SEC Charges Broker-Dealer/Investment Adviser with Deficient Cybersecurity Procedures
The Securities and Exchange Commission (“SEC”) recently charged a firm registered with the SEC as both a broker-dealer and an investment adviser in connection with a cyber-intrusion that compromised the personal information of thousands of customers. This case is significant both because cybersecurity is an area of heightened concern for the SEC and because this is one of the first cases to bring charges against a registered broker-dealer or investment adviser in connection with a cyber-intrusion.
The current chairman of the SEC has identified cybersecurity as a significant concern. See Statement on Cybersecurity, Chairman Jay Clayton (Sept. 20, 2017) available here. In addition, the Commission’s Office of Compliance Inspections and Examinations has identified cybersecurity as a priority and has stated that “[e]ach of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.” See SEC Office of Compliance Inspections and Examinations Announces 2018 Examination Priorities (SEC Press Release 2018-12) (Feb. 7, 2018) available here.
The SEC charged the firm with violating Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a); the “Safeguards Rule”) and Rule 201 of Regulation S-ID (17 C.F.R. § 248.201; the “Identity Theft Red Flags Rule”). These rules, respectively, require broker-dealers and investment advisers registered with the SEC to adopt written policies and procedures that are reasonably designed to safeguard customer records and information, and require broker-dealers and investment advisers that offer or maintain covered accounts to develop and implement a written Identify Theft Prevention Program that is designed to detect, prevent, and mitigate identify theft in connection with the opening of a covered account or any existing covered account.
This case is the first SEC enforcement action charging violation of the Identity Theft Red Flags Rule and appears to be just the second case, and the first since 2015, charging a registered broker-dealer or investment adviser in connection with a cyber-intrusion. For the earlier case, see SEC Charges Investment Adviser with Failing to Adopt Proper Cybersecurity Policies and Procedures Prior to Breach (SEC Press Release 2015-202) (Sept. 22, 2015) available here.
In its press release announcing this action, available here, the SEC referenced both weaknesses in the firm’s cybersecurity procedures and the firm’s failure to apply its procedures to systems used by the greater part of its workforce. The firm agreed to pay a $1 million fine. The firm also agreed to retain a compliance consultant to conduct a comprehensive review of the firm’s policies and procedures and to implement the recommendations resulting from such review. A copy of the underlying order is available here.
This case should serve as a warning that the SEC is prepared to use its enforcement powers where it believes broker-dealers or advisers have put their customers at an unreasonable risk of cyber-intrusion. Winston & Strawn will publish a client briefing that will provide more detail regarding the particular concerns identified by the SEC and that will offer suggestions with respect to the steps that firms should take to protect themselves from possible enforcement action.
Feature: Corporate Governance and the Role of Stakeholders
In remarks at the 17th Annual Securities and Exchange Commission (“SEC”) “Hot Topics” Conference on September 21st, SEC Commissioner Hester Peirce offered a critique of the rising influence of “stakeholders” in corporate governance. Citing recent legislation passed in California that requires public companies to appoint more women to their boards, Peirce lamented what she sees as “government attempts to remake corporations for the benefit of so-called stakeholders.” Peirce’s self-described “beef” with stakeholders arises from the elasticity of the term, which can be stretched to encompass a large group of constituencies that may have competing interests. In an effort to cater to the interests of various stakeholders, companies risk compromising shareholder interests. According to Peirce, the problem with the California legislation, as well as other attempts to advance environmental, social, and governance (“ESG”) issues, is that the breadth of interests represented by the various stakeholders will make it “challenging to draw the lines exactly right to include one group of stakeholders and exclude another,” introducing complications and possibly undue influence into board decision-making. While acknowledging research that indicates the potential benefits for companies that implement ESG policies, Peirce concluded that “[w]e have a deep and well-developed body of corporate law. It rests on the assumption that the board owes its principal duty to the shareholders collectively, not to an amorphous group of stakeholders. There is no compelling reason to overturn centuries of settled law, and there are many reasons not to.”
While Peirce remains unconvinced that the potential benefits of ESG policies outweighs the potential drawbacks of catering to the interests of stakeholders, researchers continue to find a correlation between the adoption of ESG policies and corporate performance. In a recent post on the CLS Blue Sky Blog, researchers at Seattle University and Pacific Lutheran University presented the findings of their study of the effects of corporate social responsibility (“CSR”) on firm value. Acknowledging the difficulty in measuring precisely how CSR impacts firm value, the researchers found that institutional ownership and market conditions can determine whether CSR policies increase firm value. According to these findings, CSR firms experience a loss in value during volatile market conditions, such as the 2008 financial crisis. However, high levels of institutional ownership can counteract the impact of poor market conditions on CSR firms, leading the researchers to conclude that “institutional ownership can be an effective value-increasing mechanism, especially during the crisis when agency problems get worse.”
