Insights from Winston & Strawn 

Tick-Size Pilot Program Launched for Shares of Selected Small Companies.

On October 3, the first stage of the SEC’s Tick Size Pilot Program (the “Program”)—adjusting the “tick” size—was implemented. A “tick” is the measure of a stock’s minimum quote increment. On many exchanges, the tick for many securities is currently set at one-cent. However, under the Program, shares in companies included in the Program will now be quoted at (and ultimately traded in) five-cent increments rather than one-cent increments.

The Program is an attempt by the securities industry to determine the possible effect on trading, liquidity, and market quality of widening the current one-cent tick to a five-cent tick. The SEC hopes that widening the tick will encourage more trading in small companies by providing more incentive to market makers to make markets in such securities. The SEC originally became interested in the Program in 2014, after lawmakers looked into whether larger trading increments for small stocks could increase interest in small-company shares and, subsequently, IPOs and economic growth.

The tick has been set at different levels on different exchanges over time (6.25-cent, 10-cent, 12.5-cent and 25-cent ticks are, or have all been, the norm on certain exchanges) and has always been subject to changes (in fact, the one-cent tick is largely an innovation of the last 20 years brought about by advances in technology). For larger capitalization companies with significant trading, this one-cent tick has not presented problems; however, some members of the industry have expressed concern that for companies with smaller capitalization or that have lower trading volumes, the one-cent tick can present inefficiencies.

The Program separated securities into three groups (and a control group), with increasing restrictions, as well as fewer exceptions available to the restrictions, at each level. Broker-dealers and market makers will have reporting and data collection obligations. However, for the actual issuers of the impacted securities, the real impact is in the way that their stock will trade (namely, now it will trade in five-cent increments, subject to certain exemptions for midpoint executions, retail investor executions, and negotiated trades) but will not impose any affirmative or negative duties upon the issuers. As noted in the NYSE FAQs on the Program, there is nothing that a listed company needs to do to prepare.

While increased liquidity is generally seen as an advantage, the Program is not without its critics. Bloomberg has reported that some major electronic traders are not happy with the Program, as it will force companies to publicly expose detailed trading data without much anonymity, giving competitors a chance “to reverse engineer how their prized trading algorithms work.”

By the end of October, the Program is expected to involve approximately 1,200 companies. The program will continue for 24 months. Undoubtedly, there will be extended study of the results preceding a proposed permanent rule change.

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 Releases Risk Reevaluation Guidance for Foreign Correspondent Banking

On October 5th, the Office of the Comptroller of the Currency (“OCC”) announced its issuance of risk management guidance to national banks, federal savings associations, and federal branches and agencies that addresses periodic reevaluations of risks associated with foreign correspondent banking accounts. The guidance shares a range of best practices for banks to consider when conducting these periodic reevaluations and making account retention or termination decisions.

OCC Reports Bank Trading Revenue Increased in the Second Quarter 2016

On October 4th, the OCC announced that, as reported in its Quarterly Report on Bank Trading and Derivatives Activities, trading revenue of U.S. commercial banks and savings associations rose to $6.9 billion in the second quarter of 2016 from $5.8 billion in the previous quarter, and $5.5 billion in the second quarter a year earlier.

OCC to Host Compliance and Operational Risk Workshops in Ohio

On October 4th, the OCC announced that it will be hosting two workshops in Cincinnati, Ohio, at the Hyatt Regency Cincinnati, Nov. 9-10, for directors of national community banks and federal savings associations supervised by the OCC. The Compliance Risk workshop on Nov. 9th will combine lectures, discussion, and exercises on the critical elements of an effective compliance risk management program. The workshop also focuses on major compliance risks and critical regulations. Topics of discussion include the Bank Secrecy Act, Community Reinvestment Act, and the Truth-in-Lending and the Real Estate Settlement Procedures Act of 1974 Integrated Disclosures Rule. The Operational Risk workshop on Nov. 10th will focus on the key components of operational risk: people, processes and systems. The workshop will also cover governance, third-party risk, vendor management, and cybersecurity.

