Statement at Open Meeting on Investment Company and Investment Adviser Reporting Modernization

Statement at Open Meeting on Investment Company and Investment Adviser Reporting Modernization

Statement at Open Meeting on Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting on Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting: Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting: Modernizing and Enhancing Investment Company and Investment Adviser Reporting

CFTC COMMISSIONER WETJEN'S STATEMENT BEFORE GLOBAL MARKETS ADVISORY COMMITTEE MEETING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION

Opening Statement by Commissioner Mark Wetjen before the CFTC’s Global Markets Advisory Committee Meeting

May 14, 2015

Thank you everyone for participating today. I would like to welcome Chairman Massad, Commissioner Bowen, and Commissioner Giancarlo, and extend a special warm welcome to our expert panelists.

Our panelists join us from around the globe and include:

David Bailey from the Bank of England;
Fabrizio Planta from the European Securities and Markets Authority;
Shunsuke Shirakawa from Japan’s Financial Services Agency;
Jeffrey Marquardt from the Federal Reserve; and
Sean Campbell from the Federal Reserve.
Also joining us today are staff members from the CFTC:

Bob Wasserman;
Carlene Kim; and
Paul Schlichting.
And I want to extend my welcome to the GMAC members and thank you again for convening today to discuss the topics of central counterparty (CCP) risk management, and the CFTC’s cross-border application of its margin rule for uncleared swaps.

Before I turn to Chairman Massad and the other commissioners, I want to make a couple of brief remarks.

Importance of the Clearing Market Structure

Clearinghouses are at the heart of the new market structure for cleared swaps. As we all know, the G20 recommended that this structure be implemented around the globe, and I strongly supported this effort at the CFTC.

Importantly, in the aftermath of the G20 communique, market regulators around the globe, including the CFTC, have raised significantly the standards that CCPs must meet for authorization to do business. Considerable international coordination of this effort was facilitated through the work of CPMI-IOSCO.

Clearinghouses registered with the CFTC now have enhanced financial-resource and liquidity requirements, as well as other risk management standards, that reflect their heightened role in the marketplace.

I recognize, however, that as clearing volumes increase, we need to be cognizant of, and effectively address, the resulting increased concentration of risk in the cleared space. Many market participants and stakeholders have rather vocally expressed concerns about this.

To maintain consensus behind the cleared market structure, it is important for policy makers to provide a forum to discuss the aforementioned concerns, and review whether further enhancements should be considered. That is why today’s meeting has been convened.

Today’s meeting presents an opportunity to sharpen our thinking about whether and how to further improve the cleared market structure, and how to keep pace with marketplace and technological advancements, especially as they relate to CCPs. In particular, today’s agenda focuses on the framework for conducting CCP stress tests, and the appropriate scaling of CCP capital within a CCP’s default waterfall.

Global coordination on these issues is particularly crucial. That is why I am grateful to have David, Fabrizio, and Shunsuke here today to give us their perspectives. Your contributions to today’s debate, as well as any subsequent policy development in your home countries, are highly relevant, important, and appreciated.

I should also add that, even though there remains some uncertainty about how different jurisdictions will treat one another’s CCPs more generally on a going forward basis, it’s important to pursue an open dialogue like the one today, or the ones we experienced earlier this year at Commissioner Bowen’s Market Risk Advisory Committee meeting and the CFTC staff roundtable.

I see only benefits to having an open dialogue like the one today between regulators and market participants, which will enhance a mutual understanding in the official sector, and lead to better policy outcomes.

Margin for Uncleared Swaps

I also look forward to hearing the views of our panelists and GMAC members regarding the application of the CFTC’s margin rule to cross-border swaps, and swaps between affiliates.

Last fall the commission issued an advanced notice of proposed rulemaking that laid out three different cross-border approaches it could take. The comment file appears to heavily favor an approach that mirrors the one proposed by the prudential regulators, which relies on the availability of substituted compliance but also applies U.S. jurisdiction to more firms and transactions than the CFTC’s cross-border guidance. Today’s discussion will help the commission understand better the relative merits of these approaches and clarify which approach to pursue.

