On 10 September 2014, the SEC announced it was taking action against 34 defendants for various alleged violations of federal securities laws regarding stock holdings reporting. Although the offences involved apparent “technical” violations, they reflect what some have referred to as a “broken windows” strategy by the SEC – the pursuit of small infractions in an effort to demonstrate that the agency is serious about stopping people from violating the securities laws and regulations. A similar tactic was credited by many as having played a key role in cleaning up New York City’s crime problem two decades ago.

The SEC’s ability to engage in this type of mass prosecution has been facilitated by its enhanced quantitative data and analysis tools, which profiles high-risk behaviour and transactions and enhance the agency’s ability to investigate and prevent prohibited conduct. According to the press release, the SEC intends to vigorously police these types of violations through such “streamlined actions.”

Yet despite the new “high-tech” analytical tools available to the SEC, the agency may find that a much more traditional device is even more helpful in prosecuting violators of the securities laws and regulations – large cash awards.

The SEC’s Dodd-Frank whistleblower bounty program is in full swing, and the scope  of the reward program is global. Just last month, the SEC announced the award of more than $30 million to a person who provided critical information that led to a successful SEC enforcement action. Significantly, this was the fourth award paid to a non-US person and the largest ever made to anyone under the SEC’s whistleblower program. With such significant bounties being paid for information, it would not be surprising to see an explosion of whistleblower tips from sources around the world. According to Andrew Ceresney, Director of the SEC’s Division of Enforcement, the record-breaking payment “sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement”. Indeed, the Chief of the SEC’s Office of the Whistleblower, Sean McKessy, said that “whistleblowers from all over the world should feel similarly incentivised to come forward with credible information about potential violations of the U.S. securities laws.”

Under the whistleblower program, high-quality, original information that results in SEC enforcement action with sanctions exceeding $1 million can result in awards ranging from 10 to 30 percent of the money collected. The bounties are paid out of a fund established by Congress at no cost to taxpayers or investors. The fund is financed through sanctions paid by securities law violators to the SEC, but is not taken or withheld from harmed investors.

While only one whistleblower was paid under the program in the fiscal year of 2012, four were rewarded in 2013, and nine in 2014, leading Mr McKessy to remark that the agency is “pleased with the consistent yearly growth in the number of award recipients.”

Interestingly, despite the recent award, at least one part of the Dodd-Frank whistleblower law may not apply to persons outside the US. A provision of the law that provides “anti-retaliation” protection to employees that inform on their employers was recently found by a US Court of Appeals not to apply extraterritorially. Moreover, some foreign whistleblowers may risk criminal penalties at home for unlawfully disclosing information to authorities outside their own borders. And the SEC may provide the whistleblower’s identity to foreign officials without notice to the whistleblower. The SEC has noted that “Congress expressly authorised us to disclose whistleblower-identifying information” subject to certain statutory limitations and has concluded that it would be inconsistent with Congressional intent or “the proper exercise of our enforcement responsibilities to require by rule that [the SEC] staff notify a whistleblower before any authorised disclosure.”

Nevertheless, the SEC has made it clear that they view the bounty provisions as applicable to anyone, anywhere, who provides information that leads to the successful enforcement of an action in the United States concerning violations of US securities laws. In the SEC’s view “it makes no difference whether... the claimant was a foreign national, the claimant resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities law violation occurred entirely overseas.”

Thus, while the disconnect between the two provisions might make providing information about one’s employer more risky for non-US persons than it is for US persons, in many cases the significant amount of money available to whistleblowers may well outweigh such concerns, particularly where the potential penalties against the firm – and therefore rewards for the individual – are perceived to be significant.


On 3 September 2014, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the “Banking Agencies”) announced a final rule implementing the first standardised liquidity requirement for large and internationally active US banking organisations (the “Final Rule”). The Final Rule is based on a liquidity standard agreed to by the Basel Committee on Banking Supervision and is consistent with the enhanced prudential standards requirements of Section 165 of the Dodd-Frank Act.

Under the Final Rule, a banking organisation’s leverage coverage ratio (“LCR”) is the ratio of its unencumbered high-quality liquid assets (“HQLA”) to its projected net cash outflow during a 30-day period of financial stress. The Final Rule divides HQLAs into Level 1 Assets and Level 2 Assets. Level 1 Assets include Federal Reserve Bank excess reserves, US Treasury securities, and certain claims on foreign entities that would receive a zero percent risk weight under the US Basel III capital rules. At least 60 percent of a banking organisation’s overall HQLAs must be Level 1 Assets. Level 2 Assets are further subdivided into Level 2A Assets, which are subject to a 15 percent discount, and Level 2B Assets, which are subject to a 50 percent discount. Additionally, Level 2B Assets may count for no more than 15 percent of a banking organisation’s total HQLAs. Level 2A Assets include claims on US government-sponsored entities, such as Fannie Mae and Freddie Mac, and certain claims on foreign entities or multilateral development banks that receive a twenty percent risk weight under the US Basel III capital rules. Level 2B Assets include certain corporate debt and equity securities issued by non-financial companies.

Banking organisations subject to the Final Rule must calculate their net cash outflow using standardised inflow and outflow rates, reflecting stress factors such as:

  1. a partial loss of unsecured wholesale funding capacity;
  2. a partial loss of secured, short-term financing with certain collateral and counterparties;
  3. losses from derivative positions and the collateral supporting those positions;
  4. unscheduled draws on committed credit and liquidity facilities provided to customers;
  5. the potential need to buy back debt or to honor non-contractual obligations in order to mitigate reputational and other risks;
  6. a partial loss of retail deposits and brokered deposits from retail customers;
  7. other shocks that affect outflows linked to structured financing transactions, mortgages, central bank borrowings, and customer short positions.