OCC Seeks Comment on Proposed Rule Regarding Mandatory Contractual Stay Requirements for Qualified Financial Contracts

On October 3rd, the OCC announced that it is seeking comment on a proposed rule that would enhance the resilience and the safety and soundness of federally chartered and licensed financial institutions. The proposed rule would address concerns regarding the exercise of default rights of certain financial contracts that could interfere with the orderly resolution of certain systemically important financial firms. Comments on the proposed rule are due on October 18, 2016.


FDIC Launches Financial Services Website in Spanish

On October 6th, the Federal Deposit Insurance Corporation (“FDIC”) announced that it has launched a new Spanish-language website with links to the agency's available resources in Spanish.The new website,“Recursos para Consumidores en español,” features links to webinars and video presentations that cover topics such as deposit insurance, consumer protection, and the FDIC’s Money Smart education program.


FFIEC Announces Webinars in Observance of Cybersecurity Awareness Month

On October 6th, the Federal Financial Institutions Examination Council (“FFIEC”) announced that it will host two webinars for financial institutions in October in recognition of National Cybersecurity Awareness Month: Mobile Financial Services — Appendix E of the Retail Payment System Booklet, October 13, 2016, at 3 p.m. EST; andGetting the Most Out of Your FS-ISAC Membership, October 31, 2016, 1 p.m. EST.

Federal Reserve

Task Forces Begin Review of Faster Payments Solution Proposals

On October 4th, the Federal Reserve Board announced that membersof the two national task forces convened by the Board to make payments faster and more secure have begun to review and discuss 19 specific proposals submitted by interested task force members across the payments industry that outline potential approaches for a faster payment system in the U.S.


CFPB Finalizes Strong Federal Protections for Prepaid Account Consumers

On October 5th, the Consumer Financial Protection Bureau (“CFPB”) announced that it has finalized strong federal consumer protections for prepaid account users. The new rule requires financial institutions to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and give consumers free and easy access to account information. The CFPB also finalized new “Know Before You Owe” disclosures for prepaid accounts to give consumers clear, upfront information about fees and other key details. Finally, prepaid companies must now generally offer protections similar to those for credit cards if consumers are allowed to use credit on their accounts to pay for transactions that they lack the money to cover.

Securities and Exchange Commission


Division of Corporation Finance Eliminates Requirement for ‘Tandy’ Representations in Filing Reviews

The SEC’s Division of Corporation Finance announced on October 5th that it changed its comment and review process by eliminating the requirement that companies include “Tandy” representations in their filings, which required companies to acknowledge their responsibility for the disclosure and affirmatively state that they would not raise the SEC review process and acceleration of effectiveness as a defense in any legal proceeding. The Division will instead include a statement in its comment letters that reminds companies of their responsibility for the accuracy and adequacy of their disclosures.

No-Action Relief and Exemptive Orders

Investment Management Extends No-Action Relief from Auditor Inspection Requirements under the Custody Rule

On October 4th, the SEC’s Division of Investment Management extended the no-action relief granted to investment advisers from requirements under the Investment Advisers Act’s Custody Rule, which requires auditors performing certain engagements for an investment adviser, including the audit of financial statements, the performance of surprise examinations, and the preparation of an internal control report, to be subject to regular inspection by the Public Company Accounting Oversight Board (“PCAOB”). The Division extended the no-action relief until December 31, 2019, or until the SEC approves a permanent inspection program adopted by the PCAOB for auditors of brokers and dealers, whichever is earlier. SEC No-Action Letter.

SEC Extends Exemption from Compliance with Security-Based Swap Data Repository Rules

The SEC issued an order on September 29th that extends the temporary exemptions granted to security-based swap data repositories (“SDRs”) from compliance with Securities Exchange Act Rules 13n-1 to 13n-12 until April 1, 2017. The SEC said that the extension was necessary for the agency to have adequate time to review the first applications for registration of SDRs and consider comments on or possible amendments to these applications.SEC Release No. 34-78975.

Other Developments

SEC Will Vote on Final Rules to Modernize Investment Company Disclosures and Establish Liquidity Risk Management Programs at Open Meeting

The SEC will hold an Open Meeting on October 13, 2016, to consider final rules and rule amendments to modernize the reporting of information by registered investment companies. The SEC will also consider final rules that would provide for liquidity risk management programs and related disclosures for open end management investment companies. Sunshine Act Meeting Notice.   

