The SEC Files Spoofing Case

The SEC recently announced that it has commenced administrative proceedings against three Chicago traders, Behruz Afshar, Shahryar Afshar and Richard Kenny, for spoofing and the mismarking of option orders.  Both schemes were allegedly employed to generate rebates and incentives from the options exchanges.

The traders are alleged to have spoofed the markets in order to take advantage of a “maker-taker” program offered by the exchanges which provides that an order sent to an exchange that executes against a subsequent order generates a “maker” rebate, while the order that immediately executes against a pre-existing order is charged a “taker” fee.  In this case, the three traders placed “All or None” orders, which are hidden orders that must be executed in their entirety, or not all. The three traders are alleged to have engaged in spoofing by then placing smaller orders, which were not intended to be executed, opposite the All or None orders in order to induce other market participants to place orders at the same price.  Because the All or None orders were placed first, once they were filled, the three traders would earn rebates on the orders.

The traders are also alleged to have established “customer” accounts and mismark orders originating from such customer accounts to take advantage of incentives provided to customers that the three professional traders were ineligible to receive.

FinCEN Proposes AML Rules for Investment Advisers

In August 2015, the Financial Crimes Enforcement Network (“FinCEN”), responsible for formulating and enforcing anti-money laundering regulations in the U.S., proposed anti-money laundering rules, which would be applicable to investment advisers registered with the SEC.  In support of its proposal, the director of FinCEN noted that investment advisers are on the “front lines of a multi-trillion dollar sector of our financial system.” 

Among other things, FinCEN’s proposal would define investment advisers as “financial institutions” for purposes of Bank Secrecy Act regulations, require investment advisers to adopt and implement written AML procedures and report suspicious financial activities to U.S. regulators.  Additionally, the board of directors of a registered investment adviser would need to approve in writing the AML procedures and such procedures would need to be produced to FinCEN or the SEC upon request.  In its proposal, FinCEN also authorizes the SEC to enforce the proposed rules as part of its supervisory responsibilities over investment advisers.  The comment period for the proposed rules closed on November 2, 2015.