Insights from Winston & Strawn 

SEC OCIE National Exam Program’s Examination Priorities for 2017

On January 12, 2017, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its annual list of examination priorities for 2017. These priorities can be helpful to all entities subject to supervision by the SEC, and registered investment advisers (“Registered Managers”) are advised to take these priorities into consideration when designing their supervisory and compliance programs, notwithstanding whether the Registered Manager is actually subject to examination this year, as the priorities present useful indicators of areas where the SEC is likely to start bringing enforcement action. The SEC is continuing its focus on issues relating to retail investors, risks specific to elderly and retiring investors, and assessing market-wide risk. The SEC has maintained its focus on incorporating data analytics into the vast majority of its examination initiatives to identify industry practices and/or registrants that appear to have elevated risk profiles.

Retail Investors

  1. Increasingly, people are relying on automated investment advisers and so-called “robo-advisers.” The SEC will examine Registered Managers and broker-dealers that offer such services, that primarily interact with clients online, and that utilize automation as a component of the Registered Manager’s services. Compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest are all likely to be subjects of increased scrutiny.
  2. The SEC will expand its focus on Registered Managers and broker-dealers associated with wrap-fee programs, particularly whether: (a) they are acting in a manner consistent with the Registered Manager’s fiduciary duty, (b) wrap accounts are suitable for each client, (c) disclosures are effective, (d) conflicts of interest exist, and (e) the investment advisers or broker-dealers are meeting brokerage practices, including best execution.
  3. Exchange-Traded Funds (“ETFs”) will also face additional scrutiny from the SEC as it examines: (a) compliance with applicable exemptive relief granted under the Exchange Act, the Company Act and with other regulatory requirements, (b) ETFs’ unit creation and redemption processes, (c) sales practices, (d) disclosures involving ETFs, and (e) suitability of broker-dealers’ recommendations to purchase ETFs with niche strategies.
  4. For a few years, the SEC has focused on examining Registered Managers that have otherwise not been examined before and the SEC expects to expand that program in 2017 to include focused, risk-based examinations of newly Registered Managers.
  5. The SEC will identify individuals with a track record of misconduct and examine the Registered Managers that employ them, particularly focused on the compliance oversight and controls of such Registered Managers.
  6. Registered Managers that utilize branch offices can pose unique risks and challenges, particularly in the design and implementation of an oversight and compliance program.
  7. The SEC will continue to review conflicts of interest and other factors that may affect Registered Managers’ recommendations to invest in particular share classes of mutual funds.

Senior Investors and Retirement Investments

An increasing percentage of retirees are dependent on their personally held investments, rather than a pension, for their income. Based both on the susceptibility of this population and the fact that the aggregate amount of investible assets of this population has necessarily increased, the SEC has made protection of these investors a strong focus. Efforts to protect such investors will include: (i) continuing the Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) Initiative launched in June 2015 and which reviews whether the adviser had a reasonable basis for recommendations made to investors, evaluates conflicts of interest, reviews supervision and compliance controls, and marketing and disclosure practices. Sales of variable insurance products and sales/management of target date funds will be the focus of this year’s ReTIRE program; (ii) assessing how pension plans of government entities are managing conflicts of interest, fulfilling their fiduciary duties, and reviewing other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices; and (iii) evaluating how firms manage their interactions with senior investors.

Assessing Market-wide Risks

The SEC hopes to promote an efficient and stable market by reducing market-wide risks such as: (i) examining money market managers for compliance with rules on money market funds that came into effect in October 2016 that were designed to address redemption risks in such funds; (ii) reviewing broker-dealers to assess how they are meeting their duty of best execution; (iii) inspecting clearing agencies designated systemically important; (iv) enhancing the SEC’s oversight of FINRA; (v) continuing the initiative to focus on cybersecurity controls; (vi) conducting risk-based inspections of the national securities exchanges; and (vii) examining broker-dealers to assess whether AML programs are individually tailored to the firm, whether the program receives appropriate updates, and whether the firm files suspicious activity reports.

Other Initiatives

The SEC has stated that it will also continue the following efforts: (i) conducting examinations of municipal advisors; (ii) examining transfer agents including turnaround times, recordkeeping, and safeguarding of funds and securities, particularly focused on transfer agents that service microcap issuers who it suspects may be engaging in unregistered, non-exempt offerings of securities; and (iii) examining private fund advisers, focusing on conflicts of interest and disclosure of conflicts.

