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The Federal Trade Commission (FTC) has updated the requirements of the Standards for Safeguarding Customer Information, known as the Safeguards Rule under the Gramm-Leach-Bliley Act (GLBA standards) to ensure protection of the privacy and personal information of consumers/customers. The main objectives of the GLBA standards for safeguarding information to ensure the security and confidentiality of consumer/customer information, protect against any anticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any consumer/customer. The amendments to the Safeguards Rule still retain the existing Rule’s process-based approach, which allows financial institutions to tailor their programs to reflect the financial institutions’ size, complexity, operations, and to the sensitivity and amount of customer information they collect. Investment Advisors not Registered with the SEC – Compliance with New Safeguard Rule The Safeguards Rule applies to businesses engaged in providing financial services, which includes investment advisors that are not required to register with the Securities and Exchange Commission (SEC). Notably, however, financial institutions that maintain information on less than 5,000 consumers are exempt from certain requirements under the New Safeguard Rule, such as 1.) written risk assessment, 2.) incident response plan, 3.) annual reporting to the Board of Directors, and 4.) to conduct periodic testing and vulnerability assessments. Below are the requirements all financial institutions must still comply with: However, the New Safeguard Rule does not require customer information to be encrypted while in transit through internal business networks. The definition of encryption does not require any specific process or technology to perform the encryption but does require that whatever process is used be sufficiently robust to prevent the deciphering of the information in most circumstances. It should be noted that the FTC believes transmission of customer information to remote users or to cloud service providers should be treated as external transmissions, as those transmissions are sent out of the financial institution’s systems. © 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.

If approved, the contracts will settle based on which political party controls the House and Senate. The CFTC is taking more time to review a self-certified event contract that settles based on political control of the chambers of Congress. Amid calls for the CFTC to issue proactive regulation in this area, including from dissenting Commissioner Summer Mersinger, the agency’s questions for commenters hint that it may see the contracts as a form of “gaming.” The Commission has 90 days for its review; the public has 30 days to submit comments. The CFTC was going to consider initiating the review at an open meeting, but decided to use its seriatim process instead. KalshiEX LLC self-certified the “Will be controlled by for ?” contract; the CFTC review effectively postpones it for 90 days. The contract would pay out based on the party affiliation of the Speaker of the House or the President Pro Tempore of the Senate on the expiration date. The first few questions of the 24 the CFTC cast out for public comment concern whether the contracts “involve, relate to, or reference gaming” as described in the Commodity Exchange Act and rules thereunder. The agency also asks for comment on whether the contracts have a hedging or price-basing function, whether they are contrary to the public interest, and whether they could interfere with the political process. Need for regulatory clarity. As Commissioner Mersinger argues in dissent, the Commission must permit the listing of event contracts unless they both fall into certain categories listed in the Commodity Exchange Act and are contrary to the public interest. The categories are 1) activity that is unlawful under any Federal or State law; 2) terrorism; 3) assassination; 4) war; and 5) gaming. The CFTC’s only public interpretation of this provision, a 2011-2012 conclusion that similar contracts constituted “gaming,” should be revisited. Mersinger says: “gaming” means risking money on the result of a game. Mersinger observes that Kalshi submitted the original contracts for CFTC approval nearly a year ago. The exchange requested two 90-day extensions and made changes to the contracts to address concerns raised in comment letters, including a minimum purchase requirement to reduce the risk that the contracts will be used for casual betting; enhancing the contracts’ hedging utility; and expanding prohibitions on trading by persons holding material nonpublic information. “It is fundamentally unfair for the Commission to use Kalshi’s good-faith efforts to improve its contracts as an opportunity to further delay a decision related to these contracts and, more concerning, avoid undertaking a rulemaking process that is both necessary and overdue with respect to these questions,” Mersinger writes. Some of the original comments on Kalshi’s proposal also called for regulatory clarity. The Futures Industry Association said then that additional CFTC clarity and guidance would bring transparency and regulatory certainty to event contracts, which have large overseas markets and widely available products. Fair treatment. Commissioner Caroline Pham also dissented from the decision to review the contracts. Pham said that such action could violate a recent Fifth Circuit order enjoining the CFTC from closing the PredictIt Market, which also lists political event contracts. “I believe that it is only fair for either both exchanges to list the political control contracts, or neither of them should,” Pham wrote. Last fall, Pham gave an interview to Politico where she signaled that the CFTC was preparing to rule against the Kalshi application and that she strongly disagreed with that decision. The watchdog group Better Markets filed a complaint with the CFTC Inspector General alleging that Pham violated her ethical obligations by tipping off Kalshi to the pending action. © 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.

