Insights from Winston & Strawn
On May 6th, the Securities Exchange Commission (“SEC”) approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority (“FINRA”) for a twoyear pilot program that would widen the minimum quoting and trading increments (tick sizes) for stocks of some smaller companies. The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors. According to SEC Chair Mary Jo White, “[t]he data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smallercap issuers.” The SEC modified several provisions of the proposal submitted by the exchanges and FINRA. For example, the SEC extended the pilot to two years rather than one, removed the venue limitation from the tradeat prohibition that would have required price matching executions to occur where the person’s quotation was displayed, and reduced the size of block transactions eligible for the exception to better reflect trading in smallercap stocks. The SEC also modified the market capitalization threshold for securities included in the tick size pilot and revised certain data elements concerning market maker profitability to make the collection less burdensome. The pilot will begin by May 6, 2016, and will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or fewer, and a volume weighted average price of at least $2.00 for every trading day. Participants will be divided into three test groups and a control group, with tick prices ranging from $0.01 to $0.05, and various other conditions applied. SEC Press Release.
The announcement of this new pilot program ironically coincided with the publication last week by the Treasury Department’s Office of Financial Research (“OFR”) through a joint grant program with the National Science Foundation of a working paper about the impact on the financial system of trading activity at the nanosecond level. The paper, titled “Tick Size Constraints, HighFrequency Trading, and Liquidity,” undermines the rationale for maintaining a uniform tick size and, more specifically, the policy proposal being tested in the pilot program to increase the tick size to five cents. The authors start from the premise that, due to the $0.01 uniform tick size, lowerpriced stocks have a higher relative tick size than higherpriced stocks. They contend that the $0.01 tick size imposed by Rule 612 of the SEC Regulation NMS drives speed competition in liquidity provision for low priced securities and argue that large relative tick size harms liquidity and encourages highfrequency trader liquidity provision. We will have to wait several years more to see if these findings are confirmed by the SEC’s pilot program. OFR Tick Size Press Release.
Feature: Corporate Governance
With proxy season in full swing The Race to the Bottom has been blogging about corporate bylaws. Celia Taylor, a professor at the University of Denver Sturm College of Law, analyzed recent Delaware court cases which support forum selection clauses in bylaws as well as bylaws requiring arbitration. View the blog post here.
The Race to the Bottom also published a multipart blog on proxy proposals that limit shareholder rights. After discussing recent Delaware court cases upholding forum selection bylaws and feeshifting bylaws, Part 1 introduces a proposal submitted by the management of Ashford Hospitality Prime, Inc. The Maryland company seeks to limit shareholder proposals to shareholders who own beneficially and of record at least one percent of the outstanding shares of the company.
Part 2 and Part 3 review management’s reasons for introducing the proposal, the concern that the shareholder proposal process was being used by a labor union to gain leverage in a labor dispute, and analyzes the proposal’s implications. Part 4 notes how a proposed bylaw restricting a shareholder’s ability to submit proxy proposals relates to the Securities Exchange Act’s Rule 14a8 proxy proposal process.
The Harvard Law School Forum on Corporate Governance and Financial Regulation (“HLS Forum”) published an analysis conducted by Pay Governance LLC on whether proxy advisor say on pay voting policies improve total shareholder returns. Pay Governance found that company compensation committees can obtain a proxy advisor say on pay “For” recommendation while also promoting total shareholder return. View the analysis here.
A spate of studies concerning chief executive officers (“CEOs”) has also been released recently. Nitzan Shilon of the Peking University School of Transnational Law summarized for the HLS Forum his study of the efficacy and transparency of U.S. corporate stock ownership policies, which he calls “paper tigers.” View the summary here.
The HLS Forum published an abstract by Mark HumpheryJenner, a Senior Lecturer at the University of New South Wales Business School, of a paper he coauthored with Suman Banerjee, Associate Professor in the Department of Economics and Finance at the University of Wyoming, and Vikram Nanda, Professor of Finance at Rutgers University. The paper, entitled “Restraining overconfident CEOs through improved governance: Evidence from the SarbanesOxley Act,” explores whether appropriate restraints on CEO discretion and the introduction of diverse viewpoints on the board serve to moderate the actions of overconfident CEOs and, in the end, benefit shareholders.” View the abstract here.
B rian J. Broughman, Associate Professor of Law at Indiana University's Maurer School of Law, discussed his paper, “CEO SidePayments in M&A Deals,” for the CLS Blue Sky Blog. Likening such payments to a legislative rider attached to a popular bill, Broughman suggests that companies adopt bylaws requiring that any proposed sidepayment be voted upon separately from a proposed merger. View the post here.
Holding directors and officers responsible for corporate failures was the subject of an article by Greg M. Zipes, a trial attorney with the United States Department of Justice. Zipes proposes the use of codes of conduct that would specify compensation reductions if during an executive’s tenure certain events, such as administrative fines or an accounting fraud, occur. View the article’s summary here.
