CFTC Commissioner Jill Sommers Announces Resignation

CFTC Commissioner Jill Sommers announced her resignation and made the following statement:  “As I prepare to leave the Commodity Futures Trading Commission I would like to acknowledge the hard work and dedication of my fellow Commissioners and the many talented staff with whom I have had the pleasure of working for the past five years.  While many challenges remain in finalizing the implementation of the Dodd-Frank Act, I have every confidence that the American public will be well-served by their continuing efforts.”

Lofchie Comment:  Commissioner Sommers has been a consistent internal critic of the means by which the Dodd-Frank Act was being implemented by the CFTC, and had several times dissented from rule adoptions and other actions taken by the majority of the other Commissioners.  She recently gave a speech at the Cadwalader Energy conference highlighting some of her concerns as to the implementation of Dodd-Frank.  It is unclear how (or if)  her absence will affect the regulatory actions of the CFTC given that she was in the minority among the Commissioners in any event.

See: CFTC Press Release.
See also: Chairman Gary Gensler’s Statement and Commissioner Scott D. O’Malia’s Statement.

EBA Recommends Recovery Plans for Cross-Border Banking Groups

The European Banking Authority (“EBA”) adopted a formal recommendation on the development of recovery plans in respect of 39 named banks in the European Union, including Deutsche Bank AG, Commerzbank AG and BNP Paribas SA. 

Suggestions for key elements to be addressed in a recovery plan include:

  • information on the bank and its governance structure;
  • options available in a crisis and an assessment of their potential impact; and
  • planned measures for facilitating future updates of the plan or its implementation in times of crisis.

The recommendation is addressed to the home supervisors of the named banks, who are required to notify the EBA by March 23, 2013 as to whether they have complied or intend to comply with the recommendation.

The Truth Can Not Be Hidden!! A GAO Report Shows Regulators Struggling to Finalize Dodd-Frank Rules

GAO has issued a report in which it reviewed the progress of financial regulatory reform.  According to the finding, implementation of reform is being delayed by the number, complexity and interconnectedness of the issues to be addressed, as well as a fragmented regulatory structure.

Lofchie Comment:  While the report is explicitly about the progress of Dodd-Frank rulemaking, it is implicitly a negative comment on the organization of our regulatory system and on the “benefits” of Dodd-Frank.

Click here to view report in full (links externally to GAO website).

SIFMA Criticizes Decision to Move Forward with Request for Proposal for the Creation of Consolidated Audit Trail

SIFMA submitted comments to the SROs responsible for developing and implementing a consolidated audit trail (“CAT”).  The CAT will collect and identify every order for all exchange-listed equities and equity options across all U.S. markets.  In its letter, SIFMA stated that the SROs’ decision to seek requests for proposals for the CAT’s data processor was premature because:

  1. The details of the SROs’ NMS Plan for implementing the CAT are too vague to elicit meaningful proposals for the CAT’s data processor;
  2. No procedure is in place to prevent conflicts of interest from SROs who intend to submit proposals to be the CAT’s data processor;
  3. The SROs have not determined how the CAT will be funded and its costs allocated; and
  4. No decision has been made about the ownership of the CAT or how to phase out the old auditing systems when the CAT goes into effect.

Lofchie Comment:  There is an indirect, but nevertheless significant, relationship between (i) today’s news item that the GAO has found that the Dodd-Frank rulemaking process is way behind and (ii) this item.  In short, the regulatory process is completely overwhelmed, which is to say nothing of those who are subject to it.  Therefore, in the case of a rule that is not mandated by statute and requires massive time and development costs, unless the rule is absolutely essential to the protection of baby kittens, there should be a presumption that the rule is put on hold.

View letter in full here (links externally to SIFMA website).

