Search This Blog

This is a photo of the National Register of Historic Places listing with reference number 7000063

Monday, March 30, 2015 | International Cooperation in a New Data-Driven World | International Cooperation in a New Data-Driven World

Grading the Commission’s Record on Capital Formation: A , D, or Incomplete?

Grading the Commission’s Record on Capital Formation: A , D, or Incomplete?


03/26/2015 11:05 AM EDT

The Securities and Exchange Commission today charged nearly two dozen companies and individuals who regularly bought and sold securities on behalf of a suburban Chicago-based trading firm without registering with the SEC as a broker-dealer as required under the federal securities laws.

The broker-dealer registration provisions of the securities laws ensure the protection of customers by requiring firms to undergo periodic inspections by the SEC and maintain books and records for their securities transactions.  An SEC investigation found that Global Fixed Income LLC, which was primarily in the business of purchasing investment grade corporate bonds, entered into agreements with third parties that acted as unregistered broker-dealers on its behalf and bought billions of dollars’ worth of newly issued bonds causing Global Fixed Income’s allocation in the bond offerings to increase.  Because the offerings were often oversubscribed, Global Fixed Income was generally able to sell or “flip” the bonds within a few days for a small profit compared to the dollar value of the trade, and it split profits with the third-party participants.

Global Fixed Income and its owner Charles Perlitz Kempf, who arranged the deals, agreed to settle the SEC’s charges along with 21 third-party participants.  They must collectively pay nearly $5 million in disgorgement of profits plus approximately $1 million in penalties.

“Global Fixed Income essentially hired firms to act as brokers on its behalf and purchase billions of dollars of newly issued bonds to increase profitability in the bond market, yet none of the firms or their employees were registered to legally act as brokers,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s orders instituting settled administrative proceedings, the misconduct occurred from July 2009 to June 2012.  The order finds that Global Fixed Income and Kempf caused violations of Section 15(a)(1) of the Securities Exchange Act of 1934, and Kempf willfully aided and abetted violations of Section 15(a)(1).  The third-party participants committed violations of Section 15(a)(1) and include companies and 12 individuals.

Global Fixed Income, Kempf, and the third-party participants consented to the orders without admitting or denying the findings.  In addition to the disgorgement amounts set forth in the orders, Global Fixed Income agreed to pay a $500,000 penalty, each corporate participant agreed to pay a $50,000 penalty, and each individual participant agreed to pay a $5,000 penalty.  The SEC’s order suspends Kempf from associating with a registered entity or participating in a penny stock offering for 12 months.

The SEC’s investigation was conducted by David Rosen and supervised by Finola H. Manvelian of the Los Angeles Regional Office.

Sunday, March 29, 2015

Statement at Open Meeting on Adoption of Regulation A Amendments

Statement at Open Meeting on Adoption of Regulation A Amendments


Remarks of CFTC Commissioner Sharon Y. Bowen before the 17th Annual OpRisk North America
March 25, 2015

Thank you for that wonderful introduction. I’m honored to speak today to a group that is grounded in an issue that is very near to my heart: operational risk. When I was a corporate lawyer here in New York, I was immersed in operational risk issues every time I worked on an M&A deal. For every deal, the parties and their counsels had to consider many different scenarios. From the possibility that the parties’ data systems might not easily interface, that the two companies had incompatible systems to administer retirement and benefit plans, or that operations outside of the U.S. had different regulatory oversight and restrictions – everything had to be thoroughly vetted prior to finalizing the deal.

The reason we had to do all this advance legwork is something that you all are familiar with – a deal has to make economic sense even if things don’t go as fully expected. And let’s be honest – they never truly go as fully expected. Sometimes a major supplier to one of the parties goes bankrupt for idiosyncratic reasons, forcing a rapid change in the supply chain. Maybe a strike occurs that cuts off access to a particular material that one of the parties relies on. A local election in a market unconnected to the parties’ business goes unexpectedly, triggering a broader crisis of confidence that ripples back to the parties’ core markets. Or a party’s database or its website could simply crash for several hours or days, greatly reducing business and causing significant consumer complaints.

Even worse, there could be a major negative shock to a party’s business. For instance, one of the core analytic models that a bank has relied on could be found to have a significant flaw and force a restructuring of the entire business strategy. A financial entity could face a number of lawsuits, from private actors as well as regulators, necessitating a reworking of the culture of the entity. Or, to reference something that we’re all becoming only too familiar with, hackers could compromise the data systems of a party, endangering personal, private data and causing a crisis of lost confidence in the company among the press, industry, and the general public.

These last few examples aren’t really hypotheticals – we’ve seen numerous examples of them in just the last few years. Some of the most significant events in business, from hacking to shifting the culture at firms in a better direction, are occurring in the operational risk space. In fact, I’m fairly confident all of you are only too familiar with the strife that a major film studio experienced after it was hacked last year. Dealing with these issues is certainly a challenge, but it also represents an opportunity. People who are operational risk experts, like all of you, have the chance to help address some of these significant issues and hopefully even devise some strategies to make these problems much easier to handle in the future.

Of course, as a Commissioner at the CFTC, I’m not an unbiased actor. I’m focused on these issues because I believe operational risks can easily flow to the core of our markets. So, in today’s speech, I will lay out the major trends in operational risks that I believe the market is facing at present. Then, I will provide you with some thoughts on what we need to do to address them. Also, in an effort to provide all of you with some specific insights into a major CFTC rule, I’ll explain how I view our new regulation governing the risk management practices of swap dealers and major swap participants.


The first risk is one that you all know only too well because it’s been in the news basically non-stop for months: cybersecurity. As you all know, trading is effectively entirely electronic. Most orders occur electronically, and even when two traders are booking a deal over the phone, it is being logged and finalized via electronic communications. The result is that financial actors have become storehouses for massive amounts of data, much of it incredibly sensitive. From information about trading strategies to client’s social security numbers, the damage that could be done via a major cyberattack on an exchange, clearinghouse, Swap Execution Facility (SEF), or systemically important financial institution is almost incalculable.

Before going further, it’s worth defining the world of cybersecurity threats. At base, there are really two kinds: thieves and vandals. Thieves are simply trying to make money via sensitive information, either by trading off of it or selling it to others. While their methods seem to be getting more sophisticated, this kind of cyberthreat isn’t new. Vandals, on the other hand, are simply trying to damage a system to cause pain, such as leaking information to try and change a corporate policy or by debilitating an information system with the aim of causing a market crash. This threat, which appears to now come from both private persons and even hostile governments, isn’t something we’re really accustomed to dealing with.

All major financial actors need to be ready to deal with both thieves and vandals. That means they need to have absolute top of the line cybersecurity that guards against destructive attacks as well as the theft of data, and they need to be constantly trying to improve on that level. Cybercrime is not static – thieves and vandals are constantly innovating. Therefore, our defenses need to be dynamic. That means resources need to be allocated, year in and year out, to updating defenses and crafting new strategies to prevent the loss of key data.

It also means that, in this instance, standardization is not necessarily our friend. If we at the CFTC establish one simple standard of data security and get everybody else to follow it, that just means we’ve created a blueprint for all our registrants to be hacked. While we need some baseline protections, we need to rely on each member of the industry to craft unique, sufficiently strong cybersecurity regimes. In that regard, we need a two-tiered structure, one that establishes a clear floor for everyone to obey and then mandates that each company add on additional protections, with the largest firms and those with the greatest risk having the most additional security protections. In the case of the largest firms, that probably requires hiring a dedicated team of people with extensive coding and hacking expertise to address innovations in cyber threats and a chief of information security who reports directly to the CEO or the board.

While the threats may be the greatest for the largest firms, this is not an issue that smaller firms can avoid addressing. While a small futures commodity merchant or swap trader might not think of themselves as a target, thieves obviously won’t go after just the biggest fish; they’ll try to infiltrate the systems of smaller firms too. And they will do so in the form of a virus, worm, or “phishing.” And vandals, especially if they’re employed by a foreign government, could go after a smaller firm as part of a broader attack on our financial system. We’re collectively only as strong as our weakest link, and so we need a high baseline level of protection for everyone, and we need to make sure that all registrants have crafted an effective cybersecurity plan.

I have some concerns that we’re not there yet in the financial industry. I found the Sony hack experience especially disturbing partly because that company’s information systems, while flawed, were not shockingly weak. The company had an information security czar from 2011 through 2014 who had been Deputy Undersecretary of Homeland Security.1 It also had already taken steps to improve its data security after a hack in 2011. If, despite that, Sony was this vulnerable, I worry that some financial actors who have far fewer protections may not be sufficiently protected from cyberthreats at present.

