CFTC CHAIRMAN GENSLER'S STATEMENT ON CUSTOMER PROTECTION REFORMS IN DERIVATIVES MARKET PLACE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Chairman Gary Gensler: Open Meeting to Consider Customer Protection Reforms
October 30, 2013

Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission (CFTC). I’d like to welcome members of the public, market participants and members of the media, as well as those listening to the meeting on the phone or watching the webcast.

I would like to thank Commissioners Chilton, O’Malia and Wetjen for their contributions to the rule-writing process and the CFTC’s hardworking and dedicated staff.

This is a public meeting that is partially related to the Dodd-Frank Wall Street Reform and Consumer Protection Act related because it relates to swaps funds. This meeting is about customer funds and customer protections.

Segregation of customer fund is the core foundation of the commodity futures and swaps markets. Segregation must be maintained at all times. That means every moment of every day.

Market events, though, of these last two years highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and protection of customer funds.

And today's reforms are the sixth set of rules to be finalized by this Commission, if we move forward to finalize them, during a two-year process to ensure that customers have confidence that their funds are segregated and protected. These reforms benefit from the Commission's thorough review of existing customer protection rules – looking for any gaps in those rules and the oversight of these markets.

They benefit from significant public input, including staff roundtables and the Technology Advisory Committee, Agricultural Advisory Committee meetings, and numerous reports submitted by market participants.

They also benefit from input through a coordinated effort of the CFTC with other regulators; the self-regulatory organizations (SROs), such as the CME and the National Futures Association (NFA); as well as Congressional reports and input on these matters.

I will be supporting today's rules, in summary, for at least for six reasons. They are quite comprehensive, but here are six points I want to highlight:

First, FCMs, clearing members, have to significantly enhance their supervision of and accounting for customer funds. They will have to put in place additional policies and procedures for these new protections.

Second, significant enhancements around outside accounting and auditing – regarding the actual accountants or certified public accountants that audit futures commission merchants (FCMs), and also regarding the SROs and how they audit the FCMs.

Third, significant customer fund protections with regard to how funds are moved around. Basically, when a firm moves money within a firm, how can they move that money around? Some of these reforms were adopted by SROs last year, such as requiring senior management signoff, and the pre-approval of moving those monies. There are also significant new protections coming from changes in the required acknowledgment letters from the banks and custodians.

Fourth, reforms related to investing in international futures accounts. Our Part 30 regime really had not kept pace with protections for domestic futures accounts. With these reforms and the reforms that the NFA had put in place last year, investing in foreign futures accounts will be significantly aligned with the domestic protections. They won't be identical, but they will be significantly aligned with the protections for domestic futures accounts.

Fifth, there's significant new transparency. Transparency to the regulators – we will be able to see electronically custodial accounts and cash accounts on a daily basis. There is transparency to the public, as well, with the twice-a-month statements of the details of their funds in the investment accounts. These reforms also have been put in place by the SROs, but it is important that we do this at the federal level as well, and put it in our rules.

Sixth, the final rules include provisions on capital and residual interest of the FCMs themselves. This was quite possibly the most debated feature of these reforms, but I think they are important. In response to commenters on this provision, we are phasing in compliance to smooth implementation. As the staff will present, this section calls for significant new studies and roundtables and provides for a five-year phase in on these matters.

It is important that we look very closely at the law and ensure that one customer's funds or property are not used in some way to secure or guarantee other people's accounts.
Prior to this final rule set, the Commission had already made important improvements to protections for customers. In a longer statement for the record I go through those. But this is really a remarkable achievement, and I want to thank my fellow Commissioners

I also wanted to address three other matters.

This morning, unanimously as a Commission, we actually finalized two other rule sets. Since they were noticed for this meeting, I just wanted to inform the public about them. The first is one of the five other matters that we did to help customers and protect their funds. It relates to the choice that customers will have to segregate their collateral and funds -- the initial margin standing behind swaps that are not cleared. Congress gave the clear right to counterparties of swap dealers that they can chose to have those funds segregated. I'm pleased to report that we unanimously moved that this morning. It’s a key tenant of customer protection.

Another rule that we moved on was from the Division of Market Oversight, the Office of the Chief Economist and all of our surveillance teams across the agency. It is called ownership and control reporting. This has been on our docket for four-plus years. We had an advanced notice of proposed rulemaking, and then a proposal. We re-proposed it after some staff roundtables.

I'm glad to say we again reached conclusion, and I want to thank Commissioner O'Malia for his doggedness on this. We will finally have in our rulebook that it is required to file these various forms electronically -- no longer by mail and fax. I also want to thank staff.

Many of the things in this document that we are considering today also relate to filing things electronically, which is the right place to be in the 21st century.

The ownership and control reporting will give us a greater window into those parties that actually own accounts and control those accounts -- not only for positions, but also, in the world of high frequency trading, for accounts that have high volume on a particular day, but might end the day flat or without a position.

