Regulatory Roundup: An Overview of Recent Updates

The Evolving Regulatory Landscape

The regulatory landscape is constantly evolving; however, the pace and complexity of change have ramped up in recent years. To highlight this, we’ll share updates on developments in topics explored in depth over the past year.

“Shadow Trading” Case Succeeds in Court

In December 2023, we took a deep dive into the intriguing world of “Shadow Trading,” a form of insider trading that involves related securities rather than the stock directly. This academic theory turned real-life case took a significant turn on April 5, 2024, when a federal court delivered a landmark verdict, finding the defendant liable for insider trading. The United States Securities and Exchange Commission (SEC) acknowledged that “there was nothing novel about this matter,” yet this, being the first enforcement action of its kind, undoubtedly sets a precedent for the future. The SEC has since intensified its investigations into shadow trading with a recent case from March 2024 brought against the founder and Chief Architect of a Silicon Valley technology company, which was settled with the party paying a nearly $1 million civil penalty, underscoring the seriousness of the issue.  

As also mentioned in the December 2023 edition of Regulatory Roundup, though there are fundamental differences in insider trading laws across jurisdictions, shadow trading will likely be covered under Article 14 of the EU Market Abuse Regulations as well as for other countries that follow a similar approach. It’s a trend we’ve seen in different types of securities fraud; as we’ve become better at detecting unlawful behavior, fraudsters have tried hiding their scheme by working through related securities, especially on the profit-taking leg. 

PTFs Caught in Expanded Dealer Definition

In August of last year, we covered some of the regulatory expectations for PTFs addressed in the United Kingdom’s Financial Conduct Authority’s (FCA) “Dear CEO” letter. At the same time, the SEC amended Rule 15b9-1, removing an exemption used by many PTFs to avoid membership in Financial Industry Regulatory Authority (FINRA). The rationale for the amendment dovetailed with many of the points covered in the “Dear CEO” letter.

More recently, in February of this year, the SEC adopted two new rules (Rules 3a5-4 and 3a44-2), which expand the definition of who should be considered a “Dealer” and, therefore, needs to register with the SEC, become a member of FINRA, and comply with those regulatory obligations and reporting requirements. This new rule would pull in many PTFs, hedge funds, and crypto-asset trading firms. SEC Chairman Gary Gensler explicitly mentions PTFs and their role in the markets if there is any doubt in his statement on the new rules. Compliance is set for April 2025, which is not much time for a firm to become a registered dealer. Even firms with a broker-dealer arm will need to review if those systems and processes fit the broader organization’s purpose.

Some Justice for the Victims of Financial Crime

In the July 2023 analysis on churning, an illegal and unethical practice of excessively trading assets in a client’s account without consideration of the client’s best interests, I highlighted one of the individual victims of financial crime — a 13-year-old girl whose father died while on active duty and who lost a substantial part of her father’s life insurance payment. That money was invested in an account for the child, which was then churned to generate commission and trading fees for the fraudster. 

Sadly, she was not the only Gold Star family victim. The fraudster handled $9.9 million in survivor benefits; those families lost more than $3.7 million. There are, however, some positive developments in this unfortunate story; last week, the perpetrator of the fraud pleaded guilty to wire fraud, securities fraud, and false statements in the loan application. He now faces up to 20 years in prison for his crimes. As we navigate the complexities of new, ever-evolving regulations, it is important to remember that the victims of these financial crimes tend to stay the same: those who are among the most vulnerable in our society.

Regulatory Updates

17 April: The EVP and Head of the FINRA discussed his key enforcement objectives, including protecting investors and markets, enhancing the transparency of FINRA enforcement to external stakeholders, increasing efficiency and reducing the time to complete cases, and improving collaboration across FINRA’s regulatory operations.

17 April: The Canadian Securities Administrators (CSA) extended the deadline for crypto asset trading platforms (CTPs) to comply with its interim approach to fiat-backed crypto assets (FBCAs), a type of value-referenced crypto asset (VRCA) that references a fiat currency, from April 30 to October 31, 2024. 

16 April: Conservative groups filed a lawsuit in federal court challenging the SEC’s consolidated audit trail (CAT), a single database for all equity and options trades on U.S. exchanges. The complaint challenges the SEC’s authority to collect and store all trading data from U.S. exchanges, claiming it violates the constitutional right to privacy and puts investors at risk.

16 April: The European Systematic Risk Board (ESRB)published a report focusing on three operational policy tools for cyber resilience: tools for gathering, sharing, and managing information, coordination tools, and emergency and backup systems. 