In addition, the Final Rule requires banking organisations to cap offsetting cash inflows at a maximum of 75 percent of projected outflows.

The Final Rule requires a banking organisation to maintain HQLA equal to at least 100 percent of its net cash outflows over the 30-day stress period. Banking organisations subject to the Final Rule must notify their primary federal regulator any time their LCR falls below 100 percent and must submit a plan remediate the shortfall any time their LCR is below 100 percent for three consecutive business days.

Consistent with the proposed rule, released in October 2013, the Final Rule creates two classes of LCR: a “full” LCR for the largest, internationally active banking organisations and a “modified” LCR for certain smaller banking organisations. The full LCR applies to banking holding companies (“BHC”), savings and loan holding companies (“SLHC”), and depository institutions whose total consolidated assets are equal to or greater than $250 billion or whose on-balance sheet foreign exposures are equal to or greater than $10 billion, their consolidated US depository institutions subsidiaries with more than $10 billion in total consolidated assets, and any other banking organisation whose primary federal regulator requires it to use the full LCR.

US BHCs and SLHCs use the modified LCR if their total consolidated assets are equal to or greater than $50 billion, excluding certain grandfathered unitary SLHC and insurance underwriting company assets. Unlike the full LCR class of banking organisations, the depository institution subsidiaries of banking organisations using the modified LCR are not themselves subject to LCR requirements. In addition, the LCR requirement does not apply to banking organisations with fewer than $50 billion in total consolidated assets, depository institutions that are not subsidiaries of banking organisations subject to the full LCR or that have fewer than $10 billion in consolidated assets, and foreign banking organisations and intermediate holding companies that are not otherwise subject to the LCR requirement. The Federal Reserve Board stated in the announcement of the Final Rule, however, that it anticipates implementing an LCR standard for some or all foreign banking organisations with $50 billion or more in combined US assets.

Organisations subject to the full LCR must calculate their net cash outflow using the outflow and inflow rates and an add-on maturity mismatch calculation based on the difference between net cumulative peak day maturity outflows and net cumulative maturity outflow on the last day of the 30-day period. Organisations using the modified LCR are not required to use the additional maturity mismatch calculation in determining their total net cash outflow. Further, organisations using the modified LCR are permitted to multiply their total net cash outflow by 70 percent when calculating their LCR. The Final Rule increases the stress period for modified LCR calculations from 21 days under the proposed rule, to 30 days, consistent with the full LCR calculation.

The Final Rule’s effective date was 30 September 2014, but has a rolling compliance schedule that requires banking organisations subject to the full LCR to reach an 80 percent LCR by 1 January 2015. These organisations must then reach 90 percent by 1 January 2016 and 100 percent by 1 January 2017. BHCs or SLHCs with $700 billion or more in total consolidated assets or $10 trillion in assets under custody are required to calculate their LCR on the last business day of each month from 1 January 2015 to 30 June 2015, and every business day thereafter. Any other banking organisation subject to the full LCR may calculate its LCR on the last business day of each month from 1 January 2015 to 30 June 2016, and every business day thereafter. Banking organisations subject to the modified LCR have no compliance deadline in 2015, but are required to reach a 90 percent modified LCR on 1 January 2016 and 100 percent on 1 January 2017. Banking organisations using the modified LCR are only required to calculate their LCR on the last business day of each month. Any organisation that becomes subject to the Final Rule after 30 September 2014 based on a regulatory year- end report must comply with the final rule beginning on 1 April of the following year. In addition, newly covered companies are permitted to calculate their LCR monthly from 1 April to 1 December of its first year of compliance, and must begin calculating its LCR daily on 1 January of the following year, if required to do so.


In April 2014, the Banking Agencies finalised rules imposing a SLR requirement on the largest US banking organisations. On 3 September 2014, the Banking Agencies finalised a rule revising the calculation of the SLR to conform to recent changes made by the Basel Committee on Banking Supervision to the Basel III leverage ratio (the “Final SLR Rule”).

All US banking organisations are required to maintain a four percent tier 1 leverage ratio, calculated by dividing tier 1 capital by total on-balance sheet assets. In contrast to this generally applicable leverage ratio, the SLR applies only to advanced approaches institutions, and is calculated by dividing tier 1 capital by “total leverage exposure,” a term defined to include both on-balance sheet assets and certain off-balance sheet items. An advanced approaches institution is required to begin reporting its SLR in 2015, and must maintain an SLR of three percent starting on 1 January 2018. In addition, any US top-tier BHC with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody is required to maintain an additional two percent enhanced supplementary leverage ratio (“eSLR”), for a total supplementary ratio of five percent. A depository institution subsidiary of a BHC subject to the eSLR must also maintain at least a six percent SLR to be considered well-capitalised.

The Final SLR Rule revises the total leverage exposure, the denominator of the SLR calculation, to more appropriately capture on and off-balance sheet exposures. The revisions change the definition of total leverage exposure by including the effective notional principal amount of credit derivatives and similar instruments through which a banking institution provides credit protection, modifying the calculation of total leverage exposure for derivatives and repo-style transactions, and revising the credit conversion factors applied to certain off-balance sheet exposures. In its April 2014 proposed rule, the Banking Agencies estimated that this change to the total leverage exposure would result in an aggregate increase in total leverage exposure of 5.5 percent among all advanced approaches banking organisations. Among the eight BHCs that would be subject to the eSLR, the Banking Agencies originally predicted an 8.5 percent aggregate increase in total leverage exposure as a result of the change, but revised that estimate in the discussion section of the Final SLR Rule to 2.6 percent. Accordingly, the Banking Agencies reduced their estimate of amount of aggregate capital these BHCs would need to raise to meet the SLR requirements from $46 billion to $14.5 billion.