Please contact your Winston & Strawn attorney for additional advice regarding best practices to help prevent citations in case of an examination, steps to take when notified of, and preparing for an upcoming examination, and/or properly responding to any deficiency findings as a result of an investigation.

Feature: Recent FCPA Developments

The month of December has historically seen a flurry of Foreign Corrupt Practices Act (“FCPA”) enforcement activity, and 2016 was no exception to this trend as the SEC announced settlements in three cases involving FCPA violations and this continued in January with the SEC opened the new year with two additional FCPA enforcement actions.  Collectively, the companies paid approximately $1.6 billion in fines, penalties and settlements for an assortment of violations ranging from creating false books and records to improper payments to foreign government officials with the intent to (i) obtain regulatory and formulary approvals, (ii) obtain government licenses and approvals or (iii) obtain or retain business.  Some of these actions were taken in coordination with the  the Department of Justice (“DOJ”) as well as authorities from other countries.  

As the SEC and DOJ aggressively pursue potential FCPA violations, bribery risks across the globe continue to shift, causing uncertainty for companies in assessing their exposure to corruption. Forbes reported on a study conducted by anti-bribery organization TRACE International, which found that while the number of countries categorized as “extremely low risk” has increased, so has the number of countries categorized as “extremely high risk,”—a “dynamic situation” that creates uncertainty for businesses. The study highlights dramatic changes in some countries, including Estonia, which now ranks third among countries with the lowest bribery risks. The Forbes article attributes Estonia’s shift to increased transparency brought about by its move to conduct all bureaucratic processes online. The report also attributes the shift in global bribery risk to a change in perspective by companies, which “now agree that bribery is a bad business strategy and recognize the negative effects of bribery on corporate performance and reputation.” 

Adding to the uncertainty for companies is the future of FCPA enforcement under a new administration. Previous comments by President-elect Trump have led some experts to conclude that FCPA enforcement may fall during the next administration. That theory has gained some momentum following the selection of attorney Walter J. (“Jay”) Clayton, who co-authored a paper criticizing enforcement of the FCPA for harming international business transactions, to head the SEC. However, others, including Peter J. Henning, cautioned against reading too much into Clayton’s role in drafting the paper, noting that other critics of the FCPA have later taken roles that have required them to enforce the anti-bribery law. Additionally, in remarks at the 33rd Annual International Conference on the Foreign Corrupt Practices Act, Deputy Attorney General Sally Q. Yates expressed optimism that the FCPA policies developed under her tenure would endure. The Financial Times noted that enforcement of the FCPA has steadily increased under both political parties but the DOJ’s priorities under a new administration are likely to shift, leaving in doubt the status of some enforcement initiatives, including the DOJ’s pilot program for encouraging voluntary disclosures by companies in FCPA investigations.

Banking Agency Developments


OCC Hosts Risk Governance and Compliance Workshops in Miami

On January 12th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host two workshops in Miami at the Miami Marriott Dadeland, February 7-8, for directors of national community banks and federal savings associations supervised by the OCC. The Risk Governance workshop will be held on February 7th and the Compliance Risk workshop will be held on February 8th.

Revised Comptroller’s Licensing Manual Booklet

On January 12th, the OCC announced its issuance of the “Management Interlocks” booklet of the Comptroller’s Licensing Manual, which replaces the booklet of the same title issued in October 2009. The revised booklet incorporates updated requirements following the integration of the Office of Thrift Supervision into the OCC in 2011 and clarifies guidance for both national banks and federal savings associations.    


Jay N. Lerner Sworn In as FDIC Inspector General

On January 9th, the Federal Deposit Insurance Corporation (“FDIC”) announced that Jay N. Lerner has been sworn in as Inspector General. Mr. Lerner oversees the Office of Inspector General, which conducts investigations of potential fraud and other crimes related to insured financial institutions and closed banks.     


CFPB Announces Changes to Senior Leadership

On January 9th, the Consumer Financial Protection Bureau (“CFPB”) announcedleadership changes within the agency. The positions announced were for the Chief of Staff; the Chief Information Officer; the Chief Financial Officer; the Assistant Director of Consumer Lending, Reporting, and Collections Markets; and the Assistant Director for the Office for Servicemember Affairs.

