Insights from Winston & Strawn

A recent SEC enforcement action, which imposed a $1 million penalty upon the Respondent, a registered broker-dealer and investment adviser, provides important guidance on steps that broker-dealers, investment companies and advisers should take to protect customer information while also highlighting the need to limit and monitor employee access to customer data.  

As a backdrop to this matter, it should be understood that the protection of customer data has grown in significance over the last several years, with the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) identifying cybersecurity, which includes the protection of customer data, as one of its priorities for both 2015 and 2016. In addition, in the last year, OCIE has released risk alerts launching a cybersecurity preparedness initiative and a cybersecurity examination initiative. As stated by Andrew Ceresney, Director of the SEC’s Enforcement Division, in the press release announcing this action, in light of the “dangers and impact of cyber breaches, data security is a critically important aspect of investor protection. [The Commission] expect[s] SEC registrants of all sizes to have policies and procedures that are reasonably designed to protect customer information.”  

Firms that fail to implement strong data protection controls and suffer customer information breaches are likely to face regulatory scrutiny at both the federal and state level. Of course, any regulatory scrutiny will be in addition to adverse publicity and unhappy customers. Accordingly, firms are strongly advised to compare their own controls and written policies and procedures against the guidance provided in the enforcement action. The enforcement action alleges that Respondent failed to adopt written policies and procedures reasonably designed to protect customer records and information, in violation of Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)) (the “Safeguard Rule”). Rule 30(a) provides that: 

Every broker-dealer, investment company and investment adviser registered with the Commission must adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information. These policies and procedures must be reasonably designed to:
  1. Insure the security and confidentiality of customer records and information;
  2. Protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
  3. Protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

This action arose out of the fact that one of Respondent’s employees misappropriated customer data from two of Respondent’s software applications. The misappropriated data included data regarding approximately 730,000 customer accounts associated with approximately 330,000 different customer households. The misappropriation occurred over a three-year period; the misappropriated data included personally identifiable information, including customer names, phone numbers, street addresses, and account numbers, balances and holdings. Unfortunately for Respondent, the employee stored the misappropriated data on a personal data storage device that was hacked, with the result that portions of the customer data were posted to several Internet sites. Notably, Respondent discovered the breach through one of its “routine internet sweeps.” According to the enforcement action, while Respondent had implemented controls and written policies and procedures with respect to the handling of confidential customer data, its controls were ineffective and Respondent was unable to monitor whether employees were complying with applicable policies and procedures. Shortcomings in Respondent’s policies and procedures included failures:

  • to include reasonably designed and operating authorization modules for the software applications that restricted employee access to only the confidential customer data to which such employees had a legitimate business need;
  • to conduct auditing and/or testing of the effectiveness of such authorization modules; and
  • to monitor and analyze employee access to and use of the software applications.

Respondent’s Code of Conduct prohibited employees from accessing confidential information other than such information that they were authorized to access in order to perform their duties. Respondent also installed authorization modules that, if properly implemented, should have limited the ability of employees to download data only to such data that concerned customers supported by the employee and that the employee had authority to view. Respondent also installed and maintained technology controls that, among other things, restricted employees from copying data onto removable storage devices and from accessing certain categories of websites.  

Respondent failed, however, to ensure the reasonable design and proper operation of its policies and procedures in safeguarding confidential customer data. In particular, the authorization modules were ineffective in limiting access with respect to certain reports. Moreover, over the 10 years during which the applications were in place, Respondent failed to conduct any auditing or testing of the authorization modules, which likely would have revealed the deficiencies in these modules. Finally, Respondent did not monitor user activity in the applications to identify any unusual or suspicious patterns.  

Accordingly, firms should ensure that they have adopted and properly implemented reasonable controls and policies and procedures that will enable them to monitor and analyze employee access to customer data for the purpose of identifying any unusual or suspicious patterns, while also conducting periodic testing or auditing of the effectiveness of such controls.

