Insights from Winston & Strawn
Federal Court Upholds Challenge to Dodd-Frank’s Financial Stability Oversight Council
On February 10, 2016, U.S. District Judge Rosemary Collyer of the District of Columbia denied the Justice Department’s motion to dismiss a lawsuit challenging the Financial Stability Oversight Counsel’s (the “FSOC”) designation of insurance company MetLife as a “Systemically Important Financial Institution” (“SIFI”).
The FSOC, created by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), is responsible for identifying and reducing threats to financial stability from non-banks and ensuring that all regulators are working together to prevent financial crashes. In this role, FSOC examines non-bank financial institutions based on a variety of factors, including how a firm is interconnected with other companies and the scope of existing regulation, to determine whether the institution should be designated as a SIFI and subject to bank-like enhanced regulation and supervision by the Federal Reserve. The MetLife suit, which was filed in January 2015, is the biggest challenge to the FSOC since its creation.
MetLife contends that the SIFI designation was arbitrary and unjustified, and that the FSOC violated MetLife’s right to due process by failing to provide the company with all of the information used to make its decision. MetLife argues the FSOC relied on “unsubstantiated speculation” and “unprecedented doomsday scenarios,” and did not assess whether MetLife was actually vulnerable to significant financial stress, a factor listed in the FSOC’s own guidance on the SIFI process. MetLife found support in District Court on Wednesday, where Judge Collyer questioned why the FSOC said it would conduct a vulnerability analysis of MetLife and then didn’t follow through and expressed other criticisms of the FSOC’s methodology. Judge Collyer noted that the standard for designation—that a company “could pose” a threat to the financial system—isn’t “a very high bar.” “That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”
The lawsuit also targets the very structure of the FSOC by arguing that it violates the constitutional principle of “separation of powers,” in that the same people who mounted a case for SIFI designation also judged MetLife’s initial appeal of the decision. Judge Collyer agreed, remarking that the agency did not separate functions in a way that would allow neutrality. Judge Collyer stated that the designation process “remains bundled together” because council members vote based on the analysis of their own staff, rather than using administrative judges.
The Justice Department maintains that Dodd-Frank’s purpose was to deal with events that, while unlikely and unanticipated, have a major economic impact, that the FSOC is structured similarly to many other agencies which blend prosecutorial and judicial functions, and that courts have previously ruled that those functions can be part of executive power under the Constitution.
Feature: The Foreign Corrupt Practices Act
As recent reports have shown, 2015 was a noteworthy year for Foreign Corrupt Practices Act (“FCPA”) enforcement due to a dramatic decrease in the number of actions brought, as well as the amount of penalties obtained, by the Department of Justice (“DOJ”). While DOJ officials attribute the downturn in the number of FCPA cases to an emphasis on fewer, “higher impact” bribery cases, there is speculation that the downturn in 2015 is merely an indication that the DOJ is gearing up for a more aggressive approach to FCPA prosecution in 2016. Assistant Attorney General Leslie R. Caldwell indicated last November that the DOJ will increase the size of its Fraud Section’s FCPA Unit by 50 percent. In an interview for a recent Financial Times article, “U.S. redoubles efforts on foreign bribery cases,” Caldwell indicated that while the DOJ’s caseload may have dropped due to a focus on pursuing individuals in foreign countries, which presents challenges in building a case, the DOJ is actively pursuing a full slate of FCPA cases.
The Financial Times article provides an overview of the DOJ’s “carrot-and-stick approach to foreign bribery,” as it highlights the approach announced last fall that the DOJ will require companies to turn over evidence of misconduct by executives and other individuals in FCPA and other corporate crime investigations in exchange for receiving credit for their cooperation. The DOJ is also using increased transparency about the factors they considered when determining whether to file criminal charges, as well as the actions by companies it considers in settlements, to motivate companies to self-report potential FCPA violations.
