The sole registered clearing agency for exchange listed option contracts agreed to pay $20 Million in fines to the SEC and the CFTC for failing to adopt and implement reasonable policies and procedures. The regulators allege that the clearing agency, an SRO designated as a systemically important financial market utility under the Dodd-Frank Act, did not adopt or enforce reasonable policies and procedures related to margin, credit exposure, risk management, and information security. Also, the firm failed to obtain required approval for changes in core risk management policies. In addition to the fines, the respondent agreed to retain an independent compliance auditor and implement a series of board and executive level risk management oversight mechanisms.
The regulators can impose significant fines and penalties for failures to implement required policies and procedures without alleging any underlying loss or harm to investors. The failure to implement required risk management and compliance policies can itself serve as the predicate for an enforcement action.
The SEC has adopted a new rule requiring open-end registered funds to establish liquidity risk management programs. New Rule 22e-4 will require registered funds to implement a program that assesses liquidity risk, classify securities into one of four liquidity categories, set a liquidity minimum, and report violations of overall portfolio illiquidity limits. The liquidity risk program also requires Board oversight including the designation of a fund officer to administer the program. The SEC also adopted new monthly portfolio disclosure rules for registered funds as well as a rule allowing funds to use swing pricing. Fund complexes with more than $1 Billion in net assets must comply with the liquidity risk management rule by December 1, 2018.
OUR TAKE: The new rules will require a great deal of additional work for the folks in operations, legal and compliance. The Oper-Pros will need to figure out how to pull and classify the data. The lawyers will have to create additional disclosures. And, the Compli-Pros will likely be the appointed officers to administer the programs.