Insights from Winston & Strawn
On December 30, 2015, the U. S. District Court for the Central District of California denied a motion for judgment on the pleadings filed by CashCall, Inc., a defendant in an enforcement action by the Consumer Financial Protection Bureau (CFPB). The CFPB has sued CashCall for engaging in unfair, deceptive, and abusive acts because CashCall demanded and collected payments on loans that state licensing and usury laws rendered void or uncollectible. In a manner similar to the way marketplace lending is conducted, the loans were marketed by CashCall, but had been originated by a South Dakota Indian tribe and sold to CashCall; while some states assert that their licensing and usury laws apply to loans originated by Indian tribes, there has been no definitive federal precedent on that subject. The CFPB asserted that CashCall tried to collect loans from residents of states that apply licensing and usury limits to loans originated by Indian tribes, that such loans were void or uncollectible because the Indian tribe had not been licensed in such states and the loans violated the usury ceilings in those states, and, that, therefore, CashCall was collecting on void and uncollectible loans, which the CFPB deems to be an unfair, deceptive, or abusive practice (UDAAP).
CashCall argued that suing for violations of state law was beyond the CFPB’s legal authority and, further, that it had the effect of establishing a usury limit which is expressly prohibited by the statute creating the CFPB. Such a motion for judgment on the pleadings was acted upon by the court on the assumption that all allegations in the CFPB’s complaint are true and all reasonable inferences from those facts are in favor of the CFPB because an actual trial has yet to have been held to establish facts.
In a brief order, the court concluded that the CFPB was not suing for violations of state law but for collecting debts not actually owed. It is not uncommon for a state law violation to be a predicate offense to federal law violation. It also concluded that the CFPB was not establishing a usury limit.
Some practitioners believe that this decision, another in a string of court decisions upholding CFPB positions, reinforces the CFPB’s position that participants in the consumer finance arena have a legal duty to police third parties with which they deal and have vicarious liability for the conduct of such third parties. The consequence of the CFPB’s position is that a purchaser of loans not only risks losing the right to collect principal and interest if somehow the originator can be deemed to have violated usury laws, but also the purchaser can end up being liable for civil money penalties for engaging in a UDAAP violation. One theoretical irony of this position is that purchasers of loans in those cases in which someone may assert, and prevail on, a novel theory of a usury violation may have UDAAP liability. One is reminded of the plight of purchasers of loans in the Second Circuit where the current law, unless and until the Midland decision is reversed by the U. S. Supreme Court, is that such purchasers may not have the originator’s protection from certain usury laws. If that decision stands, arguably any loan purchaser that has been attempting to collect a loan that lost usury protection by virtue of the Midland decision might be accused of engaging in an unfair, deceptive, or abusive act.
While technology is constantly progressing, so are cyberthreats. Financial services companies, which are not immune to these cyberthreats, have to be ready when cybercriminals decide to attack the financial advisory industry for its considerable amount of private information and assets. InvestmentNews recently met with several broker-dealer professionals to discuss cybersecurity in the digital age. They pointed to client email accounts as being a concern for advisers and their firms, where hackings, outdated digital signature models, and third-party vendor breaches could expose sensitive information and data and business relationships, and could even lead to identity theft. James Clabby, chief information officer at AIG Advisor Group, noted that while his firm guides its employees about best practices regarding cybersecurity, hackers can always find ways to gain access to the valuable information that financial services companies retain in their systems.
The Securities and Exchange Commission (“SEC”) has very recently demonstrated its commitment to policing cybersecurity. At the 2015 American Institute of Certified Public Accountants (“AICPA”) National Conference, SEC Chair Mary Jo White in her keynote speech stressed the importance of cybersecurity. And, on December 10, 2015, Reuters reported on the SEC’s plans to bring more cases against investment advisers who do not have policies to prevent hacking. Andrew Ceresney, head of the SEC’s enforcement division, noted that the SEC is actively pursuing advisers in cyber-related cases who focus on regulatory obligations to keep their customers’ information private. And now President Obama has made a move towards curbing hackers – on December 18th, he signed the Omnibus Appropriations Act, a $1.1 trillion omnibus spending package that was primarily designed to allocate funds and avoid a potential government shutdown. The 2009-page Omnibus Appropriations Act contains a range of measures that distribute funds for a variety of areas such as healthcare, national parks, and defense spending. Also included in the Omnibus Appropriations Act is a widely disputed provision called the Cybersecurity Information Sharing Act (“CISA”), which was signed into law as the “Cybersecurity Act of 2015.” The main objective of the Cybersecurity Act, which encourages businesses to share more data on hacking threats with the government, is to give legal authority to private companies to hand over information to federal agencies, including the National Security Agency (“NSA”) (an earlier bill only allowed information sharing in the case of "imminent threats," while the new "specific" language disregards any timeliness).