Another paper posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation considered the impact of employees as internal stakeholders on company performance. The paper examined the performance of companies across North America and Europe, taking into account which companies use employee engagement surveys to measure employee satisfaction and solicit employee feedback about company operations. The paper found that companies that used employee engagement surveys demonstrated, among other things, higher long-term rates of return, lower implied volatility, and lower probability of default. The paper concludes that “[l]istening to and considering the perspectives of a wide range of stakeholders, including employees, can inform more balanced and effective decision making” by public companies.
Placing the interests of stakeholders at the forefront of corporate decision-making is the goal of new legislation proposed by Senator Elizabeth Warren (D-Mass). Outlining the objectives of The Accountable Capitalism Act in an op-ed for The Wall Street Journal, Warren explained that the legislation would “restore the idea that giant American corporations should look out for American interests,” a concept in place throughout U.S. history until the mid-1980s, when the business model shifted to emphasize the maximization of shareholder returns as the primary responsibility of corporations. Noting that her bill follows the benefit corporation model, Warren explained that companies with more than $1 billion in annual revenue would be required to get a federal corporate charter, which would oblige corporate directors to consider the interests of all major corporate stakeholders in company decisions. Not unexpectedly, Warren’s proposal is controversial, with critics maintaining that under Warren’s system “honest companies will find themselves tied up in extensive regulation and never-ending stakeholder engagement.”
Given the current political climate, Senator Warren’s proposed legislation has little chance of becoming law. However, as long as shareholders continue to pressure companies to adopt ESG and other corporate responsibility policies, companies may have a hard time ignoring the interests of stakeholders.
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
Consumer Financial Protection Bureau CFPB Report, RFI Focus on Agency’s Sources and Uses of Data
On September 25th, the Consumer Financial Protection Bureau (“CFPB”) announced that it has published a reportand Request for Information (“RFI”) regarding the CFPB’s sources of data and how data is used. The report describes the data the CFPB collects, the sources of the data, and how it is accessed and reused within the agency and includes the full text of the CFPB’s internal data governance policies and charters. The RFI requests feedback on the CFPB’s data governance program and data use. Comments should be submitted within 90 days of publication in the Federal Register.
Federal Reserve Board FRB Approves Discount Rate Increases by New York and Minneapolis Fed
On September 27th, the Federal Reserve Board (“FRB”) announced that it has approved actions by the Boards of Directors of the Federal Reserve Banks of New York and Minneapolis that increase the discount rate at the Banks from 2-1/2 percent to 2-3/4 percent, effective immediately.
FRB Publishes FOMC Statement and Economic Projections
On September 26th, the FRB released the statement of the Federal Open Market Committee (“FOMC”) following its meeting on September 25-26, 2018. FOMC indicated that, in light of the strong labor market conditions and economic activity and steady inflation numbers, it will raise the target range for the federal funds rate to 2 to 2-1/4 percent. The FRB and FOMC also published a summary of the economic projections and the target federal funds rate projections made by FOMC participants for the meeting.
OCC OCC Issues Bulletin on Prompt Corrective Action
On September 28th, the Office of the Comptroller of the Currency (“OCC”) published a bulletin that describes the guidelines and procedures by which the OCC implements its authority under section 38 of the Federal Deposit Insurance Act, entitled “Prompt Corrective Action.” Among other things, the bulletin discusses the purpose of prompt corrective action (“PCA”) and the capital categories that establish the OCC’s framework of supervisory actions based on the capital level of a bank.
OCC Updates TILA Guidance
On September 26th, the OCC announced the publication of a revised version of the “Truth in Lending Act” (“TILA”) booklet of the Comptroller's Handbook. The revised booklet provides updated guidance and procedures to examiners in connection with changes made to Regulation Z. The OCC also announced that it has rescinded a previous booklet issued on December 16, 2014, as well as the TILA sections of OCC Bulletin 2015-27, “Revised Interagency Examination Procedures for Consumer Compliance,” and OCC Bulletin 2015-42, “Initial Examinations for Compliance With TILA-RESPA Integrated Disclosure Rule.”
OCC Releases Fiscal Year 2019 Bank Supervision Operating Plan
On September 25th, the OCC announced that it has released its bank supervision operating plan for fiscal year 2019. The plan indicates that the OCC will focus on supervisory strategies during the fiscal year related to, among other things, cybersecurity and operational resiliency; Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance management; and internal controls and end-to-end processes necessary for product and service delivery.