Banking Agency Developments
Revised Interagency Examination Procedures for Consumer Compliance
On May 1st, the Office of the Comptroller of the Currency (“OCC”) issued a Bulletin on interagency examination procedures recently developed by the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council. The procedures reflect Consumer Financial Protection Bureau amendments to Regulations Z and X published in December 2013 and February 2015. Most of the changes to the procedures relate to the integrated mortgage disclosure requirements under the Truth in Lending Act and the Real Estate Settlement Procedures Act.
Securities and Exchange Commission
Regulation SCI Outreach Programs
The SEC has opened registration for outreach programs to help firms comply with the agency’s Regulation Systems Compliance and Integrity (“Regulation SCI”) rule. The program is sponsored by the Office of Compliance Inspections and Examinations Technology Controls Program in coordination with the Division of Trading and Markets. Outreach programs will be held on July 16, 2015 at the SEC’s New York Regional Office and on July 29, 2015 at the SEC’s Chicago Regional Office. The events will include panel discussions on the regulatory framework of Regulation SCI, compliance obligations, and the monitoring and examination processes. SEC Press Release.
Chair White’s Cybersecurity Concerns
On May 8th, the Wall Street Journal summarized the remarks of SEC Chair Mary Jo White before the Investment Company Institute. White voiced her concern over cybersecurity, stating that it is the number one systemic risk. White Comments.
On May 8th, the SEC announced that David Grim has been named Director of the Division of Investment Management. Grim has been the Division’s acting director since February, following the departure of former Director Norm Champ. SEC Press Release.
Chief Accountant Preparing GAAP/IFRS Recommendation
On May 7th, James Schnurr, the SEC’s Chief Accountant, discussed the convergence of U.S. Generally Accepted Accounting Principles with International Financial Reporting Standards. Schnurr is preparing a recommendation to the Commission on how the two should be approached. Schnurr Remarks.
On May 7th, Think Advisor summarized the remarks of David Joire, senior counsel in the Division of Investment Management, at the Investment Company Institute’s annual meeting. Joire said that chief compliance officers should be actively involved in a firm’s cybersecurity efforts. Cybersecurity.
On May 5th, Reuters, citing the testimony of SEC Chair Mary Jo White, reported the agency may make public its process for determining whether to bring an enforcement case as a civil lawsuit or as an administrative proceeding. Forum Selection.
Commodity Futures Trading Commission
Market Risk Advisory Committee
The Market Risk Advisory Committee will hold an open meeting on June 2, 2015. The Committee will discuss cybersecurity and market liquidity. CFTC Press Release.
Comments on DCO Application Requested
On May 7th, the CFTC requested comment on an application by Nodal Clear, LLC for registration as a derivatives clearing organization. Comments should be submitted on or before June 8, 2015. CFTC Press Release.
Spoofing Charges Filed Against Gold and Silver Traders
On May 5th, the CFTC filed contested civil fraud charges against Heet Khara and Nasim Salim, residents of the United Arab Emirates, for “spoofing” in the gold and silver futures markets by placing bids and offers with the intent to cancel them before execution. CME Group’s Market Regulation Department identified the disruptive trading practices and initiated an investigation. On or about April 30, 2015, CME Group issued notices summarily denying Khara and Salim’s access to all CME Group markets and any trading platforms owned or controlled by CME Group. CFTC Press Release.
EndUser Interpretive Guidance
On May 4th, the Division of Clearing and Risk released interpretive guidance concerning Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (“CEA”). The guidance clarifies that a securitization special purpose vehicle that is whollyowned by, and consolidated with, an entity described in CEA Section 2(h)(7)(C)(iii) qualifies as a captive finance company and is eligible to elect the enduser exception from a clearing requirement determination. CFTC Press Release.
Federal Rules Effective Dates
May 2015 July 2015
Commodity Futures Trading Commission
May 26, 2015 Residual Interest Deadline for Futures Commission Merchants. 80 FR 15507.
Federal Deposit Insurance Corporation
July 1, 2015 Restrictions on Sale of Assets of a Failed Institution by the Federal Deposit Insurance Corporation. 80 FR 22886.
Federal Finance Housing Agency
July 6, 2015 Minority and Women Inclusion Amendments. 80 FR 25209.
Federal Reserve Board
May 15, 2015 Regulations Q, Y, and LL: Small Bank Holding Company Policy Statement; Capital Adequacy of BoardRegulated Institutions; Bank Holding Companies; Savings and Loan Holding Companies. 80 FR 20153.
National Credit Union Administration
July 6, 2015 Chartering and Field of Membership Manual. 80 FR 25924.
June 5, 2015 Corporate Credit Unions. 80 FR 25932.
Securities and Exchange Commission.
June 19, 2015 Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A). 80 FR 21805.
June 15, 2015 Nationally Recognized Statistical Rating Organizations. 79 FR 55077.
[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g3(a)
(7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g2(a)(9), (b)(13) through (15), Sec. 240.17g5(a)(3)(iii)(E),
(c)(6) through (8), Sec. 240.17g7(a) and (b), and Form ABS15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga2, 240.17g8, 240.17g9, 240.17g 10, and Form ABS Due Diligence15E are effective June 15, 2015.]
May 18, 2015 Regulation SBSRReporting and Dissemination of SecurityBased Swap Information. 80 FR 14563.