Again, thank you for being here today, and I look forward to our discussion.

Last Updated: May 14, 2015

CFTC COMMISSIONER BOWEN'S SPEECH BEFORE 2015 COMPLIANCE CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Commissioner Bowen Speech before the Managed Funds Association, 2015 Compliance Conference

May 5, 2015

Thank you John for the introduction and good morning everyone. It’s a pleasure to be here today at the Managed Funds Association’s 2015 Compliance Conference. I would like to give a few very brief remarks before we move into my fireside chat with Adam Cooper. I have known Adam through our membership on the Northwestern Law School Board, which I chaired several years ago. I look forward to our conversation at the end of my brief remarks this morning. Of course, my remarks today are my own and do not reflect the views of my fellow Commissioners or the CFTC staff.

In my eleven months as a Commissioner, I’ve spoken about a few topics that are at the top of my agenda and which I hope the Commission will address early during my term. One of those is the need for increased regulation of retail foreign exchange transactions, which I believe is necessary to protect the retail investors who trade in that market. Another is the need for full funding of the Commodity Futures Trading Commission (CFTC) so that we will have strong, comprehensive oversight of the swaps and futures markets. Still another is the need to finalize the remaining regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, aka Dodd-Frank.

Finally, I have also spoken about my belief that we need to ensure that our system of regulation, including our universe of self-regulatory organizations, works efficiently and effectively. In fact, I would like to talk to you today about a subject that confirms my belief that we need to finish our Dodd-Frank rules, while enhancing our overall comprehensive regulations. Specifically, I want to talk to you about the topic of governance.

As compliance professionals, I know that you all understand how good governance protocols and rules are at the heart of how any fund or corporation operates. What some of you may not know is that the CFTC was tasked to issue regulations on this subject under Dodd-Frank. Per Section 726 of Dodd-Frank, “In order to mitigate conflicts of interest,” the CFTC was supposed to issues rules within six months of the law’s passage that could potentially “include numerical limits on the control of, or the voting rights with respect to, any derivatives clearing organization that clears swaps, swap execution facility, or board of trade” that is sufficiently involved in the swaps market.1 Additionally, we were mandated to adopt those rules if we determined that “such rules are necessary or appropriate to improve the governance of” a derivatives clearing organization (DCO), a contract market, or certain swap execution facilities (SEFs).2

This rulemaking requirement was one of the first things we acted on. Back in October 2010, almost three months after Dodd-Frank became law, we issued a proposed rule on this subject. It provided guidelines on conflicts of interest over these entities and also crafted a system to improve the governance of DCOs and SEFs.3 Ironically, however, we have not finalized that governance proposal in the intervening five years nor have we issued a new proposal.

So, to some extent, one of the first regulations out of the gate has become one of the last ones to be completed. In fact, the governance rulemaking is one of three major rules we have to complete, along with such well-known regulations as position limits and capital for swap dealers and margin for uncleared swaps. And honestly, I believe that it is as important for us to complete and promulgate a rule on governance, as it is for us to complete those two rules.

The reason I believe completing the rule on governance is critical is two-fold. First, the governance of designated contract markets (DCMs) and SEFs is critical to how the overall markets we regulate function. As a reminder, the governance proposal covered a number of major topics - from compensation policies for public boards of directors4 to an expertise standard for other members of public boards.5 The proposal even required that boards of directors of registered entities engage in an annual performance review.6 Some of those concepts might seem self-evident, but it’s critical that all such entities have such policies in place.

Second, I believe this rule can and should be part of a broader effort to address another key issue at present: improving culture. As I have mentioned previously and as seems self-evident, we have a culture problem in finance at present.7 As a Commissioner at the CFTC, I’ve seen a significant number of settlements and alleged violations of our laws in the last eleven months. Sometimes those violations are from individuals deliberately seeking to defraud investors. Other times, however, the violations come from large organizations that have previously violated the rules. And that is something that should trouble us.