In the same regard, I worry that our registrants won’t inform us of a hack the moment it occurs. There’s nothing you can do during a cyberattack that is more important than to inform your regulators, particularly if the attack is coming from a foreign government. And not knowing the source of the attack, which often takes days or weeks to identify, makes prompt notification even more important. By delaying that notification, you increase the risk that the attack has catastrophic consequences for your firm and the rest of the system.

At the end of the day, regulators and the industry are allied in the fight to prevent and mitigate cyberattacks. We have to be working together. Because this threat is constantly changing and new entities are continually developing new strategies, we all need to adopt a stance of constant improvement. No security system, firewall, or protocol will ever be flawless for very long. Instead, the moment you release a new protection into the system, you need to start developing its replacement, just as software companies do. The Commission and other regulators are not exempt from this commitment – we also need to be trying to come up with the next security regulation within minutes of finalizing the last one. The Commission recently held a public roundtable where we received input from registered entities, market participants and organizations, and other government agencies that have developed best practices and standards for cybersecurity. The discussion focused on the need to test system safeguards, risk assessment practices, vulnerability and business continuity, and disaster recovery. While I think we can make great strides to reduce our exposure to cyberattacks in a very short time frame of years or even months, this is not a problem we can ever cure, and I encourage you to approach these cybersecurity risks through that prism.


My second risk trend is also technology related – specifically, it’s the trend of technology breaking. As I said earlier, the markets have become almost completely electronic. Many of the technologies that comprise commerce are easily understood, such as e-mail, virtual private networks, and databases. Much of the trading technology itself is more esoteric, such as client-matching software within networks, software that interfaces between two exchanges, SEFs, and even high-frequency trading algorithms. Now, none of these innovations is inherently bad – many of them are logical extensions of previous technologies like client-matching software. Yet, as finance has become an industry that is really housed in cyberspace, there is a risk that these new technologies may not fully be understood by the people who are using them, particularly with regard to high frequency trading.2 This isn’t a hypothetical fear – there have been numerous examples of algorithms in particular malfunctioning in both the equities and futures markets, including during the 2010 Flash Crash, 3 and the majority of these events appear to have been accidents. I am grateful that, so far, there has not been a notable example of a massive technological failure affecting clearinghouses.

But this is not a risk that is going away. Instead, I am concerned that similar events will continue unless there is a countervailing pressure to encourage companies to better quality control and monitor their algorithms. I am not saying that this is grounds for the CFTC or other regulators to specifically approve the use of new technologies as we used to approve products for sale on futures exchanges. I do think entities that are using, for instance, high frequency trading algorithms in the futures market should at least be required to inform the CFTC that they are using those technologies, just as other registrants often inform the CFTC if they are implementing major new technological changes.

Doing so will help ensure that industry participants fully understand the tools that they are using to trade. The existence of that kind of disclosure would also make it easier for us to unwind similar malfunctions in the market and make it easier for us to see who is trying to use algorithms to manipulate the markets.

For now, though, I primarily want to encourage you to consider the dangers that your technologies could fail or malfunction to be part of your overall risk management. That includes getting a fulsome grounding in how the technology works and getting the input of your technical experts on the flaws in your present technology. Hopefully, you are already doing this, and if you are, I congratulate you. If you are not, engaging in this kind of risk analysis will allow you to better anticipate a major risk and, hopefully, allow you to fix or replace any risky technology before it causes a major problem, rather than after a system has failed.


The third risk trend is something that has received a lot of attention in finance recently: culture. As a Commissioner at the CFTC, I’ve seen a significant number of settlements and alleged violations of our laws and regulations in just the last nine months. Too many times, these settlements and alleged violations are coming from large actors who have previously run afoul of the rules, endangering the reputation of those actors and the trust that undergirds the larger financial system. In fact, in one 2011 poll, 67% of Americans said that most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it. While that number should be surprising, what’s even more shocking is that even in 1999, at the peak of the dot-com bubble, 60% of Americans took the same view.4 We have a culture problem in finance, full stop, and it’s getting to the point of endangering firm’s profits and our system’s sustainability and stability.

I agree that we need to improve the culture in finance, but it’s not just that we need to disincentivize people from going against the rules. I think we also need to improve the culture of communication within financial firms. In a world as complex and convoluted as finance, it is easy to make mistakes. Maybe an analyst fails to consider a particular possibility while developing a model. Perhaps a coder makes a mistake while designing an algorithm and accidentally includes a line of code that will cause the algorithm to put in a sell order in natural gas at 1000 times the usual size given a rare move in the price. Or someone analyzing a potential purchase could overlook a key appendix.

The point is mistakes happen. Culture is how those mistakes get addressed. Every company needs to make it easy to fix or mitigate those mistakes, and that requires a culture where information about mistakes easily travels from the bottom to the top and vice versa. I’ve seen numerous examples where a person at a desk learns about a problem and, rather than report it to his superiors, sits on the information. As a result, the problem is often not fully fixed and the entire company pays a price. By the same token, messages from the top need to filter down to the bottom that following the rules is not negotiable or something to do when they make economic sense. Too often, it seems that message has been insufficiently strong in some large firms to make it all the way down to the rank and file. The average business school graduate will change jobs many times during her career. That means that this message must constantly and consistently become part of the DNA of the organization.

One thing I learned in my career is that when something is the responsibility of everybody on a team, too often nobody actually focuses on it. The same is true of culture. If there isn’t a dedicated person in the company trying to improve the culture – both through communication and making it clear that the rules need to be constantly followed – the culture won’t broadly improve.

Each organization should have codes of conduct, rules of ethics, and conflicts of interest that are clear. And a mandatory condition of continued employment for each employee should be that he annually certifies that he has abided by such standards. Failure to adhere to this standard, absent significant extenuating circumstances, should result in termination of employment.

Each supervisor and division head should also be responsible for ensuring that those who report to them have received sufficient training, have fully understood the rules, and will abide by those rules. Those supervisors and division heads must then provide written certifications to that effect to senior management. On the basis of those documents, the CEO should provide certifications to that effect to the Board of Directors, shareholders, and regulators.

If, subsequently, it emerges that ethical problems continued in significant fashion or major problems were not relayed up or down the chain, the designated certifier could face sanction. If a company has a number of violations, the sanctions for future violations would inherently have to be more severe to discourage recidivism, and it is possible that more than one person at the company among senior management would also be on the hook.

The CFTC is mandated by Dodd-Frank to release binding rules on governance, and I will endeavor to ensure that those rules are strong. In the meantime, I would encourage all of you to do what you can both to assess your risks of having a bad culture and to improve your organization’s culture as fast as you can. Unlike cybersecurity, this is a problem that can be solved by each individual firm.

Lack of Regulatory Clarity

The fourth risk trend is something that I am uniquely positioned to both discuss and talk about: a lack of regulatory clarity. This is a topic that is typically talked about in the context of the risk that regulators will change previously finalized rules without giving sufficient notice to industry. Yet, it also applies to situation where rules required by Congress remain unfinished for long periods of time and therefore in a state of flux. Additionally, it also applies to situations where a regulator relies too much on issuing guidance and no-actions letters for previously finalized rules. I believe that, as much as possible, we should change our regulations via the ordinary process of notice and comment and resist the temptation to craft a regulatory regime primarily through no-action letters.

While the CFTC has largely completed its required Dodd-Frank rulemakings, we still have a few rules left on the docket, including margin, governance and position limits. It is my sincere belief that we can finalize all three this year. I see no reason why these rules need to remain in flux when the calendar turns over to 2016, and I think failing to finalize them this year will exacerbate uncertainty that harms both industry and the overall market.

Risk Management Policies

Regulatory clarity also requires that the industry understand what regulators meant when they released particular rules. With that goal in mind, I wanted to give you my thoughts on a final rule the CFTC released a few years ago: our regulation requiring risk management programs for swap dealers and major swap participants, known as Section 23.600. Now, I suspect you’re all experts on this rule, so you know that this rule states that each swap dealer and major swap participant needs to establish and enforce a system of risk management policies associated with its swaps activities.5 This written policy needs to be approved by the governing body of the swap dealer or major swap participant and it has to be provided to the Commission.6 The swap dealer or MSP also has to establish and maintain an independent risk management unit that will carry out the risk management program and it has to report directly to senior management.7 The program has to cover, among other things, a number of risk categories: market risks, credit risks, legal risks, and, of course, operational risk.8 The program also must include a policy for identifying and taking into account the risks of new products before they are used in transactions.9

1. List of Risks Not All-Inclusive

As I’m sure you all have been told by your legal advisers or have seen first-hand, this is a dense regulation. There are a few points I want to flag though. First, the list of risks that risk management programs have to consider is not all-inclusive. It explicitly states that the risk management program of each swap dealer and major swap participant, and I quote, “shall include, but not be limited to” several categories of risk, such as market risk, credit risk, operational risk, et cetera.10 This is not a check-the-box exercise. Instead, that means we have stated the risks that you absolutely must include but you should not regard your risk management plan as complete if you only deal with the risk categories listed explicitly. For instance, I think any risk management plan should probably include at least one other category: systemic risk, which may be regarded as the risk of your products to financial crises and major geopolitical disruptions, among other things. While I wish we’d explicitly included systemic risk in the regulation, I believe it is required given the goals and text of the regulation.