Feature: The European Securities and Markets Authority

ESMA Statement on Bail-In Financial Instruments

In an effort to address concerns regarding the exposure of retail investors to risky bail-in bonds, the European Securities and Markets Authority (“ESMA”) published a statement on June 2nd reminding banks and investment firms of their obligations under the Markets in Financial Instruments Directive (“MiFID”) to act in their clients’ best interests when selling these financial instruments. The rise in bail-in securities is a by-product of new Banking Recovery and Resolution Directive (“BRRD”) rules that, according to the Financial Times, are designed to eliminate taxpayer bailouts by transferring the risk to bond investors. Under the rules, EU firms must hold a certain number of these instruments to bear some of the losses resulting from their potential failure. However, ESMA’s analysis of investor complaints raised concerns that retail investors are unaware of the heightened risks of these investments. ESMA learned that many investors in bail-in bonds falsely believed that the instruments were as safe as a deposit or otherwise protected by a deposit guarantee scheme. According to a report in Reuters, concerns about the risks of bail-in bonds peaked after retail bond holdings were used to bail out several small banks in Italy, which caused hundreds of people to lose their savings.  

In the statement, ESMA emphasizes the importance of providing new and existing investors with current and complete information about the application of BRRD requirements to bail-in securities; ensuring products are suitable and appropriate for the investor by collecting additional information about the client to reflect the fact that a client could lose money without the firm entering into insolvency; and managing conflicts of interest, especially surrounding self-placement, or when a firm sells its own bail-in securities directly to its own customers. As ESMA Chair Steven Maijoor noted, “Prudential measures on recovery and resolution are extremely important but in complying with them, firms must not compromise the way they treat their clients.”

ESMA Consultations

As the enthusiasm surrounding blockchain technology increases among Fintech companies and other financial firms, ESMA is calling for a more detailed assessment of the potential risks and benefits of blockchain’s broader use in the securities markets. On June 2nd, ESMA launched a public consultation on a Discussion Paper on distributed ledger technology (“DLT”), which follows ESMA’s initial analysis of virtual currencies and their use in investments. In the Discussion Paper, ESMA sets out its preliminary assessment of DLT’s potential benefits, including higher security, reduced costs, and greater efficiency in clearing and settlement. ESMA also notes several legal and regulatory challenges that would need to be addressed before the technology could be applied to the securities markets. ESMA’s overall objective in the consultation is to consider the challenges and opportunities posed by DLT from a regulatory standpoint and whether the use of the technology in the securities market requires a specific regulatory response. Comments should be submitted on or before September 2, 2016.ESMA Press Release.  

At the end of May, ESMA launched a consultation on proposed guidelines on participant default rules and procedures under the Central Securities Depository Regulation (“CSDR”). The proposed guidelines, which are based on Principles for financial markets infrastructures (“PFMIs) established by the Committee on Payments and Market Infrastructures (“CPMI”) and the International Organization of Securities Commissions (“IOSCO”), specify the steps that a central securities depository (“CSD”) should set up in its rules and follow if insolvency proceedings are initiated with respect to one or more of its participants. Comments on the proposed guidelines should be submitted on or before June 30, 2016.  

Last month, ESMA published a consultation paper seeking comments on draft Technical Advice that details the regulatory framework for financial benchmarks under the Benchmarks Regulation, which seeks to improve the governance and control of the benchmark process. In the consultation paper, ESMA makes proposals regarding the definition of benchmarks; the measurement of the use of critical and significant benchmarks; the criteria for identifying critical benchmarks; the endorsement of benchmarks  provided in a third country; and transitional provisions. Comments on the consultation paper should be submitted on or before June 30, 2016.

ESMA Guidance

ESMA released several updated guidance documents at the beginning of June. On June 6th, ESMA published an updated version of its questions and answers (“Q&A”) document on the European Markets Infrastructure Regulation (“EMIR”). The updated guidance includes new answers to questions regarding self-categorization under the clearing obligation, and specifically clarifies how counterparties should handle the situation where some of their counterparties have not provided the information about their categorization.  On June 3rd, ESMA released a revised Q&A document on the application of the Alternative Investment Fund Managers Directive (“AIFMD”). The updated Q&A addresses the requirements regarding the domicile of EU Alternative Investment Funds (“AIFs”) which are marketed in the home Member State of the AIF Manager, as well as the marketing of EU Feeder AIFs that have a non-EU master AIF. The guidance also provides answers to new questions regarding the influence of committed capital on the calculation of the total value of assets under management and additional own funds.  