I believe the governance rule is a major tool to deter rule-breaking. Culture comes from the top – when you have a strong, independent, and involved board of directors, it’s more likely that issues will be fixed before they become problems or cause a regulation or law to be broken.

I think completing this governance rule is important because it is a critical step in the process of addressing our mandate. We need to be able to release a strong rule on governance practices for SEFs and DCMs if we’re going to fix the broader culture problem on Wall Street. We all expect that the governance of our DCMs and SEFs will be superior – after all, these markets revolve around trust. If market participants don’t trust that decisions are made fairly on an exchange, they are less likely to trade on that exchange.

It is because of that key fact that I believe there is support for strong governance rules on these entities because they’re the intermediaries between industry players. They’re a big part of the marketplace. And if we want to fix a big problem like culture, this is a good place to start. If we can establish strong, robust governance practices on DCMs and SEFs, that may not be a panacea to our cultural ills, but it could be a small dose of medicine.

To return to the particular rule at hand, the 2010 governance proposal was filled with a number of good, worthy ideas. I want to offer my thoughts on how to enhance this governance rulemaking. My hope is that with these and possibly other enhancements, we can at least be closer to introducing model rules and best practices that serve as a template to improve the culture in the financial industry.

First, we need to have some qualitative standard for board membership. The previous proposal required that 35% of the members of boards of directors of our registrants be public directors and that those boards have a minimum of two public directors.8 I see why that was done that way – specific numerical standards are easy to implement. But I think we can do better. After all, a person being a public director doesn’t immediately make them a good director. We want people who are fully invested in their firms and who will diligently oversee management accountability.

To put a finer point on it, I do think you need a sufficient number of public directors to achieve meaningful independence. We could approach an independence standard through a holistic review of the board’s independence or we may require certifications by the public directors each year to the stockholders that they are truly independent. Alternatively, we could ask that the board certify that it is providing adequate resources to improve culture and the tone at the top or that it craft plans for improving the overall culture of a company. Clearly the standard needs to be more dynamic than just a number. It also has to be one that can clearly be consistently met by a registrant.

Second, I think we should use this rule to ensure that issues of culture will merit the active attention of the board. The previous proposal had provisions that mandated the board of directors to do certain things. For instance, it mandated an annual self-review and required that a registered entity establish procedures to remove a member of the board. I think this rule can be enhanced with a requirement that issues of culture be considered by the board.

There are several ways this could work. As I mentioned in my OpRisk speech, “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.”9

Third, we need to try and standardize governance across entities as much as possible. Good governance principles should apply across entities, financial or non-financial, because they provide simple incentives designed to protect the company and its shareholders from issues; inadvertent errors as well as deliberate ones. Entities should strive to ensure that a board is independent and that it is really taking a separate hard-look at the company’s actions, just as entities should strive to prevent conflicts of interest from arising.

Yet, we should not be micro-managing the process. If we’re crafting rules that are too entrenched in the particulars of how a DCM operates, we’re making two mistakes. First, having standards that aren’t largely uniform will lead to additional legal and compliance expenses for those entities. Differing standards could lead to confusion and result in entities making mistakes. Second, we’re missing the chance to actually establish standards that could be a model for others to use, and that would be a clear missed opportunity to improve the culture in finance and increase board independence.

If we can seek standardization and harmonization on the particulars of data standards or determine which country has the jurisdiction over a particular trade, we shouldn’t shy away from the chance to seek standardization on this subject. And I hope and believe that if we can establish strong rules on these entities -- rules that work -- there will be other private sector entities that will voluntarily adopt these rules as well.

I would hope that many entities which are not SEFs or DCMs would view a new governance rule as a model and adopt it voluntarily. But even if they do not, I believe we have the ability to set governance rules on a number of swap dealers and major swap participants, and that we should consider whether it makes sense to apply this rule to those entities.