2. Risk Categories Not All-Inclusive

Second, the risk categories themselves are similarly not all-inclusive. In the case of each category, the rule states that programs and policies to address a specific risk shall include two or three explicit risks, quote, “among other things.”11 In the case of operational risk, we explicitly stated that a risk management program has to take into account secure, reliable, and independent operating systems, safeguards against deficiencies in operation and information systems, and reconciliation of all data in operating systems. Yet, I think these three topics only begin to scratch at the surface of operational risk. As I’ve already said, another operational risk that needs to be considered is the danger of inadequate training or communication failures within the organization. I would specifically urge you not to think, by addressing the three explicit operational risks, that you have sufficiently considered the operational risks to your organization. Instead, I recommend that you use these three explicit operational risks as a starting point to help you to identify additional operational risks that do not fall within these three topics.

On the subject of the safeguards referenced in the operational risks to consider, I want to make one additional point. The rule requires your risk management plans to take into account, quote, “safeguards to detect, identify, and promptly correct deficiencies in operating and information systems.”12 I do not think that this requirement can be satisfied with either a list of principles that staff will use to address deficiencies or a listing of the technology you have in place. Instead, you can only address this list with both. You need to lay out the specific technology that you use to find and fix these problems and how staff will use these systems. Only with that kind of information will it be clear to both your employees and the Commission how these technological deficiencies will be addressed.

3. Senior Management Involvement

Third, on the subject of senior management, it is not enough to simply show the plan to the governing body and have them unthinkingly sign it. The regulation is designed to create risk management programs that are really substantively considered by the senior management of a swap dealer or major swap participant. That is why we made sure that the implementation and enforcement of the risk management plan is to be carried out by an independent unit that has direct access to senior management. Senior management therefore needs to really consider and engage with the process of creating and updating the risk management plan. At the end of the day, senior management needs to have a vested interest in the success and usefulness of the risk management program, and I hope that we can make this point more clear when we finalize our governance rules.

4. Independent

Fourth, the risk management unit needs to truly be independent. Ideally, each risk management program would have a majority of people in it who, when they arrive at the risk management unit, have no prior work experience in the company. That kind of distance from the company will help ensure that the unit looks at issues with fresh eyes and reduce the risk that the risk management unit simply ratifies prior analyses without really considering the costs and benefits of doing so. Of course, there is no numerical requirement that you have a majority of “new” employees in the unit. I would however, at least urge you to hire some people without company experience to serve in the unit. Not only does hiring such people make it more clear that the unit is truly independent to us, but it also helps ensure that you are getting unbiased analysis from the unit. Additionally, allowing the unit to truly be independent should help with the implementation of policies to encourage employees to report violations of the risk management plan to senior management, a requirement under subsection c(7) of the regulation.13

Finally, these plans should be dynamic. While I’m not saying that you should create a new risk management plan each year from scratch, I would encourage you to seriously rethink everything about your overall risk management plans with some frequency. This includes doing aggressive testing to see that the rest of the organization is carrying out the plan and that your technological safeguards and firewalls continue to be able to withstand new threats. This may seem like a tall request, but the truth is that the world itself is dynamic and change is constant. These plans are fundamentally designed to protect you and your clients, as well as the market and the general public, and you’ll be better off if you’re aggressively trying to catch all the notable risks that your business faces. After all, in finance especially, an ounce of prevention is better than a pound of cure.

Operational Risk Critically Important to Finance

Well, I think I’ve now exhausted everyone’s patience on the subject of Section 23.600. Before concluding, I want to return to what I said at the beginning of this speech – I think operational risk is a critically important part of finance. It’s by considering operational risk in advance that a smart company is able to be flexible in a tough market or weather a storm. Ultimately, the future of our industry is an unknown commodity and regulators and investors all have to be ready. And while there will always be black swan events that do come out of nowhere, the more companies take into account as many of their real risks as is possible, the better each individual company and our financial system generally will be able to withstand unforeseen events.


In that regard, I’m focused on these issues because they are important to me as a regulator, as someone experienced in the financial sector, and as a member of the public. As a regulator, I believe that our confidence in the financial system depends on its ability to withstand future potential financial crises, and that means major financial actors need to fully implement requirements regarding risk management programs. As someone experienced in the financial sector, I believe that our confidence in the financial system depends on its ability to properly function, and that requires sufficient protections in place in financial entities against hacking and cyberattacks. And as a member of the public, I believe that our confidence in the financial system depends on the public trusting that the financial laws and regulations are being followed, and that means changing the culture at major financial institutions so that there are far fewer violations of our laws and regulations. Thank you, and I welcome your questions.

1 Elizabeth Weise, “Chief Information Security Officers Hard to Find – and Harder to Keep,” USA Today, Dec. 3, 2014, available at

2 Markets Media, “Futures Markets Warm to Algos,” Nov. 10, 2014, available at

3 Ronald D. Orol, “SEC, CFTC Blame Algorithm for ‘Flash Crash’,” MarketWatch, Oct. 1, 2010, available at

4 The Harris Poll, “Massive 6-to-1 Majority Favors Tougher Regulation of Wall Street, “ May 20, 2011, available at

5 Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20128, 20205 (Apr. 3, 2012) (adding 17 C.F.R. § 23.600), available at

6 Id.

7 Id. at 20205-06

8 Id. at 20206-07

9 Id. at 20206

10 Id.

11 Id.

12 Id. at 20207

13 Id.

Last Updated: March 25, 2015

Saturday, March 28, 2015

The Benefits of Structured Data for Investors

The Benefits of Structured Data for Investors


SEC Proposes Rule to Require Broker-Dealers Active in Off-Exchange Market to Become Members of National Securities Association
03/25/2015 12:45 PM EDT

The Securities and Exchange Commission today proposed rule amendments to require that broker-dealers trading in off-exchange venues become members of a national securities association.  The amendments would enhance regulatory oversight of active proprietary trading firms, such as high frequency traders.

“This proposal embodies a simple but powerful principle of the federal securities laws – the protection of investors and the stability of our markets require that trading is overseen by both the Commission and a strong self-regulatory organization,” said SEC Chair Mary Jo White.  “Today’s proposed rules would close a regulatory gap by extending oversight to a significant portion of off-exchange trading.”

The proposed amendments to Rule 15b9-1 under the Exchange Act would narrow an exemption that currently exempts certain brokers-dealers from membership in a national securities association if they are a member of a national securities exchange, carry no customer accounts, and have annual gross income of no more than $1,000 that is derived from securities transactions effected otherwise than on a national securities exchange of which they are a member.  Income derived from proprietary trading conducted with or through another broker-dealer does not count against the $1,000 limit.  The exemption originally was designed to accommodate exchange specialists and other floor members that might need to conduct limited hedging or other off-exchange activities ancillary to their floor-based business.  Over time, the markets have undergone a substantial transformation, including the emergence of active cross-market proprietary trading firms, many of which engage in so-called high-frequency trading strategies.  Although the business of these firms may not be focused on an exchange floor, and they may be responsible for a substantial percentage of the trading volume in the off-exchange market, many are not members of a national securities association because they have been able to rely on the broad proprietary trading exemption in Rule 15b9-1.

The proposed amendments would amend the exemption to target the broker-dealers for which it was originally designed – those with a business focused on an exchange floor and over which that exchange is positioned to oversee the entirety of their trading activity.  The proposed amendments, among other things, would eliminate the current proprietary trading exemption and replace it with a more focused one that would accommodate off-exchange transactions by a floor-based dealer that are solely for the purpose of hedging the risks of its floor-based activities.  They also would update the exemption that permits off-exchange transactions necessary to comply with regulatory requirements restricting trade-throughs, under Rule 611 of Regulation NMS.

The SEC will seek public comment on the proposed rule amendment for 60 days following its publication in the Federal Register.

