Gary DeWaal's Bridging the Week: December 23, 2013 to January 3 and 6, 2014 (Recordkeeping and Soft Dollar Violations; The Wolf of Wall Street)

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Published Date : January 06, 2014

Santa Claus may have left presents for many during the holiday season, but a few financial services' industry registrants received only coal in their stockings during the past two weeks. These matters, a flurry of year-end no action letters issued by the US Commodity Futures Trading Commission, and helpful advisories issued by a number of regulatory entities highlight the first Bridging the Week for 2014.

Specifically the following matters are covered for what should be more correctly titled "Bridging the Weeks: December 23, 2013 to January 3, 2014:"

Also included is a new feature, Totally Irrelevant (But Is It?) that has my review of the new Martin Scorsese film, The Wolf of Wall Street.

Video version:

Article version:

Barclays Capital Sanctioned US $3.75 Million for Record Retention Failures

On the day after Christmas, December 26, Barclays Capital was fined US $3.75 Million by the US Financial Industry Regulatory Authority (FINRA) for various electronic record keeping breakdowns; the Firm had agreed to the fine in an Offer of Settlement.

Among other things, according to FINRA, the Firm failed to retain:

Although FINRA acknowledged that Barclays conducted conformance and validation testing since 2004 to help ensure its compliance with applicable record retention rules, the testing was aimed at ensuring that the Firm retained records for, and was able to retrieve such records within, required time periods, as opposed to whether they were stored in the required WORM format.

FINRA said that Barclays' failures regarding email attachments and instant messages arose because of inadequacies related to the setup of the Firm's method to capture Bloomberg-system provided data into its own electronic communication storage vault. FINRA alleged that because the Firm's capture system "…was functioning according to its default settings (albeit improperly configured settings), no alerts were generated indicating that the program had malfunctioned."

In May 2013, FINRA also fined five ING firms US $1.2 Million for deficiencies related to their email retention (see:

Compliance Weeds: All principal international regulators have rules related to the generation and retention of records. These rules typically describe the type of records that must be prepared in the first instance; how long and in what format such records must be retained; and to whom and in what time period such records must be produced when requested by an authorized requestor. Unfortunately, given the large number of records that even a small size registrant generates in a given day, it is easy for a firm to run afoul of applicable requirements. This is why each registrant should (1) ensure it is fully familiar with applicable requirements, (2) design a comprehensive system that ensures compliance with these requirements in the first instance, but most importantly, (3) routinely test the applicable procedures afterwards. This testing should be two-fold: (1) from front to back, to ensure that the system is set up and functions according to requirements; and (2) back to front, to ensure that a wide variety sampling of documents (and with electronic communications, include attachments and so-called "bcc's") generated from different sources can be produced fully (and within time periods) as expected by regulators. Firms should periodically ensure also (1) that electronic documents are stored in a non-rewritable and non-erasable format and (2) that internal systems designed to capture electronic communications from different sources, capture all aspects of those communications including attachments and bcc's. Where oral communications are required to be retained, firms periodically should also test that applicable requirements are adhered to, especially that polices are robust related to order-related conversations occurring solely on recorded phones (to the extent required by the applicable regulation) and that there is adequate monitoring to ensure compliance.

Instinet Sanctioned More Than US $800,000 for Soft Dollar Violations

The US Securities and Exchange Commissions sanctioned Instinet LLC more than US $800,000 for approving soft dollar payments to an investment advisory firm when there allegedly were numerous "red flags" that such payments were for expenses never properly disclosed by the advisory firm to its clients. The investment advisory firm was San Diego, California-based J.S. Oliver Capital Management, LP.

According to the SEC, Instinet remitted US $430,000 in client commission credits to JS Oliver from January 2009 through July 2010 for expenses that were never properly disclosed by JS Oliver to its clients. These expenses included:

The SEC claimed that Instinet made these payments, despite one or more of its employees being aware of various red flags. These included, among other things:

For its sanctions, Instinet agreed to pay disgorgement and interest totaling in excess of US $438,000 and a fine of US $375,000, as well as retain an independent consultant to review its policies, procedures and practices related to soft dollars and issue recommendations.