SecurityBased Swap Data Repository Registration, Duties, and Core Principles. 80 FR 14437.
Exchanges and SelfRegulatory Organizations
Financial Industry Regulatory Authority
TRACE Amendments Approved
On May 6th, FINRA advised that the SEC approved an amendment to the Trade Reporting and Compliance Engine rules to permit FINRA to implement a new contraparty type for use by firms in identifying transactions with nonmember affiliates. The amendment also requires firms to separately identify transactions with non member affiliates that occur within the same day, at the same price, and in the same security as a trade with another contraparty. The amendment will become effective on November 2, 2015. FINRA Regulatory Notice 15 14.
Rule Governing the Sale of Securities at Military Bases Proposed
On May 6th, the SEC provided notice of FINRA’s proposed adoption of Rule 2272, which would govern sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of May 11. SEC Release No. 3474890.
Proposed Exemption to the Trading Activity Fee for Proprietary Trading Firms
On May 5th, FINRA noted that the SEC has proposed amendments to Securities Exchange Act Rule 15b91 that would require a proprietary trading firm to register with FINRA if the firm engages in overthecounter trading or trading on an exchange of which it is not a member. Since that registration would unnecessarily subject proprietary trading firms to FINRA’s trading activity fee (“TAF”), FINRA proposes an exemption to exclude from TAF transactions by a proprietary trading firm on exchanges of which the firm is a member. Comments should be submitted on or before June 19, 2015. FINRA Regulatory Notice 1513.
2015 GASB Accounting Support Fee
On April 29th, FINRA announced the 2015 fee which will be used to support the Governmental Accounting Standards Board (“GASB”). The GASB Accounting Support Fee is collected on a quarterly basis from member firms that report trades to the Municipal Securities Rulemaking Board (“MSRB”). Each member firm’s assessment is based on the firm’s portion of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB during the previous quarter. FINRA will assess and collect a total of $7,357,300 to adequately fund the GASB’s annual budget by collecting $1,839,325 from its member firms each calendar quarter beginning in May 2015. FINRA Regulatory Notice 1512.
International Swaps and Derivatives Association
EMIR Clearing Classification Tool Released
On May 8th, the International Swaps and Derivatives Association (“ISDA”) and Markit announced the launch of the EMIR Clearing Classification Tool. The tool will be available on ISDA Amend, an online service from ISDA and Markit that facilitates compliance with certain European Market Infrastructure Regulation (“EMIR”) and other regulatory requirements. The EMIR Clearing Classification Tool enables derivatives users to indicate to their counterparties whether they are subject to clearing obligations set by the European Securities and Markets Authority for interest rate derivatives. ISDA Press Release.
Municipal Securities Rulemaking Board
Municipal Advisor Rules Proposed
On May 4th, the SEC provided notice of the MSRB’s filing of proposed new Rule G42, on duties of nonsolicitor municipal advisors, and proposed amendments to Rule G8, on books and records to be made by brokers, dealers, municipal securities dealers, and municipal advisors. Comments should be submitted on or before May 29, 2015. SEC Release No. 3474860.
NASDAQ OMX Group
Longer Period Designated for Consideration of Proposed Restatement of Rules
On May 6th, the SEC designated June 24, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The NASDAQ Stock Market’s proposed amendment and restatement of certain Nasdaq rules that govern the Nasdaq Market Center that are intended to provide a clearer and more detailed description of certain aspects of the Nasdaq Market Center’s functionality. SEC Release No. 3474881.
Disapproval Proceedings Instituted for Proposed Listing of Municipal Bond Index Fund
On May 4th, the SEC instituted proceedings to determine whether to approve or disapprove NYSE Arca’s proposal to amend Equities Rule 5.2(j)(3), Commentary .02 to accommodate the listing of certain Investment Company Units based on municipal bond indexes. Comments should be submitted on or before May 29, 2015. Rebuttal comments should be submitted on or before June 12, 2015. SEC Release No. 3474863.
The Options Clearing Corporation
Minimum Capital Requirements For Letters of Credit Approved
On May 7th, the SEC approved The Options Clearing Corporation’s proposed amendment of its bylaws and rules in order to enhance the measurement used to establish minimum capital requirements for banks approved to issue letters of credit that may be deposited by clearing members as a form of margin asset. SEC Release No. 3474894.
Bitcoin Exchange Charters a First
On May 7th, Reuters reported the New York Department of Financial Services approved the first banking charter for a virtual currency exchange. First Charter.
Too Much of a Good Thing?
On May 7th, the Wall Street Journal asked whether the contraction in the market for credit default derivatives is such a good thing given the increase in issuance of new corporate bonds. Contraction.
A Clash of Margins
On May 6th, Reuters described the different approaches the U.S. and the E.U. have taken to safeguard the derivatives markets and the difficulties those differences have created. Marginal Differences.
Bill Proposes Inclusion of Municipal Securities as HighQuality Assets
On May 4th, Representatives Luke Messer and Carolyn Maloney announced they have proposed a bill that would require federal banking regulators to consider municipal bonds as highquality assets for purposes of the Liquidity Coverage Ratio, which requires banks to maintain a minimum amount of liquid assets. Messer Press Release.