Friday, March 27, 2015


March 25, 2015

CFTC Revokes Registrations of John G. Wilkins and His Company, Altamont Global Partners LLC, Based on Federal Court’s Permanent Injunction Order and on Wilkins’s Related Criminal Conviction

Washington, DC—The U.S. Commodity Futures Trading Commission (CFTC) today announced the revocation of the registrations of Altamont Global Partners LLC (AGP) of Longwood, Florida and its owner, John G. Wilkins, formerly of Chuluota, Florida. AGP was registered with the CFTC as a Commodity Pool Operator, and Wilkins was registered as an Associated Person of AGP.

The CFTC initiated revocation proceedings against AGP and Wilkins on November 25, 2014 (see CFTC Press Release 7069-14, November 25, 2014). After AGP and Wilkins failed to participate in the proceedings, CFTC Judgment Officer Philip V. McGuire issued an Initial Decision on Default (see CFTC Docket No. SD 15-01) on February 23, 2015. The Judgment Officer found that AGP and Wilkins are subject to statutory disqualification from CFTC registration based on an Order for entry of default judgment and an amended Order of permanent injunction entered by the U.S. District Court for the Middle District of Florida that, among other things, (1) found AGP and Wilkins committed fraud by misappropriating commodity pool funds and by delivering false quarterly account statements to pool participants and (2) enjoined AGP and Wilkins from further violations of the anti-fraud provisions of the Commodity Exchange Act, as charged, and from trading or applying for registration with the CFTC (see CFTC Press Release 6869-14, February 28, 2014).

The Judgment Officer also found that Wilkins is subject to statutory disqualification based on his felony conviction for conspiracy to commit mail fraud and wire fraud in connection with these same activities (see United States v. Wilkins, No. 13-cr-181 (M.D. Fla. July 19, 2013)).

The Judgment Officer’s Initial Decision on Default became a final Order of the CFTC on March 25, 2015.

The CFTC thanks the National Futures Association for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this case are Rachel Hayes, Peter Riggs, and Charles Marvine.

Thursday, March 26, 2015


03/25/2015 12:45 PM EDT

The Securities and Exchange Commission today adopted final rules to facilitate smaller companies’ access to capital.  The new rules provide investors with more investment choices.

The new rules update and expand Regulation A, an existing exemption from registration for smaller issuers of securities.  The rules are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.

The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12 month period, subject to eligibility, disclosure and reporting requirements.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White.  “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

The final rules, often referred to as Regulation A+, provide for two tiers of offerings:  Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings.  Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

The rules will be effective 60 days after publication in the Federal Register.

Wednesday, March 25, 2015 | Statement at Open Meeting on Rule 15b9-1 and Reg A | Statement at Open Meeting on Rule 15b9-1 and Reg A


CFTC Orders Marubeni America Corporation to Pay $800,000 for Inaccurately Reporting Positions in Multiple Grains

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Marubeni America Corporation (Marubeni), a dealer and merchant of agricultural commodities and the largest overseas subsidiary of Japan-based Marubeni Corporation, for failing to comply with its legal obligation to submit accurate monthly CFTC Form 204 Reports, regarding the composition of Marubeni’s fixed price cash grain purchases and sales, in violation of the reporting requirements in CFTC Regulation 19.01.

As the CFTC Order states, under CFTC Regulations all persons holding or controlling reportable futures and options positions in certain agricultural commodities (including wheat, corn, oats, soybeans, soybean oil, and soybean meal) and any part of which constitute bona fide hedging positions as defined in CFTC Regulation 1.3(z), are required to file CFTC Form 204 reports showing the composition of their fixed price cash position in each such commodity hedged. According to the Order, a purpose of the Form 204 report is to check compliance with speculative position limits by ensuring that filers that classify their futures positions as hedging actually own or control offsetting cash positions.

The Order finds that during the period from July 2010 through August 2013, Marubeni held reportable positions in Form 204 commodities and was required to file Form 204 reports showing the quantities of the fixed price purchase and sale open cash positions of such commodities it hedged. The Order further finds that during the relevant period Marubeni filed 38 Form 204 reports with the CFTC that did not accurately state the quantities of Marubeni’s fixed price cash positions of each such commodity it hedged. Specifically, the Order finds that Marubeni included in its Form 204 reports both basis and fixed priced cash positions. As noted in the CFTC Order, Marubeni thereafter submitted corrected Form 204 reports.

The CFTC Order requires Marubeni to pay an $800,000 civil monetary penalty and to cease and desist from committing further violations of CFTC Regulation 19.01.

Monday, March 23, 2015


CFTC Staff Issues Advisory Reminding Futures Commission Merchants, Clearing Members, Foreign Brokers, Swap Dealers, and Certain Reporting Markets of their Reporting Obligations Pursuant to the Ownership and Control Final Rule

Washington, DC — The U.S. Commodity Futures Trading Commission’s (“Commission”) Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight today issued a staff advisory (CFTC Staff Advisory No. [15-14]) to remind futures commission merchants, clearing members, foreign brokers, swap dealers, and certain reporting markets (collectively, “reporting parties”) of their obligation to obtain information on a timely basis from their customers or counterparties in order to comply with the ownership and control reports final rule (“OCR Final Rule”).

The staff advisory states that, pursuant to the requirements of the OCR Final Rule, reporting parties must obtain from their customers or counterparties the information necessary for reporting parties to submit certain OCR reporting forms by the deadlines specified in the OCR Final Rule. The advisory further states that it may be advisable for reporting parties to take steps to ensure that their customers and counterparties: respond promptly to requests from reporting parties for OCR information; promptly notify reporting parties of any subsequent updates to the information; and otherwise assist reporting parties in fulfilling their reporting obligations under the OCR Final Rule.

The OCR Final Rule requires the electronic submission of trader identification and market participant data on new and updated reporting forms. These reporting forms collect new information to better identify participants in futures and swaps markets. The OCR Final Rule is currently subject to staff no-action letter 15-03, issued on February 10, 2015. Pursuant to the no-action letter, reporting obligations under the OCR Final Rule follow a staggered implementation schedule with obligations beginning on October 1, 2015. Reporting parties should take preparatory steps, as described in staff no-action letter 15-03, so that they may successfully comply with their reporting obligations on October 1, 2015.

Sunday, March 22, 2015


March 16, 2015
CFTC Orders ICE Futures U.S., Inc. to Pay a $3 Million Civil Monetary Penalty for Recurring Data Reporting Violations

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against ICE Futures U.S., Inc. (ICE), a designated contract market (DCM), for submitting inaccurate and incomplete reports and data to the CFTC over at least a 20-month period, from at least October 2012 through at least May 2014.

According to the CFTC Order, on every reporting day during the period above, ICE submitted reports and data containing errors and omissions, with cumulative inaccuracies totaling in the thousands. The Order further finds that CFTC staff repeatedly notified ICE of the problems with its reports and data and requested that ICE take action to correct the mistakes, but that ICE continued to submit inaccurate reports and data. The Order requires ICE to pay a $3 million civil monetary penalty and to comply with undertakings aimed at improving its regulatory reporting.

CFTC Director of Enforcement Aitan Goelman commented: “The CFTC cannot carry out its vital mission of protecting market participants and ensuring market integrity without correct and complete reporting by registrants, including DCMs. Today’s action makes clear that registrants who fail to meet their reporting obligations will be held accountable and that the CFTC takes a particularly dim view of reporting violations that continue over many months, especially after CFTC staff has repeatedly alerted the registrant in question to the problems in its reporting.”

Pursuant to Part 16 of the CFTC Regulations, a DCM is required to submit certain trading and market-related reports and data to the CFTC. In particular, a DCM is required to submit, for each business day, clearing member reports showing certain information for each future or option contract, including, among other things, the quantity of contracts currently open, the quantity of contracts bought and sold throughout the day, and the quantity of delivery notices. A DCM is also required to provide the CFTC with permanent record data relating to trading volume, open contracts, prices, and certain critical dates, and transaction-level trade data and related order information for each futures or options contract.

The Order specifically finds that, beginning in at least October 2012, CFTC staff notified ICE about its data and reporting errors, which included incorrect clearing member reports, permanent record data, and transaction-level trade data. ICE responded that these errors resulted primarily from technology upgrades and data migration projects, and while they affected data provided to the CFTC, they did not affect data published by ICE on its website. ICE further assured CFTC staff that its data-reporting problems would be fixed with the conversion to a new data-reporting format. CFTC staff informed ICE that continuing to report faulty data in the interim was unacceptable. Nevertheless, ICE continued to submit inaccurate and incomplete reports.

