Insights from Winston & Strawn

On May 6th, the Securities Exchange Commission (“SEC”) approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority (“FINRA”) for a two­year pilot program that would widen the minimum quoting and trading increments (tick sizes) for stocks of some smaller companies. The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors. According to SEC Chair Mary Jo White, “[t]he data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller­cap issuers.” The SEC modified several provisions of the proposal submitted by the exchanges and FINRA. For example, the SEC extended the pilot to two years rather than one, removed the venue limitation from the trade­at prohibition that would have required price matching executions to occur where the person’s quotation was displayed, and reduced the size of block transactions eligible for the exception to better reflect trading in smaller­cap stocks. The SEC also modified the market capitalization threshold for securities included in the tick size pilot and revised certain data elements concerning market maker profitability to make the collection less burdensome. The pilot will begin by May 6, 2016, and will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or fewer, and a volume weighted average price of at least $2.00 for every trading day. Participants will be divided into three test groups and a control group, with tick prices ranging from $0.01 to $0.05, and various other conditions applied. SEC Press Release.

The announcement of this new pilot program ironically coincided with the publication last week by the Treasury Department’s Office of Financial Research (“OFR”) through a joint grant program with the National Science Foundation of a working paper about the impact on the financial system of trading activity at the nanosecond level. The paper, titled “Tick Size Constraints, High­Frequency Trading, and Liquidity,” undermines the rationale for maintaining a uniform tick size and, more specifically, the policy proposal being tested in the pilot program to increase the tick size to five cents. The authors start from the premise that, due to the $0.01 uniform tick size, lower­priced stocks have a higher relative tick size than higher­priced stocks. They contend that the $0.01 tick size imposed by Rule 612 of the SEC Regulation NMS drives speed competition in liquidity provision for low­ priced securities and argue that large relative tick size harms liquidity and encourages high­frequency trader liquidity provision. We will have to wait several years more to see if these findings are confirmed by the SEC’s pilot program. OFR Tick Size Press Release.

Dania Becker

Feature: Corporate Governance

With proxy season in full swing The Race to the Bottom has been blogging about corporate by­laws. Celia Taylor, a professor at the University of Denver Sturm College of Law, analyzed recent Delaware court cases which support forum selection clauses in by­laws as well as by­laws requiring arbitration. View the blog post here.

The Race to the Bottom also published a multi­part blog on proxy proposals that limit shareholder rights. After discussing recent Delaware court cases upholding forum selection by­laws and fee­shifting by­laws, Part 1 introduces a proposal submitted by the management of Ashford Hospitality Prime, Inc. The Maryland company seeks to limit shareholder proposals to shareholders who own beneficially and of record at least one percent of the outstanding shares of the company.

Part 2 and Part 3 review management’s reasons for introducing the proposal, the concern that the shareholder proposal process was being used by a labor union to gain leverage in a labor dispute, and analyzes the proposal’s implications. Part 4 notes how a proposed by­law restricting a shareholder’s ability to submit proxy proposals relates to the Securities Exchange Act’s Rule 14a­8 proxy proposal process.

The Harvard Law School Forum on Corporate Governance and Financial Regulation (“HLS Forum”) published an analysis conducted by Pay Governance LLC on whether proxy advisor say on pay voting policies improve total shareholder returns. Pay Governance found that company compensation committees can obtain a proxy advisor say on pay “For” recommendation while also promoting total shareholder return. View the analysis here.

A spate of studies concerning chief executive officers (“CEOs”) has also been released recently. Nitzan Shilon of the Peking University School of Transnational Law summarized for the HLS Forum his study of the efficacy and transparency of U.S. corporate stock ownership policies, which he calls “paper tigers.” View the summary here.