While it remains to be seen whether the increased commitment to FCPA prosecution by the DOJ will result in more actions this year, the Securities and Exchange Commission (“SEC”) started the year off aggressively by filing three separate FCPA enforcement actions during the first week of February. According to an announcement on February 4th, the SEC filed a settled administrative proceeding against a pharmaceutical company for violations of the FCPA. The SEC alleged that employees of the company’s subsidiaries provided gifts, money and other valuables to health care professionals at Chinese state health institutions to secure millions of dollars in sales of pharmaceutical products. The company failed to disclose the payments and failed to implement adequate internal accounting controls as well as an anti-corruption compliance program. Without admitting or denying the allegations, the company agreed to pay over $12 million to settle the charges and consented to the entry of a cease-and-desist order.
Also on February 4th, the SEC charged the CEO of a South American-based airline company with violating the FCPA after he approved payments to a third-party consultant who agreed to pass some of the money to union officials involved in a labor dispute with the airline. Without admitting or denying the allegations, the CEO agreed to a settlement in the administrative proceeding that requires him to undertake additional compliance training, pay a civil penalty of $75,000, and consent to the entry of a cease-and-desist order.
A settled administrative proceeding filed on February 1st illustrates the increased emphasis placed on cooperation by SEC. The agency announced charges against a software company for violations of the FCPA stemming from internal control failures that permitted a senior executive to pay bribes to Panamanian government officials in exchange for lucrative sales contracts. The SEC alleged that a vice president with the company, who faced SEC charges in civil and criminal proceedings filed last summer, worked with a Panamanian partner to establish a slush fund, financed by large discounts provided to the partner, for paying bribes to government officials. The company failed to recognize the discounts as possible red flags for detecting the vice president’s misconduct and incorrectly recorded them as legitimate discounts in its financial statements. Without admitting or denying the allegations, the software company settled the charges by agreeing to the entry of a cease-and-desist order and to disgorge $3.7 million in profits. However, the SEC did not impose a civil penalty in recognition of the company’s cooperation and remedial efforts.
If the SEC and the DOJ are emphasizing the importance of cooperation on the part of companies in FCPA investigations, the agencies are also relying on cooperation with foreign governments in the global enforcement of the FCPA. The Financial Times article notes that the DOJ is using its additional resources to increase international collaboration to assist the agency in gathering evidence in FCPA investigations. Some members of Congress are hoping that the DOJ will put these additional resources to use in an investigation of alleged FCPA violations by a tobacco company that is one of the largest companies in the U.K. According to a report in The Guardian, several U.S. politicians recently requested that the DOJ launch an investigation of the company after documents disclosed in a documentary film suggested that the company may have made improper payments to individuals to conceal scandals connected to the company’s operations in Africa in an effort to protect its reputation. The politicians have called on the DOJ to determine whether the U.K. company’s actions violate the FCPA.
SEC Chair Mary Jo White has also emphasized the importance of international cooperation in the pursuit of global enforcement actions, including FCPA violations. Nowhere is this more evident than in an enforcement action brought late last year by the SEC against a London-based bank for failing to disclose certain payments made by one of its affiliates to a Tanzanian firm in connection with an offering of sovereign debt securities issued by the Tanzanian government. The SEC alleged that the bank failed to investigate the Tanzanian firm’s role in the transaction, ignored signs that the payments were intended to influence the Tanzanian government to select the bank to serve as a lead manager for the offering, and failed to disclose the payment to potential investors. The bank reached a coordinated global settlement with the SEC and the U.K’s Serious Fraud Office, which retained jurisdiction over the bank and brought charges under the U.K.’s Bribery Act of 2010. According to the terms of the settlement with the SEC, in which the bank admitted to the charges set forth in the U.K. proceeding, the bank agreed to pay a $4.2 million civil penalty and consent to the entry of a cease-and-desist order.
The SEC and the DOJ have made it clear that they intend to investigate violations of the FCPA actively and aggressively in 2016. The agencies are hoping that a combination of additional resources, increased cooperation by companies in reporting misconduct, and international collaboration in the global enforcement of the FCPA will assist them in realizing this goal.