On August 30. 2013, the SEC filed charges in an administrative action against JS Oliver, Mr. Mausner and Douglas Drennan, who has served as a portfolio manager and Chief Compliance Officer for JS Oliver at various times since June 2011. These charges related to the soft dollar payments discussed in the Instinet action, as well as the SEC's allegation that, from June 2008 to November 2009, JS Oliver purportedly gave favorable trades to some clients (including four affiliated hedge funds) while disfavoring others, through a cherry-pick trade allocation scheme, hurting such unfavored clients by US $10.7 Million. This action remains pending.

And briefly:

And finally:

Totally Irrelevant (But Is It?): I saw The Wolf of Wall Street during the recent holiday period. This is Martin Scorsese's depiction of the rise and fall of Jordan Belfort, the founder of Stratton Oakmont one of the infamous pump and dump brokerage operations of the 1980's and 90's. Although the leading cast members in the movie perform admirably, especially Jonah Hill as Belfort's --2, the depiction of both Belfort and Stratton Oakmont are quite disturbing. Plain and simple, Belfort was a criminal who, to me, got off way too easily in light of the extensive nature of Stratton Oakmont's fraudulent operations and its horrible rip off of many retail clients (he served less than two years in prison for his crimes). However, Belfort's character, as depicted by Leonardo DiCaprio, appears glorified in the movie, and he is portrayed, in a cameo role at the end of the film as a reformed, successful motivational speaker. Indeed, the message of the film seems to be "so what?" However, Belfort's actions deserve condemnation not glorification. Even through today, Belfort may be failing to live up to his sentencing requirement to pay 50% of his income up to US $110 Million as restitution, despite his now successful career as a motivational speaker, as an author (he has written two life stories), and now as an actor in this film. If you have not done so already, go see this film but not necessarily to enjoy it; rather to be reminded of the danger of greed and a life of excess. Let's just hope that Martin Scorsese isn't planning as a sequel an equally enthusiastic portrayal of Russell Wassendorf and the collapse of Peregrine Financial Group. And, despite the title of the film, Stratton Oakmont was headquartered on Long Island, NY, not on Wall Street -- and not remotely like any firm on Wall Street that I have ever come across!

For additional information:

CFTC-FERC Jurisdiction and Information Sharing MOUs:
Information Sharing:

See also: Brian Hunter v. FERC (USCA, DC Cir. March 15, 2013):

CFTC No Action Letters:
CTAs and Swaps:
Extension of time for Combined FCMs/SDs and BDs to File Annual Compliance Report:
Floor Trader Relief:
Introducing Broker Relief:
No 2014 Annual Compliance Report Required by Firms Not Required to Register as a Swap Dealer during 2013:
CFTC Actions Regarding the Singapore Exchange Derivatives Clearing:
Approval as a DCO:

No Action Relief for non-FCM Members:
CFTC Seeks Public Comments on Advisory re: Non-US swaps arranged by US Persons:

See also, CFTC's Extension of Compliance Date of November 2013 Advisory for non-US Swap Dealers:

EUREX to Take 5% Interest in TAIFEX:
FINRA 2014 Examination Priorities:
FINRA v. Barclays:
In the Matter of Instinet, LLC (SEC action):

See also: In the Matter of J.S. Oliver Capital Management LP et al (SEC action):

Miscellaneous Exchange Disciplinary Actions:
FC Stone (NYMEX):
Available on Request
Newedge USA (NYMEX):
Rex Trading (ICE):
NFA Summary Regarding CFTC Enhanced Customer Protection FCM Obligations:
In the Matter of Artem Obolensky (CFTC action): 

See also: In the Matter of SMP Bank and Epaster Investments Ltd:

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of January 4, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.


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