Securities Industry Commentator by Bill Singer Esq

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KAREN LECRAFT HENDERSON, Circuit Judge: The Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq., directs the Securities and Exchange Commission (Commission) to facilitate the establishment of a national market system (NMS), a key component of which is the public dissemination of market data regarding quotations for and transactions in equity securities. Equity market data is collected, consolidated and disseminated pursuant to NMS plans governed and operated by "self-regulatory organizations" (SROs), groups comprising, in large part, the major national securities exchanges for equity securities. Beginning in 2020, the Commission issued two orders aimed at consolidating the existing NMS plans governing the dissemination of equity market data into a single, consolidated plan (CT Plan) and modifying the governance structure to increase efficiencies, mitigate conflicts of interest among the securities exchanges and facilitate greater involvement by nonexchange stakeholders. See Order Directing the Exchanges and the Financial Industry Regulatory Authority To Submit a New National Market System Plan Regarding Consolidated Equity Market Data, 85 Fed. Reg. 28,702 (May 13, 2020) (Governance Order); Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data, 86 Fed. Reg. 44,142 (Aug. 11, 2021) (CT Plan Order).

A group of national securities exchanges associated with Nasdaq, Inc. (Nasdaq), the New York Stock Exchange (NYSE) and Cboe Global Markets (Cboe) (collectively, petitioners) challenge the Commission's orders, arguing that several elements are arbitrary and capricious under the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq., or contrary to the text and goals of the Exchange Act. In particular, petitioners challenge three provisions of the final, Commission-approved CT Plan: (1) the inclusion of representatives of non-SROs as voting members of the CT Plan's operating committee; (2) the grouping of SROs based on corporate affiliation for voting; and (3) the requirement that the administrator of the CT Plan be "independent," meaning independent of any SRO that sells equity market data products. 

As detailed infra, we grant petitioners' three petitions as to the first challenged provision-non-SRO representation-and deny them in all other respects. Further, because the non-SRO-representation provision is not severable from the CT Plan Order, we vacate that Order in its entirety. We do, however, uphold in large part the Governance Order, which preceded the CT Plan Order and merely directed the SROs to propose an NMS plan that included the three challenged provisions. 

The Commission, for its part, pays little more than lip service to our concern that severing parts of the CT Plan Order would render the plan unworkable. It first makes the unsupported statement that, if one of the challenged provisions of the CT Plan is found to be unlawful, "the remaining provisions could 'function sensibly.'" Resp't Br. 56 (quoting Carlson, 938 F.3d at 351-52). As explained above, we struggle to see how that is the case. The Commission then invokes the severability provision included in the CT Plan itself, which states that "any determination that any provision of the CT Plan is invalid or unenforceable shall not affect the validity or enforceability of any other provisions of the CT Plan, all of which shall remain in full force and effect." CT Plan Order, 86 Fed. Reg. at 44,207. But "the ultimate determination of severability will rarely turn on the presence or absence" of a severability clause. Cmty. for Creative Non-Violence v. Turner, 893 F.2d 1387, 1394 (D.C. Cir. 1990) (quoting United States v. Jackson, 390 U.S. 570, 585 n.27 (1968)). Instead, we look to agency intent and whether the valid portions can function absent the invalid portions, id.; doing so, we conclude that the CT Plan, as currently constructed, would be unworkable if we simply severed the provision requiring non-SRO representation. 

At the hearing, Claimant requested $345,448 in damages, plus 1/3 for attorneys' fees ($115,137.82), plus expert fees of $35,167.50, plus $29,415.65, equaling $525,168.97, plus an award of appropriate punitive damages. Alternatively, if rescission of the unauthorized options trades is allowed instead, Claimant requested $427,312.69 in damages, plus 1/3 for attorneys' fees ($142,423.32), plus expert fees of $35,167.50, plus $29,415.65, equaling $634,319.16, plus an award of appropriate punitive damages.

The causes of action related to Claimant's allegation regarding the purchase of options, unspecified non-dividend paying stocks, over-concentration in many stocks, and repeated violations of Claimant's margin limits.