Earlier this month, ESMA also published an updated Q&A document on the application of MiFID to the marketing and sale of financial contracts for difference (“CFDs”) and other speculative products, including binary options and rolling spot forex, to retail clients. The revised Q&A contains a new question and answer addressing conflicts of interests that may arise from the business models adopted by firms offering speculative products to retail investors. In the Q&A, ESMA clarifies the conflicts of interest that national competent authorities should consider when firms that offer speculative products to retail investors use other parties to perform activities on their behalf. ESMA emphasized that firms must manage conflicts of interest that may result from remuneration between the parties.  

In preparation for the Market Abuse Regulation (“MAR”), which will become effective on July 3, 2016, ESMA issued a new Q&A document addressing practical issues regarding the implementation of the new MAR regime. The Q&A offers guidance to national competent authorities regarding the scope of firms that are required to detect and report suspicious orders and transactions.

Banking Agency Developments

FFIEC

FFIEC Seeks Comment on Proposed Uniform Interagency Consumer Compliance Rating System

On June 9th, the Federal Financial Institutions Examination Council (“FFIEC”) announced that it is seeking public comment on its proposal to revise the existing Uniform Interagency Consumer Compliance Rating System to reflect regulatory, supervisory, technological, and market changes since the system was established.

FFIEC Advises Financial Institutions to Manage Risks Related to Interbank Messaging and Wholesale Payment Networks

On June 7th, FFIEC members advised financial institutions, consistent with existing regulatory expectations, to actively manage the risks associated with interbank messaging and wholesale payment networks. In a statement, the FFIEC stressed that financial institutions should review risk-management practices and controls related to IT systems and wholesale payment networks, including risk assessment; authentication, authorization and access controls; monitoring and mitigation; fraud detection; and incident response. The joint statement also notes that recent cyber attacks have targeted interbank messaging and wholesale payment functions at financial institutions to originate unauthorized transactions, which could subject a bank that originates such transactions to losses and compliance risk.

Federal Reserve

Agencies Extend Deadline for Certain Foreign Banking Organizations’ Resolution Plan Submissions

On June 8th, the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) announced that four foreign banking organizations (“FBOs”) will be required to submit their next resolution plans on July 1, 2017. Previously, the four FBOs (Barclays PLC, Credit Suisse Group, Deutsche Bank AG, and UBS) were required to submit their next plans on July 1, 2016. However, the agencies have jointly determined that the 2016 annual resolution plan filing requirement will be satisfied by the submission of 2017 resolution plans.

Federal Reserve Board Approves Advance Notice of Proposed Rulemaking, Approves Proposed Rule Related to Insurance Companies

On June 3rd, the Federal Reserve Board approved an advance notice of proposed rulemaking (“ANPR”) inviting comment on conceptual frameworks for capital standards that could apply to systemically important insurance companies and to insurance companies that own a bank or thrift. The standards would differ for each group. The Federal Reserve also approved a proposed rule to apply enhanced prudential standards to systemically important insurance companies designated by the Financial Stability Oversight Council. As required under the Dodd-Frank Act, these standards would apply consistent liquidity, corporate governance, and risk-management standards to the firms. These firms would also be required to employ both a chief risk officer and chief actuary to help ensure that firm-wide risks are properly managed. The enhanced prudential standards would only apply to systemically important insurance companies, reflecting the heightened risk these firms pose to financial stability. Comments on both the ANPR and proposed rule are due by August 2, 2016. Federal Reserve Board Press ReleaseJanet Yellen StatementGovernor Daniel K. Tarullo Statement.

CFPB

CFPB Updates eRegulations with Regulations X, C, and More

On June 6th, the Consumer Financial Protection Bureau (“CFPB”) announced that it recently updated its eRegulations platform, which now includes Regulations C, X, and DD. The CFPB also updated Regulation Z on the eRegulations platform so that it includes all the amendments made to the regulation through March 2016.

Treasury Department Developments

FinCEN

FinCEN Deputy Director Delivers Speech at the CSBS State Federal Supervisory Forum

On June 6th, FinCEN published a speech that Deputy Director Jamal El-Hindi delivered at the May 26th Conference of State Bank Supervisors.

Securities and Exchange Commission

Whistleblower Nets Award of $17 Million

The Securities and Exchange Commission (“SEC”) announced on June 9th that it has awarded over $17 million to a company employee for providing the SEC with a detailed tip that bolstered the SEC’s investigation and resulted in a successful enforcement action. The whistleblower award is the second largest issued by the SEC.SEC Press Release.