The HLS Forum published an abstract by Mark Humphery­Jenner, a Senior Lecturer at the University of New South Wales Business School, of a paper he co­authored with Suman Banerjee, Associate Professor in the Department of Economics and Finance at the University of Wyoming, and Vikram Nanda, Professor of Finance at Rutgers University. The paper, entitled “Restraining overconfident CEOs through improved governance: Evidence from the Sarbanes­Oxley Act,” explores whether appropriate restraints on CEO discretion and the introduction of diverse viewpoints on the board serve to moderate the actions of overconfident CEOs and, in the end, benefit shareholders.” View the abstract here.

B rian J. Broughman, Associate Professor of Law at Indiana University's Maurer School of Law, discussed his paper, “CEO Side­Payments in M&A Deals,” for the CLS Blue Sky Blog. Likening such payments to a legislative rider attached to a popular bill, Broughman suggests that companies adopt by­laws requiring that any proposed side­payment be voted upon separately from a proposed merger. View the post here.

Holding directors and officers responsible for corporate failures was the subject of an article by Greg M. Zipes, a trial attorney with the United States Department of Justice. Zipes proposes the use of codes of conduct that would specify compensation reductions if during an executive’s tenure certain events, such as administrative fines or an accounting fraud, occur. View the article’s summary here.

Banking Agency Developments

Revised Interagency Examination Procedures for Consumer Compliance

On May 1st, the Office of the Comptroller of the Currency (“OCC”) issued a Bulletin on interagency examination procedures recently developed by the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council. The procedures reflect Consumer Financial Protection Bureau amendments to Regulations Z and X published in December 2013 and February 2015. Most of the changes to the procedures relate to the integrated mortgage disclosure requirements under the Truth in Lending Act and the Real Estate Settlement Procedures Act.

Securities and Exchange Commission

Other Developments

Regulation SCI Outreach Programs

The SEC has opened registration for outreach programs to help firms comply with the agency’s Regulation Systems Compliance and Integrity (“Regulation SCI”) rule. The program is sponsored by the Office of Compliance Inspections and Examinations Technology Controls Program in coordination with the Division of Trading and Markets. Outreach programs will be held on July 16, 2015 at the SEC’s New York Regional Office and on July 29, 2015 at the SEC’s Chicago Regional Office. The events will include panel discussions on the regulatory framework of Regulation SCI, compliance obligations, and the monitoring and examination processes. SEC Press Release.

Chair White’s Cybersecurity Concerns

On May 8th, the Wall Street Journal summarized the remarks of SEC Chair Mary Jo White before the Investment Company Institute. White voiced her concern over cybersecurity, stating that it is the number one systemic risk. White Comments.

Staff Announcement

On May 8th, the SEC announced that David Grim has been named Director of the Division of Investment Management. Grim has been the Division’s acting director since February, following the departure of former Director Norm Champ. SEC Press Release.

Chief Accountant Preparing GAAP/IFRS Recommendation

On May 7th, James Schnurr, the SEC’s Chief Accountant, discussed the convergence of U.S. Generally Accepted Accounting Principles with International Financial Reporting Standards. Schnurr is preparing a recommendation to the Commission on how the two should be approached. Schnurr Remarks.


On May 7th, Think Advisor summarized the remarks of David Joire, senior counsel in the Division of Investment Management, at the Investment Company Institute’s annual meeting. Joire said that chief compliance officers should be actively involved in a firm’s cybersecurity efforts. Cybersecurity.

Forum Selection

On May 5th, Reuters, citing the testimony of SEC Chair Mary Jo White, reported the agency may make public its process for determining whether to bring an enforcement case as a civil lawsuit or as an administrative proceeding. Forum Selection.

Commodity Futures Trading Commission

Market Risk Advisory Committee

The Market Risk Advisory Committee will hold an open meeting on June 2, 2015. The Committee will discuss cybersecurity and market liquidity. CFTC Press Release.

Comments on DCO Application Requested

On May 7th, the CFTC requested comment on an application by Nodal Clear, LLC for registration as a derivatives clearing organization. Comments should be submitted on or before June 8, 2015. CFTC Press Release.