Pursuant to the Cybersecurity Act, which will stay in effect for 10 years, network operators now have the authority to:
- monitor their own information system or, with written consent, someone else’s information system for “cybersecurity purposes”;
- operate defensive measures to protect the rights or property of the network owner; and
- share data with others.
It is important to note that the Cybersecurity Act does not actually require companies to share data with the federal government – it instead provides protective legal cover if companies choose to do so.
Met with Supporters and Detractors
The Cybersecurity Act has been controversial since its original introduction in 2014. Supporters of the Cybersecurity Act include Department of Homeland Security (“DHS”) Secretary Jeh Johnson, who stated that “[c]ybersecurity is a top priority for DHS and the Obama administration, and this bipartisan effort is a significant step forward in strengthening our nation's cybersecurity.”
In addition, U.S. Chamber of Commerce president and CEO Thomas Donohue noted that, as cybercrime targets both government and businesses, the Cybersecurity Act will allow businesses to voluntarily work with authorities “to better prevent, detect and mitigate threats,” adding that this “is our best chance yet to help address this economic and national security priority in a meaningful way and help prevent further attacks.”
Another supporter of the Cybersecurity Act includes the House Committee on Rules, which described the information-sharing measure as “a voluntary cybersecurity information sharing process that will encourage public and private sector entities to share cyberthreat information, without legal barriers and the threat of unfounded litigation — while protecting private information.”
On the other hand, several legislators complained that they were unable to vote for the Omnibus Appropriations Act because its Cybersecurity Act “will function as a surveillance tool,” contained “unacceptable surveillance provisions,” and is so flawed that “violations of Americans’ privacy will be more likely to go unnoticed.”
Other critics have referred to the Cybersecurity Act as a new “backdoor” for surveillance by the NSA. Critics have also argued that its language basically expands the powers of the federal government to collect data from tech companies and conduct warrantless surveillance of U.S. citizens. Critics further argued that the exclusion of language that would specifically prohibit data transfers to the NSA allows for the DHS to hand off data from companies to the NSA, essentially allowing the NSA to maintain its surveillance capabilities.
In addition, major tech companies such as Twitter and Reddit have complained that the Cybersecurity Act violates user privacy, while other opponents argue that the Cybersecurity Act is not clear about what constitutes a “cybersecurity threat.”
And finally, groups such as the Open Technology Institute (“OTI”) have suggested that the Cybersecurity Act allows companies to monitor a user’s online activities regardless of whether those activities are connected to what the bill terms a “cyber threat indicator” or any type of criminal mischief. OTI’s policy counsel, Robyn Greene, asserted that “[f]or over five years, the information sharing debate took up all of the air in the room when it came to cybersecurity policy … Now that it is over, we hope that Congress will finally turn its attention to passing legislative reforms that will improve cybersecurity while also respecting or even enhancing privacy.”
What Detractors Are Saying Can Be Done
In general, there seems to be a lot more than can be done in the cybersecurity arena. Detractors are urging Congress to consider other related actions, including reforming the Computer Fraud and Abuse Act and the Digital Millennium Copyright Act to ensure that security researchers are able to identify and responsibly disclose weaknesses without fear of prosecution or civil liability; establishing a grant program to support small businesses in implementing programs that accept and reward vulnerability reports; and motivating businesses to practice better cyber hygiene.
FINRA – Regulatory Matters at a Glance
Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.
Banking Agency Developments
OCC Revises Small and Intermediate Small Bank and Savings Association Asset Thresholds
On January 7th, the Office of the Comptroller of the Currency (“OCC”) published in the Federal Register revisions to its Community Reinvestment Act (“CRA”) regulations that became effective on January 1, 2016. The revisions adjust the asset-size thresholds that are used to define “small bank,” “small savings association,” “intermediate small bank,” and “intermediate small savings association.” The rulemaking adjusts the threshold amount based on the annual percentage change in a measure of the consumer price index. The rulemaking also deletes obsolete references to the Office of Thrift Supervision and its former CRA rule and revises cross-references in the rule to reflect transfers of certain authority from the Federal Reserve Board to the Consumer Financial Protection Bureau. OCC Bulletin.