Deputy Chief Accountant Highlights New and Emerging Issues in Financial Reporting

In remarks before the 35th Annual SEC and Financial Reporting Institute Conference on June 9th, SEC Deputy Chief Accountant Wesley R. Bricker discussed the new and emerging issues related to internal control over financial reporting, the Public Company Accounting Oversight Board’s (“PCAOB”) standard-setting activities, auditor independence, and the implementation activities for the new revenue recognition and leasing standards. Bricker Remarks.

SEC Adopts Final Rules on Trade Acknowledgment and Verification Requirements for SBS Transactions

The SEC adopted final rules on June 8th that would require security-based swap (“SBS”) dealers and major SBS participants to provide trade acknowledgements and to verify the acknowledgements in SBS transactions. Under the rules, SBS entities would have to include all of the terms of the transactions in the trade acknowledgement, provide the acknowledgement electronically to its transaction counterparty no later than the first business day following the day of execution, and verify or dispute the terms of any trade acknowledgement they receive. The rules provide exemptions for certain transactions, including those that are processed through a registered clearing agency, executed on an SBS execution facility, or executed on a national securities exchange. The final rules will be effective 60 days after publication in the Federal Register. SEC Press Release.

Investor Advisory Committee Telephonic Meeting

The SEC’s Investor Advisory Committee met by telephone on June 7th to discuss the SEC’s concept release on business and financial disclosures under Regulation S-K and a recommendation of its Market Structure subcommittee to enhance information for bond market investors. In her opening remarks, SEC Chair Mary Jo White registered her support of the Committee’s proposed recommendations on bond market transparency and welcomed the Committee’s comments on the use of non-GAAP measures in response to the Regulation S-K concept release. SEC Commissioner Michael S. Piwowar also addressed the Committee, commending the Committee for focusing on issues related to transparency in the fixed-income markets and reiterating the importance of pre-trade price transparency.

Commodity Futures Trading Commission

CFTC Proposes Additional Interest Rate Swaps For Clearing Requirement

On June 9th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced its proposal to amend CFTC regulation 50.4(a) to require certain additional interest rate swaps to be cleared by market participants through a registered derivatives clearing organization (“DCO”) or a DCO that has been exempted from registration under the Commodity Exchange Act. The scope of proposed expanded regulation would make the CFTC’s clearing requirement consistent with those proposed or finalized in 2015 or 2016 by the CFTC’s counterparts in Australia, Canada, the EU, Hong Kong, Mexico, and Singapore. The proposed rule will be open for public comment for 30 days after publication in the Federal Register.

CFTC’s Market Risk Advisory Committee Is Meeting on June 27, 2016

On June 9th, the CFTC announced that its Market Risk Advisory Committee (“MRAC”) will be holding a public meeting on June 27, 2016 at the CFTC's Washington, D.C. headquarters. The MRAC will discuss the CCP Risk Management Subcommittee’s draft recommendations on how Central Counterparties can better coordinate their efforts in preparing for the default of a significant clearing member, as well as the role of the FDIC and CFTC in the resolution of both banks and CCPs.

CFTC Signs MOU with ESMA Regarding Recognized Central Counterparties

On June 6th, the CFTC announced that Chairman Timothy Massad signed a Memorandum of Understanding (“MOU”) with ESMA regarding cooperation with respect to derivatives clearing organizations established in the U.S. that have applied or that may apply to ESMA for recognition as central counterparties.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

BATS

BZX Amends Proposal on Generic Listing Standards for Managed Fund Shares

On June 7th, the SEC provided notice that Bats BZX Exchange, Inc. (“BZX”) filed a new amendment to its proposal to adopt generic listing standards for Managed Fund Shares. The amendment replaces the originally filed proposed rule in its entirety and, among other things, clarifies the context of “system failures” in the definition of normal market conditions, the scope of “equity” securities, and the exclusion of U.S. Department of Treasury securities and government-sponsored entity securities from the minimum diversification requirements applicable to fixed income securities. Comments on the amendment should be submitted within 15 days of publication in the Federal Register. SEC Release No. 34-78005.