Banking Agency Developments
OCC Issues Revisions to ‘Comptroller’s Handbook.’
On February 12th, the Office of the Comptroller of the Currency (“OCC”) issued the “Installment Lending” booklet of its Comptroller’s Handbook. The revised “Installment Lending” booklet updates and replaces the “Installment Loans” booklet issued in March 1990, and examination procedures issued in March 1998. It also replaces section 217, “Consumer Lending,” issued in January 2000 as part of the former Office of Thrift SupervisionExamination Handbook for examining federal savings associations. The OCC also issued the “Country Risk Management” booklet, which replaces the booklet of the same title issued in March 2008. The revised “Country Risk Management” booklet was prepared for use by OCC examiners in assessing a bank’s exposure to country risk and includes procedures to evaluate the adequacy of the bank’s country risk management framework.
OCC Releases 2016 Schedule of Workshops for Directors of National Community Banks and Federal Savings Associations.
On February 4th, the OCC announced its 2016 schedule of workshops for directors of national community banks and federal savings associations. The OCC’s examiner-led workshops provide practical training and guidance to support the safe and sound operation of community-based financial institutions. OCC Press Release.
FDIC Releases Economic Scenarios for 2016 Stress Testing
On February 9th, the Federal Deposit Insurance Corporation (“FDIC”) released the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Federal Reserve Announces TDF Test Operation
On February 12th. The Federal Reserve announced its plans to continue its previously announced periodic testing of the Term Deposit Facility (“TDF”) with one operation in February. These operations are aimed at ensuring the operational readiness of the TDF and providing eligible institutions with an opportunity to maintain familiarity with term deposit procedures. The TDF test operations are a matter of prudent planning and have no implications for the near-term conduct of monetary policy.
Federal Reserve Issues Repeal of Regulation AA, Requests Comment on Proposal to Repeal Regulation C
On February 11th, the Federal Reserve Board announced that, in order to comply with statutory provisions that transferred certain consumer protection rulewriting authority to the Consumer Financial Protection Bureau (“CFPB”), it has repealed its Regulation AA (Unfair or Deceptive Acts or Practices) as proposed in August 2014 and is inviting public comment on the proposed repeal of Regulation C (Home Mortgage Disclosure).
Treasury Department Developments
U.S. Department of the Treasury
U.S.-EU Financial Markets Regulatory Dialogue Joint Statement
On February 12th, the U.S. Department of the Treasury reported on the February 3rd meeting between U.S. and European Union (“EU”) participants in the Financial Markets Regulatory Dialogue (“FMRD”).
CFPB Acting Deputy Director Testifies Before House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit
On February 11th, the Consumer Financial Protection Bureau (“CFPB”) published the written testimony of CFPB Acting Deputy Director David Silberman before the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit regarding the CFPB’s work related to payday lending.
Securities and Exchange Commission
SEC Adopts Final Rules on Foreign Dealers Conducting Security-Based Swap Transactions in U.S.
At an Open Meeting on February 10th, the SEC unanimously voted to adopt final rules that define the security-based swap transactions that foreign dealers must include when determining their obligation to register as a security-based swap dealer as mandated under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rules, non-U.S. persons who use personnel located in a U.S. branch or office to arrange, negotiate, or execute security-based swap transactions must include these transactions in their dealerde minimis threshold calculations, which dealers use to determine whether they are required to register as a security-based swap dealer. The final rules will become effective within 60 days of publication in the Federal Register, although compliance with the rules will not be required until the latest of 12 months of publication in the Federal Register or the SBS Entity Counting Date. SEC Press Release. SEC commissioners praised the final rules, with Chair Mary Jo White calling the rules an important step in “promoting the goals of OTC derivatives reform” and Commissioner Michael Piwowar describing the rules as “well-thought and well-supported by the analysis in the release.” See also Stein Remarks.