Further, ICE did not respond in a timely and satisfactory manner to inquiries from CFTC staff from multiple divisions about these data-reporting issues, including initial inquiries from the Division of Enforcement. Eventually, ICE did cooperate fully with the investigation and took effective corrective actions to address its reporting deficiencies. The CFTC has taken that cooperation and those actions into account in settling this matter.

In addition to imposing the $3 million civil monetary penalty, the CFTC ordered ICE to comply with undertakings to improve its regulatory reporting. For instance, ICE must create and maintain a new senior position of Chief Data Officer, who will have direct responsibility for systems and procedures relating to regulatory reporting, and ICE must hire and maintain at least three additional quality assurance staff who will be dedicated to regulatory reporting. ICE also must undertake certain data-reconciliation efforts, including reviewing certain prior data submissions to the CFTC to identify further violations of the charged CFTC Regulations and, beginning 120 days from the date of the Order, endeavoring to reconcile data provided to the CFTC with data published on its website, as well as with other data existing within ICE’s systems and its clearing providers’ systems. Additionally, ICE must correct any errors or omissions in data provided to the CFTC pursuant to Part 16 of the CFTC Regulations within one week of discovery or notification of the errors or omissions, or, in the event such corrections will take more than a week’s time, reporting to the CFTC why additional time will be necessary.

The CFTC Division of Enforcement staff members responsible for this matter are Margaret Aisenbrey, Allison Sizemore, Jeff Le Riche, and Charles Marvine, with assistance from the CFTC Division of Market Oversight staff Kelly Beck, Matthew Hunter, Harry Hild, and Anthony Saldukas and the CFTC Office of Data and Technology staff Regina Sanders, Margie Sweet, Rene Garcia, and Ed Wehner.

Friday, March 20, 2015


Remarks of Chairman Timothy Massad before the National Grain and Feed Association 119th Annual Convention
March 17, 2015
As Prepared For Delivery

Thank you for inviting me today, and I thank Gary for that kind introduction. It’s a pleasure to be here. It’s been a while since I have been to San Antonio, but I am not a stranger to this part of the country. I drove in this morning from Austin, where I spent last night. Both my mother and sister live there, and my brother lives in Houston. My family lived in Texas for many years when I was a kid – in Midland, Brownsville and Houston. My father worked in the oil business so we moved around a lot between Texas, Louisiana and Oklahoma. Eventually as my dad advanced in his career we moved to the Northeast. When my dad retired, my folks moved back to Texas and my siblings gradually migrated back as well. I was the black sheep of the family who stayed in the Northeast, other than some years in the Midwest and abroad. So I hope those of you from this part of the country will give me a little credit for at least having lived here, rather than concluding I’ve got bad judgment for not coming back.

While my time in Texas had more to do with oil than with agriculture, as a kid I did spend some time on farmland outside of Tyler Texas. My uncle, who still lives in Dallas, and my father had some land there, and we’d come for part of the summer and vacations. They had a few cattle that a local guy tended for them. I can’t say that taught me anything about raising cattle – other than to watch where I was walking – but I have fond memories of those times.

Moving around a lot as a kid, and later as an adult, taught me a few things about our country. One is you appreciate the incredible richness and physical beauty of this country. Another is you learn to listen to and respect those who may have a different point of view. When you live in different parts of the country and the world, when you have to make new friends and acquaintances, you come to appreciate that people can look at things differently. Now, of course, if you work in Washington as I do, admitting that others may have a reasonable point of view, even if you don’t agree with it, can be an occupational hazard. But I try to do the best I can despite this limitation.

My view of the country was also shaped by the fact that my grandparents were immigrants who came over as teenagers, one suitcase in hand and speaking no English. After getting past Ellis Island, they went to Oklahoma and Kansas. This was in the years before World War I. They struggled hard to make it and create a better life for their kids. And my parents were part of the Greatest Generation, who grew up learning how to survive and build a better life for their kids in the face of events that were totally out of their control – the Depression and then World War II.

I say all this because many of the characteristics that have made our country great – the richness of the land, the diversity of our people, the opportunities for those who work hard, and the challenge of dealing with forces and events that are far greater than you and are outside of your control – are deeply tied to agriculture. You all know that, I’m sure. Every day, your work, your lives are shaped by these things – the richness of the land, the opportunity for those who work hard, and the challenge of dealing with events beyond your control.

So today I want to say a few words about the importance of the agricultural industry to our work at the CFTC, then talk about our current priorities, and then I would be happy to take your questions.

The agricultural industry is the foundation for the CFTC. Indeed, helping the agricultural industry is what gave this agency its start, its purpose, and it remains central to our mission today.

As you know, the futures industry started because farmers and ranchers needed a way to deal with events outside of their control – the uncertainties of weather, the unpredictability of the market. Many decades before people in finance figured out that they could manage interest rate or credit risk using futures, people in agriculture were hedging risk. Futures on agricultural commodities have been traded in the U.S. since the 19th century and have been regulated at the federal level since the 1920s. The CFTC itself was part of the U.S. Department of Agriculture before becoming an independent agency in 1974-1975. And, in fact, the newly independent Commission initially worked out of the USDA basement and cafeteria.

In the hall leading to my office in the CFTC’s headquarters, there’s a wall with historic objects documenting the roots of the agency in the agriculture sector. You can see some of the first agricultural contracts approved by the USDA – objects signed by both USDA Secretary Henry Wallace Sr. of the Hoover administration and Secretary Henry Wallace Jr. of the Roosevelt administration.

Many things have changed in the 40 years since the agency was created. Like the agricultural industry itself, the derivatives markets we at the CFTC oversee have grown and changed over the years. The number and types of futures, options and swaps have increased dramatically, with products based on energy, metals, interest rates, currencies, and equities in addition to those based on agricultural commodities. The markets have grown substantially in size. U.S. futures and options markets are now estimated to be $30 - $40 trillion, measured in notional value, and the swaps markets are around ten times that amount. The way trades take place has also changed. Trading pits have given way to automated, electronic trading.

Despite these significant changes, a few things haven’t changed: the first is the importance of agricultural futures products. While they may no longer be the largest segment of the markets by volume, their importance is just as great today as it was then, just as agriculture is just as important today as it was then – if not, in each case, more so. After all, our agricultural industry doesn’t just put food on the table for every American family, it feeds the world. You all also know that while there have been tremendous advances in technology, science and knowledge, and our ability to influence or control many things, you still can’t control the weather. And even if you can at least predict the weather a bit better, you can’t predict or control the market. And so, the derivatives markets have remained just as important for agricultural folks as they were when they started: farmers and ranchers rely on these markets to hedge price, production, and other risk.

For these very reasons, the connection, and commitment, of the CFTC to agriculture is still strong, and our mission has changed very little. At its core, our mission is to make sure that the farmers, ranchers, and other businesses that depend on these markets to hedge risk can use them effectively. Our job is to help these markets thrive, to do all we can to make sure they operate with integrity, to prevent fraud and manipulation, and to protect customers.

The global financial crisis, however, taught us that this is not the only thing we must think about. We learned how excessive risk and a lack of transparency in the over-the-counter swaps market could intensify the crisis and the damage it caused. Now, I know that excessive swap risk wasn’t created by agricultural futures. I know it wasn’t caused by farmers, ranchers, or other commercial businesses hedging routine price risk. But the damage that was caused by the crisis hit all of us: millions of jobs lost and homes foreclosed, many businesses shuttered, and countless retirements and college educations deferred. I saw the terrible impacts first hand and spent five years working to help our nation recover. It’s an experience that has shaped how I approach being Chairman of the CFTC.

So the task for us today is to do our job in a way that helps make sure these markets continue to thrive and work well for the businesses that depend on them, while also making sure they do not create excessive risk to our financial system or our economy generally.

If you look at what we have been doing since June, when two other commissioners and I took office, you will see that we are addressing both those goals, and trying to do so in a pragmatic, balanced manner. We have been active in a number of areas, and I want to review what we have been doing and what’s on our agenda in the months ahead.

Before I do so, I want to thank the CFTC staff. Our recent progress and, really, how far we have come since the crisis is a credit to their hard work and dedication. I also want to thank my fellow commissioners as well for their willingness to collaborate and work constructively together.

I know all of us are committed to carrying out the CFTC’s responsibilities and enhancing these markets.

I also want to acknowledge the work that the NGFA and its members do to help us do our work. Your participation in the issues facing the Commission is appreciated and very valuable. We appreciate your input through comment letters, and through arranging meetings or occasions like this one.