Depository Trust Company

DTC Proposes Rules for Imposing Deposit Chills and Global Locks

On June 3rd, the SEC requested comments on a proposal filed by the Depository Trust Company (“DTC”) that would amend its rules to establish the circumstances under which it would impose and release a restriction on Deposits of an Eligible Security (“Deposit Chill”) or on book-entry services for an Eligible Security (“Global Lock”) as well as the procedures for issuers to challenge the Deposit Chill or Global Lock. Comments should be submitted on or before June 30, 2016. SEC Release No. 34-77991.

Financial Industry Regulatory Authority

SEC Seeks Comments on FINRA’s Proposed Changes to Rules on Public Communications, Investment Analysis Tools, and Bond Mutual Fund Volatility Ratings

On June 9th, the SEC provided notice of a proposed rule change filed by the Financial Industry Regulatory Authority (“FINRA”) that would revise the filing requirements in its rules governing communications with the public and the use of investment analysis tools as well as the content and disclosure requirements in its rules regarding the use of bond mutual fund volatility ratings. Comments should be submitted with 21 days of publication in the Federal Register, which is expected the week of June 13, 2016. SEC Release No. 34-78026.

FINRA Offers Guidance on New Qualification and Registration Requirements Related to Algorithmic Trading

FINRA published a Regulatory Notice on June 6th that provides information on recently approved amendments to its rules that extend requirements to register as a Securities Trader to associated persons involved in algorithmic trading strategies. Effective January 30, 2017, each associated person who is responsible for the design, development or significant modification of algorithmic trading strategies, or who is responsible for the supervision or direction of such activities, will be required to pass the Series 57 exam and register as a Securities Trader. FINRA Regulatory Notice 16-21.

Fixed Income Clearing Corporation

SEC Approves FICC’s Proposed Rule Changes Related to the GCF Repo Service

On June 3rd, the SEC issued an order approving the Fixed Income Clearing Corporation’s (“FICC”) proposal to amend the Government Securities Division (“GSD”) Rulebook by permanently adopting the current pilot program for the GCF Repo Service, clarifying the rules regarding the “net-of-net” settlement process for the GCF Repo Service, and making technical changes to the GSD Rulebook. SEC Release No. 34-77988.

International Swaps and Derivatives Association

ISDA and IIFM Release Islamic Foreign Exchange Forward Standards

On June 6th, the International Swaps and Derivatives Association (“ISDA”) and the International Islamic Financial Market (“IIFM”) published the ISDA/IIFM Islamic Foreign Exchange Forward (“IFX Forward”) standards for use in Islamic hedging transactions. The IFX Forward is part of an ISDA and IIFM initiative to help the Islamic finance industry mitigate risk arising from currency and rate-of-return mismatches. ISDA Press Release.

NASDAQ OMX Group

SEC Approves Nasdaq’s Proposed Secondary Contingency Procedures for Its Closing Cross, Seeks Comments on Amendment

On June 8th, the SEC issued an order granting accelerated approval to a proposed rule change filed by The Nasdaq Stock Market LLC (“Nasdaq”) that would establish Secondary Contingency Procedures for its Closing Cross. The SEC also requested comments on an amendment to the proposal that, among other things, specifies the situations in which Nasdaq would employ the proposed Secondary Contingency Procedures, the procedures for publicly announcing its determination to use the Secondary Contingency Procedures, and the implementation date for the proposal. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 13, 2016. SEC Release No. 34-78014.

National Securities Clearing Corporation

SEC Approves NSCC’s Proposed Changes to the DTCC Limit Monitoring Risk Management Tool

On June 3rd, the SEC approved the National Securities Clearing Corporation’s (“NSCC”) proposed rule change that would remove from its DTCC Limit Monitoring risk management tool the alert sent to its members when the trading activity in any of their Risk Entities reaches 50 percent of the pre-set trading limits. SEC Release 34-77990.

