Trading On margin

Stock-based swaps, insider trading and more

SEC Approves Proposal to Apply FINRA Rules to Securities-Based Swaps

The SEC has approved a FINRA proposal to address the application of FINRA rules to security-based swaps (“SBS”).

As previously noted, the proposal amends FINRA Rules 0180 (“Application of Rules to Securities Swaps”), 4120 (“Regulatory Notification and Reduction of Activities”), 4210 (“Margin Requirements”), 4220 (“Daily Recording of Required Margins”), 4240 (“Margin Requirements for Credit Default Swaps”) and 9610 (“Application”) to report SBS activities of its members. As modified by Amendment No. 1 and approved by the SEC, the changes include:

  • replacing expiring FINRA Rule 0180 with new FINRA Rule 0180, which makes FINRA Rules applicable to Members’ SBS activities and positions while providing exceptions where FINRA has deemed them appropriate; and

  • requiring FINRA members who enter into swaps to comply with the SEC’s changes to its capital, margin and segregation requirements.

The SEC approval contains an extensive discussion of how SBS regulations apply to FINRA members who may enter SBS, but who may not be registered securities swap dealers (“SBSD”). Amendment #1 extended the effective date of proposed amendments to FINRA Rules 0180, 4120, 9610 to February 6, 2022, and extended 4210, 4220, and 4240 to April 6, 2022.

FINRA rules should be closely reviewed and incorporated into policies and procedures by (1) brokers who engage in SBS as principals (including those registered as SBSDs), (2) brokers who act as SBS agents for others (including affiliates), and (3) brokers who have employees who represent SBS for others (so-called “double hatted” personnel).

The proposal is most significant for the first category, as the FINRA rules provide an additional layer of regulation beyond the SEC SBS requirements. Non-SBSD brokers are subject to most FINRA rules on their SBS, including suitability and new margin requirements. Broker-dealers and SBSDs are subject to a more limited subset of FINRA rules for their SBS activities, but must still comply with a number of FINRA requirements in addition to the SEC SBSD rules, including amended requirements for FINRA capital (and related financial responsibility).

SBS nominee brokers are distinguished by whether they are acting on behalf of a registered SBSD or an entity relying on the de minimis exception in Rule 3a71-3(d), in each case with the ability to rely on certain exceptions to FINRA’s Rules of Conduct given similar SEC SBSD requirements.

Finally, companies employing “double hatted” structures should ensure that personnel are classified appropriately and that activities are handled in accordance with FINRA Rule 3270 on Outside Business Activities. (In the original proposal, FINRA included a caveat about the “facts and circumstances” nature of a determination of whether someone employed by a broker is acting solely on behalf of an SBSD.) said Nihal Patel by Cadwalader.

SEC Charges Emoji User With Insider Trading

The SEC has accused two people of trading in material, nonpublic information from a company’s confidential earnings meeting.

In a lawsuit filed in the Northern District of Illinois court, the SEC alleged that a company employee learned inside information – that profits were significantly higher than the company’s forecast – while attending a non-public internal company meeting. He then shared the information with a second person who was a close friend and former colleague. The friend took advantage of this by buying call options based on the information and then liquidating the options when earnings were announced. The SEC complaint highlighted the use of an emoji in communications between the alleged miscreants.

The SEC charged the two individuals with violating Exchange Act Section 10(b) (“Regulation of the Use of Manipulative and Deceptive Devices”) and SEA Rule 10b-5 (“Use of manipulative and deceptive devices”), and sought civil penalties. and a permanent injunction to prevent further violations.

Both individuals also face criminal charges from the U.S. Attorney’s Office in the Northern District of Illinois.

GAO finds inconsistencies in implementation of FISMA cyber requirements

The GAO found that federal agencies were inconsistent in implementing cybersecurity requirements under the Federal Information Security Modernization Act (“FISMA”).

GAO assessed (i) the effectiveness of federal agencies’ implementation of cybersecurity policies and practices, and (ii) the extent to which relevant federal agency officials consider FISMA to be effective in improving security. agency information systems.