Corporation Finance Staff Provide Q&As for ABS Issuers on EDGAR Filings
The SEC’s Division of Corporation Finance published new guidance on February 9th for issuers of Asset-Backed Securities (“ABS”). The new guidance responds to changes to the EDGAR system as a result of recently adopted revisions to Regulation AB and new Securities Exchange Act Rule 15Ga-2. The guide contains questions and answers regarding the procedures an ABS depositor must follow in EDGAR to file a preliminary prospectus; Form ABS-15G and the accompanying tables and third-party due diligence reports; and any other initial filings for the ABS issuing entity. Division of Corporation Finance Staff Guidance.
SEC Revises No-Action Relief on ‘Ready Market’ Definition for Foreign Equity Securities
The SEC’s Division of Trading and Markets issued a no-action letter on February 9th that revises the no-action relief it previously granted in response to a request by the Financial Industry Regulatory Authority (“FINRA”) in November 2012, which permits broker-dealers to treat an equity security of a foreign issuer as having a “ready market” under Securities Exchange Act Rule 15c3-1.The Division indicated in the new no-action letter that it has revised the requirement that shares purchased by the computing broker-dealer during the preceding 20 business days should be excluded when determining the median trading volume; instead, the Division will require trading volume calculations to be based on bona fide transactions to reduce operational burdens on computing broker-dealers. SEC No-Action Letter.
C. Dabney O’Riordan and Alka Patel will serve as Associate Directors for Enforcement in the SEC’s Los Angeles Regional Office, according to an announcement on February 9th. SEC Press Release.
SEC Seeks Comments on PCAOB’s Proposed Audit Participant Disclosure Rules
The SEC announced on February 8th that the Public Company Accounting Oversight Board (“PCAOB”) filed a proposal to adopt new rules and amendments to auditing standards that would require firms to disclose information about the engagement partner and accounting firms that participate in the audit for each issuer. Under the proposed rules, firms would be required to disclose the name of the engagement partner, the name and extent of participation of firms whose work constituted five percent of total audit hours, and the aggregate extent of participation of all other accounting firms that participated in the audit. Comments should be submitted within 21 days of publication in the Federal Register. SEC Release No. 34-77082.
Commodity Futures Trading Commission
CFTC Designates the NFA as a Recipient of SDR Data
On February 12th, the U.S. Commodity Futures Trading Commission (“CFTC”) issued an Order authorizing the National Futures Association (“NFA”), the only registered futures association (“RFA”) registered with the CFTC, to be a designee to receive access to data maintained by swap data repositories (“SDR”). As a condition to the Order, access and use is limited to SDR data that will facilitate the NFA’s performance of functions delegated to it by the CFTC and other duties that the NFA performs as an RFA. CFTC Press Release.
CFTC’s Energy and Environmental Markets Advisory Committee to Meet
On February 11th, the CFTC announced that the Energy and Environmental Markets Advisory Committee (“EEMAC”) will hold a public meeting at the Commission’s Washington, D.C. headquarters on February 25, 2016 from 10am to 1:30pm. The EEMAC will present a report summarizing its 2015 proceedings, examine the CFTC’s Proposed Order Exempting the Southwest Power Pool from Certain Provisions of the Commodity Exchange Act, and consider the CFTC Staff Preliminary Report regarding the Swap Dealer De Minimis Exception. CFTC Press Release.
CFTC and European Commission’s Common Approach for Transatlantic CCPs
On February 10th, CFTC Chairman Timothy Massad and European Commissioner for Financial Stability, Financial Services and Capital Markets Union Jonathan Hill announced a common approach regarding requirements for central clearing counterparties (“CCPs”). Following this agreement, the European Commission intends to adopt an equivalence decision with respect to CFTC requirements for U.S. CCPs, which will allow the European Securities and Markets Authority (“ESMA”) to recognize U.S. CCPs as soon as possible. Once recognized by ESMA, U.S. CCPs may continue to provide services in the EU while complying with CFTC requirements. CFTC Press Release.