Treasury Department Developments

Treasury, USTR Successfully Complete Negotiations for a Covered Agreement with the EU

On January 13th, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative (“USTR”) announced the successful completion of negotiations for a covered agreement with the European Union (“EU”).      

The U.S. and Iraq Sign Loan Guarantee Agreement

On January 5th, the U.S. Department of the Treasury announced that the U.S. and Iraq have signed a loan guarantee agreement that, once entered into force, will enable Iraq to access up to $1 billion in low-cost financing from international capital markets.

Securities and Exchange Commission

Final Rules

SEC Approves Annual Adjustment of Maximum Civil Monetary Penalties

The SEC adopted a final rule on January 6th that implements the first annual adjustment for inflation under the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 of the maximum amount of civil monetary penalties administered by the SEC, which include civil penalties assessed under the Securities Act, the Securities Exchange Act, the Investment Company Act, and the Investment Advisers Act as well as certain penalties under the Sarbanes Oxley Act. The final rule will be effective upon publication in the Federal Register.     

No-Action Letters

Division of Investment Management Issues Guidance on Application of Investment Company Act Restrictions on Commissions to Clean Shares

In response to a request for interpretive guidance by the Capital Group, the SEC’s Division of Investment Management issued a no-action letter on January 11th clarifying that the restrictions of section 22(d) of the Investment Company Act do not apply to a broker when the broker acts as agent on behalf of its customers and charges its customers commissions for effecting transactions in Clean Shares, or a class of shares of a registered investment company without any front-end load, deferred sales charge, or other asset-based fee for sales or distribution. Capital Group requested the guidance to alleviate issues faced by the mutual fund industry under the Department of Labor’s (“DOL”) fiduciary rule.     

Speeches and Statements

SEC Will Not Advance Dodd-Frank Rules During Interim Period under Piwowar

SEC Commissioner Michael S. Piwowar indicated that the SEC will not consider any outstanding rules mandated by the Dodd-Frank Act when he is likely appointed as interim chair of the agency, according to a report in the Wall Street Journal on January 6th. Piwowar also remarked that he and SEC Commissioner Kara M. Stein have agreed on other measures to advance during his time as acting chairman, including rules to modernize the format of corporate disclosures and to shorten the settlement cycle for stocks.   

Other Developments 

Staff Announcements

On January 12th, the SEC announced that Michael J. Osnato Jr., Chief of the Enforcement Division’s Complex Financial Instruments Unit, will leave the agency later in January. 

Commodity Futures Trading Commission

CFTC Unanimously Approves Proposal to Amend Recordkeeping Requirements

On January 12th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that it has unanimously approved proposed amendments to Regulation 1.31. The proposed amendments would modernize and make technology-neutral the form and manner in which regulatory records must be kept, as well as rationalize the rule text for ease of understanding. The CFTC is seeking comments on the proposed amendments. The comment period ends 60 days after the proposal’s publication in the Federal Register. See Chairman Massad Statement on the Notice of Proposed Rulemaking to Amend Regulation 1.31.

Federal Rules Effective Dates

January 2017 – March 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

BOX Options Exchange

SEC Takes More Time to Consider BOX’s Proposed Open Outcry Rules

On January 10th, the SEC designated March 5, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding BOX Options Exchange LLC’s (“BOX”) proposed rule change to adopt rules for an open-outcry trading floor. SEC Release No. 34-79768.     

Chicago Board Options Exchange

SEC Designates Longer Period to Consider CBOE’s Proposal on Complex Orders

On January 12th, the SEC designated March 2, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning the Chicago Board Options Exchange Incorporated’s (“CBOE”) proposed rule amendments that would allow complex orders in Hybrid 3.0 classes consisting of series in the group authorized for trading on the Hybrid 3.0 Platform and series in the group authorized for trading on the Hybrid Trading System to be executed electronically. SEC Release No. 34-79783.    

Depository Trust Company

SEC Approves DTC’s Proposed Rules on Processing of Transactions in Money Market Instruments

On January 9th, the SEC approved The Depository Trust Company’s (“DTC”) proposal to establish a change in the processing of transactions in money market instruments (“MMIs”) that would, among other things, eliminate provisions for intra-day reversals of processed MMI Obligations based on an issuing and paying agent’s refusal to pay or issuer insolvency. SEC Release No. 34-79764.   