[C]laimant's submission of information to the Commission was not "voluntary," as required by Section 21F(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 21F-3 and 21F-4(a)(1) thereunder, because Claimant provided information in *** after Enforcement staff had already subpoenaed Claimant and taken Claimant's testimony in the *** Investigation on a subject matter related to his/her information. Second, the CRS determined that, under Rule 21F-8(c)(7), Claimant was ineligible for an award because Claimant had knowingly and willfully made false statements to Commission staff during Claimant's *** testimony.

[F]or more than five years, from 2016 through at least 2021, BNPP failed to correctly report numerous swap transactions to a swap data repository (SDR) as required by the CEA and CFTC regulations. BNPP did not report more than 6,000 swap transactions with U.S. persons, because the counterparties had been incorrectly classified as non-U.S. persons. As a result, BNPP failed to make more than 300,000 reports relating to these transactions. These reports are required by the CEA and CFTC regulations.

The order also finds that BNPP also entered into more than 3 million swap transactions during this period that were incorrectly reported under the CFTC's rules. From 2016 to 2018, the swap dealer also failed to correctly report thousands of bunched trades. Instead of correctly reporting them as allocations of trades, BNPP reported these transactions as new trades. In addition, from 2016 to 2020, BNPP incorrectly reported certain commodity swaps. These trades were reported, but were incorrectly described as equity trades rather than commodity trades. In total, approximately 3,000 transactions were incorrectly reported in this fashion. 

Moreover, during the period 2016 to 2017, as the order finds, BNPP adjusted daily mark disclosures for 82 swap transactions, which resulted in approximately 19,000 adjusted daily mark disclosures being made to the relevant swap counterparties, contrary to the requirements of the CEA and CFTC regulations.

In accepting BNPP's Offer of Settlement, the CFTC recognizes BNPP's substantial cooperation during the Division of Enforcement's investigation of this matter. The CFTC notes that BNPP's cooperation and remediation are recognized in the form of a substantially reduced civil monetary penalty.

The order specifically finds that, from September 2015 to February 2020, J.P. Morgan failed to report approximately 2.1 million short-dated foreign exchange (FX) swap transactions. These unreported short-dated FX swap transactions represented approximately fifty-one percent of the total number of FX swaps that J.P. Morgan executed during that same period. 

Short-dated FX swaps are transactions in which the parties exchange two currencies the day after execution and then reverse that exchange at a predetermined rate on the following business day. A short-dated FX swap is a reportable FX swap transaction because it involves an exchange of currencies and a reversal of that exchange on specific dates and at rates fixed at the inception of the contract. Consequently, J.P. Morgan was obligated to report its short-dated FX swaps under the relevant statutory and regulatory provisions, which it failed to do during the relevant period.

 J.P. Morgan has represented that it has reported all of the previously-unreported FX swaps transactions it was obligated to report. 

I strongly support this enforcement action against JP Morgan for violating CFTC swap data reporting requirements for years, and failing to report accurately more than 2.1 million swap transactions.  I am quite concerned by the duration and substantial nature of violations by JP Morgan.  I also note that JP Morgan has been the subject of several CFTC enforcement actions over the years, and the subject of many other federal agency enforcement actions.

Swap data reporting is fundamental to post-crisis financial regulation.  It is one of the key measures in the Dodd Frank Act to bring transparency to risk previously hidden.  This transparency is necessary for regulators to identify risk, and ultimately to reduce risk that could become systemic.  Transparency is also necessary for the CFTC to fulfill its mission to promote market resilience and integrity so that our markets remain the strongest and safest in the world.  This requires, among other things, the CFTC to conduct market and financial surveillance-surveillance that relies on swap dealers fulfilling their obligation to provide accurate and complete data.

This case should serve as a message to all swap dealers that the CFTC will bring justice for failures in swap data reporting.  It has been more than 10 years since the Dodd-Frank Act swap data reporting rules have been in place.  It is far past time for swap dealers to come into compliance with the law.

• Securities Industry Commentator
• Bill Singer