Spoofing Charges Filed Against Gold and Silver Traders

On May 5th, the CFTC filed contested civil fraud charges against Heet Khara and Nasim Salim, residents of the United Arab Emirates, for “spoofing” in the gold and silver futures markets by placing bids and offers with the intent to cancel them before execution. CME Group’s Market Regulation Department identified the disruptive trading practices and initiated an investigation. On or about April 30, 2015, CME Group issued notices summarily denying Khara and Salim’s access to all CME Group markets and any trading platforms owned or controlled by CME Group. CFTC Press Release.

End­User Interpretive Guidance

On May 4th, the Division of Clearing and Risk released interpretive guidance concerning Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (“CEA”). The guidance clarifies that a securitization special purpose vehicle that is wholly­owned by, and consolidated with, an entity described in CEA Section 2(h)(7)(C)(iii) qualifies as a captive finance company and is eligible to elect the end­user exception from a clearing requirement determination. CFTC Press Release.

Federal Rules Effective Dates

May 2015 ­ July 2015

Commodity Futures Trading Commission

May 26, 2015             Residual Interest Deadline for Futures Commission Merchants. 80 FR 15507.

Federal Deposit Insurance Corporation

July 1, 2015               Restrictions on Sale of Assets of a Failed Institution by the Federal Deposit Insurance Corporation. 80 FR 22886.

Federal Finance Housing Agency

July 6, 2015               Minority and Women Inclusion Amendments. 80 FR 25209.

Federal Reserve Board

May 15, 2015             Regulations Q, Y, and LL: Small Bank Holding Company Policy Statement; Capital Adequacy of Board­Regulated Institutions; Bank Holding Companies; Savings and Loan Holding Companies. 80 FR 20153.

National Credit Union Administration

July 6, 2015               Chartering and Field of Membership Manual. 80 FR 25924.

June 5, 2015              Corporate Credit Unions. 80 FR 25932.

Securities and Exchange Commission.

June 19, 2015            Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A). 80 FR 21805.

June 15, 2015            Nationally Recognized Statistical Rating Organizations. 79 FR 55077.

[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g­3(a)

(7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g­2(a)(9), (b)(13) through (15), Sec. 240.17g­5(a)(3)(iii)(E),

(c)(6) through (8), Sec. 240.17g­7(a) and (b), and Form ABS­15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga­2, 240.17g­8, 240.17g­9, 240.17g­ 10, and Form ABS Due Diligence­15E are effective June 15, 2015.]

May 18, 2015             Regulation SBSR­Reporting and Dissemination of Security­Based Swap Information. 80 FR 14563.

                                      Security­Based Swap Data Repository Registration, Duties, and Core Principles. 80 FR 14437.

Exchanges and Self­Regulatory Organizations

Financial Industry Regulatory Authority

TRACE Amendments Approved

On May 6th, FINRA advised that the SEC approved an amendment to the Trade Reporting and Compliance Engine rules to permit FINRA to implement a new contra­party type for use by firms in identifying transactions with non­member affiliates. The amendment also requires firms to separately identify transactions with non­ member affiliates that occur within the same day, at the same price, and in the same security as a trade with another contra­party. The amendment will become effective on November 2, 2015. FINRA Regulatory Notice 15­ 14.

Rule Governing the Sale of Securities at Military Bases Proposed

On May 6th, the SEC provided notice of FINRA’s proposed adoption of Rule 2272, which would govern sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of May 11. SEC Release No. 34­74890.

Proposed Exemption to the Trading Activity Fee for Proprietary Trading Firms

On May 5th, FINRA noted that the SEC has proposed amendments to Securities Exchange Act Rule 15b9­1 that would require a proprietary trading firm to register with FINRA if the firm engages in over­the­counter trading or trading on an exchange of which it is not a member. Since that registration would unnecessarily subject proprietary trading firms to FINRA’s trading activity fee (“TAF”), FINRA proposes an exemption to exclude from TAF transactions by a proprietary trading firm on exchanges of which the firm is a member. Comments should be submitted on or before June 19, 2015. FINRA Regulatory Notice 15­13.