Bank Regulatory Agencies and CDFI Fund to Sponsor National Interagency Community Reinvestment Conference
On January 6th, the OCC announced that federal bank regulatory agencies, the Federal Reserve Bank of San Francisco, and the Community Development Financial Institutions Fund will host the 2016 National Interagency Community Reinvestment Conference in Los Angeles from February 8th to 10th. This biennial conference offers participants from around the country the opportunity to learn about the CRA and to discuss best practices and emerging challenges in community development. OCC Press Release.
Federal Agencies Seek Comment on Regulations Related to Procedure, Safety and Soundness, and Securities and Recently Issued Regulations
On December 23rd, pursuant to Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“EGRPRA”) requirements, the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) published in the Federal Register their fourth and final notice, seeking comment on rules in the categories of Procedure, Safety and Soundness, and Securities. The agencies are also seeking comment on newly issued rules, including those issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the recently finalized domestic capital and liquidity rules, and any other final rules issued on or before December 31, 2015. Comments may be submitted through the agencies’ EGRPRA Website. Additional ways to comment are discussed in the Federal Register notice. The notice provides for a 90-day comment period, with comments due by March 23, 2016. OCC Bulletin.
Agencies Release Annual CRA Asset-Size Threshold Adjustments for Small and Intermediate Small Institutions
On December 22nd, the FDIC, Federal Reserve Board of Governors, and the OCC announced in a joint release the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank, and intermediate small savings association under the Community Reinvestment Act (“CRA”) regulations. OCC Press Release.
OCC Reports Third Quarter Trading Revenue of $5.3 Billion
On December 21st, the OCC announced that, according to OCC’s Quarterly Report on Bank Trading and Derivatives Activities, insured U.S. commercial banks and savings associations reported trading revenue of $5.3 billion in the third quarter of 2015, a drop of four percent or $200 million from the previous second quarter. OCC Press Release.
FRB Releases Guidance to its Examiners and Banking Institutions That Consolidates Capital Planning Expectations for all Large Financial Institutions
On December 21st, the Federal Reserve Board (“FRB”) released guidance to its examiners and banking institutions that consolidates the capital planning expectations for all large financial institutions and clarifies differences in those expectations based on firm size and complexity. FRB Press Release.
FRB Seeks Public Comment on Proposed Policy Statement Detailing the Framework it Would Follow in Setting the CCyB
On December 21st, the FRB announced that it is seeking public comment on a proposed policy statementdetailing the framework that it would follow in setting the Countercyclical Capital Buffer (“CCyB”). The buffer is a macroprudential tool that can be used to increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal losses in the future. The CCyB would then be available to help banking organizations absorb shocks associated with declining credit conditions. Implementation of the buffer could also help moderate fluctuations in the supply of credit. Comments on the proposed policy statement must be received by February 19, 2016. Appendix A.
Treasury Department Developments
FinCEN Publishes Notice of Availability of Regulatory Impact Assessment and Initial Regulatory Flexibility Analysis Regarding the Customer Due Diligence Requirements for Financial Institutions Proposed Rulemaking
On December 23rd, the Financial Crimes Enforcement Network (“FinCEN”) announced the availability of two related documents that are part of the Customer Due Diligence Requirements for Financial Institutions Proposed Rulemaking: A Regulatory Impact Assessment (“RIA”) and an Initial Regulatory Flexibility Analysis (“IRFA”).FinCEN Press Release.
CFPB Names New Acting Deputy Director
On January 7th, the Consumer Financial Protection Bureau (“CFPB”) announced that David Silberman will serve as Acting Deputy Director beginning next week, replacing Meredith Fuchs. CFPB Press Release.
Securities and Exchange Commission
Proposed Rules and Requests for Comment
SEC Seeks Comments on Transfer Agent Regulation
On December 22nd, the SEC issued an advance notice of proposed rulemaking containing new requirements for transfer agents as well as a concept release that requests comments on the SEC’s broader approach to transfer agent regulation. The SEC indicated in the advance notice of proposed rulemaking that it plans to propose rules or amendments in specific areas, including registration and annual reporting requirements, safeguarding of funds and securities, antifraud requirements in connection with the issuance and transfer of restricted securities, and cybersecurity and information technology. Comments on both the advance notice of proposed rulemaking and the concept release should be submitted on or before February 29, 2016. SEC Press Release. Commissioner Luis Aguilar released a statement commending the SEC for taking action to update the regulatory regime for transfer agents.