I’m also pleased that we have NGFA representation on our Agricultural Advisory Committee. Our advisory committees are a very good way for us to get input from the public. I am the sponsor of the Agricultural Advisory Committee. As chairman, I get to choose, and I wanted to be the sponsor of this committee because of the importance of agriculture to the CFTC and these markets, and because the issues interest me. We had an excellent meeting in Washington in December, where we were joined by Secretary Vilsack. MJ Anderson and Todd Kemp were there, and it was an excellent opportunity to hear directly from farmers, ranchers, and others, who rely on these markets day in and day out – about how our rules are working, where some adjustments may be necessary, and perhaps most importantly, what issues we should be focusing on going forward.

Let me describe some of the things we’ve been doing and some of our current priorities.

Making Sure the Markets Work for Commercial End-Users

I believe that a key measure of our markets’ success is how well they serve the needs of commercial end-users – the farmers, ranchers and wide range of other businesses that depend on them. So a key priority since I took office has been to address some of the concerns of end-users with respect to our rules and fine-tune them where possible.

Last November, the Commission proposed to modify one of our customer-protection related rules to address a concern that I know many of you have had, as have others in the agricultural community, regarding the posting of collateral. Market participants asked that we modify the rules so that the deadline for futures commission merchants to post “residual interest” would not automatically become earlier in the day a couple years from now. This deadline can affect when customers must post collateral. So we have proposed changing the rule so that the deadline would not become earlier unless the Commission takes affirmative action to change it.

I should note that we separately made it clear that you can use electronic transfers, or ACH payments, which makes it easier to meet the deadline.

We also proposed to revise our rules regarding record-keeping requirements to provide some relief to commercial end-users. We proposed to exempt end-users and commodity trading advisors from certain recordkeeping requirements related to text messages and phone calls, as well as from some requirements as to how records must be kept.

On both the residual interest and record-keeping proposals, I appreciate the NGFA’s input and support for these changes, although I also recognize that you’d like us to make further changes. I hope we can take final action on both proposals soon.

We have taken a number of other steps as well that may not be of direct concern to you but that reflect our desire to address the needs of end-users generally. These other changes include making it easier for local utility companies to access the energy swaps market. We also recently proposed to clarify when forward contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price – will be excluded from being considered swaps. This change, if adopted, should make it easier for commercial companies to use these types of contracts in their daily operations efficiently.

The Commission staff has also taken action to make sure that end-users can use the Congressional exemptions given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.

Some of these changes affect the cost of trading, an issue that I know is of concern to many of you. We will continue to focus on these costs. I have recently spoken out about a banking regulation that may increase the cost of clearing because of requirements placed on clearing members. This pertains to the leverage ratio. I’ve directed our staff to work with the staffs of the banking regulators to see if they can modify this rule to address the concern.

Finishing the Remaining Rules

Another priority for us is completing the position limits rule. Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that commercial end-users like agricultural producers can continue to engage in bona fide hedging. We have received substantial public input on the position limits rule. We got input at the Agricultural Advisory Committee meeting last December, for example. The Commission and CFTC staff are considering these comments carefully. We understand the importance of bona fide hedging, and I want you to know that we are looking at the concerns many of you have raised. We are going to take our time to get this right.

Another rule we must finish is our proposed rule on margin for uncleared swaps. This would require swap dealers to post and collect margin from their counterparties on uncleared swaps, much as is required on cleared swaps. This helps reduce the risk of those trades and the risk to our financial system as a whole. Our rule makes clear that swap dealers are not required to collect margin from end-user counterparties. This is consistent with Congress’s intent. Congress recognized that the activities of commercial end-users in the derivatives markets do not create the same types or degree of risk as with large financial institutions, and so Congress provided these exemptions to minimize the impact of necessary regulatory reform on commercial end-users.


We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. There is nothing more important to restore and maintain public confidence in our markets than robust enforcement. An important part of this effort is vigorous financial surveillance over futures commission merchants. We have stepped up our efforts to make sure FCMs safeguard customer funds and meet their financial obligations to clearinghouses. We require FCMs to make daily reports demonstrating compliance with the segregation obligations; and to provide notice to us of certain withdrawals of funds from the customer segregated accounts. Depositaries holding customer funds also are required to confirm balances on a daily basis, so that it is possible to verify that the funds that FCMs report as being held for customers are, in fact, on deposit. And CFTC staff, working with the self-regulatory organizations, conduct periodic on-site examinations of the FCMs to assess their compliance with the financial requirements.

With regard to enforcement, we have been vigilant in bringing cases where FCMs have failed to meet their financial and regulatory obligations – not maintaining sufficient capital or keeping customer funds properly segregated, for example. We have held some of the world’s largest banks accountable for attempting to manipulate LIBOR. And we recently ordered five of the biggest banks in the world to pay $1.5 billion in fines for attempting to manipulate foreign exchange benchmarks. We have brought successful cases against those who would attempt to manipulate our markets through high frequency trading using spoofing strategies. And we have also stopped crooks trying to defraud seniors through precious metal scams and Ponzi schemes. In all these efforts, our goal is to make sure that the markets we oversee operate fairly for all participants regardless of their size or sophistication.

Finally, we are focused on new challenges and risks in our markets. Cybersecurity has been getting a lot of attention, and rightly so. It is now perhaps the single biggest threat to financial stability. We are making this a priority in our examinations. Another example of a new challenge is automated, electronic trading, including high frequency trading. We are looking at whether we should take further action to make sure this type of trading does not lead to unfair advantages for some traders or pose excessive risks to our markets.

We are also doing all we can to make sure clearinghouses are strong and stable. The reforms that are being implemented worldwide since the financial crisis have made clearinghouses even more important in the global financial system. A few clearinghouses, in particular, are clearing most of the futures and swaps products. As a result, there is more attention being paid around the world to the risks that clearinghouses pose and what would happen if there was a problem at a clearinghouse. As we think about these issues, we need to address financial stability concerns while still making sure that clearinghouses, and clearing members, can operate successfully so that their clients – end-users like you – can still participate in these markets in a cost-effective manner.

The Importance of Market Participant Feedback

In all that we do, feedback from people like you, businesses that use these markets, is vital. Your input helps us understand the issues you face in using these markets. That’s particularly helpful when we face the task of balancing competing objectives. So I look forward to your continued input.


One of the biggest challenges we face is simply that there is more we should be doing that we cannot do because of resources. Not more rules to write, but rather, things like responding quickly to the concerns of market participants. Dealing with the threats posed by cybersecurity, or the challenges of high frequency trading. Or simply processing requests for registration, rule changes, or new product approvals. The CFTC’s current budget has simply not kept up with the growth of the markets and our responsibilities.

We have more work to do than we have people to do it. This means we cannot be as responsive as we wish to be. And today’s markets are sophisticated and technology driven. To be effective, our oversight must be as well. Without additional resources, it is difficult for us to do the job that I believe our markets need and the American people deserve.


The United States has the best derivatives markets in the world – the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity, in large part because they have attracted participants and served the needs of end-users who depend on them. I know this group understands the importance of risk management and price discovery more than most. I look forward to working with all of you to make sure that these markets continue to work well for businesses like yours in the years ahead.

Thank you for inviting me. I would be happy to take some questions.

Thursday, March 19, 2015

A Few Observations on Shareholders in 2015

A Few Observations on Shareholders in 2015


Speeches & Testimony
Statement of Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation: Examining the Regulatory Regime for Regional Banks before the Committee on Banking, Housing, and Urban Affairs; 538 Dirksen Senate Office Building; Washington, DC
March 19, 2015

Chairman Shelby, Ranking Member Brown, and members of the Committee, I appreciate the opportunity to testify on the regulatory regime for regional banks. My testimony will begin with a profile of the large companies subject to the enhanced prudential standards requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). I then will describe how regulators have implemented the enhanced standards requirements. Finally, I will review various considerations important to any discussion of proposals to change these requirements.

Profile of Large Companies Subject to Section 165

Section 165 of the Dodd-Frank Act requires the Board of Governors of the Federal Reserve System (Federal Reserve) to establish enhanced prudential standards for certain groups of institutions. The Act defines these institutions to include bank holding companies with total consolidated assets equal to or greater than $50 billion and nonbank financial companies that the Financial Stability Oversight Council (Council) has designated for Federal Reserve supervision.
The companies that meet the $50 billion threshold for enhanced prudential standards represent a significant portion of the U.S. banking industry. As of December 31, 2014, 37 companies with combined assets of $15.7 trillion reported total assets greater than $50 billion. They owned a total of 72 FDIC-insured subsidiary banks and savings institutions, with combined assets of $11.3 trillion, or 73 percent of total FDIC-insured institution assets.

