EXEC PAY AND FINANCIAL PERFORMANCE: SEC PROPOSES DISCLOSURE REQUIREMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Proposes Rules to Require Companies to Disclose the Relationship Between Executive Pay and a Company’s Financial Performance
04/29/2015 03:46 PM EDT

The Securities and Exchange Commission today voted to propose rules to require companies to disclose the relationship between executive compensation and the financial performance of a company.  The proposed rules, which would implement a requirement mandated by the Dodd-Frank Act, would provide greater transparency and allow shareholders to be better informed when they vote to elect directors and in connection with advisory votes on executive compensation.

“These proposed rules would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance,” said SEC Chair Mary Jo White.  “The proposal would require enhanced disclosure that can be compared across companies.”

The proposed rule would require a company to disclose executive pay and performance information for itself and companies in a peer group in a table and to tag the information in an interactive data format.  A company would be required to disclose executive compensation actually paid for its principal executive officer using the amount already disclosed in the summary compensation table required in the proxy statement, making adjustments to the amounts included for pensions and equity awards.  The amount disclosed for the remaining executive officers would be the average compensation actually paid to those executives.  As the measure of performance, a company would also be required to report its total shareholder return (TSR) and the TSR of companies in a peer group.

All companies would be required to disclose the information for the last five fiscal years, except for smaller reporting companies, which would only be required to provide disclosure for the last three fiscal years.  The proposed rules provide phase-in periods for these requirements.

The comment period for the proposed rules will be 60 days after publication in the Federal Register.

SEC FILES ENFORCEMENT ACTION AGAINST COMPANY FOR USING CONFIDENTIALITY AGREEMENTS IN VIOLATION OW WHISTLEBLOWER PROTECTION RULE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
04/01/2015 10:45 AM EDT

The Securities and Exchange Commission today announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.

The SEC charged Houston-based global technology and engineering firm KBR Inc. with violating whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act.  KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.  Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

KBR agreed to pay a $130,000 penalty to settle the SEC’s charges and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

“By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.  We will vigorously enforce this provision.”

According to the SEC’s order instituting a settled administrative proceeding, there are no apparent instances in which KBR specifically prevented employees from communicating with the SEC about specific securities law violations.  However, any company’s blanket prohibition against witnesses discussing the substance of the interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.

“KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us.” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower.  “Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

Without admitting or denying the charges, KBR agreed to cease and desist from committing or causing any future violations of Rule 21F-17.

The SEC’s investigation was conducted by Jim Etri and Rebecca Fike and supervised by David L. Peavler of the Fort Worth Regional Office.

CFTC APPROVES TOKYO COMMODITY EXCHANGE, INC. REGISTRATION AS FBOT

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION  

Statement of CFTC Commissioner Mark Wetjen on CFTC Approval of TOCOM as an FBOT
January 21, 2015

Washington, DC – I am pleased that Chairman Tim Massad brought forward and the Commission then moved quickly to approve registration of the Tokyo Commodity Exchange, Inc. (TOCOM) as a Foreign Board of Trade (FBOT).  As I have stressed before, this cross-border approach to the oversight of trading platforms incentivizes higher standards around the world by requiring foreign entities that want access to U.S. market participants to be subject to supervision that is comparable and comprehensive to our regime under Dodd-Frank.  I hope the Commission will move quickly to consider the remaining applications for FBOTs that have been relying on no-action relief for years.

As a next step, I believe the Commission should formalize a regulatory regime for foreign Swap Execution Facilities, just as Congress contemplated in the Dodd-Frank Act. Embracing a foreign SEF regime would be a useful step toward implementing the CFTC’s cross-border framework and would also help prevent unnecessary fragmentation of the global swaps market. Just as with FBOTs and substituted compliance, a foreign SEF regime would incentivize foreign jurisdictions to harmonize their regulations with ours.

Last Updated: January 21, 2015

SEC ISSUES ANNUAL STAFF REPORT REGARDING NRSROs

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
12/23/2014 05:15 PM EST

The Securities and Exchange Commission issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs) and submitted a separate report on NRSROs to Congress.

“These reports provide the most current and comprehensive picture of the credit rating industry,” said SEC Chair Mary Jo White.  “The SEC’s enhanced oversight of NRSROs, informed by risk assessment, regular examinations and policy considerations, provides increasingly robust and effective oversight of the industry, as reflected by overall improvements in compliance, documentation, and board oversight.”

The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO once a year and issue an annual report summarizing the examination findings.  In addition to covering eight areas required by the Dodd-Frank Act, SEC examiners used risk assessment tools to identify specific areas of focus such as information technology, cybersecurity, or certain ratings activities.  During the 2014 examinations, the staff observed improvements concerning:

Compliance resources, monitoring, and culture
Documentation and resources for criteria and model validation
Document retention
Board of directors or governing committee oversight
The staff made recommendations for improvement in certain areas, including:

Use of affiliates or third-party contractors in the credit rating process
Management of conflicts of interest related to the rating business operations
Adherence to policies and procedures for determining or reviewing credit ratings
“The findings and recommendations in the 2014 examination report demonstrate the impact of rigorous oversight by the SEC and regular examinations by the Office of Credit Ratings,” said Thomas J. Butler, Director of the SEC’s Office of Credit Ratings.

The annual report to Congress, which is required by the Credit Rating Agency Reform Act of 2006, details the state of competition, transparency, and conflicts of interest at NRSROs.  The staff report includes a discussion of the new requirements for NRSROs adopted by the Commission in August 2014 to improve the quality of credit ratings and increase credit rating agency accountability through enhanced transparency, governance, and protections against conflicts of interest.

The following SEC staff made significant contributions to the examinations and reports:  Diane Audino, Rita Bolger, Patrick Boyle, Matthew Chan, Kristin Costello, Scott Davey, Shawn Davis, Franco Destro, Michael Gerity, Kenneth Godwin, Natalia Kaden, Julia Kiel, Russell Long, Abe Losice, Carlos Maymi, Matt Middleton, David Nicolardi, Sam Nikoomanesh, Harriet Orol, Abraham Putney, Jeremiah Roberts, Mary Ryan, Warren Tong, Evelyn Tuntono, Chris Valtin, Kevin Vasel, and Michele Wilham.  The Office of Credit Ratings appreciates the assistance provided during the examinations by Todd Scharf and Ted Shelkey of the SEC’s Office of Information Technology.

SEC'S FIRST WHISTLEBLOWER UNDER NEW PROGRAM TO RECEIVE ADDITIONAL $150,000 PAYOUT

FROM:  SECURITIES AND EXCHANGE COMMISSION 

4/04/2014 12:51 PM EDT

The Securities and Exchange Commission today announced that the whistleblower who received the first award under the agency’s new whistleblower program will receive an additional $150,000 payout after the SEC collected additional funds in the case.

The whistleblower, who the SEC did not identify in order to protect confidentiality, has now been awarded a total of nearly $200,000 since the award was announced on Aug. 21, 2012.  The award recipient helped the SEC stop a multi-million dollar fraud by providing documents and other significant information that allowed its investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims.

The award represents 30 percent of the amount collected in the SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed under the law.  The additional payout comes after the SEC collected an additional $500,000 from one of the defendants in the case.

“This latest payment shows that the SEC’s aggressive collection efforts pay dividends not only for harmed investors but also for whistleblowers,” said Sean McKessy, chief of the SEC’s Whistleblower Office.  “As we collect additional funds from securities law violators, we can increase the payouts to whistleblowers.”

The SEC expects to collect additional money from defendants in this case as some are making payments under a periodic payment schedule ordered by the court.

The 2010 Dodd-Frank Act authorized the whistleblower program to reward individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.  Awards can range from 10 percent to 30 percent of the money collected.  The Dodd-Frank Act included enhanced anti-retaliation employment protections for whistleblowers and provisions to protect their identity.  The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.

FLORIDIAN FINED FOR MAKING FALSE AND MISLEADING STATEMENTS DURING CFTC INVESTIGATION

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Sean R. Stropp to Pay $250,000 Penalty to Settle Charges of Making False and Misleading Statements During a CFTC Investigation

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Sean R. Stropp (Stropp), formerly of Jupiter, Florida. Stropp is ordered to pay a $250,000 civil monetary penalty for making false and misleading statements of material fact, and omitting material facts, to CFTC staff during a CFTC Division of Enforcement (DOE) investigation. The Order enforces the false statements provision of the Commodity Exchange Act (CEA), which was added by the 2010 Dodd-Frank Act.

In addition to the $250,000 civil monetary penalty, the Order requires Stropp to cease and desist from violating the relevant provision of the CEA and permanently prohibits him from, directly or indirectly, engaging in trading on or subject to the rules of any registered entity.