Enforcement Initiatives as to Private Equity Funds

Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit, spoke at the Private Equity International Conference today. Below is an outline of his remarks the SEC’s Asset Management Unit and its work in the private equity area:

The creation of the Asset Management Unit and the overall purpose and functions of the Unit;
The growth in the area of private equity has led to the SEC bringing more private equity cases, a trend which Mr. Karpati expects to continue;
A mention and very brief summary of the private equity cases that the SEC has brought;
Mr. Karpati mentioned capital overhang, fundraising, valuation of illiquid assets and conflicts of interest as potential concerns in the private equity field;
Explanation of (Enforcement) Risk Analytics Initiatives: how they work and how they are used by the Enforcement Division in targeting certain funds; and
The obligations and roles of COOs and CFOs in implementing and overseeing compliance procedures and identifying issues.

Lofchie Comment: Anyone involved in regulatory compliance by funds (not only private equity funds) and advisers should review Question 3 of the attached, which lists a number of the types of misconduct that Mr. Karpati sees as cause for concern. Many of these involve the allocation of the expenses of the fund.

View Q&A in full here (links externally to SEC website).

View on WSJ “QE’s Impact Defying Logic”

The Wall Street Journal’s Tom Lauricella wrote a thoughtful piece this morning called QE’s Impact Defying Logic.  The story focused on FX markets.

I enjoyed the perspective.  However, two counter examples resonate:

1) The comparison is largely against the majors.  Countries from Korea to Costa Rica to Brazil are screaming about outsized currency moves and pressure.  This is due to QE by the major central banks.  So, QE is impacting currency markets.

2) QE is also having a dramatic influence on asset prices – see

The article raised the point that if inflation ultimately pushes higher in the US, major currencies will suffer.  The question remains.  Which one will fall furthest?

We believe that the CFS monetary and financial data will help provide an early warning signal.

CFTC to Host Public Roundtable to Discuss “Futurization” of Swaps Market

The CFTC announced that staff will hold a public roundtable on January 31, 2013, from 9:30 a.m. to 3:15 p.m., to discuss the “futurization” of the swaps market.  The roundtable will consist of four panels, discussing 1) general industry views and concerns regarding the conversion of swaps to futures in each asset class; 2) clearing and different margin requirements for swaps and futures; 3) transaction-related matters, including appropriate block rules for swaps and futures; and 4) the effect of the conversion of swaps to futures on end-users.

Agenda for the Public Roundtable Discussion:

9:30 a.m.


9:50 a.m.

Panel One: General industry views and concerns regarding the futurization of swaps in each asset class.

11:15 a.m.

Panel Two: Clearing and different margin requirements for swaps and futures.

12:00 p.m.

Lunch Break

1:00 p.m.

Panel Three: Transaction-related matters, including appropriate block rules for swaps and futures.

2:15 p.m.


2:20 p.m.

Panel Four: The effect of the conversion of swaps to futures on end-users.

3:15 p.m.

Roundtable concludes

Lofchie Comment:  This could be an interesting conference to follow.  To my eye, in all kinds of ways, the heavy burden of regulation on swaps imposed by Dodd-Frank and by the implementation of the rules thereunder is driving market participants away from swaps and (to some extent) into futures.  From the standpoint of the U.S. economy, what is more worrisome is that the U.S. regulations are also driving non-U.S. customers away from U.S. swaps and U.S. markets and into non-U.S. swaps and other financial markets.  Swaps customers outside the United States are saying they do not want to be subject to U.S. jurisdiction.  For an economy such as ours that benefits from being a locus of global financial activity, this is a bad thing.

View Press Release in full here (links externally to CFTC website).

OIG Report: Evaluation of the SEC’s Whistleblower Program

Section 922 of the Dodd-Frank Act required the Office of Inspector General (“OIG”) to evaluate the SEC’s Whistleblower Program and answer the following questions.  OIG will examine whether:

1. the final rules and regulation issued under the amendments of Section 922 have made the whistleblower protection program clearly defined and user-friendly;

2.  the program is promoted on the SEC’s website and has been widely publicized;

3. the SEC is prompt in: a) responding to information provided by whistleblowers; b) responding to applications for awards filed by whistleblowers; c) updating whistleblowers about the status of their applications; and d) otherwise communicating with the interested parties;