OCC Reports Mortgage Performance Unchanged
On September 21st, the OCC announced that, according to its quarterly report on mortgages, performance of first-lien mortgages remained largely unchanged during the second quarter of 2018 compared with a year earlier. Among other things, OCC Mortgage Metrics Report, Second Quarter 2018 showed that 95.6 percent of mortgages included in the report were current and performing at the end of the quarter, compared to 95.4 percent a year earlier.
Treasury Department Developments
Treasury Announces Designations Targeting Corruption in Venezuela
On September 25th, the U.S. Department of the Treasury (“Treasury Department”) announced that the Office of Foreign Assets Control (“OFAC”) has designated members of the Venezuelan president’s inner circle, which include key current or former officials of the Venezuelan government. OFAC’s action blocks all property and interests in property of the designated individuals subject to U.S. jurisdiction, and generally prohibits U.S. persons from engaging in transactions with them.
Treasury Announces New Employer Tax Credit for Paid Family and Medical Leave
On September 24th, the Treasury Department announced that, as part of the 2017 Tax Cuts and Jobs Act, eligible employers who provide paid family and medical leave to their employees during tax years 2018 and 2019 may qualify for a new business credit. Retroactive credit may also be available to employers for setting up or updating a leave policy. Additionally, the Treasury released guidance clarifying how to calculate the credit, including the application of special rules and limitations.
Securities and Exchange Commission
Proposed Rules SEC Proposes Rule Amendments to Codify and Clarify Exemptions for NRSROs
The SEC announced on September 26th that it has proposed rule amendments that would codify an existing exemption to Exchange Act Rule 17g-5(a)(3), relating to ratings of structured finance products, for credit rating agencies registered with the SEC as nationally recognized statistical rating organizations (“NRSROs”). The proposed amendments would also clarify that the exemption, as well as similar exemptions in Exchange Act Rules 17g-7(a) and 15Ga-2, apply only if all offers and sales of a security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the United States. Comments should be submitted within 30 days of publication in the Federal Register, which is expected shortly.
Guidance Trading and Markets Division Answers FAQs About Regulation Crowdfunding
On September 25th, the SEC’s Division of Trading and Markets released answers to frequently-asked questions (“FAQs”) regarding Regulation Crowdfunding and requirements for intermediaries, including broker-dealers and funding portals. Among other things, the FAQs address due diligence requirements for intermediaries, requirements for the delivery of educational materials, the registration of funding portals, and recordkeeping requirements for funding portals.
SEC Publishes New C&DI on Presentation of Shareholder Equity Changes in Quarterly Reports
On September 25th, the SEC’s Division of Corporation Finance added New Question 105.09 to its Compliance and Disclosure Interpretations (“C&DIs”) on Exchange Act forms. The new C&DI clarifies the effective date for new requirements to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q.
Staff Guidance for EDGAR Filings for ABS Issuers
On September 24th, the SEC’s Division of Corporation Finance published a guide, in question and answer format, to issuers of Asset-Backed Securities (“ABS”) regarding certain programming changes to the EDGAR system that have been made to support recently adopted revisions to Regulation AB and new Exchange Act Rule 15Ga-2.
Speeches and Statements Blass Defends Withdrawal of Proxy Advisor Letters
On September 26th, Law360 reported that SEC Division of Investment Management Director Dalia Blass defended the SEC’s decision to rescind two staff letters on the use of proxy adviser recommendations by investment managers during her testimony before the U.S. House of Representatives Financial Services Committee. Blass told the Committee that the decision was made as part of a larger SEC initiative to review and modernize its regulations.
Clayton Asks Roundtable Participants to Consider Regulatory Changes to Help Prevent Investor Fraud
In opening remarks at the SEC Staff Roundtable on Regulatory Approaches to Combating Retail Investor Fraud on September 26th, SEC Chairman Jay Clayton maintained that the SEC must continue to examine its regulatory framework to determine its effectiveness in preventing fraudulent activity before it occurs.
Other Developments Staff Announcements
On September 27th, the SEC announced that Lacey Dingman, the SEC’s Chief Human Capital Officer and Director of the Office of Human Resources, will leave the agency at the end of September.
Money Market Fund Statistics
On September 26th, the SEC’s Division of Investment Management published updated money market fund statistics, which reflect data as of August 31, 2018.