2015 GASB Accounting Support Fee

On April 29th, FINRA announced the 2015 fee which will be used to support the Governmental Accounting Standards Board (“GASB”). The GASB Accounting Support Fee is collected on a quarterly basis from member firms that report trades to the Municipal Securities Rulemaking Board (“MSRB”). Each member firm’s assessment is based on the firm’s portion of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB during the previous quarter. FINRA will assess and collect a total of $7,357,300 to adequately fund the GASB’s annual budget by collecting $1,839,325 from its member firms each calendar quarter beginning in May 2015. FINRA Regulatory Notice 15­12.

International Swaps and Derivatives Association

EMIR Clearing Classification Tool Released

On May 8th, the International Swaps and Derivatives Association (“ISDA”) and Markit announced the launch of the EMIR Clearing Classification Tool. The tool will be available on ISDA Amend, an online service from ISDA and Markit that facilitates compliance with certain European Market Infrastructure Regulation (“EMIR”) and other regulatory requirements. The EMIR Clearing Classification Tool enables derivatives users to indicate to their counterparties whether they are subject to clearing obligations set by the European Securities and Markets Authority for interest rate derivatives. ISDA Press Release.

Municipal Securities Rulemaking Board

Municipal Advisor Rules Proposed

On May 4th, the SEC provided notice of the MSRB’s filing of proposed new Rule G­42, on duties of non­solicitor municipal advisors, and proposed amendments to Rule G­8, on books and records to be made by brokers, dealers, municipal securities dealers, and municipal advisors. Comments should be submitted on or before May 29, 2015. SEC Release No. 34­74860.


Longer Period Designated for Consideration of Proposed Restatement of Rules

On May 6th, the SEC designated June 24, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The NASDAQ Stock Market’s proposed amendment and restatement of certain Nasdaq rules that govern the Nasdaq Market Center that are intended to provide a clearer and more detailed description of certain aspects of the Nasdaq Market Center’s functionality. SEC Release No. 34­74881.


Disapproval Proceedings Instituted for Proposed Listing of Municipal Bond Index Fund

On May 4th, the SEC instituted proceedings to determine whether to approve or disapprove NYSE Arca’s proposal to amend Equities Rule 5.2(j)(3), Commentary .02 to accommodate the listing of certain Investment Company Units based on municipal bond indexes. Comments should be submitted on or before May 29, 2015. Rebuttal comments should be submitted on or before June 12, 2015. SEC Release No. 34­74863.

The Options Clearing Corporation

Minimum Capital Requirements For Letters of Credit Approved

On May 7th, the SEC approved The Options Clearing Corporation’s proposed amendment of its by­laws and rules in order to enhance the measurement used to establish minimum capital requirements for banks approved to issue letters of credit that may be deposited by clearing members as a form of margin asset. SEC Release No. 34­74894.

Industry News

Bitcoin Exchange Charters a First

On May 7th, Reuters reported the New York Department of Financial Services approved the first banking charter for a virtual currency exchange. First Charter.

Too Much of a Good Thing?

On May 7th, the Wall Street Journal asked whether the contraction in the market for credit default derivatives is such a good thing given the increase in issuance of new corporate bonds. Contraction.

A Clash of Margins

On May 6th, Reuters described the different approaches the U.S. and the E.U. have taken to safeguard the derivatives markets and the difficulties those differences have created. Marginal Differences.

Bill Proposes Inclusion of Municipal Securities as High­Quality Assets

On May 4th, Representatives Luke Messer and Carolyn Maloney announced they have proposed a bill that would require federal banking regulators to consider municipal bonds as high­quality assets for purposes of the Liquidity Coverage Ratio, which requires banks to maintain a minimum amount of liquid assets. Messer Press Release.