Staff Announcements

David H. Saltiel will head the Office of Analytics and Research in the SEC’s Division of Trading and Markets, according to an announcement by the agency on October 6th. The SEC also announced that Aaron W. Lipsonwill serve as the Associate Regional Director for enforcement in the SEC’s Atlanta office. Lipson will succeed William P. Hicks, who now serves as senior trial counsel in the Atlanta office.

Advisory Committee on Small and Emerging Companies Meeting

The SEC’s Advisory Committee on Small and Emerging Companies met on October 5th to discuss disclosure requirements in Regulation S-K, diversity on corporate boards, and finders and other intermediaries in small business capital formation transactions, among other matters. SEC Chair Mary Jo White addressed the committee, noting that the launch of the Tick Size Pilot Program on October 3rd reflects the SEC’s understanding that “market structure should promote capital formation for smaller companies, and that one market structure may not fit all companies.” According to a report in Law360, members of the committee advocated for streamlining the disclosure requirements for small companies rather than adding new disclosures.

SEC Partners with FINRA, MSRB to Host Compliance Program for Municipal Advisors

The SEC, the Financial Industry Regulatory Authority (“FINRA”), and the Municipal Securities Rulemaking Board (“MSRB”) will hold a compliance outreach program for municipal advisors on November 10, 2016. The program, which will be broadcast as a live webinar on the MSRB’s website, will focus on OCIE and FINRA staff examination findings on municipal advisors’ registration and provide a detailed explanation of the registration process. SEC Press Release.

Section 31 Fee Rate Will Remain Unchanged Until SEC Receives Fiscal Year 2017 Appropriation

The SEC announced on September 30th that the fees paid under Section 31 of the Securities Exchange Act will remain at their current rate until 60 days after the date of enactment of a regular appropriation for the SEC. The SEC began fiscal year 2017 without a regular appropriation and is currently operating under a short-term continuing resolution. SEC Press Release.

Commodity Futures Trading Commission

CFTC Signs MOU with UK FCA to Enhance Supervision of Cross-Border Regulated Firms

On October 6th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that CFTC Chairman Timothy Massad and Andrew Bailey, Chief Executive of the Financial Conduct Authority (“FCA”), signed aMemorandum of Understanding (“MOU”) regarding cooperation and the exchange of information in the supervision and oversight of certain regulated firms that operate on a cross-border basis in the U.S. and in the U.K.

Federal Rules Effective Dates

October 2016 – December 2016

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Depository Trust Company

DTC Proposes Changes to Processing of Money Market Instrument Transactions

On October 5th, the SEC provided notice of a proposed rule change filed by the Depository Trust Company (“DTC”) that would change the processing of transactions in money market instruments (“MMI”) that are processed in DTC’s MMI Program. Among other things, the proposal would eliminate provisions for intra-day reversals of processed MMI Obligations based on an Issuing and Paying Agent’s (“IPA”) refusal to pay or Issuer insolvency and would require certain acknowledgements to be made by an IPA before DTC will process Income Presentments. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 10, 2016. SEC Release No. 34-79046.

Municipal Securities Rulemaking Board

MSRB Announces Priorities for 2017 Fiscal Year

On October 3rd, the MSRB announced its operating objectives for fiscal year 2017, which will include several rulemaking initiatives related to mark-up disclosures, dealer syndicate practice, and uniform and fair practice rules. The MSRB will also emphasize the role of education in market regulation and improve the usefulness of its Electronic Municipal Market Access (“EMMA”) website. MSRB Press Release.

NASDAQ OMX GroupSEC Takes More Time to Consider Nasdaq’s Proposed Third Party Connectivity Service

On October 5th, the SEC designated December 1, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The Nasdaq Stock Market LLC’s (“Nasdaq”) proposal to adopt the Third Party Connectivity Service under Rules 7034(b) and 7051. SEC Release No. 34-79049.