ICE Clear Credit

SEC Approves ICC’s Amendments to Rules on Default Management, Clearing House Recovery and Wind-Down

On January 6th, the SEC issued an order granting accelerated approval to ICE Clear Credit LLC’s (“ICC”) proposal to amend its clearing rules relating to clearing house default management, recovery, and wind-down, and to adopt certain related default auction procedures. The SEC also requested comments on ICC’s amendment to the proposal, which clarifies certain aspects of the proposal related to reduced gains distribution and initial margin. Comments should be submitted on or before February 2, 2017. SEC Release No. 34-79750.     

Municipal Securities Rulemaking Board

MSRB Publishes Information on Upcoming Municipal Securities Offerings to EMMA

On January 9th, the Municipal Securities Rulemaking Board (“MSRB”) announced that it has added a new issue calendar to its Electronic Municipal Market Access (“EMMA”) website. The new calendar lists municipal bonds scheduled for sale to investors as well as pricing of recently sold issues and allows users to filter upcoming bond issues by state, tax status and whether the issue is bank qualified.

MSRB Seeks Applicants for Its Board of Directors

The MSRB announced on January 9th that it is accepting applications for several positions on its Board of Directors, including three public and two regulated-entity positions, one of which is a non-dealer municipal advisor. Qualified candidates should submit applications on or before February 17, 2017.      


SEC Approves Nasdaq’s Proposed Changes to Continued Listing Requirements for Exchange-Traded Products

On January 12th, the SEC granted accelerated approval to The NASDAQ Stock Market LLC’s (“Nasdaq”) proposal related to continued listing requirements and delisting procedures for exchange-traded products. The SEC also requested comments on an amendment to the proposal, which clarifies, among other things, the procedures for initiating delisting proceedings. Comments on the amendment should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 16, 2017. SEC Release No. 34-79784.    

National Futures Association

NFA Reminds Members of Affirmation Requirements for Exempt CPOs and CTAs

On January 11th, the National Futures Association (“NFA”) published a Notice that reminds members of the obligation of individuals claiming an exclusion from commodity pool operator (“CPO”) registration or an exemption from commodity trading advisor (“CTA”) registration to annually affirm the applicable notice of exemption by March 1, 2017. The Notice clarified that members who take reasonable steps to determine the registration and membership status of previously exempt persons will not be in violation of NFA by-laws if they transact customer business between January 1 and March 31, 2017, with a previously exempt person who fails to comply with the affirmation requirement or to register with the NFA.     


SEC Designates Longer Period for Consideration of NYSE Arca’s Proposed Changes to Rules on Electronic Complex Orders

On January 9th, the SEC designated March 2, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning NYSE Arca, Inc.’s (“NYSE Arca”) proposed rule change to amend NYSE Arca Rule 6.91 to clarify and provide greater transparency to its rules governing the trading of Electronic Complex Orders. SEC Release No. 34-79759.

Industry News

House Votes on One of Several Deregulatory Measures Expected to Advance in 2017

The Wall Street Journal reported on the House’s January 12th vote to approve a bill that would require securities regulators to more comprehensively evaluate how much their rules cost the financial industry. Pursuant to the measure, the SEC would have to analyze all of its existing rules and regularly conduct “look backs” to guarantee that new and existing rules continue to be effective.    

With New Chair, SEC Role as Enforcer Could Shrink

On January 9th, DealBook reported on Trump’s announcement that he is going to nominate Wall Street lawyer Walter J. Clayton as chairman of the SEC. According to the article, this nomination raises questions about how securities laws will be enforced during the new administration. Mr. Clayton is expected to support rolling back Dodd-Frank, which is a reflection of Trump’s larger agenda to lighten the regulatory burden on the financial sector.     

D.T.C.C. to Adopt Bitcoin Technology

On January 9th, DealBook reported that the Depository Trust and Clearing Corporation (“D.T.C.C.”) will replace one of its central databases with new software inspired by the virtual currency Bitcoin. D.T.C.C., which plays a part in recording and reporting almost every stock and bond trade in the U.S. in addition to most valuable derivatives trades, will not use Bitcoin’s blockchain. Instead, the company is building something similar to a blockchain, or a “distributed ledger,” which multiple financial institutions can update and view at the same time. Unlike Bitcoin’s blockchain, the D.T.C.C. ledger will be open only to invited participants.