CFTC’s Technology Advisory Committee Meeting Is Rescheduled
On February 9th, the CFTC announced that it has rescheduled the Technology Advisory Committee (“TAC”) public meeting, which was previously scheduled for January 26th, to Tuesday, February 23rd from 9:45a.m. to 3:45p.m. at CFTC’s Washington, D.C. headquarters. The TAC will discuss the CFTC’s proposed Regulation Automated Trading (“Reg AT”); swap data standardization and harmonization; and blockchain and the potential application of distributed ledger technology to the derivatives market. CFTC Press Release.
Federal Rules Effective Dates
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Exchanges and Self-Regulatory Organizations
Financial Industry Regulatory Authority
SEC Designates Longer Period to Consider FINRA’s Proposed Rule on Outside Accounts
On February 10th, the SEC announced that it has designated April 8, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding FINRA’s proposal to adopt a new rule that addresses accounts opened or established by associated persons of members at firms other than the firm with which they are associated. SEC Release No. 34-77103.
SEC Approves FINRA’s Proposal to Apply the Derivatives and Other Off-Balance Sheet Items Schedule to Certain Non-Carrying/Non-Clearing Firms
On February 9th, the SEC approved a proposed rule change by FINRA that would amend the instructions to the Derivatives and Other Off-Balance Sheet Items Schedule (“OBS”) to expand the application of the OBS to include firms that neither carry customer accounts nor clear transactions that have a minimum dollar net capital requirement equal to or greater than $100,000, and at least $10 million in reportable items pursuant to the OBS.SEC Release No. 34-77098.
FINRA Offers Guidance to Broker-Dealers Regarding Contingency Offering Obligations
On February 8th, FINRA issued a regulatory notice in response to a review of offering documents, which found several instances in which broker-dealers failed to comply with Securities Exchange Act requirements relating to private placements and public offerings subject to a contingency. The notice reminds broker-dealers that they are required, among other things, to conduct a reasonable investigation of the security and the issuer’s representations, to return subscriber funds following a change in the contingency by the issuer, and to flag offerings in which the issuer used non-bona fide sales. FINRA Regulatory Notice 16-08.
ICE Clear Credit LLC
ICE Proposes Rule Changes to Establish Basis for Clearing Asia-Pacific CDS Contracts
On February 8th, the SEC provided notice of ICE Clear Credit LLC’s (“ICC”) proposal to adopt new rules to allow ICC to clear certain Asia-Pacific credit default swap (“CDS”) contracts. The proposed rules would amend the ICC Rulebook to provide for the clearance of specified Asia-Pacific CDS contracts, add two pricing windows to the ICC End-of-Day Price Discovery Policies and Procedures to accommodate submission of end-of-day prices related to the CDS contracts, and modify the ICC Risk Management Framework to include the risk horizon used for instruments traded during Asia-Pacific hours. Comments should be submitted on or before March 4, 2016.SEC Release No. 34-77079.
NASDAQ OMX Group
Nasdaq Proposes Changes to Process for Commencing Trading of Securities Subject to a Trading Halt or IPO
On February 5th, the SEC requested comments on a proposed rule change filed by The NASDAQ Stock Market LLC (“Nasdaq”) that would amend Nasdaq’s process for accepting orders prior to the initiation of trading for a security that is the subject of Nasdaq and non-Nasdaq-listed initial public offerings and trading halts. Comments should be submitted on or before March 3, 2016. SEC Release No. 34-7706.
National Futures Association
Member Firms Required to Comply with NFA’s Cybersecurity Requirements on March 1
On February 11th, the National Futures Association (“NFA”) reminded members that its Cybersecurity Interpretive Notice will become effective on March 1, 2016, which will require member firms to implement written policies and procedures to secure customer data and access to their electronic systems. NFA Notice I-16-08.