Nasdaq Proposes Changes to Eligibility Requirements for Acquisition Companies to Receive Complimentary Services

On October 3rd, the SEC requested comments on a proposed rule change filed by Nasdaq that would modify the treatment of acquisition companies under IM-5900-7, which governs complimentary services offered by Nasdaq to newly listing companies. Under the proposal, an Acquisition Company would not be eligible to receive complimentary services until it completes a business combination that satisfies the conditions in IM-5101-2(b) and lists on the Global or Global Select Market in conjunction with the business combination. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 10, 2016. SEC Release No. 34-79025.

National Futures Association

NFA Prepares for Electronic Vote for Board and Nominating Committee Elections

On October 4th, the National Futures Association (“NFA”) published a Notice that reminds members of the requirement to designate an Executive Representative to participate in the electronic voting process for Directors’ elections, contested Nominating Committee member elections, and Articles’ amendments approval votes. The NFA also published a list of the Board and Nominating Committee members whose terms will expire at the Board of Directors’ regular annual meeting on February 16, 2017, and asked members to submit names of persons eligible to fill these vacancies. NFA Notice I-16-21.


NYSE Offers Guidance to Members Regarding Changes to Rule 4530 Reporting Procedures

In an Information Memo published on October 6th, the New York Stock Exchange LLC (“NYSE”) reminded members of their obligations under Rule 4530 to self-report potential misconduct concerning securities, investment and other financial-related matters and offered guidance on how to report disclosures in light of recent regulatory changes. NYSE informed members who are also members of FINRA to continue to file disclosure reports with FINRA, while firms that are not also FINRA members should submit reports to NYSE at an email address designated for the submission of Rule 4530 disclosure reports. NYSE Information Memo 16-14.

NYSE Urges Members and Public to Submit Tips and Complaints Regarding Potential Misconduct

On October 6th, NYSE published guidance on the submission of tips and complaints by NYSE members and the public concerning potential misconduct or trading. NYSE encouraged individuals with tips or complaints to submit the information to the NYSE in a timely manner and offered information regarding how to submit information online, by email, or by phone. NYSE Information Memo 16-15.

SEC Approves NYSE MKT’s Amendments to SPACs’ Eligibility for Complimentary Products and Services

On October 6th, the SEC issued an order approving NYSE MKT LLC’s (“NYSE MKT”) proposed rule change that would adjust the service entitlements of special purpose acquisition companies (“SPACs”) by requiring SPACs to wait to become eligible to receive complimentary products and services until they meet the Business Combination Condition rather than at the time of their initial listing. SEC Release No. 34-79056.

SEC Seeks Comments on Whether to Approve or Disapprove NYSE MKT’s Proposed Extension to Form U5 Filing Deadline

On October 5th, the SEC instituted disapproval proceedings regarding NYSE MKT’s proposed rule change to extend the time within which a member or member organization, an Amex Trading Permit Holder (“ATP Holder”), an Options Trading Permit Holder (“OTP Holder”) or Options Trading Permit Firm (“OTP Firm”) must file a Form U5, or any amendments. Under the proposal, Form U5 must be filed promptly and no later than 30 calendar days after the date of termination of a member, ATP Holder, registered employee, officer, or approved person. Comments should be submitted within 21 days of publication in the Federal Register. Rebuttal comments are due within 35 days. SEC Release No. 34-79055.

SEC Designates Longer Period to Consider NYSE’s Proposal on Maximum Fees for Investment Company Shareholder Reports

On October 5th, the SEC designated November 20, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE’s proposal to adopt maximum fees that NYSE member organizations may charge in connection with the distribution of investment company shareholder reports pursuant to any notice and access delivery rules adopted by the SEC. SEC Release No. 34-79051.

NYSE Offers Guidance on Handling of Specific Order Types under Tick Size Pilot

NYSE published an Information Memo on September 30th that offers guidance to NYSE members regarding the handling of certain order types, including G-quotes, Buy Minus/Zero Plus (“BMZP”), and discretionary e-quotes (“d-quotes), under the new Tick Size Pilot Program, which launched on October 3, 2016, to evaluate the impact of widening the tick size for securities of smaller capitalization companies on trading, liquidity, and market quality.NYSE Information Memo 16-13.