15 April: The U.S. Department of Justice (DOJ) launched a self-reporting pilot program aimed at encouraging voluntary self-disclosures for individuals who are witnesses to or involved in corporate or financial wrongdoing.

15 April: The Swedish Financial Supervisory Authority (FSA) published a note highlighting four reasons why investments in crypto should be avoided. The note reflects on the current high interest in crypto in media and investment tips shared on social media. Further information is available in Swedish only.

12 April: The International Organization of Securities Commissions (IOSCO) published its updated Workplan for 2024, which supports its overall two-year Work Program published on 5 April 2023. New workstreams are announced to reflect increased focus on AI, tokenization and credit default swaps, as well as additional work on transition plans and green finance.

11 April: The European Securities and Markets Authority (ESMA) published the fourth edition of its Report on the Quality and Use of Data, aiming to provide transparency on how data collected under different regulations is used systematically by authorities in the EU and clarify the actions taken to ensure data quality.

11 April: The Financial Stability Board (FSB) Regional Consultative Group (RCG) for Europe gathered to discuss the impact of global and regional economic trends on financial stability, as well as the risks from commercial real estate and crypto-asset markets. The group also received an update on the FSB’s work priorities for 2024, including its crypto-asset regulatory framework.

9 April: The Dutch Authority for the Financial Markets (AFM) published its 2023 Annual Report, which reveals that young persons are more prone to digital temptations such as the ‘buy now pay later’ phenomena, as well as excessive trading in cryptos and finfluencers.

9 April: The European Securities and Markets Authority (ESMA) published a report on EU securities financing transactions (SFT) markets that provides the first comprehensive market-level overview of the EU repo market based on information reported by market participants. This report contributes to ESMA’s financial stability objective by monitoring repo market developments and providing key risk metrics for its monitoring framework on securities financing transactions.

5 April: The Danish Financial Supervisory Authority (FSA) published its annual assessment of the largest risks seen by market participants. Information technology and cyber threats are at the top, followed closely by geopolitical conditions. The full report is available in Danish.

4 April: The IOSCO published a consultation report, “Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices.” The report analyzes the structural and organizational changes within exchanges, focusing on business models and ownership structures. It highlights a shift towards more competitive, cross-border, and diversified operations as exchanges integrate into larger corporate groups. Furthermore, the report discusses regulatory considerations, particularly in the organization of individual exchanges and exchange groups and the supervision of multinational exchange groups.

4 April: The SEC issued a stay of final climate disclosure rules. The SEC signaled its intention to continue defending the rules in court and has not changed the timeframe for compliance.

4 April: The Central Bank of Iceland published its annual report, containing a summary of the bank’s activities and its annual accounts. The report includes a section describing the bank’s financial supervision activities in various financial areas.

3 April: The Bank of England and the U.K. Financial Conduct Authority (FCA) published a joint consultation on proposals to implement and operate the Digital Securities Sandbox (DSS), as well as the Bank of England’s rules and fee regime.

3 April: The Bank for International Settlements (BIS)collaborated with seven central banks to announce plans to join forces with the private sector to explore how tokenization can enhance the functioning of the monetary system. The project, titled Project Agorá, brings together the central banks of France, Japan, Korea, Mexico, Switzerland, England, and the U.S. 

Enforcement Actions & Fines

The SEC announced charges against a registered investment adviser for widespread and longstanding failures to maintain and preserve certain electronic communications and failure to enforce its code of ethics. The adviser agreed to pay a $6.5 million penalty and to implement improvements to its compliance policies and procedures.

The U.S. Commodity Futures Trading Commission (CFTC) issued an order simultaneously filing and settling charges against Australia and New Zealand Banking Group Ltd. (ANZ), a financial services firm provisionally registered as a swap dealer for violating its supervision obligations and for failing to ensure its spoofing surveillance tool was operating effectively. The order requires ANZ to pay a $500,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC regulations as charged.

The United States District Court for the Northern District of California found an executive at a biotech company, Medivation, Inc., liable for insider trading in violation of the federal securities laws. The executive used confidential information about an impeding announcement of the acquisition of his firm to acquire a large stake in call options of another comparable public company. The behavior has been known as “Shadow Trading”.

The SEC settled charges against five registered investment advisers (GeaSphere LLC, Bradesco Global Advisors Inc., Credicorp Capital Advisors LLC, InSight Securities Inc., and Monex Asset Management Inc.) for Marketing Rule violations. All firms have agreed to settle the SEC’s charges and to pay $200,000 in combined penalties.

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