According to the Order, Stropp provided DOE staff a signed and notarized financial disclosure statement in connection with the CFTC’s investigation into potentially unlawful sales of off-exchange leveraged metals contracts by Stropp and his company Barclay Metals, Inc. (Barclay). In his statement, Stropp falsely represented that the statement included all his known assets and that the statement was true, correct, and complete, per the Order. Further, the Order finds that Stropp omitted material facts from the statement, including both his control of, and his spouse’s ownership interest in, another entity selling leveraged metals contracts and his ownership and control of two of that other entity's bank accounts.

CFTC DOE Acting Director Gretchen Lowe commented, “Lying or failing to disclose material information during a CFTC investigation is unacceptable, and those who do so must bear the consequences.”

CFTC Previously Settled with Stropp

On January 28, 2013, the Commission issued an Order finding that Stropp, Barclay, and others engaged in illegal, off-exchange metals transactions in violation of the CEA (see CFTC press release 6503-13, January 28, 2013).

Related Criminal Action

On August 20, 2013, the Manhattan (New York) District Attorney’s office announced Stropp’s indictment for operating a fraudulent investment scheme through the undisclosed leveraged metals entity at issue in the Order. According to the indictment, the scheme allegedly resulted in millions of dollars of customer losses. Stropp pleaded guilty to the charges on February 4, 2014 and was sentenced to one to three years in prison in New York, where he is currently incarcerated.

CFTC DOE staff responsible for this action are Jenny Chapin, Jeff Le Riche, Steve Turley, Charles Marvine, Rick Glaser, and Richard Wagner. The CFTC thanks the Manhattan District Attorney’s Office for its assistance.

SEC COMMISSIONER PIWOWAR'S REMARKS ON INTERNATIONAL FINANCIAL REGULATIONS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Remarks at AIMA Global Policy & Regulatory Forum
 Commissioner Michael S. Piwowar
New York, NY

March 6, 2014

Thank you, Kathy [Casey], for that kind introduction. Thank you, Kathy and Jiri [Krol], for inviting me to lead off the excellent program that AIMA has put together. I have enjoyed working with both of you over the past few years on numerous global policy and regulatory issues, which is the focus of today’s forum.

In addition to serving as SEC Commissioners, Kathy and I have a lot in common, including the fact that we both studied international politics as undergraduates at Penn State. Many of the concepts that we learned from that curriculum have served us well over the course of our careers, particularly as international financial regulatory issues have become more important in the aftermath of the global financial crisis.

Jiri and I also have something important in common. I remember the first time I met with Jiri, he commented about my last name “Piwowar” which means “Brewer” or “Beer Maker” in Polish. The Polish and Czech languages are very similar, so Jiri knew exactly what it meant. What I did not realize, however, was that Jiri’s last name “Krol” is Czech for “Beer Drinker.” Of course, I’m kidding.

Seriously, I am excited to be here with you this morning to share my thoughts on how I approach the international financial regulatory issues that come before the Commission. But, before I continue, I need to provide the standard disclosure that my remarks are my own and they do not necessarily reflect the views of the Commission or my fellow Commissioners.

International engagement has long been a fundamental aspect of effective capital markets regulation. As Kathy [Casey] noted in a speech she gave while Commissioner in 2007: “If we, as regulators, are to remain effective and relevant in meeting our mission of protecting investors, fostering capital formation and maintaining competitive, fair and orderly markets, we will need to be more nimble and responsive to market developments and rely more on cooperation and collaboration with our international counterparts.”[1]

It has become clear to me over these past few months that at no time in the Commission’s history have we been more engaged with the international community or more involved in collaborative workstreams with our fellow regulators from around the globe.

Much of this international work stems from the 2009 G-20 initiatives regarding over-the-counter (OTC) derivatives reforms.[2] It thus came as little surprise to me that, from the very beginning of my tenure as Commissioner, I have seen a steady stream of visitors eager to discuss the Commission’s approach to the regulation of cross-border OTC derivatives. In addition to sharing their own views and observations on these issues, visitors frequently ask me my personal views on the topic.

I believe I can condense them into a single, concise theory that should provide you with clarity on where I stand on every cross-border issue facing the Commission: “I am a proponent of the rationalization of the global regulatory framework by seeking convergence and harmonization of rules through bilateral and multilateral dialogue and the mutual recognition of comparable regimes based on principles of international comity.”

I am sure that clears things up.

I have been struck by two observations regarding international financial regulatory issues, particularly with respect to OTC derivatives. First, this is an incredibly complex area where actual details matter more than abstract concepts. Second, much of the conversation involves buzzwords and terms of art that may mean different things to different people.

I recognize that labeling regulatory approaches is sometimes constructive and frequently necessary in order to foster dialogue between regulators. However, the two observations I just mentioned often collide with each other as regulators and market participants alike seek to understand how jurisdictions around the world intend to regulate cross-border activities. Broad concepts and terms of art not only fail to provide the specificity required by the financial markets, but also lend themselves to being misconstrued as individuals read into the terms what they seek to get out of them.

We saw a recent example with regard to the so-called “Path Forward” agreement on derivatives regulation negotiated between the Commodity Futures Trading Commission (CFTC) and the European Commission.[3] Not long after the agreement was published, it became clear that the regulators had differing interpretations of the understandings in that document. Surely, neither side intended to mislead the other by agreeing to a set of broad concepts that left significant room for interpretation rather than specific requirements that would have bound both parties. However, the fact remains that the document failed to resolve any of the crippling uncertainty in the market.

At this point you may be questioning how I can critique the reliance on international buzzwords and broad concepts, and yet give a speech in which I share with you some of the broad principles that guide my decision-making in this area?

I raise these issues only to express my view that the use of such terms, while at times helpful, must be met with a healthy dose of skepticism, and cannot serve as a substitute for detailed guidelines. The principles I share with you should be treated the same way. However, my hope is that they will provide you with insight into my thinking as the Commission tackles these complex issues in the near future.

Respect for International Regulators
The first principle guiding my thoughts in this area is respect for my international counterparts.

My education gave me a broad perspective of, and healthy respect for, the international community. My respect for the international financial regulatory community has only grown as I have worked with regulators from around the globe during my professional career at both the Senate Banking Committee and the SEC.

Approaches to regulating the same activity often differ across jurisdictions. This is not surprising given the role that legal traditions and cultural norms play in shaping financial development and regulation. However, we must not let these differences get in the way of cooperation, and lead to unnecessary burdens for market participants or duplicative or conflicting regulations.

Therefore, I reject any notion that we must pull the whole world into the U.S. regulatory sphere, or that other jurisdictions should simply adopt U.S. regulations. This would be neither appropriate given our mission, nor necessary given applicable regulations in other jurisdictions.

I believe that market participants that comply with the regulatory requirements in the jurisdiction in which they are based should, under certain circumstances, be deemed to comply with our requirements in the Dodd-Frank Act Title VII space.

This is probably the area where the most ink is spilled on creating terms of art for use by the international financial regulatory community. It is no wonder that this occurs, however, because allowing for compliance with home country requirements in this manner is vital to creating an effective global regulatory environment.

As a result, I believe we should apply this principle broadly, and expect that regulators in other jurisdictions will do the same. Determinations about which jurisdictions qualify for this type of treatment should be based on a minimum level of acceptable regulation, and focused on regulatory outcomes rather than a rule-by-rule comparison.

In addition, where differences in the timing of compliance dates among jurisdictions arise, we should provide reasonable relief to market participants in the interim period. The implementation of enhanced regulation for OTC derivatives represents the creation of a long-term system of oversight, and must not be used as a short-term power grab between regulators or jurisdictions. Market participants should not pay the price — either directly through increased compliance and restructuring costs or indirectly through market uncertainty — for differences in their regulators’ compliance dates.

Territorial Approach to Regulation
The second principle that guides my thoughts on cross-border applications of Commission regulations is that the Commission should take a territorial approach.

The territorial approach to regulation has a long history at the Commission,[4] and there is no reason to abandon it as we develop the new framework for OTC derivatives regulation.

Of course, a territorial approach to regulation may itself be viewed as a term of art. In using this term in the context of OTC derivatives, I mean that the Commission’s regulation of cross-border OTC derivatives activity should generally apply to transactions involving activity within the United States. An activity may be deemed to occur within the United States either because a transaction is entered into with a U.S. person, or because it is conducted within the United States.

These concepts are only given meaning through the definitions applied to them. I could spend this entire speech talking about the definition of the term “U.S. person,” but for now I will simply convey the two essential aspects of this definition.

First, the definition of U.S. person must be clearly defined and easily applied. Market participants will inevitably be required to build out their compliance systems to account for how this term is defined. It is our job as regulators to give them clear guidelines to follow.

