eleventh, and D.C. Circuit Courts of Appeals.
• Financial Crimes Enforcement Network. Customer Due Diligence Requirements for Designated Beneficiaries of Individual Retirement Accounts. On March 15, 2024, FinCEN issued an administrative ruling that further clarifies the obligations for broker dealers that open new accounts for legal entity customers. The ruling supersedes FinCEN's April 14, 2023, clarification of the same matter.

Other News of Note

• Commodity Futures Trading Commission. CFTC's Current Priorities. On March 12, 2024, CFTC Chairman Rostin Behnam provided a brief overview of CFTC's current priorities. These priorities include the consideration of a proposal to amend CFTC rules that address the treatment of certain types of event contracts, and the finalization of amendments to the Part 39 rules to address the protection of clearing member funds held by DCOs, commonly referred to as the "Member Property" proposal.
• Financial Industry Regulatory Authority. FINRA Impersonation Scams. On March 1, 2024, FINRA issued a cybersecurity advisory, proactively warning member firms of continuing social engineering campaigns involving fraudulent representations of individuals purporting to be FINRA representatives. FINRA observed that many of the reported sites impersonating FINRA or FINRA staff leveraged end-to-end encrypted communication platforms to communicate with victims. FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments, or clicking on any links.

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