Division of Investment Management Highlights Problem of Mutual Funds Mischaracterizing Sub-Accounting Fees
The SEC Division of Investment Management issued a Guidance Update on January 6th that addresses issues surrounding payments of sub-accounting fees by mutual funds to financial intermediaries that provide shareholder and recordkeeping services. The Division issued the guidance after an examination sweep revealed that mutual funds often mischaracterized these sub-accounting fees as non-distribution related, which may result in the inappropriate use of fund assets to pay for distribution-related activities in violation of Investment Company Act Rule 12b-1(a) and the misrepresentation of fees and investor returns to potential fund investors. The Guidance recommended that mutual fund boards establish a process to evaluate whether sub-accounting fees are being used for distribution-related activities and that advisers provide sufficient information regarding servicing arrangements so that boards can evaluate the appropriateness of payments that may be related to distribution. IM Guidance Update 2016-01.
SEC Offers More FAST Act Guidance
The SEC Division of Corporation and Finance published additional guidance on the changes to federal securities laws prompted by the enactment of the Fixing America’s Surface Transportation (“FAST”) Act. The Division released new C&DIs on December 21st that address how the amendments impact the obligations of savings and loan holding companies under the Securities Exchange Act. The Division also published updated versions of the Jumpstart Our Business Startups (“JOBS”) Act frequently asked questions that address generally applicable questions and the confidential submission process for emerging growth companies to reflect the FAST Act amendments to Section 6(e) of the Securities Act.
No Action Letters
Division of Corporation Finance Grants Additional Tender Offer Exemptions to Address Differences in U.S. and Taiwanese Securities Laws
On December 28th, the SEC’s Division of Corporation Finance granted Advanced Semiconductor Engineering, Inc.’s request for exemptions from Section 14(d)(6) of the Securities Exchange Act of 1934 and Rule 14d-8 thereunder to permit the company to include in its unsolicited tender offer of Siliconware Precision Industries Co., Ltd., an Odd-Lot Provision in the offer to be made in the Republic of China but not in the offer to be made in the U.S. The Division granted a similar request by Advanced Semiconductor in September 2015 to address conflicting requirements under U.S. and Taiwanese securities laws. Exemptive Letter.
SEC Shields WKSI from Ineligible Issuer Status Resulting from Subsidiary’s Violations
The SEC’s Division of Corporation Finance issued a no-action letter on December 21st in which it granted KCG Holdings, Inc.’s request for relief from being considered an “ineligible issuer” under Rule 405 of the Securities Act, which threatened KCG’s status as a well-known seasoned issuer (“WKSI”). The request stems from an administrative proceeding against KCG’s subsidiary broker-dealer for failing to seek the best execution of certain customer orders and falsely representing to customers that it had handled their orders consistent with best execution requirements. In requesting the waiver, KCG noted that the misconduct targeted in the administrative proceeding involved a non-scienter based violation by a non-issuer subsidiary and did not impact the reliability of KCG’s current or future disclosures.
Division of Trading and Markets Will Permit Broker-Dealers to File Annual and Supplemental Reports via EDGAR
The SEC’s Division of Trading and Markets issued a no-action letter on December 21st addressing the request by broker-dealers and OTC derivatives dealers for the ability to electronically file their annual and supplemental reports, which are required to be filed by paper form with the SEC and electronically with FINRA. The Division indicated that it would not recommend enforcement action against a broker-dealer or OTC derivatives dealer who files the required annual and supplemental reports electronically through the EDGAR system in lieu of filing them with the SEC in paper form. SEC No-Action Letter.
Statements and Speeches
Aguilar Reviews How Far the SEC Has Come, How Far It Needs to Go in Farewell Remarks
In preparation for his departure from the SEC at the end of December, SEC Commissioner Luis Aguilar issued a statement on December 21st in which he provided an overview of the improvements to the SEC’s internal structure and processes during his seven-year tenure and highlighted the SEC’s remaining “unfinished business.” Aguilar urged the SEC to address several remaining items in 2016, including completing the rulemaking mandated by the Dodd-Frank Act, establishing a better environment for the secondary trading of the securities of smaller issuers, updating the regulation of transfer agents, completing work on the fiduciary standard for broker-dealers providing personalized investment advice, among others. Aguilar Statement.
SEC Announces Investor Advisory Committee Meeting
The SEC’s Investor Advisory Committee will hold a public meeting on Thursday, January 21, 2016, to discuss fixed income market structure and pre-trade price transparency, an update on crowdfunding rules, and NASDAQ listing standards, among other things. Written statements should be submitted on or before January 21, 2016.SEC Release No. 33-10000.
SEC Announces Increased Fee Rates for Securities Transactions Beginning on February 16
The SEC announced on January 7th that the fee rate applied to most securities transactions occurring on charge dates on or after February 16, 2016, will rise to $21.80 per million dollars. The SEC also announced that the assessment on security future transactions will remain $0.0042 for each round turn transaction. SEC Release No. 34-76848.