Second, the definition of U.S. person must be limited in scope. We should not attempt to expand the reach of our rules by creating an unreasonably broad definition.

The definition of what constitutes a “transaction conducted within the United States” is also an important aspect of the territorial approach to regulation. It ensures that all market participants operating within the United States are subject to the same rules and that everyone entering into transactions in the U.S. market receives the same protections.

However, it is important to note that not all activities that touch the United States should be drawn into its regulatory sphere. For example, a phone call from abroad made to someone in the United States seeking OTC derivatives market color is not the type of activity that should trigger application of our regulations.

Predictable Changes in Behavior in Response to Regulation
Another key principle in this area is that we should consider the predictable changes in behavior by market participants in response to regulation.

Markets are dynamic and constantly changing. As a result, market participants must be creative and able to adapt. It would be naïve and foolish for regulators to think that we can completely control markets and prevent market participants from pursuing their economic interests.

If we adopt unnecessarily harsh regulations in the United States, we must expect that market participants will adapt. This could involve structuring business activities away from our jurisdictional reach, which some call regulatory arbitrage. We should not be surprised by this activity, nor should we condemn it. It would not be nefarious. Rather, it would simply be a rational response to overly burdensome regulation.

It would also be naïve and foolish for regulators to downplay the impact of our decisions on markets and the burdens they place on market participants. We know that increased regulation is not costless. Market regulators must always strive to implement effective regulation that adequately protects investors. However, we must do so in full recognition of the tradeoffs and costs associated with our rules. These costs can burden our economy and ultimately hurt investors.

It is not just the potential increased costs associated with our regulations that we must consider. We must also recognize that, with truly global capital markets, our actions have the power to shift the markets themselves. If our rules are unnecessarily harsh and we reject international cooperation, market participants may rationally seek other jurisdictions in which to operate.

If this happens, we must own up to the fact that our own actions — even ones undertaken with the best of intentions — can result in less regulatory transparency, less effective regulation, fewer protections for investors, higher prices, fewer productive jobs, and slower economic growth.

Regulatory Process Matters
This leads me to my final point — regulatory process matters.

Just as we cannot ignore the impacts associated with our rules, we must not ignore the appropriate process for developing them. That process includes a rigorous economic analysis, which includes identifying and evaluating reasonable alternatives to the proposed regulatory approach.[5]

The regulation of cross-border OTC derivatives activity involves many decision points, each with a number of viable alternatives. In developing our final rules in this area, we must engage in a thoughtful economic analysis to guide our decision-making process. The importance of the rulemaking process is highlighted by the current state of OTC derivatives regulation in the United States.

As I am sure all of you are aware, both the SEC and CFTC have been tasked with implementing portions of Title VII, including application of the statute to cross-border activities. The SEC has undertaken a methodical, deliberative process that includes the publication of a comprehensive document in May 2013 containing proposed rules developed with the insight of a thoughtful economic analysis.[6] SEC staff is currently reviewing the public comments on that proposal, and I expect that in the near future we will adopt final rules in this area that reflect the comments received and that are based on sound analysis of the economic consequences of the rules.

The CFTC, on the other hand, chose not to engage in a disciplined rulemaking process, and instead attempted to address these same issues by publishing “interpretive guidance” in July 2012.[7] This interpretive guidance did not contain clear rules, and was not based on any economic analysis. It is therefore not surprising that the guidance received widespread condemnation by foreign regulators. In December 2012, the CFTC responded with “further” interpretive guidance[8] that received so much criticism from foreign governments and regulators that the House Committee on Agriculture held a hearing a few weeks later.[9] In July 2013, the CFTC issued “final” interpretive guidance on the cross-border application of the swap provisions added by the Dodd-Frank Act.[10] Lacking the clarity and finality achievable through the rulemaking process, the CFTC’s final guidance has now been called into question through litigation, injecting further uncertainty into the markets.[11]

While the CFTC’s guidance is currently tied up in the courts for an indeterminate period of time, I can envision the SEC’s methodical approach to these issues bearing fruit in the form of a robust final rule in the coming months. Aesop, the ancient Greek story teller, would be quite happy looking at the state of Title VII regulation right now. His fabled story of the tortoise and the hare seems quite appropriate, with its overarching message that “Slow and steady wins the race.”

Conclusion
In closing, it bears repeating that the application of Dodd-Frank Act Title VII provisions to cross-border OTC derivatives activities is an incredibly complex area that does not lend itself to mere generalities. That is precisely why many of the common terms of art used in international dialogue are not always helpful.

Market participants do not need to know whether their regulators support abstract notions of mutual recognition, comparability assessments, or international comity. They do need to know whether their transactions must be reported, cleared, or traded on an exchange, and where they can undertake those activities.

I trust that my remarks give you a better sense of how I intend to approach international financial regulatory issues, including the final cross-border OTC derivatives rulemaking. I further hope that the Commission, as a whole, will follow the old adage “the little things you do matter more than the big things you say” and rely more on cooperation and collaboration with our international counterparts as we work together to develop an effective global financial regulatory framework that is consistent with our mission of protecting investors, maintaining fair, orderly and efficient markets, and promoting capital formation.

Thank you. Enjoy the rest of the day.


[1] Remarks at the Institute of International Bankers Fall Membership Luncheon by Commissioner Kathleen L. Casey (Oct. 9, 2007), available at http://www.sec.gov/news/speech/2007/spch100907klc.htm.

[2] See Leaders’ Statement at the Pittsburgh Summit, G-20 Meeting (Sept. 25, 2009), available at http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

[3] Cross-Border Regulation of Swaps/Derivatives Discussions between the Commodity Futures Trading Commission and the European Union — A Path Forward (July 11, 2013), available at http://www.cftc.gov/PressRoom/PressReleases/pr6640-13.

[4] See, e.g., Registration Requirements for Foreign Broker-Dealers, Securities Exchange Act Release No. 27017, 54 F.R. 30013, 30016 (July 18, 1989).

[5] See, e.g., Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 6, 2012), available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.

[6] Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants; Proposed Rule, Securities Exchange Act Release No. 69490, 78 F.R. 30967 (May 23, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-10835.pdf.

[7] See Cross-Border Application of Swaps Provisions, U.S. Commodity Futures Trading Commission website, available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/Cross-BorderApplicationofSwapsProvisions/index.htm.

[8] Id.

[9] See Dodd-Frank Derivatives Reform: Challenges Facing U.S. and International Markets Before the Subcommittee On General Farm Commodities and Risk Management of the House Committee on Agriculture (Dec. 13, 2012). Hearing transcript, testimonies, and other documents are available at http://agriculture.house.gov/hearing/dodd-frank-derivatives-reform-challenges-facing-us-and-international-markets.

[10] See Cross-Border Application of Swaps Provisions, U.S. Commodity Futures Trading Commission website, available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/Cross-BorderApplicationofSwapsProvisions/index.htm. See also Statement of Dissent by Commissioner Scott D. O’Malia, Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations and Related Exemptive Order (July 12, 2013), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

[11] Securities Industry and Financial Markets Association, International Swaps and Derivatives Association, and Institute of International Bankers v. United States Commodity Futures Trading Commission, No. 13-CV-1916 (D.D.C. filed Dec. 4, 2013).

SEC STATEMENT ON WHISTLEBLOWER COURT FILING

FROM:  SECURITIES AND EXCHANGE COMMISSION
Statement on Court Filing by SEC to Protect Whistleblowers From Retaliation
 Sean McKessy
Chief, Office of the Whistleblower

Feb. 20, 2014

“The Commission’s whistleblower program both encourages whistleblowers to report wrongdoing and protects them when they do.  Today's filing makes clear that under SEC rules, whistleblowers are entitled to protection regardless of whether they report wrongdoing to their employer or the Commission.  The Commission's brief supports the anti-retaliation protections under the Dodd-Frank Act that I believe are critical to the success of the SEC's whistleblower program.”

CFTC OFFICIAL'S TESTIMONY REGARDING FUTURES MARKET OVERSIGHT

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Testimony of Vincent McGonagle, Director Division of Market Oversight, Commodity Futures Trading Commission Before the Financial Institutions and Consumer Protection Subcommittee Senate Committee on Banking, Housing, and Urban Affairs

January 15, 2014

Chairman Brown, Ranking Member Toomey, and Members of the Subcommittee, thank you for the opportunity to appear before you today. I am Vincent McGonagle and I am the Director of the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC).