Trading and Markets Will Host Roundtable on Market Data and Market Access
The SEC announced on September 24th that its Division of Trading and Markets will host a two-day roundtable on October 25 and 26, 2018, on market data and market access. The agenda for the roundtable includes, among other things, panel discussions focused on assessing current market data products, market access services, and their associated fees, as well as on potential steps to improve market data products and market access services.
SEC Awards Foreign Whistleblower Nearly $4 Million
The SEC announced on September 24th that an overseas whistleblower has earned an award of nearly $4 million for providing the SEC with a tip and ongoing assistance during the SEC’s investigation of misconduct that resulted in a successful enforcement action.
SEC Announces Date of Proxy Process Roundtable
The SEC announced on September 21st that its planned roundtable on the proxy process will take place on November 15, 2018. The SEC invited the public to submit comments on the proxy process in advance of or after the roundtable, which will focus on key aspects of the U.S. proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms.
OIG Finds Lack of Governance and Preventative Controls Contributed to 2016 EDGAR Breach
The SEC’s Office of Inspector General (“OIG”) issued a report on September 21st that presents its findings and recommendations following its review of the SEC’s response to the 2016 breach of the EDGAR system that resulted in the unauthorized access by hackers to non-public information. Among other things, OIG’s report concludes that during the years leading up to the breach, the EDGAR system lacked adequate governance commensurate with the system’s importance to the SEC’s mission.
DERA White Paper Analyzes Market for Unregistered Securities Offerings
On September 21st, the SEC released a white paper prepared by staff in its Division of Economic and Risk Analysis (“DERA”) that offers an analysis of unregistered offerings conducted in reliance on Regulation D of the Securities Act between 2009 and 2017. The paper provides a detailed examination of offering characteristics, analyzes the impact of the new and amended exemptions created pursuant to the Jumpstart Our Business Startups Act, and looks at the level of activity among the various registered and unregistered offering alternatives.
Disruptive Technology Developments
Crypto Firm Prepares to Launch IPO
Bloomberg reported on September 26th that Bitmain Technologies, one of the world’s largest cryptocurrency mining firms, has filed financial disclosure statements with the Stock Exchange of Hong Kong and the Securities and Futures Commission, confirming Bitmain’s plans to launch an initial public offering (“IPO”). The filing offers a look inside “[o]ne of the cryptocurrency world’s most powerful, controversial and secretive companies.”
Why Bitcoin ETF Hopefuls Won’t Take No for an Answer
On September 23rd, The Wall Street Journal examined the tenacity of bitcoin firms, which continue to submit proposals for bitcoin exchange-traded funds (“ETFs”) despite numerous rejections by the SEC. The article notes that the advantage enjoyed by the first fund to market and the desire to bring legitimacy to the growing cryptocurrency market motivate firms to keep trying to win SEC approval.
Federal Rules Effective Dates
October 2018 – December 2018
Consumer Financial Protection Bureau
October 12, 2018
Disclosure of Records and Information. 83 FR 46075.
Federal Deposit Insurance Corporation
October 1, 2018
Securities Transaction Settlement Cycle. 83 FR 26347.
Federal Financial Institutions Examination Council
October 1, 2018
Appraisal Subcommittee; Appraiser Regulation. 83 FR 43739.
Federal Reserve System
October 5, 2018
Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations. 83 FR 38460.
National Credit Union Administration
October 1, 2018
Bylaws; Voluntary Mergers of Federally Insured Credit Unions. 83 FR 30301.
Office of the Comptroller of the Currency
October 1, 2018
Securities Transaction Settlement Cycle. 83 FR 26347.
Securities and Exchange Commission
October 30, 2018
Amendments to Municipal Securities Disclosure. 83 FR 44700.
October 9, 2018
Regulation of NMS Stock Alternative Trading Systems. 83 FR 38768.
Treasury Department
October 11, 2018
Removal of Office of Thrift Supervision Regulations. 82 FR 47083.
Exchanges and Self-Regulatory Organizations
Cboe Global Markets SEC Delays Action on BYZ’s Request to Make Permanent Its Retail Price Improvement Program
On September 27th, the SEC designated November 15, 2018, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning Cboe BYX Exchange Inc.’s (“BYX”) proposal to make permanent Rule 11.24, which sets forth BYX’s pilot Retail Price Improvement Program. SEC Release No. 34-84297.