The 37 companies represent a diverse set of business models. The four largest companies, holding combined assets of $8.2 trillion, are universal banks that engage in commercial banking, investment banking, and other financial services. Another twenty companies holding $3.3 trillion in assets are diversified commercial banks that essentially take deposits and make loans. The remaining 13 companies, with a combined total of $4.2 trillion in assets, do not engage predominantly in traditional commercial banking activities. These companies include two investment banks, four custodial banks, two credit-card banks, one online bank, and four specialty institutions. The 37 institutions include eight U.S.-owned institutions that are designated as global systemically important banks by the Financial Stability Board. They include the four universal banks, two investment banks, and two custodial banks.

By way of contrast, the FDIC's Community Banking Study of December 2012 profiled institutions that provide traditional, relationship-based banking services. The FDIC developed criteria for the Study to identify community banks that included more than a strict asset size threshold. These criteria included a ratio of loans-to-assets of at least 33 percent, a ratio of core deposits-to-assets of at least 50 percent, and a maximum of 75 offices operating in no more than two large metropolitan statistical areas and in no more than three states. Based on criteria developed in the Study, 93 percent of all FDIC-insured institutions with 13 percent of FDIC-insured institution assets currently meet the criteria of a community bank. This represents 6,037 institutions, 5,676 of which have assets under $1 billion. The average community bank holds $342 million in assets, has a total of six offices, and operates in one state and one large metropolitan area.

The FDIC does not have a similar set of criteria to identify regional banks. Regional banks may be thought of as institutions that are much larger in asset size than a typical community bank and that tend to focus on more traditional activities and lending products. These institutions typically have expanded branch operations and lending products that may serve several metropolitan areas and they may do business across several states. Regional banks are less complex than the very largest banks, which may have operations and revenue sources beyond traditional lending products.

The 20 holding companies identified as diversified commercial banks -- the subset of the 37 institutions with total assets over $50 billion noted earlier -- have a traditional banking business model that involves taking deposits and making loans, and they derive the majority of their income from their lending activities. Operationally, however, the 20 diversified commercial banks are much more complex than traditional community banks. They operate in a much larger geographic region, and have a much larger footprint within their geographic region.

Of the 20 holding companies:

Seven have total assets from $50 billion to $100 billion. They have an average of nearly 700 offices, and operate in 12 states and 22 large metropolitan areas.
Nine have assets from $100 billion to $250 billion. They have an average of nearly 1,200 offices, and operate in 12 states and 24 large metropolitan areas.
Four have total assets from $250 billion to $500 billion. They have an average of nearly 1,800 offices, and operate in 18 states and 24 large metropolitan areas.
The operational complexity of these 20 diversified commercial bank holding companies presents challenges that community banks do not. Supervisory tools and regulations need to match the complexity of these large $50 billion plus organizations. Any particular institution at the lower to middle part of the grouping may be a dominant player within a particular geographic or market segment and as such may require greater regulatory attention. If there would be a failure, the resolution of any one of these organizations may present challenges. In addition, the failure of more than one of these institutions during a period of severe financial stress could present challenges to financial stability.
Implementation of Enhanced Prudential Standards

Section 165 provides the FDIC with explicit responsibilities in two substantive areas related to prudential supervision: resolution plans and stress testing. In both areas, the FDIC has tailored requirements to fit the complexity of the affected institutions.

Resolution planning

Resolution plans, or living wills, are an important tool for protecting the economy and preventing future taxpayer bailouts. Requiring these plans ensures that firms establish, in advance, how they could be resolved in an orderly way under the Bankruptcy Code in the event of material financial distress or failure. The plans also provide important information to regulators, so they can better prepare for failure to protect markets and taxpayers.

In 2011, the FDIC and the Federal Reserve jointly issued a final rule implementing the resolution plan requirements of Section 165(d) of the Dodd-Frank Act (the 165(d) rule) for bank holding companies. The FDIC also issued a separate rule that requires all insured depository institutions (IDIs) with greater than $50 billion in assets to submit resolution plans to the FDIC for their orderly resolution through the FDIC's traditional resolution powers under the Federal Deposit Insurance Act (FDI Act). The 165(d) rule and the IDI resolution plan rule are designed to work in tandem by covering the full range of business lines, legal entities, and capital-structure combinations within a large financial firm.
Bank holding companies with $50 billion or more in total consolidated assets and nonbank financial companies regulated by the Federal Reserve are subject to the requirement to prepare resolution plans. However, the FDIC and the Federal Reserve used our statutory discretion to develop a joint resolution planning rule which recognizes the differences among institutions and scales the regulatory requirements and potential burdens to the size and complexity of the institutions subject to that rule. The joint rule also allows the agencies to modify the frequency and timing of required resolution plans.

Our resolution plan regulations also are structured so that both firms and regulators are focused on the areas of greatest risk. Smaller, simpler, and less complex institutions have much smaller and simpler resolution plans than more systemic institutions, with complex structures, multiple business lines, and large numbers of legal entities.

In implementing the requirement for resolution plans, the FDIC and the Federal Reserve instituted a staggered schedule for plan submissions to reflect differing risk profiles. The first group of companies required to file plans on or before July 1, 2012, included bank holding companies with $250 billion or more in nonbank assets. This group comprised 11 institutions—seven U.S. bank holding companies and four foreign banking organizations. These institutions generally ranked among the largest institutions in the United States, although some equally large institutions with smaller amounts of nonbank assets, did not file in this group.

The second group was comprised of bank holding companies with $100 billion or more, but less than $250 billion, in total non-bank assets. These firms submitted their initial resolution plans on or before July 1, 2013. The remaining companies, those subject to the rule with less than $100 billion in total non-bank assets, submitted their initial plans on or before December 31, 2013.

Grouping the firms by their holdings of nonbank assets provided the agencies with an initial proxy for firm complexity. By delaying the submission of plans for those with fewer nonbank assets, less complex firms were given more time to prepare. The FDIC and the Federal Reserve also were able to focus on those firms that are more likely to pose serious adverse effects to the U.S. financial system should they need to be resolved under the Bankruptcy Code. Based on their groupings and measured by asset size as of December 2011, no U.S. bank holding company (BHC) with less than $200 billion in total consolidated assets was required to file with either the first or second group of filers.

For their initial submissions, bank holding companies with less than $100 billion in total nonbank assets and 85 percent or more of their assets in an insured depository institution also were generally permitted to submit tailored resolution plans. Tailored resolution plans simplify the task of creating a living will by aligning it with the FDIC’s IDI resolution plan requirement and focusing on the firm’s nonbank operations. Since the initial filings, the FDIC and Federal Reserve have further recognized differences among institutions with less than $100 billion in nonbank assets and nearly all U.S. institutions in this category filed tailored plans.

Though smaller firms are less systemic, appropriately tailored resolution plans or other enhanced prudential supervision requirements for these firms provide important benefits. Any particular institution at the lower to middle part of the grouping may be a dominant player within a particular geographic or market segment, and its failure would likely have a sizeable impact for those markets. The Deposit Insurance Fund also would face a substantial loss from the failure of even one of these firms. Finally, the size of these firms presents an obstacle in arranging the sale to another firm as only other larger firms would be likely acquirers. Therefore, the FDIC and Federal Reserve should continue to receive and review resolution plans in order to ensure that a rapid and orderly resolution of these companies through bankruptcy could occur in a way that protects taxpayers and the economy.

Stress testing

Section 165(i)(2) of the Dodd-Frank Act requires the federal banking agencies to issue regulations requiring financial companies with more than $10 billion in total consolidated assets to conduct annual stress tests. The statutory language governing stress testing is more detailed and prescriptive than the language covering other prudential standards, leaving the regulators with less discretion to tailor the stress testing process. The Act requires IDIs and BHCs with assets greater than $10 billion to conduct an annual company-run stress test, while BHCs with assets greater than $50 billion must conduct semiannual, company-run stress tests and also are subject to stress tests conducted by the Federal Reserve. The company-run tests must include three scenarios and the institutions must publish a summary of the results.

In October 2012, the FDIC, OCC, and the Federal Reserve issued substantially similar regulations to implement the company-run stress test requirements. The FDIC’s stress testing rules, like those of the other agencies, are tailored to the size of the institutions consistent with the expectations under section 165 for progressive application of the requirements. Under the agencies' implementing regulations, organizations in the $10 billion to $50 billion asset size range have more time to conduct the tests and are subject to less extensive informational requirements, as compared to larger institutions. Currently, 107 IDIs are subject to the banking agencies’ stress testing rules, with the FDIC serving as primary federal regulator for 28 of these IDIs.