Background on Commodity Exchange Act and the CFTC Mission

The purpose of the Commodity Exchange Act (CEA) is to serve the public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information. Consistent with its mission statement and statutory charge under the CEA, the CFTC is tasked with protecting market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives – both futures and swaps – and to foster transparent, open, competitive and financially sound markets. In carrying out its mission and statutory charge, and to promote market integrity, the Commission polices derivatives markets for various abuses and works to ensure the protection of customer funds. Further, the agency seeks to lower the risk of the futures and swaps markets to the economy and the public. To fulfill these roles, the Commission oversees designated contract markets (DCMs), swap execution facilities (SEFs), derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, commodity pool operators and other intermediaries.

The CEA has for many years required that any futures transaction, unless subject to an exemption, be conducted on or subject to the rules of a board of trade which has been designated by the CFTC as a DCM. Sections 5 and 6 of the CEA and Part 38 of the Commission’s regulations provide the legal framework for the Commission to designate DCMs, along with each DCM’s compliance requirements with respect to the trading of commodity futures contracts. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), DCMs were also permitted to list swap contracts. Along with this expansion of product lines that can be listed on DCMs, the Dodd-Frank Act also amended various substantive DCM requirements, under CEA Section 5, and adopted a new regulatory category for exchanges that provide for the trading of swaps (SEFs).1 The Commission revised its DCM regulations to reflect these new requirements, and also adopted regulations to implement the Dodd-Frank Act’s SEF requirements.

Under the CEA and the Commission’s contract and rule review regulations, all new product terms and conditions, and subsequent associated amendments, are submitted to the Commission before implementation. In submitting new products and associated amendments, DCMs and SEFs are legally obligated to meet certain core principles; one of the most significant being the prohibition, in DCM and SEF Core Principle 3, on listing contracts that are readily susceptible to manipulation.2 DCMs and SEFs self-certify most of their products to the Commission, as allowed under the CEA,3 and self-certified contracts may be listed for trading shortly after submission.4 The Commission has provided Guidance to DCMs and SEFs on meeting Core Principle 3 in Appendix C to Part 38 of the Commission’s regulations. Failure of a DCM or SEF to adopt and maintain practices that adhere to these requirements may lead to the Commission’s initiation of proceedings to secure compliance.

Among other things, a DCM or SEF that lists a contract that is settled by physical delivery should design its contracts in such a way as to avoid any impediments to the delivery of the commodity in order to promote convergence between the price of the futures contract and the cash market value of the commodity at the time of delivery. The specified terms and conditions considered as a whole should result in a deliverable supply that is sufficient to ensure that the contract is not susceptible to price manipulation or distortion.5 The contract terms and conditions should describe or define all of the economically significant characteristics or attributes of the commodity underlying the contract, including: quality standards that reflect those used in transactions in the commodity in normal cash marketing channels; delivery points at a location or locations where the underlying cash commodity is normally transacted or stored; conditions that delivery facility operators must meet in order to be eligible for delivery, including considerations of the extent to which ownership of such facilities is concentrated and whether the level of concentration would render the futures contract susceptible to manipulation; delivery procedures that seek to minimize or eliminate any impediment to making or taking delivery by both deliverers and takers of delivery to help ensure convergence of cash and futures at the expiration of a futures delivery month.

Commission staff utilizes considerable discretion and can request that DCMs and SEFs provide full explanations of their compliance with the Commission’s product requirements. Commission staff may ask a DCM or SEF at any time for a detailed justification of its continuing compliance with core principles, including information demonstrating that any contract certified to the Commission for listing on that exchange meets the requirements of the Act and DCM or SEF Core Principle 3.

Expansion of CFTC Enforcement Authority Under Dodd-Frank

The Commission’s responsibilities under the CEA include mandates to prevent and deter fraud and manipulation. The Dodd-Frank Act enhanced the Commission’s enforcement authority by expanding it to the swaps markets. The Commission adopted a rule to implement its new authorities to police against fraud and manipulative schemes. In the past, the CFTC had the ability to prosecute manipulation, but to prevail, it had to prove the specific intent of the accused to affect prices and the existence of an artificial price. Under the new law and rules implementing it, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of manipulative schemes. Specifically, Section 6(c)(3) of the CEA now makes it unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity. In addition, Section 4c(a) of the CEA now explicitly prohibits disruptive trading practices and the Commission has issued an Interpretive Guidance and Policy Statement on Disruptive Practices.6

In addition, the Dodd-Frank Act established a registration regime for any foreign board of trade (FBOT) and associated clearing organization who seeks to offer U.S. customers direct access to its electronic trading and order matching system. Applicants for FBOT registration must demonstrate, among other things, that they are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country or countries that is comparable to the comprehensive supervision and regulation to which Commission-designated contract markets and registered derivatives clearing organizations are respectively subject.

CFTC Coordination with Foreign and Domestic Regulators

The Commission recognizes that commodity markets are international in nature and, accordingly, regularly consults with other countries’ regulators. In particular, staff regularly consult with staff of the FCA (the LME’s home regulatory authority) as to market conditions with respect to products of mutual interest, including the LME’s recent introduction of warehouse reforms. The two agencies also participate in mutual information-sharing agreements for both market surveillance and enforcement purposes.

Similarly, the Commission formally and informally consults and coordinates with other domestic financial regulators. For example, the CFTC and the Federal Energy Regulatory Commission (FERC) have had a memorandum of understanding (MOU) in place since 2005 that provides for information exchange related to oversight or investigations. Earlier this month, FERC and the CFTC signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect the nation’s energy markets and increased cooperation between the agencies.

Again, thank you for the opportunity to appear before the Subcommittee. I will be pleased to respond to any questions you may have.

1 In addition to the provisions regarding listing of swaps on DCMs and SEFs, the Dodd-Frank Act provides that, unless a clearing exception applies and is elected, a swap that is subject to a clearing requirement must be executed on a DCM, SEF, or SEF that is exempt from registration under CEA, unless no such DCM or SEF makes the swap available to trade.

2 DCM and SEF Core Principle 3 states, “Contract Not Readily Subject to Manipulation—The board of trade shall list on the contract market only contracts that are not readily susceptible to manipulation.”

3 For example, while contracts can be submitted for approval, of the almost 5,000 contracts submitted by DCMs and SEFs since the Dodd-Frank Act was enacted, all were submitted on a self-certification basis, and over 2,000 contracts were certified in calendar year 2013 alone.

4 A DCM or SEF need wait only one full business day after the contract has been submitted to list the contract for trading.

5 Deliverable supply means the quantity of the commodity meeting the contract’s delivery specification that reasonably can be expected to be readily available to short traders and salable by long traders at its market value in normal cash marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movement in interstate commerce.

6 Antidisruptive Practices Authority, 78 FR 31890 (May 28, 2013),


Last Updated: January 15, 2014

CFTC ISSUES ADVISORY REGARDING COMMODITY TRADING ADVISORS AND SWAPS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC’s Division of Swap Dealer and Intermediary Oversight Issues Advisory Concerning Commodity Trading Advisors and Swaps

Washington, DC — The U.S. Commodity Futures Trading Commission’s (CFTC or Commission) Division of Swap Dealer and Intermediary Oversight (DSIO) today issued an advisory that provides guidance regarding requirements imposed on commodity trading advisors (CTAs) resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The Dodd-Frank Act amended the statutory definition of CTA to include any person who engages in the business of advising others on swaps. Additionally, certain CTAs who were previously exempt from registration with the CFTC are now required to register because of the CFTC’s rescission of Commission Regulation 4.13(a)(4) and amendments to Commission Regulation 4.5. As a result, provisions of the Commodity Exchange Act (CEA) and CFTC regulations applicable to CTAs might, depending on the circumstances, result in new advisory obligations.

This advisory provides guidance on the potential new advisory obligations of CTAs arising from the Dodd-Frank Act. It also informs the newly expanded class of CTAs and those previously exempt CTAs as to the general regulatory framework, including: (1) provisions of the CEA and CFTC regulations applicable generally to CTA activities; (2) CTA advisory obligations with respect to swap risk disclosures; and (3) requirements relevant to CTAs that advise Special Entities on swap transactions.

STATEMENT FROM FDIC OFFICIALS ON "TOO BIG TO FAIL" BANKS

FROM: FEDERAL DEPOSIT INSURANCE CORPORATION

Statement of Federal Deposit Insurance Corporation by James R. Wigand, Director, Office Of Complex Financial Institutions And Richard J. Osterman, Jr., Acting General Counsel on Who Is Too Big To Fail? Examining the Application of Title I of the Dodd-Frank Act before the Subcommittee on Oversight and Investigations; Committee on Financial Services; U.S. House of Representatives; 2128 Rayburn House Office Building
April 16, 2013


Chairman McHenry, Ranking Member Green, and members of the Subcommittee, thank you for the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) on Sections 165 and 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Our testimony will focus on the FDIC's role and progress in implementing Section 165, including the resolution plan requirements and the requirements for stress testing by certain financial institutions.