4. the minimum and maximum reward levels are adequate to entice whistleblowers to come forward with information and, conversely, whether the reward levels are so high as to encourage illegitimate whistleblower claims;

5. the appeals process has been unduly burdensome for the SEC;

6. the funding mechanism for the Investor Protection Fund established by Section 922 is adequate;

7. in the interest of protecting investors and identifying and preventing fraud, it would be useful for Congress to consider empowering whistleblowers or other individuals, who have already attempted to pursue a case through the SEC, to have a private right of action to bring suit based on the facts of the same case, on behalf of the government and themselves, against persons who have committed securities fraud; and

8. the Freedom of Information Act (“FOIA”) exemption established in Section 21 F(h)(2)(A) of the Securities and Exchange Act of 1934, as added by the Dodd-Frank Act,

a) aids whistleblowers in disclosing information to the SEC;
b) has had an impact through the FOIA exemption described above on the ability of the public to access information about regulation and enforcement activities of the SEC, and if so, what impact; and
c) any recommendations on whether the exemption described above should remain in effect.

This report contains two recommendations that were developed to aid the SEC in establishing performance metrics for key processes in its whistleblower program and to facilitate the SEC’s monitoring of the whistleblower program’s performance.

Lofchie Comment:  I wish the OIG would also consider whether the whistleblower program is a good thing for American society.  To me, the thought that the government is tapping my phones or reading my email is far less disturbing than the fact that the government effectively pays co-workers to secretly spy on each other, and that no one ever has to come forward with a public accusation or be revealed.

View Report in full here (links externally to OIG report).

IOSCO Publishes Suitability Requirements for Distribution of Complex Financial Products (with dissenting statements by SEC Commissioners)

The International Organization of Securities Commissions (“IOSCO”) published a final report on Suitability Requirements with respect to the Distribution of Complex Financial Products, which sets out principles relating to the distribution by intermediaries of complex financial products to retail and non-retail customers.  The report introduces nine principles that cover the following areas related to the distribution of complex financial products by intermediaries:

  • Classification of customers
  • General duties irrespective of customer classification
  • Disclosure requirements
  • Protection of customers for non-advisory services
  • Suitability protections for advisory services (including portfolio management)
  • Compliance function and internal suitability policies and procedures
  • Incentives
  • Enforcement

In their dissenting statement as to the final report, SEC Commisioners Paredes and Gallagher said that they “objected” to the publication of the report, that the report “does not accurately reflect the relevant law in the U.S.,”  and that, ultimately, U.S. law should “[not] conform” to the report, the “substance of which we disagree with in key respects.”   The dissenting statement concludes by saying, “We especially disagree with the Final Report’s failure to properly respect the distinction between retail and institutional investors when determining the suitability requirements that should apply.”

Lofchie Comment:  According to the report, a significant motivator of its production was the material loss suffered by retail investors globally on the purchase of various Lehman mini-bonds, which the report says were not sold in the United States. 

Although the U.S. obviously has a well-developed set of rules around suitability, primarily through FINRA, it is certainly possible that this report could play a role in the discussion over the imposition of a fiduciary obligation on broker-dealers.  The report advocates, among other things, that sell-side firms should have some level of obligation even in connection with financial products as to which the firms had made no recommendation (“recommendation” is not a defined term in the report); and the report also suggests that certain products might be prohibited for sale to retail customers.  The report also indicates that the definition of “retail customer” (meaning the class of persons entitled to additional productions) potentially should be quite broad and might vary with the relevant product.

What is interesting to me intellectually is the attempt to find the appropriate level of obligation that sell-side firms owe to their customers and the specificity of that obligation.  If the bar of obligation is set too low, retail investors are bound to make lots of foolish investments.  On the other hand, if the bar of obligation is set too high, or if the level of the bar is indeterminate and is subject to reset after an investor has lost money, retail investors may be locked out of the market because the costs or risks of providing them with financial services are simply too high to bear.

View IOSCO Report in full here (links externally to IOSCO website).
View Press Release in full here (links externally to IOSCO website).
See also: [Dissenting] Statement by Commissioners Paredes and Gallagher.