If you’re going to have an optimally effective organization, you’ve got to have good governance. It’s a condition that is absolutely necessary for success. I believe the time has come for the CFTC to finish this rule, ideally before the end of this calendar year. Thank you and I look forward to my fireside chat with Adam and questions from the audience. Obviously, time is a constraint, so feel free to reach out to me or my staff if you do not have the opportunity to ask a question or raise issues this morning.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(a), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

2 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(b), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

3 Commodity Futures Trading Commission, “Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 17 CFR Parts 1, 37, 38, 39 & 40, October 18, 2010, 75 Fed. Reg. 63732, [hereinafter “Proposed CFTC Governance Rule”], available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

4 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(4), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

5 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(3), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

6 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(5), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

7 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

8 Proposed Governance Rule, 17 C.F.R. Part 40.9(b)(1)(i), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

9 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

Last Updated: May 5, 2015

SEC CHARGES "MAN CAMP" OPERATOR FOR ALLEGEDLY DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23252 / May 6, 2015

Securities and Exchange Commission v. North Dakota Developments, LLC, Robert L. Gavin, and Daniel J. Hogan, et. al., Civil Action No. 4:15-cv-00053-DLH-CSM (D.N.D.)

SEC Halts Bakken Oil and Gas-Related Investment Scheme

The Securities and Exchange Commission today announced charges and an emergency asset freeze against North Dakota Developments, LLC ("NDD") and its two principals for allegedly defrauding investors in a scheme to purportedly build and operate short-term housing facilities or "man camps" for workers in the Bakken oil and gas formation of North Dakota and Montana.

The SEC alleges that NDD and its owners Robert L. Gavin and Daniel J. Hogan have raised over $62 million from hundreds of investors in various states in the U.S. and foreign countries for interests in one of four "man camp" projects. According to the SEC's complaint filed yesterday in U.S. District Court for the District of North Dakota, investors bought "units" in NDD's projects motivated by the Defendants' promises of exceptionally high annual returns, up to 42%, and that NDD would jointly manage all of the units as a fully-developed short-term housing facility with amenities typically found in a hotel. The SEC also alleges that the Defendants offered investors the option of receiving a "guaranteed" annual return of up to 25% of the purchase price of their unit without regard to actual rental income. As further inducement to invest, Defendants also promised investors that the various projects would be operational in a very short time frame, often within months. In reality, the SEC alleges, despite the substantial amount of funds raised by the Defendants since May 2012, at the present time, none of the projects are fully operational and one of the projects offered does not even have governmental approval for construction to begin.

According to the SEC's complaint, Defendants directly or indirectly made material misrepresentations and omissions regarding the use of investor funds, the payment of commissions, and the return on the investment. Among other things, the SEC alleges that NDD's first project was delayed and unprofitable. The SEC alleges that, despite the lack of profits, the Defendants made Ponzi-style payments to certain early investors by paying their "guaranteed" returns using funds provided by later investors. The SEC also alleges that instead of developing the projects as promised, the Defendants have misappropriated over $25 million of investor funds to pay undisclosed commissions to sales agents, make payments to Gavin and Hogan, make investments in unrelated Bakken area projects for Gavin's and Hogan's personal benefit, and to make the Ponzi-like payments.

On May 5, 2015, the Honorable Daniel L. Hovland for the U.S. District Court for the District of North Dakota granted the SEC's request for a temporary restraining order and asset freeze against NDD, Gavin, and Hogan. A court hearing has been scheduled for May 18, 2015, on the SEC's motion for a preliminary injunction.

The Commission's complaint alleges that NDD, Gavin, and Hogan violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against each of them.

The SEC's investigation has been conducted by Michael Cates, Anne Romero, and J. Lee Robinson of the Denver Regional Office, with supervision by Ian S. Karpel. The SEC appreciates the assistance of the North Dakota Securities Department.