Insights from Winston & Strawn

The pay ratio disclosure rule is back on the agenda for the Securities and Exchange Commission (the “SEC”). On July 29th, the SEC stated that it will hold an open meeting on Wednesday, August 5, 2015, to consider, among other things, whether to adopt proposed rules for pay ratio disclosure as required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC first proposed its rules in September 2013 and the controversial proposal has now garnered over 280,000 public comment letters. Provided below, is an overview of the proposed rules. The proposed rules would require public companies to disclose the pay gap between their chief executive and their median worker pay by identifying:

  • the median of the annual total compensation of all its employees except the CEO;
  • the annual total compensation of its CEO; and
  • the ratio of the two amounts. 

The proposed rules do not prescribe any required calculation methodologies for identifying the median employee in terms of total compensation for all employees. Instead, the proposal allows companies to select a methodology that best suits their particular circumstances (i.e., appropriate to their business size and structure of their own businesses and how they compensate employees). For example, a company would be permitted to identify the median employee based on total compensation using either its full employee population or a statistical sample of that population. A company could, for example, identify the median of its population or sample:

  • using annual total compensation as determined under existing executive compensation rules; or
  • using any consistently used compensation measure such as compensation amounts reported in its payroll or tax records. A company would then calculate the annual total compensation for that median employee in accordance with the definition of total compensation set forth in the SEC’s executive compensation rules.

The proposal allows companies to use reasonable estimates when:

  • calculating the annual total compensation;
  • calculating any element of total compensation; and
  • determining the annual total compensation of the median employee.

All “employees of the registrant” would include:

  • all employees (including full-time, part-time, temporary, seasonal and non-U.S.
  • employees);
  • those employed by the company or any of its subsidiaries; and
  • those employed as of the last day of the company’s prior fiscal year.

Companies would be required to disclose the methodology used to identify the median, and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation. One key issue in the proposal, which has also been a topic of interest in many of the comment letters, is the international scope of the employee exclusions that the SEC may allow in the calculation of a company’s median worker pay. Commenters and other organizations have raised concerns about the compliance costs and other practical considerations (such as data collection and differences in how certain countries calculate compensation) to include foreign employees. The Wall Street Journal reports that the SEC is expected to allow companies to exclude 5% of their overseas workers from the pay-ratio calculation.

While finalization and implementation of a pay ratio rule has been slow, it will be interesting to see how this week’s open meeting unfolds. The SEC has repeatedly stated that it hopes to complete the measure by fall 2015. Many companies are not waiting for the final rules before starting to ask important strategic questions, such as whether having a low ratio is important, whether year-to-year consistency is important, and what will be the compliance costs. We will continue to monitor the status of the pay ratio rule as the SEC works to finalize this new disclosure requirement. 

Elisia Klinka

Feature: The U.K.’s Pillar 2 Capital Framework

Last Wednesday the U.K. Prudential Regulation Authority (“PRA”) published a series of documents regarding the implementation of the Pillar 2 capital framework, the capital which financial institutions must set aside to support the risks their businesses face, such as the risks associated with credit concentration and weaknesses in governance and risk management. Under Pillar 2, firms must conduct an Internal Capital Adequacy Assessment Process (“ICAAP”) in accordance with the PRA’s Internal Capital Adequacy Assessment (“ICAA”) rules. The ICAA rules require firms to adopt sound, effective, and comprehensive strategies and processes to assess and maintain, on an ongoing basis, the amounts, types and distribution of financial resources they consider adequate to cover the nature and level of the risks to which they are, or might be, exposed. 

There are two main areas that the PRA considers when conducting a Pillar 2 review: (i) risks to the firm which are either not captured, or not fully captured, under the capital requirements, referred to as Pillar 2A; and (ii) risks to which the firm may become exposed over a forward-looking planning horizon (e.g. due to changes in the economic environment), referred to as Pillar 2B. The Pillar 2 documents published by the PRA include a policy statement, which sets out the PRA’s response to comments it received when it opened its Pillar 2 consultation; two supervisory statements which set forth the PRA’s expectations; and a statement of policy which explains the PRA’s methodology for setting Pillar 2 capital. 

In Policy Statement 17/15, the PRA explains the changes which are being made to its rules, how the final supervisory statements differ from those that were proposed, and what the PRA’s expectations are. The PRA has endeavored to enhance the proportionate application of Pillar 2 to account for firms’ different sizes and to clarify the role of supervisory judgment and own capital assessments. If the PRA assesses a firm’s risk management and governance to be significantly weak it may impose a capital buffer to cover the risk posed by those weaknesses. The Policy Statement further emphasizes that the PRA expects a firm’s ICAAP to be the responsibility of a firm’s management body and to be an integral part of the firm’s management process and decision making. If a firm is merely attempting to replicate the PRA’s own methodologies it will not be complying with the ICAA rules. 