SEC Staff Reports Examine the State of NRSROs
The SEC published two staff reports on December 28th that examine the credit rating agencies registered as nationally recognized statistical rating organizations (“NRSROs”). The first report contains the SEC staff findings from the Dodd-Frank mandated examinations of NRSROs, which indicated that NRSROs have increased their awareness of their obligations as regulated entities and have made operational improvements. The second report, an annual report required by the 2006 Credit Rating Agency Reform Act, examines the state of competition, transparency, and conflicts of interest at NRSROs, highlighting the increased market share of smaller NRSROs and new requirements for NRSROs implemented this year. SEC Press Release.
Investor Advocate Reports on 2015 Activities
On December 23rd, the SEC published the annual report from the Office of the Investor Advocate describing the activities of the Investor Advocate during the 2015 Fiscal Year. The report, which covers the period from October 1, 2014, to September 30, 2015, describes the Investor Advocate’s activities and recommendations related to its focus on six key policy areas, including equity market structure, investor flight, municipal market reform, effective disclosure, elder abuse, and data protection and cybersecurity. SEC Investor Advocate Report on Activities Fiscal Year 2015.
Commodity Futures Trading Commission
CFTC Adopts Regulations on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
On January 6th, the Commodity Futures Trading Commission (“CFTC”) adopted regulations to implement a provision of the Commodity Exchange Act (“CEA”), as added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which requires the CFTC to adopt initial and variation margin requirements for certain swap dealers (“SDs”) and major swap participants (“MSPs”). The final rules will become effective April 1, 2016. The CFTC also adopted and invited comment on an interim final rule that will exempt certain uncleared swaps with certain counterparties from these margin requirements. This interim final rule implements Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), which exempts from the margin rules for uncleared swaps certain swaps for which a counterparty qualifies for an exemption or exception from clearing under the Dodd-Frank Act. Comments on the interim final rule must be received on or before February 5, 2016. CFTC Rule.
CFTC Amends Regulation on Records of Commodity Interest and Related Cash or Forward Transactions
On December 24th, the CFTC issued a final rule to, among other things, clarify that all records, except records of oral and written communications leading to the execution of a commodity interest transaction and related cash or forward transactions, must be kept in a form and manner that allows for identification of a particular transaction.
CFTC Approves Final Rule on Records of Commodity Interest and Related Cash or Forward Transactions
On December 18th, the CFTC unanimously approved a final rule to amend Commission Regulation 1.35(a) relating to recordkeeping obligations for certain market participants. These amendments decrease regulatory burdens on affected market participants by excluding certain types of those participants from aspects of the rule’s written and oral recordkeeping requirements. The final rule further clarifies the requirements governing the form and manner in which records must be kept. Finally, the final rule reorganizes the rule text to provide affected market participants with greater clarity regarding their recordkeeping obligations under the rule. CFTC Press Release. CFTC Fact Sheet. Massad Statement. Giancarlo Statement.
CFTC Approves Proposed Rule Providing Alternative to Fingerprinting for Foreign Natural Persons
On January 4th, the CFTC announced that it approved a proposed rule that would add an alternative for foreign natural persons to the requirement to provide fingerprints when applying for CFTC registration. The proposal would allow a foreign natural person’s registered firm to complete a criminal history background check in lieu of submitting fingerprints. The CFTC is seeking comments on the proposal. The comment period ends 30 days after the proposal’s publication in the Federal Register. CFTC Press Release.
CFTC Requests Public Comment on Minimum Testing Frequency and Independent Contractor Testing Requirements.
On December 23rd, the CFTC issued an Advance Notice of Proposed Rulemaking requesting public comment concerning whether the minimum testing frequency and independent contractor testing requirements should be applied, via a future Notice of Proposed Rulemaking, to covered swap execution facilities (to be defined). Comments must be received on or before February 22, 2016.
CFTC Proposes Enhanced Requirements for a Derivatives Clearing Organization’s Testing of its System Safeguards
On December 23rd, the CFTC proposed enhanced requirements for a derivatives clearing organization’s testing of its system safeguards, as well as additional amendments to reorder and renumber certain paragraphs within the regulations and make other minor changes to improve the clarity of the rule text. Comments must be received by
February 22, 2016. In addition, the CFTC noted that it is amending its system safeguards rules for designated contract markets, swap execution facilities, and swap data repositories, by enhancing and clarifying existing provisions relating to system safeguards risk analysis and oversight and cybersecurity testing, and adding new provisions concerning certain aspects of cybersecurity testing.