Section 165 of the Dodd-Frank Act

Resolution Plans
Under the Dodd-Frank Act, bankruptcy is the preferred resolution framework in the event of a systemic financial company's failure. To make this prospect achievable, Title I of the Dodd-Frank Act requires that all large, systemic financial companies prepare resolution plans, or "living wills", to demonstrate how the company would be resolved in a rapid and orderly manner under the Bankruptcy Code in the event of the company's material financial distress or failure. This requirement enables both the firm and the firm's regulators to understand and address the parts of the business that could create systemic consequences in a bankruptcy.

The FDIC intends to make the living will process under Title I of the Dodd-Frank Act both timely and meaningful. The living will process is a necessary and significant tool in ensuring that large financial institutions can be resolved through the bankruptcy system.

The FDIC and the Federal Reserve Board issued a joint rule to implement Section 165(d) requirements for resolution plans – (the 165(d) Rule) – in November 2011. The 165(d) Rule requires systemically important financial institutions (SIFIs) -- bank holding companies with total consolidated assets of $50 billion or more, and nonbank financial companies that the Financial Stability Oversight Council (FSOC) determines could pose a threat to the financial stability of the United States -- to develop, maintain, and periodically submit resolution plans to regulators.

In addition to the resolution plan requirements under the Dodd-Frank Act, the FDIC issued a separate rule which requires all insured depository institutions (IDIs) with greater than $50 billion in assets to submit resolution plans to the FDIC for their orderly resolution under the Federal Deposit Insurance Act. The 165(d) Rule and the IDI resolution plan rule are designed to work in tandem by covering the full range of business lines, legal entities and capital-structure combinations within a large financial firm.

The 165(d) Rule establishes a schedule for staggered annual filings. The first group of filers -- bank holding companies and foreign banking organizations with $250 billion or more in non-bank assets ("first wave" filers) -- submitted their initial resolution plans on July 1, 2012. Financial companies with less than $250 billion, but more than $100 billion in non-bank assets ("second wave" filers), will file their initial plans by July 1, 2013, and all other bank holding companies – those with assets over $50 billion – ("third wave" filers) are scheduled to file by December 31, 2013. While the general expectation is that firms will file annually, regulators may require that a plan be updated on a more frequent schedule, and a firm must provide notice to regulators of any event that may have a material effect on its resolution plan.

Eleven firms comprised the first wave of filers. The nine firms that submitted plans on July 1, 2012, were Bank of America Corporation, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS, Credit Suisse, and Barclays. The two other first wave filers, Bank of New York Mellon Corporation and State Street Corporation, submitted plans on October 1, 2012. The second wave filers include Wells Fargo, BNP Paribas, HSBC, and RBS. The third wave filers include approximately 115 firms, the large majority being foreign financial companies conducting business in the U.S.

The 165(d) Rule sets out the information to be included in a firm's resolution plan. The key objectives laid out in the Rule for the initial resolution plans submitted by first wave filers are identifying each firm's critical operations and core business lines, mapping those operations and core business lines to each firm's material legal entities, and identifying the key obstacles to a rapid and orderly resolution in bankruptcy. With regard to key obstacles, these might include such areas as a firm's internal organizational structure, interconnections of the firm to other systemic financial companies, management information system limitations, default and termination provisions of certain types of financial contracts, cross-jurisdictional operations, and funding mechanisms.

The 165(d) Rule provides that smaller, less complex financial institutions subject to the filing requirements may be eligible to file a less detailed, tailored resolution plan, for which the information requirements generally are limited to the firm's nonbanking operations, and the interconnections between the nonbanking operations and its IDI operations.

Section 165(d) of the Dodd-Frank Act requires the FDIC and the Federal Reserve Board to review each resolution plan. If, as a result of their review, the FDIC and the Federal Reserve Board jointly determine that the resolution plan is not credible or would not facilitate an orderly resolution of the firm under the Bankruptcy Code, then the company must resubmit the plan with revisions, including, if necessary, proposed changes in business operations or corporate structure. If the company fails to resubmit a credible plan that would result in orderly resolution under the Bankruptcy Code, the FDIC and the Federal Reserve may jointly impose more stringent capital, leverage, or liquidity requirements; growth, activities, or operations restrictions; or, after two years and in consultation with the FSOC, divestiture requirements.

Federal Reserve Board and FDIC staff reviewed the first wave filers' plans for informational completeness to ensure that all information requirements of the Rule were addressed in the plans. The initial plan submissions for the first wave filers were created using an assumption of the individual firm's failure under "baseline" economic conditions as a starting point. Subsequent submissions are required to take into account "adverse" and "severely adverse" economic conditions.

The eleven firms that submitted initial plans in 2012 will be expected to revise and update their submissions in their subsequent 2013 versions, pursuant to guidance that the FDIC and the Federal Reserve Board will provide to these companies. Resolution plans submitted in 2013 will be subject to informational completeness reviews and reviews for creditability or resolvability under the Bankruptcy Code. Going forward, the FDIC and the Federal Reserve Board expect the revised plans to focus on key issues and obstacles to an orderly resolution in bankruptcy, including global cooperation and the risk of ring-fencing or other precipitous actions. To assess this potential risk, the firms will need to provide a jurisdiction-by-jurisdiction analysis of the actions each would need to take in a resolution, as well as the actions to be taken by host authorities, including supervisory and resolution authorities. Other key issues expected to be addressed in the plans include: the risk of multiple, competing insolvency proceedings; the continuity of critical operations -- particularly maintaining access to shared services and payment and clearing systems; the potential systemic consequences of counterparty actions; and global liquidity and funding with an emphasis on providing a detailed understanding of the firm's funding operations and cash flows.

Stress Testing
Section 165 of the Dodd-Frank Act requires the FDIC to issue regulations for FDIC-supervised banks with total consolidated assets of more than $10 billion to conduct annual stress tests. The banks must report their respective stress test results to the FDIC and the Federal Reserve Board and these results also are summarized in a public document. The FDIC views the stress tests as an important source of forward-looking analysis that will enhance the supervisory process for these institutions. Furthermore, these stress tests will support ongoing improvement in a bank's internal assessments of capital adequacy and overall capital planning.

The Dodd-Frank Act requires the FDIC to coordinate with the other supervisory agencies to issue regulations that are consistent and comparable. While each banking agency issued separate final rules with respect to their supervised entities, the final rules were nearly identical across the agencies. The FDIC finalized its rule on annual stress tests on October 15, 2012. Complementing this rulemaking, the FDIC also issued proposed reporting templates that were developed jointly with the other agencies. Lastly, the agencies are working closely on proposed guidance to ensure consistent treatment for all covered financial institutions under the final rule.

Certain insured institutions and bank holding companies with assets of $50 billion or more comprised the first set of companies to conduct stress tests, which were completed in March 2013. Using September 30, 2012 financial data, institutions developed financial projections under defined stress scenarios provided by the agencies in November 2012. Each company publicly disclosed the results of their stress tests on or before March 31st of this year.

Institutions with assets greater than $10 billion, but less than $50 billion, and larger institutions that have not had previously conducted stress tests, will conduct their first round of stress tests later this fall.

Section 121 of the Dodd-Frank Act

Section 121 authorizes the Federal Reserve Board, with the concurrence of two-thirds of the voting members of the Financial Stability Oversight Council (FSOC), to take various actions with respect to a bank holding company with assets of $50 billion or more or a nonbank financial company supervised by the Federal Reserve Board, if it is determined that company poses a grave threat to the financial stability of the United States. Section 121 also grants the company, upon its request, the opportunity to request a written or oral hearing before the Federal Reserve Board to contest proposed actions.

As a voting member of the FSOC, the FDIC would participate in any discussions involving findings made by the Federal Reserve Board under this section and would carefully weigh the case and its merit in exercising our FSOC vote. To date, the FSOC has not heard any matters involving the use of this "grave threat" authority.

Conclusion
The FDIC has made significant progress in the implementation of Section 165 of the Dodd-Frank Act. Our goal is to ensure that firms that could pose a systemic risk to the financial system develop and maintain resolution plans that identify each firm's critical operations and core business lines, map those operations and core business lines to each firm's material legal entities, and identify and address the key obstacles to a rapid and orderly resolution in bankruptcy. Ensuring that any institution, regardless of size or complexity, can be effectively resolved through the bankruptcy process will contribute to the stability of our financial system and will avoid many of the difficult choices regulators faced in dealing with systemic institutions during the last crisis.