Supervisory Statement 31/15 contains the PRA’s expectations as firms conduct their ICAAP; the PRA’s expectations as firms conduct their stress testing, scenario analysis, and capital planning; and the factors that the PRA will take into consideration when assessing a firm’s ICAAP. 

Supervisory Statement 32/15 provides the instructions for completing the data required to be reported and includes a schedule listing the types of data different firms must supply. 

The Statement of Policy explains the methodologies the PRA will use to set Pillar 2A and Pillar 2B capital. Pillar 2A methodologies address individual capital guidance for credit risk, market risk, operational risk, counterparty credit risk, credit concentration risk, interest rate risk in the non-trading book, and pension obligation risk. The Statement of Policy also explains the purpose of the Pillar 2B PRA buffer, how it is determined and how it relates to the European Union’s capital requirements buffers. The PRA’s approach to addressing weak governance and risk management under Pillar 2B is also explained. 

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 

Federal Reserve Board Announces Faster Payments Strategy Leader 

On July 30th, the Federal Reserve Board announced the appointment of Federal Reserve Bank of Chicago Senior Vice President Sean Rodriguez as its Faster Payments Strategy Leader. In this role, Rodriguez will lead activities to identify effective approaches for implementing a safe, ubiquitous, faster payments capability in the United States. Federal Reserve Board Press Release. 

Resolution Plan Guidance 

On July 28th, the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) provided guidance to the firms required to file updated resolution plans by December 31, 2015; that is, bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council as systemically important. The agencies also released an updated tailored resolution plan templateJoint Agency Press Release.

Regulators Respond to Non-Bank SIFI Resolution Plans 

On July 28th, the Federal Reserve Board and the FDIC provided feedback to three nonbank financial companies regarding their initial resolution plans and guidance to the firms for their upcoming filings. In addition to the specific guidance given to each company, the letters include some common areas that the firms should address. Those areas include the need for more detailed information on, and analysis of, obstacles to resolvability, including global cooperation, interconnectedness, and adequate funding and liquidity. Further, the agencies instructed the firms to describe in their resolution plans the progress they are making, and the steps remaining, to be more resolvable. Finally, the agencies directed the firms to strengthen the public portions of the firms’ upcoming resolution plans. Joint Agency Press Release. 

OCC Bulletin on Revisions to Regulatory Capital Rule 

On July 28th, the Office of the Comptroller of the Currency (“OCC”) issued a bulletin on the revisions which it, along with the Federal Reserve Board and FDIC, made to the regulatory capital rules adopted in July 2013. That rule applies only to large, internationally active banking organizations that determine their regulatory capital ratios under the advanced approaches rule, generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposures. The revisions clarify some aspects of the qualification requirements for advanced approaches systems. In addition, the revisions better align the advanced approaches subpart of the regulatory capital rule with the Basel framework. 

Comptroller Curry Discusses Risk and the Importance of Collaboration 

On July 24th, Comptroller of the Currency Thomas Curry addressed the New England Council. Curry noted the different risks which the banking industry faces and focused particularly on cyber risks. After noting how self-assessments and supervisory oversight help to protect against cyber threats, Curry discussed the role which collaboration plays. Curry Remarks.

Treasury Department Developments

Treasury Department’s OFR Studies Form PF 

On July 30th, the Treasury Department’s Office of Financial Research published a working paper entitled “Gauging Form PF: Data Tolerances in Regulatory Reporting on Hedge Fund Risk Exposures.”  The paper examines whether  SEC Form PF provides an accurate measure of market risk exposures in the hedge fund industry. The paper finds that Form PF’s measurement tolerances are sufficiently large to allow private funds with dissimilar actual risk profiles to report similar risks to regulators. However, the form’s stratification by value at risk (Form PF Question 40) helps significantly to narrow the measurement tolerances. 

Securities and Exchange Commission

Open Meeting 

The SEC will hold an Open Meeting on August 5, 2015. Commissioners are expected to consider:  

  • Whether to adopt rules and forms under the Securities Exchange Act of 1934 providing for the registration of security-based swap dealers and major security-based swap participants; 
  • Whether to propose a rule of practice to provide a process for a registered security-based swap dealer or major security-based swap participant to make an application to the Commission for an order permitting an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the security-based swap dealer or major security-based swap participant; and
  • Whether to adopt a rule requiring public companies to disclose the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company’s employees as required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Open Meeting Notice. 

Money Market Fund Statistics 

On July 29th, the SEC’s Division of Investment Management published data for money market funds as of June 30, 2015.  

Staff Announcement 

On July 29th, the SEC announced that Daniel M. Hawke, chief of the Division of Enforcement’s Market Abuse Unit, is leaving the agency after 16 years to return to the private sector. SEC Press Release. 