DMO Provides Time-Limited No-Action Relief from Certain Audit Trail Requirements in CFTC Regulations Related to Post-Trade Allocation
On December 22nd, the Division of Market Oversight (“DMO”) provided time-limited no-action relief for swap execution facilities (“SEFs”) from the requirements to capture post-trade allocation information in their audit trail data, as required under CFTC Regulations. The.DMO’s no-action relief expires on November 15, 2017 and is subject to certain conditions. CFTC Press Release.
DCR and DMO Write Letter to ISDA on Straight Through Processing and Affirmation of SEF Cleared Swaps
On December 21st, the CFTC’s Division of Clearing and Risk (“DCR”) and DMO wrote a letter to Steven Kennedy, Global Head of Public Policy at the International Swaps and Derivatives Association, Inc. (“ISDA”) in response to a letter the ISDA sent to the DCR and DMO requesting that the CFTC accept the ISDA’s proposed compliance with the requirement that derivatives clearing organizations (“DCOs”), SEFs and designated contract markets (“SCMs”) develop rules and procedures so that DCOs can accept or reject trades for clearing as quickly after execution as would be technologically practicable if fully automated systems were used (“AQATP”). The DCR and DMO wrote that it believes that it was the CFTC’s intent for the AQATP standard to take into account the need to refine and reduce errors in order to facilitate prompt and efficient transaction processing. Letter.
Requests for Comment
CFTC Staff Issues Request for Comment on Draft Technical Specifications for Certain Swap Data Elements
On December 22nd, the CFTC’s DMO and Office of Data and Technology staff issued a request for comment on the draft technical specifications for certain prioritized swap data elements and associated questions. The request for comment seeks public input on 80 enumerated questions addressing 120 data elements for several swap data reporting topics including counterparty-related elements, price, clearing, product, periodic reporting, orders, package transactions, options, additional fixed payments, notional amount, events, rates and foreign exchange. The comment period will be open for 60 days after publication on the CFTC’s website. Comments should be submitted on or before February 22, 2016. Massad Statement.
CFTC and SFC Sign Memorandum of Understanding to Enhance Supervision of Cross-Border Regulated Entities
On December 22nd, the CFTC announced that Chairman Timothy Massad signed a Memorandum of Understanding (“MOU”) with Hong Kong Securities and Futures Commission (“SFC”) CEO Ashley Alder regarding cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in the U.S. and in Hong Kong. Through the MOU, the CFTC and the SFC expressed their willingness to cooperate in the interest of fulfilling their respective regulatory mandates. The scope of the MOU includes markets and organized trading platforms, central counterparties, and intermediaries, dealers, and other market participants.
Federal Rules Effective Dates
Click here to view table.
Exchanges and Self-Regulatory Organizations
SEC Designates Longer Period to Take Action on BATS’ Proposed Rule to Prohibit Disruptive Trading Activity
On January 6th, the SEC announced that it has designated February 22, 2016, as the date by which it will approve, disapprove or institute disapproval proceedings regarding BATS Exchange, Inc.’s (“BATS”) proposal to adopt new rules that would prohibit disruptive quoting and trading activity on the BATS exchange and would allow BATS to conduct an expedited suspension proceeding when it believes the proposed prohibition on disruptive quoting and trading activity has been violated. SEC Release No. 34-76841.
SEC Takes Additional Time to Consider BATS’ Proposal on Generic Listing Standards for Managed Fund Shares
On January 4th, the SEC designated February 23, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding a proposed rule change filed by BATS that would amend its rules to adopt generic listing standards for Managed Fund Shares. SEC Release No. 34-76820.
Financial Industry Regulatory Authority
Supervision, Liquidity, and Firm Culture among FINRA’s 2016 Priorities
The Financial Industry Regulatory Authority (“FINRA”) published its 2016 Regulatory and Examination Priorities Letter on January 5th, which highlights the regulatory and enforcement issues it will focus on during 2016. The primary areas of interest for FINRA in 2016 include supervision, risk management and controls, and liquidity. FINRA also indicated it will formalize its assessment of firm culture to gain a better understanding of how it impacts compliance and risk management and continue its review of incentives and conflicts of interest relating to firms’ retail brokerage businesses. FINRA Press Release.
FINRA Gleans Information from Securities Helpline to Assist Investors and Firms in Preventing Scams Targeting Seniors
FINRA published a year-end report on the FINRA Securities Helpline for Seniors, which provides assistance to seniors who have concerns about their brokerage accounts or investments. The report, which FINRA released on December 30th, highlights several cases where calls from investors to the Helpline allowed FINRA to identify emerging scams and prevent the investors from becoming victims of fraud. In addition, the report provides a set of effective practices for protecting seniors that firms should consider, including implementing mandatory employee training on elder abuse; creating a specialized and centralized unit that focuses on the firm’s response to and strategy for complex senior issues; and providing educational materials to assist investors in protecting themselves from possible scams. FINRA Press Release.
