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In a rare reversal of its own administrative law judge in the Matter of optionsXpress, the full Securities and Exchange Commission unanimously held that the SEC’s Enforcement Division had not met its burden of proof that the customer of a broker-dealer had committed securities fraud in connection with his clearing broker-dealer’s failure to deliver stock as required by Regulation SHO.

The customer in this case implemented an option trading strategy which exploited the price difference between certain options and their underlying securities.  The trading strategy focused on “hard to borrow” securities, which were more expensive to borrow due to high short-seller demand.  As a result of the trading strategy, the customer held substantial short positions in the underlying hard to borrow securities over a sustained period of time.

Under Regulation SHO, a broker-dealer is required to deliver securities to its clearing house in connection with a sale within three days of settlement.  If it does not do so, it must close out the fail to deliver on the next settlement day by purchasing or borrowing similar securities in the market. Here, the broker-dealer repeatedly failed to deliver the securities in which the customer held short positions.

On March 4, 2016, the U.S. Court of Appeals for the Second Circuit reinforced the stringency of the new standard for liability in securities cases arising from allegedly misleading statements of opinion. Construing the Supreme Court’s 2015 Omnicare decision, the Second Circuit held in Gen. Partners Glenn Tongue v. Sanofi…

On November 24, 2015, the CFTC announced the new proposed Regulation Automated Trading (“Reg. AT”), which contains a variety of measures designed to prevent potential market disruptions arising from algorithmic trading.   Among other things, Reg. AT proposes certain pre-trade risk and order management controls, the implementation of policies and procedures governing algorithmic trading, and additional registration and reporting obligations.  Many of these proposals were foreshadowed in a recent speech by the CFTC Chair, which we blogged about here.

On November 19, 2015, the SEC announced a settlement with investment advisory firm Sands Brothers Asset Management, LLC for violating the Custody Rule, SEC Rule 206(4)-2, which requires that registered investment advisers who have custody of their clients’ assets put in place policies and procedures intended to safeguard those assets against loss, misuse or misappropriation. The SEC also imposed sanctions on Sands Brothers’ Chief Compliance Officer who was subjected to a one-year suspension and a fine for aiding and abetting these violations.

Concluding a year-long review, UK regulators issued the final report of the Fair and Effective Markets Review Committee last week, making a number of recommendations intended to restore confidence in the trading markets for fixed income, currency and commodities (“FICC”) in the wake of past misconduct.

The report noted the substantial fines that have been levied in recent years in connection with the attempted manipulation of LIBOR, foreign currency and other trading benchmarks and market prices, misrepresentations to investors and collusion.  Indeed, since 2012 authorities in multiple jurisdictions have imposed criminal and regulatory penalties aggregating more than $10 billion related to this conduct.  In June 2014, the Chancellor of the Exchequer, together with the Governor of the Bank of England, launched the Review to recommend changes in regulatory policies in the relevant markets.

Last week, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), doubled-down on his recent criticism of the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers providing retirement investment advice. Speaking at FINRA’s annual conference, Chairman Ketchum said that, while he supports a “best interests of the customer” standard, the DOL’s proposal – which we wrote about here – is “not the appropriate way to meet that goal.”

Chairman Ketchum expressed particular concern over language in the DOL proposal that would require an advisor to make recommendations in the best interest of the customer “without regard to the financial or other interests” of the advisor. He worried that this language could lead to class action lawsuits and arbitration where the standard would be misapplied, stating, “I’m not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher financial incentives no matter how sound the recommendation might be.”

FINRA recently released updated and revised Sanction Guidelines and an accompanying Regulatory Notice that, among other things, call for stricter penalties against broker-dealers who commit fraud or violate suitability rules. The revisions are effective as of May 12, 2015.

The Sanction Guidelines, first published in 1993, are intended to assist FINRA’s adjudicators in determining the appropriate disciplinary penalties for violations of the FINRA rules. Rather than provide predetermined or fixed sanctions for particular violations, the Sanction Guidelines provide a suggested range of penalties for such violations and allow adjudicators to consider various factors in determining the appropriate penalty. The Sanction Guidelines provide members and associated persons with an understanding of the sanctions associated with particular violations, thereby facilitating settlements.