The CFTC’s Division of Clearing and Risk issued a staff advisory on review of risks associated with expansion of DCO clearing of digital assets. The CFTC’s Division of Clearing and Risk (DCR) issued a staff advisory on the risks associated with the expansion of Derivatives Clearing Organization (DCO) clearing of digital assets. In the past several years, DCR has observed increased interest by DCOs and DCO applicants in expanding the types of products cleared and business lines, clearing models, and services DCOs offer, including related to digital assets (CFTC Letter No. 23-07, May 30, 2023). The advisory “reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.” DCO registrants and applicants should expect that DCR will be placing emphasis on the potential risks and DCO core principles related to system safeguards, physical settlement procedures, and conflicts of interest. Statement of Commissioner Kristin Johnson. Commissioner Johnson called for the CFTC to initiate a formal rulemaking process for CFTC-registered DCOs engaged in crypto or digital asset clearing activities. According to Johnson, proposed rules should address: 1) conflicts of interest arising from vertical integration of activities and functions; 2) custody and client asset protection; 3) operational and technological risk, specifically cyber-risks; and 4) market manipulation and fraud. This is CFTC Letter No. 23-07. © 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.

The CFTC’s staff advisory encourages entities using prime brokerage arrangements to examine the specific nature of their activities for the potential need to register as a derivatives clearing organization. The CFTC’s Division of Clearing and Risk (DCR) issued a staff advisory encouraging entities using prime brokerage arrangements that provide credit substitution on a centralized basis to examine the specific nature of their activities for the potential need to register as a DCO with the CFTC (CFTC Letter No. 23-06, May 17, 2023). DCR staff recently encountered potential DCO registration issues involving derivatives transactions executed through prime brokerage arrangements used by swap execution facilities (SEF) or those seeking to register as SEFs, particularly through the use of market structures that require the use of a single prime broker to provide centralized credit substitution to all SEF participants. The staff advisory serves as a reminder to these entities of their obligations under the Commodity Exchange Act and CFTC regulations. In addition, the advisory urges the entities to contact DCR if they need more information. This is CFTC Letter No. 23-06. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved.

LIBOR-Transition preparation efforts varied considerably depending on the type and amount of LIBOR exposure, with most firms examined having significant direct exposure to LIBOR-linked contracts, and a few with large retail client bases having more limited and indirect exposure. The SEC’s Division of Examinations has issued a Risk Alert identifying its observations from examinations conducted at investment firms concerning LIBOR-transition preparedness. With the U.S. Dollar LIBOR (formerly the London Interbank Offered Rate,) scheduled to be discontinued after June 30, 2023 (cessation date), the Division undertook a series of examinations to assess registrants’ preparedness for the cessation of LIBOR. The Alert focuses on exams of registered investment advisers and investment companies and is intended to remind firms of the transition as well as summarize some observations gleaned from the recent examinations. Types of firms reviewed. With the LIBOR-transition cessation date looming in less than 2 months, the Division examined investment firms categorized as: (i) advisers associated with large bank complexes; (ii) advisers to various types of registered investment companies (i.e., mutual funds, closed-end funds, exchange-traded funds, and business development companies); (iii) small, medium, and large fund complexes; (iv) advisers to private funds that invest in private credit, such as collateralized loan obligations; and (v) large retail-oriented advisers. Risk Management practices implemented. Although the examiners found that firms’ preparation efforts varied considerably depending on the type and amount of LIBOR exposure, most of the examined firms had significant direct exposure to LIBOR-linked contracts. A few, which had large retail client bases, had more limited and indirect exposure. The Staff observed certain risk management practices firms have implemented to address the transition away from LIBOR including the following: Operations practices adopted. Many firms were found to have actively engaged with service providers, sub-advisers, and third-party managers, and, worked extensively with fund administrators and pricing or data providers to understand their transition readiness. In addition, firms that require internal system updates had performed end-to-end testing to confirm that their systems can accommodate alternative reference rates (ARRs) currently used, or that will be used post-transition. Several firms also employed rigorous reconciliation processes, aimed at ensuring that all terms and conditions of the ARRs were properly accounted for. Gauging LIBOR exposures. Many firms took a global approach to contract identification, looking broadly at LIBOR exposure across subsidiaries and affiliates. Most firms either created or utilized internal tools to track and monitor LIBOR and ARR exposure on a real-time or periodic basis. Several firms also used third-party service providers with specialized skills in document review to identify fallback provisions, and, to proactively assess risks associated with the various fallback provisions, or lack thereof. Firms further considered what, if any, trading restrictions to place on new and legacy LIBOR-linked instruments and communicated their approaches to the relevant personnel. Although some instruments may not be susceptible to early transition, firms have been converting to ARRs where practicable and urging counterparties to convert ahead of the Cessation Date. Conclusions. The Risk Alert concluded that the firms examined have made significant efforts to prepare for the transition away from LIBOR, implementing a variety of practices depending on their business models and client base. Additionally, the Staff noted that several challenges exist to a smooth and orderly transition away from LIBOR, and the Division encourages all firms to be aware of such issues, including consideration of the resources necessary to address them, and to act consistent with their fiduciary obligations as they continue in the transition process. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved.