FINRA Proposes Its Own ‘Pay-to-Play’ Rules
On December 24th, the SEC announced that FINRA has proposed new rules to establish “pay-to-play” and other related rules to regulate the activities of member firms that engage in distribution or solicitation activities with government entities on behalf of investment advisers. The proposed rules are modeled on the SEC’s Pay-to-Play Rule and would impose a two-year time out on member firms from engaging in distribution or solicitation activities with government entities after making a political contribution to an official at the entity as well as a “look back” provision for persons who become covered associates, among other things. Comments should be submitted on or before January 20, 2016. SEC Release No. 34-76767.
International Swaps and Derivatives Association
ISDA Updates OTC Derivatives Compliance Calendar
On January 4th, the ISDA published a revised version of its OTC Derivatives Compliance Calendar.
Municipal Securities Rulemaking Board
MSRB Proposes Changes to Close-Out Procedures
The Municipal Securities Rulemaking Board (“MSRB”) published for comment on January 6th proposed amendments to its rules that would update its requirements for municipal dealers related to the close-out of open inter-dealer transactions. Among other things, the proposed amendments would require dealers to close out open municipal securities transactions no later than 30 days after the settlement date, would shorten the delivery window before implementing an execution period from 10 days to three days, and would shorten the allowable execution time frame to four days after electronic notification, among other things. Comments should be submitted on or before March 6, 2016. MSRB Press Release.
MSRB Prepares Municipal Advisors for New Conduct Rules
The MSRB provided notice to municipal advisors of new rules approved by the SEC that will impose new regulations on their professional conduct when advising state and local governments on municipal finance products and transactions in an announcement on December 24th. Among other things, the new rules will require municipal advisors to provide written disclosure of conflicts of interest, conduct reasonable due diligence to support the suitability of recommendations, and refrain from engaging in principal transactions with a municipal entity client that are directly related to the issue of securities for which the municipal advisor is providing advice. To assist municipal advisors in preparing for the implementation of the new rules, which will become effective in June 2016, the MSRB will hold an educational webinar on April 28, 2016. MSRB Press Release.
NASDAQ OMX Group
NASDAQ Proposes Adding New Price Protection Measures to the Opening Cross
On January 5th, the SEC provided notice of a proposed rule change filed by The NASDAQ Stock Market LLC (“NASDAQ”) that would implement an additional price protection process in the operation of the NASDAQ Opening Cross, which is NASDAQ’s process for opening the market for trading System securities. Among other things, the new process would require a security to pass at least one of three new tests that compare the Opening Cross price to a reference price to avoid mispriced Opening Crosses and the use of the clearly erroneous post-trade nullification process. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 11, 2016. SEC Release No. 34-76833.
National Futures Association
NFA Revamps 4s Submission Review Process
On January 6th, the National Futures Association (“NFA”) notified members of a revised process for its review of SDs’ and MSPs’ documentation showing their ability to comply with CFTC Regulations Implementing Section 4s of the Commodity Exchange Act. The NFA will no longer require an SD or an MSP to submit revised documentation in response to NFA feedback, but will instead require an attestation confirming the SD or MSP has revised its policies and procedures to address NFA comments. NFA Press Release.
SEC Designates Longer Period to Consider NYSE Arca’s Proposed Managed Fund Shares Generic Listing Standards
On January 4th, the SEC designated February 25, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE Arca, Inc.’s (“NYSE Arca”) proposal to amend its rules to adopt generic listing standards for Managed Fund Shares. SEC Release No. 34-76819.
SEC Approves NYSE’s Proposal to Allow Early Stage Companies to Bypass Shareholder Approval in Issuing Shares to Related Parties and Affiliates
On December 31st, the SEC issued an order granting accelerated approval of the New York Stock Exchange LLC’s (“NYSE”) proposed rule change to exempt early stage companies from obtaining shareholder approval before issuing shares to related parties, affiliates of related parties, or entities in which a related party has a substantial interest. The SEC also provided notice of the filing of two amendments modifying the original proposal to address concerns that a company could sell securities to a party and then use the proceeds to acquire stock or assets in a company in which the party has a direct or indirect interest. SEC Release No. 34-76814.