In its report covering fiscal year 2020, the GAO found that 23 civilian Chief Financial Officers Act (“CFO”) agencies reported progress toward achieving federal cybersecurity goals. A majority of them, however, said they did not fully meet the requirements. The GAO said inspectors general found uneven implementation and concluded that only seven CFO agencies had effective agency-wide information security programs.

Agencies that have implemented FISMA cybersecurity requirements in their security programs have benefited from, among others, (i) standardization of security program requirements, (ii) improved cybersecurity posture, ( iii) more effective communication within agencies, (iv) the ability to track the performance of security programs over time, and (v) the ability to establish accountability and authority over relates to cybersecurity programs.

The GAO noted that since 2010, it had made about 3,700 recommendations related to national cybersecurity efforts, of which about 900 had yet to be fully implemented as of November 2021.

SEC Seeks Comments on Nasdaq’s Amended Proposal on Direct Primary Offering Listings

The SEC has requested comment on a proposed amended rule from Nasdaq Stock Market LLC to adjust price limits on direct quotes from primary offerings.

The Nasdaq proposal would establish new price limitations on direct quotes of public offerings (see notice at 86 FR 34815). Executing direct quotes from primary offers currently requires price calculations by Nasdaq to fall between the highest and lowest prices listed on an issuer’s effective registration statement. The proposed rule would expand this pricing window for publication and execution, widening the upper and lower bounds of the range by 20%.

Following the SEC’s filing of proceedings (see the order here), the Nasdaq made numerous changes to its proposal on issues such as the setting of the projected price range, trading procedures and disclosure requirements.

Comments on the proposed rule change must be submitted to the SEC no later than February 2, 2022.

FDIC and FinCEN Launch “Tech Sprint” to Address Digital Identity Challenges

The FDIC and FinCEN will open registration for those interested in participating in a “Tech Sprint program” to focus on developing solutions “for financial institutions and regulators to help measure the effectiveness of verification of digital identity”.

Through Tech Sprint, FDIC Technology Lab (FDITECH) and FinCEN Seek to Increase Account Efficiency and Security; reduce fraud and other forms of identity-related crime, money laundering and terrorist financing; and fostering customer confidence in the digital banking environment. The Tech Sprint is intended to address the challenges associated with compromised Personally Identifiable Information (or “PII”), false identities, and multiple methods of digital identity authentication.

Tech Sprint participants are asked to answer the following question: “What is a scalable, cost-effective, and risk-based solution for measuring the effectiveness of digital identity verification to ensure that people who (that is to say, not in person) showing up for financial activities are who they say they are? »

Interested individuals can register online by mid-February 2022. The FDIC and FinCEN will select individuals to work as a team for approximately three weeks before presenting their findings to a panel of expert judges.

Primary sources

  1. Federal Register: Order Approving a Proposed Rule Amendment, as Amended by Amendment No. 1, Regarding Security-Based Swaps

  2. Federal Register: Notice of Filing of Amendment No. 1 and Establishment Procedural Order to Determine Whether to Approve or Disapprove the Proposed Rule Change, as Amended by Amendment No. 1, relating to security-based swaps

  3. SEC Complaint: David S. Sargent and Christopher M. Klundt

  4. SEC Statement: SEC Charges Two Friends and Former Business Associates with Insider Trading

  5. GAO Report: Preliminary Cybersecurity Findings Show Agencies’ Implementation of FISMA Requirements Was Inconsistent

  6. Federal register: Self-regulatory organizations; the Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change, as Amended by Amendment No. 2, to Amend Certain Fee Limits for Direct Listing Listed Firms

  7. FDIC Press Release: FDIC and FinCEN Launch Digital Identity Tech Sprint

  8. FinCEN Press Release: FDIC and FinCEN Launch Digital Identity Tech Sprint

  9. FDITECH Tech Sprint Webpage: Measuring the Effectiveness of Digital Identity Proof for Digital Financial Services

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 14