In remarks to the MFA, he discussed some of the reasoning behind the Commission’s pending proposals that affect how private funds operate. Private funds currently are the focus of a number of SEC initiatives, including February 2022 proposals to enhance the regulation of private fund advisers, many of which are intended to keep up with fast-changing technology and business models, according to SEC Chair Gary Gensler. In remarks to the Managed Funds Association (MFA), he provided some context and rationale for the Commission’s work on those initiatives. As a backdrop, Gensler noted that advisers currently report more than $25 trillion in private fund gross asset value among tens of thousands of funds, eclipsing the size of the $23 trillion banking sector. In contrast, 25 years ago the private fund industry had a little under $1 trillion in assets representing about 25 percent of the value of the $4-plus trillion banking industry. Average fees now add up to 3 to 4 percent in private equity and 2 to 3 percent in hedge funds each year, resulting in hundreds of billions of dollars in fees and expenses annually, he said. 2022 proposed rules. Given the industry’s size, the SEC monitors the industry as part of its remit to maintain fair, orderly, and efficient markets, Gensler indicated. Accordingly, it proposed rules in 2022 that would increase transparency by requiring registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. The proposed rules also would prohibit private fund advisers from providing certain types of preferential treatment to investors in their funds and all other preferential treatment unless it is disclosed to current and prospective investors, and would create new requirements for private fund advisers related to fund audits, books and records, and adviser-led secondary transactions. Gensler noted that the proposals use transparency and market integrity to promote competition and efficiency. The effort can be traced back to 1996 reforms, he stated, when Congress explicitly instructed the SEC to consider efficiency and competition in the capital markets in its rulemaking. Congress also gave the SEC a role in promoting market integrity and disclosure, Gensler added, and he outlined five pending projects focused on those issues, all of which were authorized by the Dodd-Frank Act. The projects include proposals to reduce information asymmetries between borrowers and sellers in the securities-lending market and proposals to make aggregate data about large short positions available to the public. The three additional proposals relate to investment advisers’ custody of client assets, beneficial ownership, and large positions in security-based swaps, Gensler noted. Custody rule proposal. After the Bernie Madoff scandal, Congress provided updated authorities to the Commission to ensure that that investment advisers safeguard client assets over which they have custody. The result was the safeguarding proposal, Gensler said, which would update the existing custody rule. He pointed out that Congress gave the agency the authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities. The proposal also would enhance the protections that qualified custodians provide, which helps protect assets should the adviser or custodian go bankrupt, he stated. Gensler noted that the SEC received additional Congressional authority after the 2008 financial crisis to address security-based swaps, including credit default swaps, which played a leading role in the crisis. The Commission used that authority to propose rules requiring prompt disclosure of large security-based swap positions and strengthening investor protection in security-based swaps, he said. Form PF changes. Gensler reminded his MFA audience that history is full of instances when trouble in one corner of the financial system or at one financial institution spilled into the broader economy. The 2008 crisis is one such example, he said, and that led to the Dodd-Frank Act and its Form PF requirements regarding registration and reporting of private fund advisers. Since that form was adopted, Gensler said, market conditions have changed resulting in the need to update the form. The day after his remarks, the Commission voted to finalize those updates, including one related to current reporting, and one that expands the reporting requirements for large hedge fund advisers on their large funds. Gensler also mentioned important projects to address the registration and regulation of Treasury dealers and platforms, as well as to facilitate greater clearing of treasuries in both cash and funding markets. In his view, the projects are important because hedge funds can create risks for financial stability through the use of leverage and through counterparty exposures. Moreover, risks from hedge fund exposures to repurchase agreements, reverse repurchase agreements, and Treasury securities have increased in recent years, he said. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved.