New York Stock Exchange
SEC Accelerates Approval for NYSE Exchanges’ Proposals on Co-Location Services and Seeks Comments on Amendments
On February 5th, the SEC issued orders granting accelerated approval to NYSE Arca, Inc.’s (“NYSE Arca”) and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals that would amend their respective rules to provide that the co-location services offered by the exchanges include three time feeds and four Partial Cabinet Solution bundles, and to establish fees for these services. The SEC also provided notice of amendments to the proposals filed by the exchanges which clarify the differences in precision among the three time feeds and specify the date on which the Partial Cabinet Solution bundles will be offered. Comments on the amendments should be submitted on or before March 3, 2016.
Options Clearing Corporation
SEC Rejects Bid by SROs to Overturn Approval of OCC’s Capital Plan
On February 11th, the SEC issued an order setting aside its approval of The Options Clearing Corporation’s (“OCC”) proposed Capital Plan, which seeks to increase OCC’s capitalization, to conduct a review of the proposal in response to petitions filed by several self-regulatory organizations (“SROs”). The SROs objected to OCC’s proposal on the grounds that the proposed Capital Plan is unnecessary and the proposal’s Dividend Policy harms the competitive balance between Stockholder Exchanges and Non-Stockholder Exchanges and raises transaction costs. The SEC approved OCC’s proposed Capital Plan and denied the petitions for review, concluding that OCC’s proposal is appropriate and in the public interest. SEC Release No. 34-77112.
Parent Company Must Have Been Aware of Subsidiary’s ‘Obvious’ Financial Instability
Plaintiff brought a class action on behalf of purchasers of Dolan Company’s securities (“Dolan”), alleging Dolan made material misrepresentations and omissions about the financial stability of subsidiary DiscoverReady. The District of Minnesota dismissed the class action for failure to state a claim, finding plaintiff failed to allege scienter. Plaintiff argued Dolan recklessly failed to disclose that DiscoverReady’s biggest client had stopped sending it new work. On February 10th the Eighth Circuit reversed, finding that DiscoverReady’s financial instability caused by the losing work from its largest client was, at least, “so obvious that [Dolan] must have been aware of it.”Dolan.
President Obama’s Budget Requests $19 Billion for Cybersecurity Plan
On February 10th, CFO reported that President Obama’s last budget includes $19 billion for the Cybersecurity National Action Plan (“CNAP”), a package of “sweeping” measures to strengthen the security of the nation’s computer networks. CNAP would, among other things, establish a panel of experts to advise the government on ways to improve its cybersecurity and protect citizens’ data, create a federal chief information security officer (“CISO”), and increase coordination between federal officials who focus on privacy issues. Approximately $3 billion of the funding would go toward an information technology modernization fund, which would update the computer systems used by federal agencies. Security firms applauded the proposal, but warned that the CISO would be ineffective unless given direct power over the government’s cybersecurity infrastructure. CFO.
European Union and U.S. Regulators Reach Deal Over Derivatives Clearing Rules
On February 10th, Reuters reported that the EU and the U.S. have agreed to recognize each other’s derivatives clearing rules to avoid punitive capital charges on banks. The bulk of derivatives are traded in New York and London but the EU and U.S. had been unable to accept each other’s rules in order to avoid international banks, which handle most transactions, being saddled with overlapping requirements. Reuters.
President Obama Unveils Final Budget Proposal with Increases for SEC and CFTC
On February 9th, The Fiscal Times reported on highlights of President Obama’s final budget proposal, which include increased funding for the SEC and the CFTC, two key government overseers of the financial system. Under the proposal, President Obama would increase SEC funding by 11 percent and CFTC funding by 32 percent. The Fiscal Times.
Audit Trail Prompted by ‘Flash Crash’ Should Be Established by 2017
On February 9th, Reuters reported that an audit trail that was prompted by the 2010 “Flash Crash” in an effort to help U.S. regulators more efficiently police Wall Street trading activity in stock and options markets should be up and running by the end of 2017. The creation of a consolidated audit trail would establish a central database for every trade order, execution and cancellation, as mandated by the SEC in July 2012. The SEC will reportedly make the plan available for public comment in the second quarter, after which the SEC has 180 days to decide whether it should be approved. There are apparently no plans to include futures market trading data in the new audit trail. Reuters.