Stress testing requirements are an important risk-assessment supervisory tool. The stress tests conducted under the Dodd-Frank Act provide forward-looking information to supervisors to assist in their overall assessments of a covered bank’s capital adequacy and to aid in identifying downside risks and the potential impact of adverse outcomes on the covered bank. Further, these stress tests are expected to support ongoing improvement in a covered bank’s internal assessments of capital adequacy and overall capital planning.

Other Regulatory Standards Affecting Regional Banks

Many of the standards required under section 165 address issues that are within the longstanding regulatory and supervisory purview of the federal banking agencies. For example, with respect to banking organizations, the agencies have pre-existing authority to establish regulatory capital requirements, liquidity standards, risk-management standards, and concentration limits, to mandate disclosures and regular reports, and to conduct stress tests or require banking organizations to do so. These are important safety and soundness authorities that the agencies have exercised by regulation and supervision in the normal course and outside the context of section 165.

The FDIC's capital rules are issued pursuant to its general safety and soundness authority and the FDI Act. In many cases, FDIC capital regulations and those of other federal banking agencies are consistent with standards developed by the Basel Committee on Banking Supervision. For example, recent comprehensive revisions to the agencies’ capital rules and the liquidity coverage ratio rule incorporated aspects of the Basel III accord, which was developed separate and independent from, and mostly before, the Dodd-Frank Act was finalized.

These capital and liquidity rules play an important role in promoting the safety and soundness of the banking industry, including regional and larger banks. The agencies’ capital rules are entirely consistent with the statutory goal in section 165 of progressively strengthening standards for the largest institutions. As a baseline, a set of generally applicable capital rules apply to all institutions. A defined group1 of large or internationally active banking organizations are subject to more extensive U.S. application of Basel capital and liquidity standards. In addition, eight Global Systemically Important Banks (G-SIBs) are subject to enhanced supplemental leverage capital requirements.
Policy Considerations

Section 165 establishes the principle that regulatory standards should be more stringent for the largest institutions. This idea is rooted in the experience of the financial crisis, where the largest financial institutions proved most vulnerable to sudden market-based stress, with effects that included significant disruption of the real economy. The thresholds in the enhanced prudential standards legislative framework state Congress’s expectation for the asset levels at which enhanced regulatory standards should start to apply, while providing for regulatory flexibility to set the details of how those standards should progress in stringency.
In our judgment, the concept of enhanced regulatory standards for the largest institutions is sound, and is consistent with our longstanding approach to bank supervision. Certainly, degrees of size, risk, and complexity exist among the banking organizations subject to section 165, but all are large institutions. Some of the specializations and more extensive operations of regional banks require elevated risk controls, risk mitigations, corporate governance, and internal expertise than what is expected from community banks. We should be cautious about making changes to the statutory framework of heightened prudential standards that would result in a lowering of expectations for the risk management of large banks.

That being said, it is appropriate to take into account differences in the size and complexity of banking organizations when formulating regulatory standards. The federal banking agencies have taken into account such differences in a number of contexts separate and apart from section 165. Examples include asset thresholds for the interagency capital rules, trading book thresholds for the application of the market risk rule, and proposed notional derivatives thresholds for margin requirements. These examples and other size thresholds illustrate that precedents exist apart from section 165 for the application of different and heightened regulatory standards to larger institutions, and that different size thresholds may be appropriate for different types of requirements. Finally, many of the rules that apply to more complex capital market activities do not apply, as a practical matter, to the types of traditional lending activities that many regional banks conduct.


Section 165 provides for significant flexibility in implementation of its requirements. The agencies have made appropriate use of this flexibility thus far, and where issues have been raised by industry, we believe that we have been responsive. The FDIC remains open to further discussion on how best to tailor various enhanced prudential standards and other regulations and supervisory actions to best address risk profiles presented by large institutions, including regional banks.

Sunday, March 15, 2015


03/13/2015 01:45 PM EDT

The Securities and Exchange Commission charged eight officers, directors, or major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private.  Each of the respondents, without admitting or denying the SEC’s allegations, agreed to settle the proceedings by paying a financial penalty.

The charges involve outdated disclosures in reports filed by “beneficial owners” who hold more than 5 percent of a company’s stock.  Federal securities laws require beneficial owners to promptly file an amendment when there is a material change in the facts previously reported by them on Schedule 13D, commonly referred to as a “beneficial ownership report.” The disclosure requirements include plans or proposals that would result in certain transactions, such as a going private transaction.

“Investors are entitled to current and accurate information about the plans of large shareholders and company insiders,” said Andrew J. Ceresney, Director of the Division of Enforcement.  “Stale, generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take a company private.”

The SEC’s orders find that the respondents took steps to advance undisclosed plans to effect going private transactions.  Some determined the form of the transaction to take the company private, obtained waivers from preferred shareholders, and assisted with shareholder vote projections, while others informed company management of their intention to privatize the company and formed a consortium of shareholders to participate in the going private transaction.  As described in the SEC orders, each respective respondent took a series of significant steps that, when viewed together, resulted in a material change from the disclosures that each had previously made in their Schedule 13D filings.

According to the SEC’s orders, some of the respondents also failed to timely report their ownership of securities in the company that was the subject of a going private transaction.  In addition, six respondents only disclosed their transactions in company securities months or years after the fact, not within two businesses days, as required for these disclosures by insiders.

The SEC today issued the following orders:

Berjaya Lottery Management (H.K.) Ltd.

According to the SEC’s order instituting a settled administrative proceeding, Berjaya Lottery Management (H.K.) Ltd., a Hong Kong corporation, waited eight months to disclose it had taken steps to effectuate a going private transaction for International Lottery & Totalizator Systems Inc.  Berjaya’s failure to promptly amend its disclosure violated Section 13(d)(2) of the Exchange Act and Rule 13d-2(a).  Berjaya was ordered pay a civil money penalty in the amount of $75,000.

The Ciabattoni Living Trust; SMP Investments I, LLC; Anthony J. Ciabattoni; Jane G. Ciabattoni; William A. Houlihan; and Brian Potiker

According to SEC orders instituting a settled administrative proceeding against The Ciabattoni Living Trust and Anthony and Jane Ciabattoni, the Trust and the Ciabattonis waited more than five months to amend their Schedule 13D disclosure after taking steps to effectuate a going private transaction for First Physicians Capital Group, Inc.  The Trust and the Ciabattonis failed to promptly amend their disclosure, in violation of Section 13(d)(2) of the Exchange Act and Rule 13d-2(a).  The order also found that the Trust and the Ciabattonis violated Section 16(a) by failing to report material transactions in First Physicians Capital Group shares until months or years later.  The Ciabattoni Living Trust and the Ciabattonis were ordered to pay a civil money penalty in the amount of $75,000.

In separate SEC orders, the SEC found that SMP Investments I, LLC, and Brian Potiker waited approximately three months to update their Schedule 13D disclosure after taking steps to effectuate a going private transaction for First Physicians Capital Group.  SMP and Potiker’s failure to promptly amend their disclosures violated Section 13(d)(2) of the Exchange Act and Rule 13d-2(a).  The order also found that SMP and Potiker violated Section 16(a) by failing to report material transactions in First Physicians Capital Group shares until months or years later.  SMP and Potiker were ordered to pay a civil money penalty in the amount of $63,750.

According to the SEC’s order instituting settled administrative proceedings against William Houlihan, the SEC found that Houlihan waited approximately five months before amending his previous Schedule 13D after taking a series of steps to effectuate a going private transaction for First Physicians Capital Group.  Houlihan’s failure to promptly amend his disclosure violated Section 13(d)(2) of the Exchange Act and Rule 13d-2(a).  The order also found that Houlihan violated Section 16(a) by waiting more than five months to report a material transaction in First Physicians Capital Group shares. Houlihan was ordered to pay a civil money penalty in the amount of $15,000.

Shuipan Lin

According to the SEC’s order instituting a settled administrative proceeding, Shuipan Lin, the Chairman and CEO of China-based Exceed Company Ltd., failed to timely amend his Schedule 13D report after taking steps to effectuate a going private transaction for Exceed.  In addition, the order finds that Lin did not file his initial Schedule 13D report until May 2011 even though his filing obligation began in October 2009 when he owned approximately 20% of Exceed’s ordinary shares.  Finally, the order finds that Lin failed to amend his Schedule 13D to report a subsequent acquisition of Exceed’s shares.  Lin was ordered to pay a civil money penalty in the amount of $30,000.

The SEC’s investigations were conducted by Sharan K.S. Custer and Allen A. Flood and supervised by Anita B. Bandy and Conway T. Dodge.  The Enforcement Division staff worked in close collaboration with Michele Anderson, Nicholas Panos, Christina Chalk, and Mellissa Duru in the Division of Corporation Finance’s Office of Mergers and Acquisitions.