U.S. GOVERNMENT ISSUES FINAL RULE ON APPRAISALS FOR HIGH-PRICE MORTGAGE LOANS

FROM: FEDERAL DEPOSIT INSURANCE CORPORATION
Agencies Issue Final Rule on Appraisals for Higher-Priced Mortgage Loans

WASHINGTON— Six federal financial regulatory agencies today issued the final rule that establishes new appraisal requirements for "higher-priced mortgage loans." The rule implements amendments to the Truth in Lending Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Under the Dodd-Frank Act, mortgage loans are higher-priced if they are secured by a consumer's home and have interest rates above certain thresholds.

For higher-priced mortgage loans, the rule requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

If the seller acquired the property for a lower price during the prior six months and the price difference exceeds certain thresholds, creditors will have to obtain a second appraisal at no cost to the consumer. This requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.

The rule exempts several types of loans, such as qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes, and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.

The rule is being issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency. The Federal Register notice is attached. The rule will become effective on January 18, 2014.

In response to public comments, the agencies intend to publish a supplemental proposal to request additional comment on possible exemptions for "streamlined" refinance programs and small dollar loans, as well as to seek clarification on whether the rule should apply to loans secured by existing manufactured homes and certain other property types.

　

CFTC ALLEGES MAN AND CO. RAN A $90 MILLION SILVER BULLION PONZI SCHEME

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Charges Ronnie Gene Wilson of South Carolina and His Company, Atlantic Bullion & Coin, Inc., with Operating a $90 Million Silver Bullion Ponzi Scheme

Defendants are allegedly to have fraudulently sold contracts of sale of silver in a nationwide scheme
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a federal civil enforcement action charging defendants Ronnie Gene Wilson (Wilson) and Atlantic Bullion & Coin, Inc. (AB&C), both of Easley, S.C., with fraud in connection with operating a $90 million Ponzi scheme, in violation of the Commodity Exchange Act (CEA) and CFTC regulations.

The CFTC’s complaint charges violations under the agency’s new Dodd-Frank authority prohibiting the use of any manipulative or deceptive device, scheme, or contrivance to defraud in connection with a contract of sale of any commodity in interstate commerce in violation of Section 6(c)(1) of the CEA, as amended, to be codified at 7 U.S.C. §§ 9, 15 and the CFTC’s implementing Regulation 180.1 (a). The complaint was filed on June 6, 2012, in the U.S. District Court for the Southern District of South Carolina, Anderson Division.

According to the complaint, since at least 2001 through February 29, 2012, Wilson and AB&C operated a Ponzi scheme, and, as part of the scheme, fraudulently offered contracts of sale of silver, a commodity in interstate commerce. Through their 11-year long scheme, the defendants allegedly fraudulently obtained at least $90.1 million from at least 945 investors for the purchase of silver.

From August 15, 2011, through February 29, 2012 – the time period during which the CFTC has had jurisdiction over the defendants’ actions under new provisions contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – the defendants allegedly fraudulently obtained at least $11.53 million from at least 237 investors in 16 states for the purchase of contracts of sale of silver. The complaint further alleges that during this period, the defendants failed to purchase any silver whatsoever. Instead, the defendants allegedly misappropriated all of the investors’ funds and to conceal their fraud, issued phony account statements to investors.

In its continuing litigation, the CFTC seeks restitution to defrauded investors, a return of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws.

The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office in Greenville, S.C., and the U.S. Secret Service.

CFTC Division of Enforcement staff responsible for this case are A. Daniel Ullman II, George H. Malas, Antoinette Chance, John Einstman, Richard Foelber, Paul G. Hayeck, and Joan M. Manley.

DEPUTY SECRETARY OF THE TREASURY SPEAKS BERORE SENATE COMMITTEE ON WALL STREET REFORM

FROM:  U.S. DEPARTMENT OF TREASURY
Testimony by Deputy Secretary Neal Wolin before the Senate Committee on Banking, Housing, and Urban Affairs on “Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic Risk”

As prepared for delivery
WASHINGTON – Chairman Johnson, Ranking Member Shelby, and members of the Committee, thank you for the opportunity to appear here today to discuss progress implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

The Dodd-Frank Act represents the most significant set of financial reforms since the Great Depression.  Its full implementation will help protect Americans from the excessive risk, fragmented oversight, and poor consumer protections that played such leading roles in bringing about the recent financial crisis.

That crisis, and the recession that accompanied it, cost nearly 9 million jobs, erased a quarter of families’ household wealth, and brought GDP growth to a low of nearly negative 9 percent.

Today, our economy has improved substantially, although more work remains ahead.  More than 4.3 million private sector jobs have been created over the past 27 months and, since mid-2009, our economy has grown at an average annual rate of 2.4 percent.

As part of our broader efforts to strengthen the economy, Treasury is focused on fulfilling its role in implementing the Dodd-Frank Act to build a more efficient, transparent, and stable financial system—one that contributes to our country’s economic strength, instead of putting it at risk.

The Dodd-Frank Act’s reforms address key failures in our financial system that precipitated and prolonged the financial crisis.  The Act’s core elements include:

Tougher constraints on excessive risk-taking and leverage across the financial system.  To lower the risk of failure of large financial institutions and reduce damage to the broader economy in the event a large financial institution does fail, the Dodd-Frank Act provides authority for regulators to impose tougher safeguards against risks that could threaten the stability of the financial system and the broader economy.

The Federal Reserve has proposed new standards to require banks to hold greater capital against risk and fund themselves more conservatively.  New rules restricting proprietary trading under the Volcker Rule and limits to the size of financial institutions relative to the total financial system have been proposed or will be proposed in the coming months.  Safeguards against excessive risk-taking and leverage will not only apply to the biggest banks, but also designated nonbank financial companies.  Importantly, the bulk of these requirements do not apply to small and community banks, and help level the playing field for these smaller participants by helping eliminate distortions that previously favored the biggest banks that held the most risk.

The Dodd-Frank Act also established the Financial Stability Oversight Council (the Council) to coordinate agencies’ efforts to monitor risks and emerging threats to U.S. financial stability, and the Office of Financial Research (OFR) to collect and standardize financial data, perform essential research, and develop new tools for measuring and monitoring risk in the financial system.

Orderly liquidation authority.  The Dodd-Frank Act created a new orderly liquidation authority to resolve a failed or failing financial firm if its failure would have serious adverse effects on the financial stability of the United States.  The statute makes clear that taxpayers will not be put at risk in the event a large financial firm fails.  Investors and management, not taxpayers, will be responsible for the cost of the failure.

The FDIC has completed most of the rules necessary to implement the orderly liquidation authority, and is engaging in planning exercises with Treasury and other regulators to coordinate how it would work in practice.  This summer, the largest bank holding companies will submit the first set of “living wills” to regulators and the Council.  These documents will lay out plans for winding down a firm if it faces failure.

Comprehensive oversight of derivatives.  The Dodd-Frank Act created a new regulatory framework for over-the-counter derivatives markets to increase oversight, transparency, and stability in this previously unregulated area of the financial system.

Regulators have proposed almost all the necessary rules to implement comprehensive oversight of the derivatives markets, and we expect most to be finalized this year.  We are already seeing signs of standardized derivatives moving to central clearing, and substantial work is being done to build out new financial infrastructure to move trades into clearing and onto electronic trading platforms.

Stronger consumer financial protection.  The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to consolidate consumer financial protection responsibilities that had been fragmented across several federal regulators into a single institution dedicated solely to that purpose.  The CFPB’s mission is to help ensure consumers have the information they need to make financial decisions appropriate for them, enforce Federal consumer financial laws, and restrict unfair, deceptive, or abusive acts and practices.

The CFPB is currently working to improve clarity and choice in consumer financial products through the Know Before You Owe project, which aims to simplify mortgage forms, credit card disclosures, and student financial aid offers.  The CFPB is also focused on helping improve consumer financial protections for groups like servicemembers and older Americans, as well as bringing previously unregulated consumer financial institutions, like payday lenders, credit reporting bureaus, and private mortgage originators, under federal supervision for the first time.  Earlier this year, the CFPB commenced its supervision of debt collectors and credit reporting agencies.

Transparency and market integrity.  The Dodd-Frank Act included a number of measures that increase disclosure and transparency of financial markets, including new reporting rules for hedge funds, trade repositories to collect information on derivatives markets, and improved disclosures on asset-backed securities.

This summer, the largest hedge funds and private equity funds will be required to report important information about their investments and borrowing for the first time, helping regulators understand exposures at these significant investment vehicles.  New swaps data repositories are being created that will provide regulators and market participants with a stronger understanding of the scale and nature of exposures within previously opaque derivatives markets.

Treasury’s core responsibilities in implementing the Dodd-Frank Act include the Secretary’s role as Chairperson of the Council, standing up the Office of Financial Research and Federal Insurance Office, and coordinating the rulemaking processes for risk retention for asset-backed securities and the Volcker Rule.