Pay Ratio Rule 

On July 27th, The Wall Street Journal described the SEC’s expected pay ratio disclosure rule. The rule requires companies to disclose how their executives’ compensation compares to that of their median employees. The Wall Street Journal noted that in keeping with a recent study conducted by the SEC’s Division of Economic Research and Analysis, the rule will likely allow companies to exclude 5 percent of their overseas workforce from their calculations. Pay Ratio Rule.

An Opaque Process 

On July 27th, Reuters reported the SEC has denied Precidian Funds’ second application for permission to sell actively-managed exchange-traded funds (“ETF”) that do not disclose their holdings on a daily basis. Word of that denial was made possible by Eaton Vance Corp., who has received a SEC exemptive order for non-transparent ETFs. Eaton Vance obtained a copy of the SEC’s rejection of Precidian’s application through a Freedom of Information Act request. Competitive Advantage. 

Proxy Access Staff Working Paper 

On July 24th, the SEC’s Division of Economic and Risk Analysis published a staff working paper entitled “Public versus Private Provision of Governance: The Case of Proxy Access.” The paper studies the tradeoffs between universal regulatory mandates and private contracting in the field of corporate governance. It uses the legal challenge of the SEC’s 2010 proxy access rule to benchmark the market’s expectation of the benefits of universally mandated proxy access even though the rule never came into effect. At the same time, a 2010 rule amendment facilitating shareholder proposals for proxy access opened a new channel for proxy access through “private ordering.” The paper documents that this private channel has been active, spawning about 160 proxy access proposals. However, while private ordering creates value, it may not efficiently deliver proxy access at the firms that need it most. 

Federal Rules Effective Dates

August 2015 - October 2015 

Consumer Financial Protection Bureau

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Federal Deposit Insurance Corporation


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Federal Housing Finance Agency

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Federal Reserve System

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Financial Crimes Enforcement Network 

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National Credit Union Administration

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Office of the Comptroller of the Currency

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Securities and Exchange Commission

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Exchanges and Self-Regulatory Organizations

BATS Global Markets

BATS Proposes Anti-Spoofing and Anti-Layering Rule 

On July 30th, BATS Global Markets announced it has filed with the SEC a proposed rule entitled the “BATS Client Suspension Rule.” The proposed rule would explicitly enable the company to take expedited action in response to spoofing and layering on the BATS Exchanges. BATS Global Markets Press Release. 

Financial Industry Regulatory Authority 

FINRA Municipal Securities Guidance on Firm Short Positions and Fails-to-Receive 

On July 30th, the Financial Industry Regulatory Authority (“FINRA”) reminded firms engaging in municipal securities transactions that their written supervisory procedures should identify the process for detecting, resolving, and preventing the consequences of firm short positions and fails-to-receive in municipal securities, as well as the controls for ensuring that communications with customers regarding municipal securities transactions, including the tax status of interest payments, are not false or misleading. FINRA examinations have found that, as a result of trading errors and inadequate firm controls, some customers who purchased tax-exempt municipal securities have been paid substitute interest, which is not tax-exempt under the Internal Revenue Code. FINRA Regulatory Notice 15-27. 


Longer Period Designated for Consideration of Proposed Changes to the Risk Management Framework 

On July 27th, the SEC designated September 10, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding ICE Clear Credit’s proposed changes to its Risk Management Framework. SEC Release No. 34-75529.


Longer Period Designated to Consider Proposed Changes to the Complex Order Rule

On July 30th, the SEC designated September 21, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NASDAQ OMX PHLX’s proposed rule change to amend and correct several provisions in Phlx Rule 1080.07, which governs the trading of Complex Orders on Phlx XL. SEC Release No. 34-75570.
Additional Data Element to IPO Book Viewer Proposed

On July 24th, the SEC provided notice of The NASDAQ Stock Market’s filing of a proposal to introduce an additional data element, to be known as the “IPO Book Viewer,” to its IPO Indicator Service, which currently assists Nasdaq Participants in monitoring the Orders they have entered for execution in the Nasdaq Halt Cross for an IPO. Comments should be submitted on or before August 20, 2015. SEC Release No. 34-75517.
National Futures Association

Relief from CTA-PR Filing Requirement

On July 30th, the National Futures Association advised that in keeping with the Commodity Futures Trading Commission’s (“CFTC”) July 21, 2015 relief which exempted registered commodity trading advisers (“CTA”) that do not direct trading of commodity interest accounts from filing CFTC Form CTA-PR, NFA will no longer require those CTAs to file NFA Form PR under NFA Compliance Rule 2-46. In order to ensure that NFA’s records are accurate for determining CTA-PR filing requirements, any CTA that intends to take advantage of this relief must notify NFA by August 13, 2015 in the CTA Annual Questionnaire. NFA Notice to Members I-15-19


Disapproval Proceedings Extended for Municipal Bond Index Fund Proposal 

On July 30th, the SEC designated October 2, 2015 as the date by which it will approve or disapprove NYSE Arca’s proposed amendment of NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 relating to the listing of Investment Company Units based on municipal bond indexes. SEC Release No. 34-75569. 

