CFTC Unveils New Rules for Market Manipulation

Now that the dust has settled from the passing of Dodd-Frank, federal agencies are beginning the arduous task of complying with its laundry list of new provisions, which require various rulemakings and studies to be completed over the next year. The Commodities Futures Trading Commission is no exception.

The CFTC is currently working on rulemaking in 30 different topic areas. The most recent rule proposals were announced Tuesday, October 26, 2010. The new rules are focused on preventing manipulative and disruptive trading in commodities markets, such as precious metals, natural gas, and agricultural products.

The CFTC’s new rules regarding market manipulation create a new prohibition that bans all fraud-based market manipulation derived from “intentional and reckless conduct” that deceives or defrauds market participants, including making false or misleading statements of material facts, omitting material facts, and knowingly providing false or misleading information regarding crops or conditions that affect commodities. According to Commissioner Bart Chilton, the new rule is intended to be a “broad, catch-all” for violations that would otherwise fall through the existing “gaps” in market manipulation rules.

Currently, there is a four-prong test for manipulation that requires (1) showing that prices were outside the bounds of normal supply and demand (i.e. “artificial”), (2) proving that the actor has the ability to cause an “artificial price”, (3) showing that the actor took actions to cause the artificial price, and (4) that those acts be intentional.

On its face, the new rule language lowers this existing standard for proving manipulation from specific intent to recklessness. The penalties include a $1 million fine or triple the monetary gain, whichever is greater, and restitution to customers.

If approved, the proposed rules will expand the CFTC’s authority to the OTC market. These rules come partly in response to the recent allegations of manipulation in the silver market. (The CFTC announced that it would release more information on its investigation soon.) Although partially aimed at the OTC precious metals markets, the proposed rules are not intended to reach into retail OTC precious metals transactions.

The comment period for the new rules will be open for 60 days.

New Broker-Check Disclosure & Dispute Process Begins August 23, 2010

Last month, the Securities and Exchange Commission approved changes to FINRA Rule 8312. The changes will expand the information available in BrokerCheck and codify the dispute process regarding inaccuracies in the disclosed information. The amendments will be implemented in two phases, the first of which goes into effect on Monday, August 23, 2010. This first phase of implementation deals with the changes to historic complaints and the dispute process.

On Monday, all customer complaints will be publicly available in BrokerCheck. This includes any complaints that had previously been deemed “non-reportable” when the Central Registration Depository (CRD) was implemented (i.e. complaints made after August 16, 1999).

Also to be implemented on Monday is FINRA’s new dispute process regarding inaccuracies in BrokerCheck. Under the new dispute process, only an “eligible party” will be able to bring a dispute. FINRA defines an “eligible party” as any current member firm, a CXO of a former member firm, or any person associated with or formerly associated with a member firm that has a BrokerCheck report. In order to file a dispute under the amended rule, an eligible party must (1) submit a BrokerCheck Dispute Form (which will become available on FINRA’s website), (2) identify and explain the inaccuracy, and (3) provide any supporting documents.

The next (and final) implementation of the new amendments regarding the disclosure period and permanently available information will occur on November 6, 2010.

A complete discussion of all the rule changes and commentary on those changes can be accessed here.

FINRA CLOSES COMMENTS ON REGULATORY NOTICE 09-70: PROPOSED CHANGES TO REGISTRATION AND QUALIFICATION REQUIREMENTS

In December 2009, the Financial Industry Regulatory Authority (“FINRA”) proposed changes to the consolidated FINRA rulebook, which incorporated the National Association of Securities Dealers (“NASD”) rules on registration and qualifications. These changes were proposed pursuant to FINRA Regulatory Notice 09-70: “FINRA Requests Comment on Proposed Consolidated Registration and Qualification Requirements” (“Proposal”).

Essentially, the purpose of the Proposal is to streamline NASD Rules 1021 and 1031. Under the NASD, these rules governed registration requirements of representatives and principals. Under current FINRA rules, investment bankers and broker-dealers of FINRA member firms must register. Additionally, FINRA member firms may register any individuals that engage in legal, compliance, internal audit, or back-office operations. The primary effect of the proposal would significantly broaden the current “permissive” registration categories to allow member firms to register certain persons employed by member firms or their financial services affiliates. Because of this expansion, FINRA also would introduce new stand-alone registration categories:

(1) active registration, for individuals engaged in investment banking or securities activities

(2) inactive registration, for individuals engaged in the “bona fide” business purpose of the member

(3) retained associate registration, for individuals functioning as financial services affiliates.

The actual text of the Proposal can be accessed here.

The comment period was slated to end February 1, 2010, but was extended to March 1, 2010. Twenty-one organizations submitted comments, voicing opinions ranging from full support to complete abandonment. The organizations included investment firms such as Edward Jones and T.Rowe Price and industry associations like the North American Securities Administrators Association, Inc. (“NASAA”) and the Securities Investment and Financial Markets Association (“SIFMA”). Most of the comments voiced general overall support, but suggested small changes to help effectuate a more efficient transition. See SIFMA Comment and Edward Jones Comment. The NASAA was one of the few who voiced complete abandonment of the acquisition of NASD rules into the consolidated FINRA rulebook. The primary objection to the Proposal is FINRA’s lack of guidance on the appropriate substance of a registered inactive person’s education and continuing education requirements. However, NASAA suggests this issue could be solved by continued use of FINRA’s current qualification examination waiver process, which would be superseded by the new rules. Further, the NASAA believes these three new registration categories constitute radical changes that are structured for the convenience of member firms not investor protection.

FINRA has not yet filed its rule proposal with the Securities and Exchange Commission, which may suggest the organization will make changes before its submission.