The Financial Stability Oversight Council
The Dodd-Frank Act created the Financial Stability Oversight Council to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.

The Council is actively engaged in these activities and has begun to institutionalize its role.  To date, the Council has held 17 principals meetings, four since I last testified in December.  In recent months, the Council’s principals have come together to share information on a range of important financial developments as the Council, its members, and staff have actively engaged in monitoring the situation in Europe, in housing markets, the interaction of the economy and energy markets, and the lessons to be drawn from recent errors in risk management at several major financial institutions, including the failure of MF Global and trading losses at JPMorgan Chase.  In addition to regular engagement at the principals level, the Council has active staff discussions through twice monthly deputies level meetings and ongoing staff work on individual committee and project workstreams.

The Council expects to release its second annual report on financial market and regulatory developments and potential emerging threats to our financial system in July.  In addition to providing new recommendations, the report will include an update on the progress made on last year’s recommendations, which focused on enhancing the integrity, efficiency, competitiveness, and stability of U.S. financial markets, promoting market discipline, and maintaining investor confidence.

One of the duties of the Council is to facilitate information-sharing and coordination among its members regarding rulemaking, examinations, reporting requirements, and enforcement actions.  Through meetings among principals, deputies, and staff, the Council has served as an important forum for increasing coordination among the member agencies.  Some argue that the Council should be able to ensure particular outcomes in independent agencies’ rules, or perfect harmony between rules with disparate statutory bases.  While the Council serves a very important role in bringing regulators together, the Dodd-Frank Act did not eliminate the independence of regulators to write rules within their statutory mandates.

Nonetheless, the Dodd-Frank Act implementation process has brought about unprecedented cooperation among agencies in writing new rules for our financial system.  As Chair of the Council, Treasury continues to make it a top priority that the work of the regulators is well-coordinated.

The Treasury Secretary, as Chairperson of the Council, is coordinating the rulemaking required for the Dodd-Frank Act’s risk retention requirements, which are designed to improve the alignment of interests between originators of risk and securitizers of, and investors in, asset-backed securities.  After the proposed rule was released, the rule-writers received over 13,000 comment letters, and they are continuing to review feedback as they work towards a final rule.

The Council has also made progress on two of its direct responsibilities under the Dodd-Frank
Act: designating financial market utilities (FMUs) and nonbank financial companies for enhanced prudential standards and supervision.

In July 2011, the Council finalized a rule setting the process and criteria for designating FMUs and, in August, began working to identify FMUs for consideration in accordance with the statue and the rule.  In January 2012, an initial set of FMUs were notified that they would be under consideration for designation.  In May, the Council unanimously voted to propose the designation of an initial set of FMUs as systemically important.  This vote is not a final determination, and FMUs may request a hearing before the Council to contest a proposed designation.  The Council expects to make final determinations on an initial set of FMU designations as early as this summer.

In April 2012, the Council issued a final rule and interpretive guidance establishing quantitative and qualitative criteria and procedures for designations of nonbank financial companies.  The Council has begun work to apply the process described in the guidance.  The Council recognizes that the designation of nonbank financial companies is an important part of the Dodd-Frank Act’s implementation and intends to proceed with due care as expeditiously as possible.

The Dodd-Frank Act also provides for limits on the growth and concentration of our largest financial institutions.  The Council has released a study and recommendations on the effective implementation of these limitations, and the Federal Reserve is expected to propose a rule to implement concentration limits later this year.

The Office of Financial Research
The Dodd-Frank Act established the Office of Financial Research to collect and standardize financial data, perform essential research, and develop new tools for measuring and monitoring risk in the financial system.

In December 2011, President Obama nominated Richard Berner to be the OFR’s first Director.  I appreciate this committee’s support of Mr. Berner’s nomination.  Confirmation by the full Senate is important to ensure the OFR can fulfill its critical role.

A key component of the OFR’s mission is supporting the Council and its member agencies by analyzing financial data to monitor risk within the financial system.  Currently, the OFR is working on a number of projects with the Council, including providing analysis related to the Council’s evaluation of nonbank financial companies for potential designation for Federal Reserve supervision and enhanced prudential standards; providing data and analysis in support of the Council’s second annual report on financial market and regulatory developments and potential emerging threats to our financial system; and, in collaboration with Council member agencies, developing metrics and indicators related to financial stability.

To avoid duplicating existing government collection efforts or imposing unnecessary burdens on financial institutions, the OFR is focused on ensuring it relies on data already collected by regulatory agencies whenever possible.  The OFR is working with regulators to catalogue the data they already collect, along with exploring ways it could promote stronger data sharing for the regulatory community to generate efficiencies and improved interagency cooperation.

As part of its mission, the OFR is also promoting standards to improve the quality and scope of financial data, which in turn should help regulators and market participants mitigate risks to the financial system and provide firms with important efficiencies and cost-savings.  One ongoing priority is establishing a Legal Entity Identifier (LEI), or unique, global standard for identifying parties to financial transactions, to improve data quality and consistency.  The OFR is playing a lead role in the international process coordinated by the Financial Stability Board (FSB) to develop an LEI.  Just last week, the FSB endorsed recommendations the OFR developed in conjunction with its international counterparts to establish a global LEI system.  This recognition allows market participants to begin preparing for the implementation of the global LEI next year.

A more comprehensive understanding of the largest and most complex financial firms’ exposures is critical to identifying risks to the financial system and mitigating future crises.  However, some have expressed concerns about the OFR—involving its accountability, access to personal financial information, and ability to secure sensitive data—that are unfounded.

First, Congress has oversight authority over the OFR, and the statute requires the Director to testify regularly before Congress.  Consistent with requirements under the Dodd-Frank Act, the OFR will provide the Congress with its first Annual Report on its activities this summer and a second report, on the Office’s human resources practices, later this year.  In addition, the Dodd-Frank Act provides authority for Treasury’s Inspector General, the Government Accountability Office, and the Council of Inspectors General on Financial Oversight to oversee the activities of the OFR.

Second, regarding data collection, the Dodd-Frank Act does not contemplate and the OFR will not collect personal financial information from consumers.  The OFR, like other banking regulators, only has the authority to collect information from financial institutions, not individual citizens.  The OFR will only utilize data required to fulfill its mission—assessing threats to stability across the financial system.

Lastly, data security is the highest priority for the OFR.  As an office of the Department of the Treasury, the OFR utilizes Treasury’s sophisticated security systems to protect sensitive data.  The OFR is also implementing additional controls for OFR-specific systems, including a secure data enclave within Treasury’s IT infrastructure.  Access to confidential information will only be granted to personnel that require it to perform specific functions, and the OFR will regularly monitor and verify its use to protect against unauthorized access.  In addition, the OFR is working in collaboration with other Council members to develop a mapping among data classification structures and tools to support secure collaboration and data sharing. Such tools include a data transmission protocol currently used by other Council members that will enable interagency data exchange and a secure collaboration tool for sharing documents.

The Federal Insurance Office
The Dodd-Frank Act created the Federal Insurance Office to monitor all aspects of the insurance industry, identify issues or gaps in regulation that could contribute to a systemic crisis in the insurance industry or financial system, monitor the accessibility and affordability of non-health insurance products to traditionally underserved communities, coordinate and develop federal policy on prudential aspects of international insurance matters, and contribute expertise to the Council.

As a member of the Council, FIO, in addition to two additional Council members that focus on insurance, has been actively involved in the rulemaking establishing the process for the designation of nonbank financial companies.  FIO will be engaged in the review of nonbank financial companies as this process moves forward.

Until the establishment of FIO, the United States was not represented by a single, unified federal voice in the development of international insurance supervisory standards.  FIO is providing important leadership in developing international insurance policy.  Recently, FIO assumed a seat on the executive committee of the International Association of Insurance Supervisors (IAIS).  The IAIS, in cooperation with the Financial Stability Board (FSB), is developing the methodology and indicators to identify global systemically important insurers, and FIO is actively engaged in that process.  Additionally, FIO established and has provided necessary leadership in the EU-U.S. insurance dialogue regarding such matters as group supervision, capital requirements, reinsurance, and financial reporting.  FIO also participated in the recent U.S.-China Strategic and Economic Dialogue in Beijing.  Importantly, FIO has and will continue to work closely and consult with state insurance regulators and other federal agencies in its work.

Priorities Ahead
Under the Dodd-Frank Act, Treasury is charged with coordinating the implementation of the Volcker Rule.  Treasury is actively engaged with the independent regulatory agencies in their work to finalize the Volcker Rule and make sure it is implemented effectively to prohibit proprietary trading activities and limit investments in and sponsorship of hedge funds and private equity funds.

