Conflict of Interest
The CFTC has adopted Rule 1.71. The Rule pertains to Conflict of Interest and will require most CFTC registered firms to implement a “Chinese wall” between the research department and non-research departments, and will therefore mainly impact the business trading unit or clearing units at futures commission merchants and introducing brokers, as applicable. The rule goes into effect June 4, 2012.
Specifically, the CFTC put restrictions on who may have a relationship with the research department, who may communicate with the research department, and how the compensation for research analysts may be determined. Furthermore, there are new disclosure requirements for research reports, a prohibition of the promise of favorable research, and a prohibition on retaliation against research analysts for unfavorable research reports.
In order for small IBs to have a more manageable level of burden in meeting any conflict of interest requirement, the CFTC has implemented an exemption for them. A Small IB is defined as: an IB that has generated, over the preceding 3 years, $5 million or less in aggregate gross revenues from its activities as an IB (e.g., an IB that generated $1MM + $2MM + $3MM in each of the last 3 years has generated $6MM in aggregate gross revenue and is not a Small IB). Small IBs will not need to meet the above standards for implementing a Chinese wall, instead they will have a separate and somewhat lower standard to meet. Small IBs much establish structural and institutional safeguards reasonably designed to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity or derivative are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in trading or clearing activities might potentially bias the judgment or supervision of the persons. Further, Small IBs must still adopt and implement written policies and procedures to ensure that it and its employees comply with this Rule. Though the standard is said to be lower, Small IBs are still required to separate their research department from other departments that might bias the research.
Identify Theft
The CFTC has also proposed rules on identity theft. The agency is accepting comments on the proposed rule until May 7, 2012.
Such rules will apply to each covered entity (FCM, RFED, CTA, CPO, IB, SD, MSP) that offers one or more covered account. The covered entity would be required to adopt and maintain a written program that is designed to detect, prevent, and mitigate identify theft. The written program may incorporate existing policies and procedures and would apply to any existing or new covered account. Each written program would be required to include reasonable policies and procedures that identify red flags, detect the occurrence of red flags, respond appropriately to the detected red flags, and the covered entities would be required to periodically update their programs.
A few noteworthy reasonable responses to red flags are monitoring a covered account for evidence of identity theft, contacting the customer, closing an existing covered account, or notifying law enforcement. The initial written program would require the approval by the board of directors or appropriate committee of the board of directors. The board of directors, an appropriate committee thereof, or a designated employee at the level of senior management must be involved in the oversight, development, implementation, and administration of the program. Furthermore, the covered entity must train staff to effectively implement their programs and appropriate and effective oversight of service provider arrangements must be exercised.
Mark E. Ruddy, Esq. | Ruddy Law Office, PLLC
www.RuddyLaw.com