The amendments advance the filing timeline in the case of a significant event, requiring large hedge fund advisers to report as soon as practicable but no later than 72 hours from its occurrence. The SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered advisers to private funds. The reporting changes are designed to provide the Financial Stability Oversight Council (FSOC) with more timely information to assess systemic risk, and to boost the Commission’s oversight of private fund advisers and its investor protection efforts, the SEC said. The amendments passed by a 3-2 vote, with Commissioners Hester Peirce and Mark Uyeda voting against their approval. Commissioner Peirce commented that the expansion of Form PF data collection “is the latest reflection of the Commission’s unquestioning faith in the Benevolent Power of More, a faith that I do not share.” Fund advisers’ requirements. The final form amendments apply to large hedge fund advisers with at least $1.5 billion in hedge fund assets under management; private equity fund advisers with at least $150 million in private equity fund assets under management; and large private equity fund advisers with at least $2 billion in private equity assets under management. The amendments will require large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain events that could indicate significant stress at a fund or investor harm. Large hedge fund advisers must file these reports not later than 72 hours from the occurrence of the relevant event. The SEC said “trigger” events for large hedge funds include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions. Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter-end. The amendments also require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved.

The SEC’s review of recent newly-registered adviser examinations identified issues in compliance policies and procedures, disclosure documents and filings, and marketing. The SEC’s Division of Examinations issued a Risk Alert discussing the focus areas reviewed during examinations of newly-registered advisers and sharing staff observations regarding compliance policies and procedures, disclosures, and marketing practices. Examinations of newly-registered advisers provide an opportunity for early engagement between advisers and the staff and assist firms in their compliance efforts. Examinations. The Division’s examinations of newly-registered advisers often focus on whether the firms have: (1) identified and addressed conflicts of interest; (2) provided clients with full and fair disclosure such that clients can provide informed consent; and (3) adopted effective compliance programs. The examinations typically involve document requests and interviews with advisory personnel addressing the adviser’s: (1) business and investment activities; (2) organizational affiliations; (3) compliance policies and procedures; and (4) disclosures to clients. The staff requests information and documents for a defined review period to assess the adviser’s compliance with the Advisers Act and to determine whether the adviser’s representations and disclosures made to clients and in SEC filings are consistent with the adviser’s actual practices. Observations. The staff’s review of recent newly-registered adviser examinations identified issues in the following three areas: (1) compliance policies and procedures; (2) disclosure documents and filings; and (3) marketing. Compliance policies and procedures. The staff observed compliance policies and procedures that: (1) did not adequately address certain risk areas applicable to the firm, such as portfolio management and fee billing; (2) omitted procedures to enforce stated policies, such as stating the advisers’ policy is to seek best execution, but not having any procedures to evaluate periodically and systematically the execution quality of the broker-dealers executing their clients’ transactions; and/or (3) were not followed by advisory personnel, typically because the personnel were not aware of the policies or procedures or the policies or procedures were not consistent with their businesses or operations. Disclosures. The staff observed required disclosure documents that contained omissions or inaccurate information and untimely filings. The disclosure omissions and inaccuracies were related to advisers’: (1) fees and compensation; (2) business or operations (including affiliates, other relationships, number of clients, and assets under management); (3) services offered to clients, such as disclosure regarding advisers’ investment strategy, aggregate trading, and account reviews; (4) disciplinary information; (5) websites and social media accounts; and (6) conflicts of interest. Marketing. The staff observed adviser marketing materials that appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance. © 2023 CCH Incorporated and its affiliates and licensors. All rights reserved.