Changes to Data Feed Proposed

On July 30th, the SEC provided notice of NYSE MKT’s and the New York Stock Exchange’s individually submitted proposals to amend their respective Trades market data feed product offerings. NYSE MKT Trades is an NYSE MKT-only last-sale market data feed and NYSE Trades is an NYSE-only last-sale market data feed. Each data feed currently allows vendors, broker-dealers and others to make available on a real-time basis the same last sale information that the respective exchange reports under the Consolidated Tape Association (“CTA”) Plan for inclusion in the CTA Plan’s consolidated data streams. Each data feed includes, for each security traded on that exchange, the real-time last sale price, time and size information and bid/ask quotations and a stock summary message. The stock summary message updates every minute and includes the exchange’s opening price, high price, low price, closing price, and cumulative volume for the security. The exchanges propose to modify the data content of the data feeds to remove the bid/ask data and to provide the individual orders that make up each reported trade. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of August 3. 

Judicial Developments

Supreme Court Asked to Review U.S. v. Newman 

On July 30th, Reuters reported the Justice Department has asked the U.S. Supreme Court to review U.S. v. Newman, where the Second Circuit held that to sustain an insider trading conviction prosecutors must prove beyond a reasonable doubt that a downstream insider trading tippee knew that an insider disclosed confidential information and did so in exchange for a tangible personal benefit. Certiorari. 

On Remand, District Court Partially Certifies Halliburton Plaintiffs’ Securities Fraud Class 

On July 27th, the U.S. District Court for the Northern District of Texas partially certified a class action complaint brought by investors in Halliburton Co. Plaintiffs allege that in an effort to inflate its stock price, Halliburton made a series of misrepresentations which, when corrected, caused the company stock price to fall, and caused plaintiffs’ losses. On remand from the Supreme Court, which held that Halliburton could introduce evidence of a lack of price impact at the class certification stage to show the absence of predominance, the District Court partially granted plaintiffs’ motion for class certification. The District Court found that at this stage, Halliburton bears the burden of production and persuasion to establish a lack of price impact. Additionally, class certification is not the proper procedural stage to determine, as a matter of law, whether the relevant disclosures were corrective. The Erica P. John Fund, Inc. v. Halliburon Co. 

Industry News

Justice Department Focuses on Compliance 

On July 30th, Reuters reported the U.S. Justice Department has asked a former prosecutor to head a new fraud section which would assess corporate compliance departments. While the new section will focus on health care, it will also monitor compliance with the Foreign Corrupt Practices Act. Compliance. 

U.S. Hedge Funds Denied E.U. Passports 

On July 30th, the European Securities and Markets Authority (“ESMA”) submitted to the European Commission its advice and opinion regarding the application of the Alternative Investment Fund Managers Directive passport to non-European Union (“E.U.”) alternative investment fund managers and alternative investment funds. The advice addresses the extension of the passport, which is currently available only to E.U. firms, to six jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the U.S. The Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation. No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria. ESMA Press Release. According to Reuters, European regulators are concerned that the provision of passports to U.S. firms, which would allow the firms to operate in any E.U. country without having to obtain individual country permission, would give U.S. firms an unfair advantage. Passports. 

Global Regulator Delays Asset Manager Designations 

On July 30th, the Financial Stability Board (“FSB”) announced it has postponed the finalization of proposed assessment methodologies for non-bank, non-insurer global systemically important financial institutions. Before those methodologies are finalized, the FSB will first complete its study of the financial stability risks posed by asset management activities. That work is focused on risks associated with market liquidity, as well as potential structural sources of vulnerability associated with asset management activities. The study also will consider the role that existing or additional activity-based policy measures could play in mitigating potential risks, and make policy recommendations as necessary. The FSB will discuss the initial findings from its work on asset management activities at its Plenary meeting in September. FSB Press Release. 

A Summer of Discontent 

On July 28th, Plan Sponsor summarized the comments made at the July 16, 2015 meeting of the SEC’s Investor Advisory Committee. Representatives from the Department of Labor (“DOL”) discussed that agency’s proposed fiduciary duty rule for retirement advisers. Although the DOL personnel defended the proposal’s provisions, they said they are open to revising the rule and will be holding additional hearings. Other speakers objected to the DOL proposal as unworkable and administratively burdensome. Discontent.