For the first time, we'll have this enhanced ability to oversee markets.

I also wanted to give a public thanks to my friend, my colleague and a wonderful head of the Division of Enforcement, David Meister. Today is, in fact, his last day of service at the CFTC.

David, you have brought tremendous energy, wisdom, talent, and, yes, expertise from the Southern District of New York. I think you've shown how to be a tough but fair prosecutor, and you've led a remarkable team, often strapped with not enough resources. I wish you well in your next professional adventures.

Note: this transcript was edited for clarity.

HOME DEPOT & EXECUTIVES CHARGED WITH VIOLATION FAIR DISCLOSURE REGULATIONS

Below is an excerpt from the SEC website which exposes a case of insider trading brought against Home Depot. In this case two executives gave out information to only certain persons before the information was released to the general public. Insider information is a great way to make money and it is not as dangerous in terms of being caught as is a Ponzi scheme. Ponzi schemes are always found out because the money eventually runs out. Insider trading may be much harder to prove unless it is done in such an obvious way that an agency like the SEC has to notice. Take a look at the details in the following case and see how such details are common among many companies traded as public entities:

“The Securities and Exchange Commission today announced enforcement actions against Office Depot, Inc. and two executives for violating or causing violations of fair disclosure regulations when selectively conveying to analysts and institutional investors that the company would not meet analysts' earnings estimates. The SEC also charged Office Depot with unrelated accounting violations.


Regulation FD requires that when issuers disclose material nonpublic information, they must make broad public disclosure of that information. The SEC's orders find that as they neared the end of Office Depot's second quarter for 2007, CEO Stephen A. Odland and then-CFO Patricia A. McKay discussed how to encourage analysts to revisit their analysis of the company. Office Depot then made a series of one-on-one calls to analysts. The company did not directly state that it would not meet analysts' expectations, but rather this message was signaled with references to recent public statements of comparable companies about the impact of the slowing economy on their earnings. The analysts also were reminded of Office Depot's prior cautionary public statements. Analysts promptly lowered their estimates for the period in response to the calls. Office Depot did not regularly initiate these types of calls to all analysts covering the company.
Office Depot agreed to settle the SEC's charges without admitting or denying the findings and allegations, and will pay a $1 million penalty. Odland and McKay also agreed to settle the Regulation FD charges against them without admitting or denying the findings, and will pay $50,000 each.

"Office Depot executives selectively shared information with analysts and the company's largest shareholders in order to manage earnings expectations," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This gave an unfair advantage to favored investors at the expense of other investors and, as today's action shows, is illegal."
"Talking Wall Street down from its earnings projections whether done expressly or through signals is prohibited," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Regulation FD is designed to level the playing field so that all investors receive the information at the same time."

The SEC's administrative orders find that Odland, in an attempt to get analysts to lower their estimates, proposed to McKay that the company talk to the analysts and refer them to recent public announcements by two comparable companies about their financial results being impacted by the slowing economy. Odland further suggested that Office Depot point out on its calls what the company had said in prior public conference calls in April and May 2007. McKay then assisted Office Depot's investor relations personnel in preparing talking points for the calls.

According to the SEC's orders, Odland and McKay were not present during the calls but were aware of the analysts' declining estimates while the company made the calls. They encouraged the calls to be completed. Office Depot continued to make the calls despite McKay being notified of some analysts' concerns about the lack of public disclosure among other things. Six days after the calls began, Office Depot filed a Form 8-K announcing that its sales and earnings would be negatively impacted due to a continued soft economy. Before that Form 8-K was filed, Office Depot's share price had significantly dropped on increased trading volume.

In addition to their $50,000 payments, Odland and McKay consented to the entry of administrative orders requiring them to cease and desist from causing any violations and any future violations of Regulation FD and Section 13(a) of the Exchange Act.
Unrelated to these Regulation FD violations, the SEC also charged Office Depot with overstating its net earnings in its financial statements for the third quarter of 2006 through the second quarter of 2007 as a result of accounting violations. Office Depot prematurely recognized approximately $30 million in funds received from vendors in exchange for the company's merchandising and marketing efforts instead of recognizing the funds over the relevant reporting periods in a manner consistent with Generally Accepted Accounting Principles. In November 2007, the company restated those financials and announced a material weakness in its internal controls over financial reporting that resulted from the failure of its personnel responsible for negotiating agreements with vendors to communicate all of the relevant information to financial accounting personnel. The SEC did not charge Odland or McKay with any issues in connection with the restatement.

Office Depot has agreed to settle the SEC's charges by consenting to the entry of an administrative order requiring it to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder, and Regulation FD. Office Depot also consented to the entry of a judgment in a separate civil action that requires it to pay the $1 million penalty.”

It would be nice to be on the receiving end of financial information regarding a publicly traded company before that information was given over to the public. The fact that this goes on all the time is a reflection of the lack of severe penalties given to these fraudsters. As long as fraud is considered an honest business practice by the media, government and citizenry then it will continue.