NFA recently adopted NFA Compliance Rule 2-51, which imposes anti-fraud, just and equitable principles of trade, and supervision requirements on NFA Members and Associates that engage in digital asset commodity activities. The Rule’s scope is currently limited to Bitcoin and Ether. The Rule also specifically references a Member’s existing obligation to comply with NFA’s Interpretive Notice 9073—Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities. NFA Compliance Rule 2-51 becomes effective on May 31, 2023. Currently, over 100 NFA Members have reported to NFA that they engage in digital asset-related business activities, both in commodity interest and spot markets. Except for NFA Interpretive Notice 9073, NFA does not impose any specific requirements on Members with respect to their spot digital asset commodity activities. Therefore, NFA’s Board determined to adopt NFA Compliance Rule 2-51 to provide NFA with the ability to discipline a Member or take other action to protect the public if a Member commits fraud or similar misconduct with respect to its spot digital asset commodity activities. The Rule also requires Members and supervisory Associates to diligently supervise these activities. Therefore, Members engaged in spot digital asset commodity activities must adopt and implement appropriate supervisory policies and procedures over these activities. NFA’s CPO/CTA, FCM, IB and Swap Participant Advisory Committees supported the adoption of NFA Compliance Rule 2-51, which was unanimously approved by the Board. NFA’s February 28, 2023 submission letter to the CFTC contains more detailed information regarding NFA Compliance Rule 2-51. If you have any questions regarding NFA Compliance Rule 2-51, please contact Mike Schorsch, Assistant General Counsel (mschorsch@nfa.futures.org or 312-781-1360). © 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.

Advances in swap data reporting will increase regulatory insight into market activity, necessary to promote market integrity, says Commissioner Romero. The CFTC issued an order on Thursday that will require registered entities and swap counterparties to use unique product identifiers (UPIs) issued by the Derivatives Service Bureau Limited for all swaps in credit, equity, foreign exchange and interest rate asset classes. The Commission set a compliance date of January 29, 2024 for the order. The Derivatives Service Bureau-issued UPIs meet the Commission’s UPI and product classification system requirements, the CFTC said. In addition, the agency said its designation of the UPIs issued by DSB will further international harmonization as other jurisdictions also begin to require the use of the UPIs in swaps reporting and recordkeeping. “As swap markets are global markets, global harmonization enhances the use of swap data for regulators, market participants and the public,” said CFTC Commissioner Christy Goldsmith Romero. “The CFTC has been collaborating with global regulators on uniform standards for defining and representing swap products.” Identification enables aggregation. In its order, the CFTC said the identification of swaps by the UPI code issued by DSB will allow the Commission and other regulators to aggregate swap transaction data at various levels of product classification. The use of the UPIs also will enhance transparency and facilitate the oversight of swaps markets, the Commission said. For example, reporting by UPI code to all four swap data repositories (SDRs) registered with the Commission would enable the CFTC to not only aggregate transactions across the SDRs, but also to aggregate by any reference data element contained in the Reference Data Library. All interest rate swap transactions with the same unique product identifier will be able to be aggregated, as well as all interest rate swap transactions referencing the same underlying interest rate index. The DSB’s function. The CFTC’s move follows action taken in April 2019 by the international Financial Stability Board when it designated the DSB as both the service provider for a future UPI system assigned to OTC derivatives products and the operator of the UPI reference data library. Combined with other standardized identifiers already used in swaps recordkeeping and reporting, such as legal entity identifiers, unique product identifier codes issued by DSB will provide a regulatory tool to facilitate the Commission’s ability to link and aggregate data to detect and mitigate systemic risk and prevent market manipulation, as first directed by the Dodd-Frank Act. Continuing in the footsteps of Dodd-Frank. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the CEA to include a regulatory framework for swaps. Those amendments added provisions requiring the retention and reporting of data regarding swap transactions to SDRs with the goal of enhancing transparency, promoting standardization and reducing systemic risk. In line with the CEA amendments, the Commission added swap data recordkeeping and reporting requirements. The Commission said it plans to publish UPI-related modifications to its current technical specifications for swaps on the CFTC website. © 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.