The five Volcker Rule rulemaking agencies released substantially identical proposed rules, which reflect the commitment of Treasury and the regulators to a coordinated approach.  The comment periods for all five rulemaking agencies are now complete, and we are reviewing and analyzing over 18,000 public comment letters.  Treasury is hosting and actively participates in weekly interagency meetings to review those comments, and remains committed to fulfilling our coordination role and working with the rulemaking agencies to achieve a strong and consistent final rule.

Regulators are still in the process of conducting their evaluation of what happened with respect to recent losses at JPMorgan Chase, and why.  The lessons learned from the recent failures in risk management at JPMorgan are an important input into the ongoing efforts to design strong safeguards and reforms, including, of course, those in the Volcker Rule.

The Volcker Rule, as reflected in the statutory language enacted as part of the Dodd-Frank Act and in the proposed rule, explicitly exempts from the prohibition on proprietary trading the ability of firms to engage in “risk-mitigating hedging activities in connection with and related to individual or aggregated positions…designed to reduce the specific risks to the banking entity.”  To that end, the final rule should clearly prohibit activity that, even if described as hedging, does not reduce the risks related to specific individual or aggregate positions held by a firm.

The exposures accumulated by JPMorgan, in the words of its executives, resulted in potential losses that exceeded its internal limits and those estimated by its internal risk management systems.  This raises concerns that go well beyond the scope of the Volcker Rule.  Among other things, regulators should require that banks’ senior management and directors put in place effective models to evaluate risk, strengthen reporting structures to ensure risks are assessed independently and at appropriately senior levels, and establish clear accountability for failures in risk management.  Regulators should make sure that they have a clear understanding of exposures and that banks and their senior management are held accountable for the thoroughness and reliability of their risk management systems.  To further accountability, there should also be appropriate public transparency of risk management systems and internal limits.

Ultimately, the true test of reform is not whether it prevents firms from taking risk or from making mistakes, but whether our financial regulatory system is tough enough and designed well enough to prevent those mistakes from hurting the broader economy or costing taxpayers money.  We all have an interest in achieving this outcome.

I emphasize the broader framework of reforms because our ability to protect the economy from financial mistakes in banks depends on the authority and resources we have to enforce tougher capital, leverage, and liquidity requirements on banks and the largest, most complex nonbank financial companies.

It depends on our ability to put in place the full framework of protections in the Dodd-Frank Act on derivatives, from margin requirements and central clearing of standardized derivatives to greater transparency into risks and exposures.

It depends on the resources available to the SEC, the CFTC, the CFPB and the other enforcement authorities to police and deter manipulation, fraud, and abuse.

It depends on our ability to protect taxpayers from future financial failures, in particular our ability to safely unwind a large firm without the broad collateral damage and risk to the taxpayer that we experienced in 2008.

And it depends on making sure that no exception built into the law is allowed to swallow the rule, frustrate the core purpose of the legislation, or otherwise undermine the impact of the tough safeguards we need.

The challenges our economy continues to experience since the financial crisis in 2008 only increase our commitment to make sure we meet our responsibility to the American public to implement lasting financial reform.

Recent events provide an additional reminder that comprehensive reform must continue to move forward.  The Administration will continue to resist all efforts to roll back reforms already in place or block progress for those that remain to be implemented.  The lessons of the financial crisis should not be left unlearned or forgotten, nor should American workers—or American taxpayers—be left unprotected from the consequences of future financial instability.

I appreciate the opportunity to discuss the priorities and progress associated with our work implementing the Dodd-Frank Act, and the leadership and support of this committee in those efforts.

Thank you.

CHAIRMAN CFTC COMMENTS ON PROPOSED VOLKER RULE TO CURB FINANCIAL RISKS

FROM:  COMMODITY FUTURES TRADING COMMISSION
Statement Regarding Public Roundtable to Discuss the Proposed Volcker Rule
Chairman Gary Gensler
May 31, 2012
Welcome to the Commodity Futures Trading Commission (CFTC) roundtable on the proposed Volcker Rule. Thank you, Dan, for that introduction, and thank you for working with the rest of the team, particularly Steven Seitz from your office and Steve Kane from the Office of the Chief Economist, to put together this important roundtable.

I’d like to thank the Treasury Department staff and the staff of the financial regulators tasked with implementing the Volcker Rule for joining us for this roundtable and for your efforts in coordinating with the CFTC on the rule. I’d also like to thank Sheila Bair, the former Chair of the Federal Deposit Insurance Corporation, for participating today.

Former Federal Reserve Chairman Paul Volcker was unfortunately on international travel today, but I’d like to acknowledge his many years of public service.

In 2008, the financial system and the financial regulatory system failed. The crisis – caused in part by the unregulated swaps market -- plunged the United States into the worst recession since the Great Depression with eight million Americans losing their jobs, millions of families losing their homes and thousands of small businesses closing their doors. The financial storms continue to reverberate with the debt crisis in Europe affecting the economic prospects of people around the globe.

In 2010, Congress and the President came together to pass the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), to promote transparency in the markets and to lower risk to the public from large, complex financial institutions. Amongst these protections is the Volcker Rule, which prohibits banking entities from proprietary trading, an activity that may put taxpayers at risk.

This is the CFTC’s 17th roundtable on important topics related to Dodd-Frank reforms. These roundtables are an additional opportunity – beyond the 30,000 comments we’ve received and 1,600 meetings with the public we’ve held -- for dialogue and helpful input from market participants and the public. Our 18th roundtable related to promoting the price discovery function on designated contract markets and related issues of swap execution facilities will be on June 5.

In adopting the Volcker rule, Congress prohibited banking entities from proprietary trading while at the same time permitting banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing this rule is achieving these multiple objectives.

I’m looking forward to a lively discussion. I’d like to highlight three main issues that I’m particularly interested in getting feedback on today.

First, as prescribed by Congress, the Volcker rule prohibits proprietary trading while permitting risk-mitigating hedging. These two provisions are consistent with each other in that they are both meant to lower the risks of banking entities to the broader public. The question is how we as regulators achieve both of these risk-lowering provisions in a balanced way.

Some commenters have said if we’re too prohibitive in one area, we may limit banking entities ability to engage in risk-mitigating hedging. On the other hand, if we follow comments of some of the banking entities, then the rule’s allowance for permitted hedging might swallow up Congress’ intent to limit the risk of proprietary trading.

Specifically, under the statute, banking entities may engage in “risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings.”

To qualify as hedging, these activities must be “designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings.”

The criteria for the hedging exemption as included in the proposed Volcker Rule are the following: hedges must mitigate one or more specific risks on either individual positions or aggregated positions, they cannot generate significant new exposures, they must be subject to continuous monitoring and management, compensation for hedging cannot reward proprietary trading, and the hedges must be reasonably correlated to the specific risks of the positions.

A further question about hedging activity that was asked by the agencies ( question 109 of the CFTC’s proposal) is whether “certain hedging strategies or techniques that involve hedging the risk of aggregated positions (e.g. portfolio hedging) create the potential for abuse of the hedging exemption.”

A related question on which it would be helpful to hear from the panel: is it possible, and if so how, could a separate trading desk with its own profit and loss statement engage in risk-mitigating hedges?

The further removed hedging activities are from the specific positions the banking entity intends to hedge, is it not more likely that such trading activity is prone to express something other than hedging?

As Dan will explain in a moment, we’re not going to be speaking about the specifics of the credit derivative product trading of JPMorgan Chase’s Chief Investment Office. I do think, though, it may be instructive for regulators as we finalize key reforms.

Second, in addition to hedging, Dodd-Frank permits market making, which is important to well-functioning markets as well as to the economy. The question for regulators once again is finding a balance, but this time between prohibiting proprietary trading and permitting market making. The agencies ask in the proposal (question 89 in the CFTC’s proposal): “Is the proposed exemption overly broad or narrow? For example, would it encompass activity that should be considered proprietary trading under the proposed rule?”

The criteria for market making in the proposed rule included seven requirements. A number of commenters suggested that these requirements may be more applicable to the listed securities markets than to the swaps market. During the second panel today, we are looking for your input on this issue. If some of these requirements are not appropriate, what would be more appropriate with regard to market making in swaps?

Third, I’m particularly interested in hearing about how the prohibition on proprietary trading should best be applied to banking entities transacting in futures and swaps. The CFTC’s role with regard to the Volcker Rule and banking entities is primarily with regard to these derivatives traded by swap dealers and futures commission merchants within the banking entity.

In particular, banking entities’ market making in swaps is likely to leave them with significant open positions for many years in customized swaps. When would a banking entity’s decision not to hedge or to only partially hedge open swaps positions be considered prohibited proprietary trading? We at the CFTC will benefit from your input on how the Volcker Rule can best protect the public against risk in the swaps and futures markets.

Thank you again for coming, and I’ll turn it back to Dan.