New Contact Information for NYSE Regulation
On December 22nd, the NYSE released its fourth Information Memo concerning the transfer of certain surveillance, investigation, and enforcement functions from FINRA to NYSE Regulation. The Information Memo provides updated email addresses for members, member organizations, and permit holders to use to communicate with NYSE Regulation regarding specific topics. The new email addresses may be used beginning on January 4, 2016. NYSE Information Memo 15-31.
NYSE Proprietary Traders Will Be Required to Pass Series 57 Exam
NYSE announced changes to the registration and examination requirements applicable to securities traders engaged solely in trading for the proprietary account of member organizations in an Information Memo published on December 18th. Beginning on January 4, 2016, individuals engaged in proprietary trading on NYSE and NYSE MKT LLC will be required to pass the Securities Trader Qualification Examination (“Series 57 Exam”). NYSE Information Memo 15-12.
Panel Affirms 40-Year Sentence for Securities Fraud Defendant
Nicholson was convicted of defrauding over 250 people, causing the loss of more than $100,000,000. On appeal, Nicholson argued that his counsel failed to advise him that double jeopardy barred consecutive prison sentences for mail and securities fraud based on the same conduct, and that his 40-year sentence was unreasonable. On January 7th, the Second Circuit affirmed, noting that some of Nicholson's fraudulent mailings reached beyond the purchase or sale of securities. The panel added that a sentence of less than 40 years "would send the wrong message" to others who might be tempted to engage in similar fraud. Nicholson.
Entry of SEC’s Asset Freeze Order Did Not Violate Bankruptcy Code’s Automatic Stay Provision.
A district court temporarily freezed assets it found to be ill-gotten gains from a securities fraud scheme perpetrated by defendants. The Second Circuit affirmed on December 18th, holding that entry of the asset freeze order obtained by the Securities and Exchange Commission as to nine Relief Defendants did not constitute impermissible “enforcement of a money judgment” and therefore did not violate the automatic stay provision of the Bankruptcy Code. However, the panel remanded solely on the issue of whether sufficient evidence supports imposition of the order against the remaining seven Relief Defendants. Miller.
SEC Will Not Have to Consider Rule Requiring Companies to Disclose Political Donations
A federal court has ruled that the SEC will not need to require public companies to disclose their political contributions. On January 5th, CFO.com reported on a lawsuit brought by watchdog group Campaign for Accountability on behalf of an Aetna investor who claimed that the SEC violated the Administrative Procedure Act (“APA”) by ignoring a rulemaking petition he submitted to force Aetna to reveal its political donations. The investor argued that shareholders have the right to assess whether corporate contributions on in the companies’ best interests. In granting the SEC’s motion to dismiss the case, the court held that the petitioner failed to state a valid APA claim as the SEC did not deny the petition and as the petitioner did not assert that the SEC “failed to act in response to a clear legal duty.” Political Contributions.
Former Viacom Finance VP Files Whistleblower Action.
On January 5th, CFO.com reported that Nataki Williams, a former vice president of financial planning and analysis at Viacom, filed a lawsuit in federal court accusing Viacom of illegally firing her for opposing a plan to avoid U.S. taxes by transferring the international licensing rights to the Teenage Mutant Ninja Turtles to the Netherlands. Williams alleged that Viacom ignored her objections to the scheme, which evolved to include the rights to other children’s characters such as SpongeBob SquarePants, and ultimately fired her in 2014 on the pretext that she had made a fraudulent benefits claim. Williams contended that she was, in fact, “fired in retaliation for her internal whistleblowing of an unlawful tax avoidance scheme that would have saved Viacom millions,” and that she “reasonably believed was fraudulent.” Viacom Whistleblowing.
Rep. Maloney Wants Companies to Disclose Gender of Board Nominees
On January 4th, The Hill reported on a letter written by Rep. Carolyn Maloney to SEC Chairwoman Mary Jo White in which she praised the agency’s challenge to all Fortune 1000 and S&P 500 companies to set a target of 40 percent women on their corporate boards by 2025. Rep. Maloney urged the SEC to “adopt a proposed amendment to proxy statement disclosures to require the clear indication of each board nominee’s gender, race, and ethnicity,” adding that this proposal “will allow investors and policymakers to evaluate companies’ progress towards the ambitious 40 percent goal.” Maloney Letter.
SEC Issues Report on ETF Trading Halt.
The SEC published a study analyzing the factors that could have contributed to a period of market volatility that stopped trading in hundreds of exchange-traded funds (“ETFs”) on August 24th. On December 29th, Bloomberg Business reported on the study, which pointed to the use of “market orders” that execute at the prevailing market price, no matter how far prices rise or fall, thereby contributing to an excess of selling, which helped further push down prices. ETFs.