NYSE

SEC Institutes Disapproval Proceedings Regarding Proposed Changes to NYSE MKT’s CUBE Auction and ACE Program

On June 9th, the SEC suspended NYSE MKT LLC’s (“NYSE MKT”) proposed rule change, which was immediately effective upon filing, that would modify the NYSE Amex Options Fee Schedule with respect to fees, rebates, and credits relating to NYSE MKT’s Customer Best Execution Auction (“CUBE Auction”), and to increase credits available under NYSE MKT’s Amex Customer Engagement Program (“ACE Program”). The SEC indicated that it has concerns regarding the potential effect of the proposal on the operation of the CUBE Auction and its potential to provide price improvement to customers, as well as on competition among participants in CUBE Auctions. The SEC also instituted disapproval proceedings regarding the proposal. Comments should be submitted within 21 days of publication in the Federal Register. Rebuttal comments are due within 35 days. SEC Release No. 34-78029.

SEC Seeks Comments on NYSE Arca’s Amended Proposal on Generic Listing Standards for Managed Fund Shares

On June 8th, the SEC requested comments on NYSE Arca, Inc.’s (“NYSE Arca”) amendment to its proposal to adopt generic listing standards for Managed Fund Shares. Comments on the amendment should be submitted within 15 days of publication in the Federal Register, which is expected the week of June 13, 2016. SEC Release No. 34-78016.

SEC Grants Accelerated Approval to NYSE Exchanges’ Amended Proposals For Closing Contingency Procedures in the Event of Systems or Technical Issues

On June 8th, the SEC granted accelerated approval to the New York Stock Exchange LLC’s (“NYSE”) and NYSE MKT’s separately filed proposals to amend their respective rules to provide for how each Exchange will determine an Official Closing Price if it is unable to conduct a closing transaction. The SEC also requested comments on an amendment to each proposal. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 13, 2016. SEC Release No. 34-78015.

SEC Takes More Time to Consider NYSE’s Proposed Listing Standards for Equity Investment Tracking Stocks

On June 6th, the SEC designated July 26, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE’s proposal to adopt initial and continued listing standards for the listing of Equity Investment Tracking Stocks and to adopt fees for Equity Investment Tracking Stocks. SEC Release No. 34-77996.

Industry News

SEC Official’s Warning Puts Private Equity Firms on Notice

Robert B. Baker, assistant regional director at the SEC’s enforcement division’s asset-management unit, recently stated that private equity firms that collect brokerage fees for executing deals as unregistered broker-dealers should consider the fact that they could be in violation of securities laws. On June 7th, the Wall Street Journal reported that Baker’s comments follow the SEC’s announcement that private equity firm Blackstreet Capital Management agreed to pay $3.1 million to settle alleged securities violations. Among other things, the SEC alleged that Blackstreet and its founder and managing partner, Murry Gunty, charged its investors for brokerage services, such as buying and selling portfolio companies, without registering as a broker-dealer.

Republicans to Reveal Plan to Dismantle Significant Portions of Dodd-Frank.

On June 7th, DealBook reported that Representative Jeb Hensarling, Republican of Texas and Chairman of the House Financial Services Committee, unveiled a legislative proposal that seeks to dismantle substantial portions of the Dodd-Frank financial regulatory overhaul. While the plan is said to have little chance of passing Congress this year, the proposal could influence the presidential debate and help form the Republican agenda in the next term. The plan would also repeal the Volcker Rule, which seeks to stop banks from making risky bets with their own money. In addition, the legislation would prevent the Financial Stability Oversight Council from designating any nonbanks as “systemically important.”

Mutual-Fund Board Members Are Staying on Boards for Decades

On June 7th, the Wall Street Journal reported that mutual-fund board members are getting older and staying longer, noting that boards of several funds have members in their 80s and 90s who have served for decades. While some are saying that directors who have worked with a fund for many years have operated through fluctuating market cycles and competitors and are deeply familiar with a fund’s investment strategy, others are saying that there are risks to letting independent directors serve indefinitely.

Facebook’s Board Is Proposing a Mark Zuckerberg Succession Plan

On June 6th, CFO reported that Facebook’s board is planning for the succession of founder Mark Zuckerberg by proposing to strip him of his control of the company in case he steps down from management or is fired. In a regulatory filing, Facebook said that it would ask shareholders at its annual general meeting on June 20th to vote on a proposal that would “ensure that we will not remain a founder-controlled company after we cease to be a founder-led company.” Pursuant to the contingency plan, Zuckerberg would keep his 14.8% economic stake in Facebook but his Class B shares would be converted into Class A shares, reducing his 53.8% voting power. As of June 2nd, he owned about 4 million Class A shares and about 419 million Class B shares.