BOX Options Exchange BOX Seeks Review of Suspension of Amendments to Connectivity Fees
On September 26th, the BOX Options Exchange Inc. (“BOX”) filed a petition for review of an order issued by the SEC’s Division of Trading and Markets that temporarily suspended an immediately effective rule change that amended the BOX fee schedule to establish certain connectivity fees and reclassify its high-speed vendor feed connection as a port fee. BOX maintained that the Division applied the wrong legal standard in suspending its proposal and failed to provide a reasoned explanation for treating its proposed rule change differently from many prior proposals from other exchanges.
Financial Industry Regulatory Authority FINRA Amends Arbitration Rules to Establish a Per-Arbitrator Fee and Honorarium for Late Cancellation of Prehearing Conferences
In a Regulatory Notice published on September 28th, the Financial Industry Regulatory Authority (“FINRA”) announced that the SEC has approved its proposal to amend its customer and industry arbitration rules to charge parties who request cancellation of a prehearing conference within three business days a $100 per-arbitrator fee. The amendment also provides for a $100 honorarium to each arbitrator scheduled to attend the cancelled prehearing conference. The amendments are effective for cases filed on or after October 29, 2018.
FINRA Will Offer NEW SIE Exam in October
On September 27th, FINRA announced that it will launch the Securities Industry Essentials (“SIE”), a new qualification exam for prospective candidates seeking to enter or re-enter the securities industry.
FINRA Reminds Firms of Obligations When Quoting OTC Equity Securities
FINRA published a Regulatory Notice on September 24th that discusses the legal obligations that apply when broker-dealers initiate a quote in an over-the-counter (“OTC”) security in addition to filing a Form 211. FINRA reminded members that they should check whether securities have been the subject of a suspension or revocation prior to seeking to initiate or resume quotations in such securities and obtain information that they reasonably believe resolves the information issues that resulted in the trading suspension.
FINRA Plans Changes to CRD System Related to Restructured Exam Program
In an Informational Notice published on September 24th, FINRA announced that it will introduce enhancements and presentation changes in the Central Registration Depository (“CRD”) system that relate to the implementation of FINRA’s restructured qualification examination program and the adoption of consolidated FINRA registration rules. The changes will become effective on October 1, 2018, and principally affect the Examination Requests and SRO Registrations sections of the CRD system.
Fixed Income Clearing Corporation SEC Approves FICC’s Plan to Apply GSD Corporation Default Rule to Sponsored Members
On September 21st, the SEC issued an order approving a proposed rule change filed by the Fixed Income Clearing Corporation (“FICC”) that modifies FICC’s Government Securities Division (“GSD”) Rulebook to amend GSD Rule 3A (Sponsoring Members and Sponsored Members) to apply GSD Rule 22B (Corporation Default) to Sponsored Members. SEC Release No. 34-84255.
Municipal Securities Rulemaking Board
MSRB Offers Guidance on Requesting Interpretive Guidance. On September 25th, the Municipal Securities Rulemaking Board (“MSRB”) published a new statement on requesting interpretive guidance in an effort to clarify the various ways that regulated entities as well as issuers, attorneys, investors and other market participants can seek assistance from the MSRB.
NASDAQ OMX Group Phlx Proposes to Use Snapshot Functionality for All Orders
On September 26th, the SEC requested comments on a proposed rule change filed by Nasdaq PHLX LLC (“Phlx”) that would allow the Snapshot functionality of the Floor Based Management System to be used for all orders. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 1, 2018. SEC Release No. 34-84290.
SEC Approves Nasdaq’s Changes to Shareholder Approval Requirement for Private Placement Securities
On September 26th, the SEC granted accelerated approval to The Nasdaq Stock Market LLC’s (“Nasdaq”) proposal to modify the circumstances in which shareholder approval is required for issuances of securities in private placement transactions by changing the definition of market value for purposes of shareholder approval under Nasdaq Rule 5635(d) and eliminating the requirement for shareholder approval of issuances at a price less than book value but greater than market value. The SEC also requested that interested parties submit comments on an amendment to the proposal within 21 days of publication in the Federal Register, which is expected the week of October 1, 2018. SEC Release No. 34-84287.
National Futures Association NFA Announces New Training Course on Safeguarding Customer Funds
On September 27th, the National Futures Association (“NFA”) notified members that it has partnered with the Futures Industry Association to develop a new training course on safeguarding customer funds, which will help futures commission merchants (“FCMs”) meet the annual training requirements included in CFTC Regulation 1.11.
NFA Notifies Members of Updates to FATF-Identified Jurisdictions with AML/CFT Deficiencies
On September 26th, the NFA advised FCMs and introducing brokers (“IBs”) to review their AML programs for compliance with the Financial Action Task Force’s (“FATF”) updated list of jurisdictions with strategic AML/CFT deficiencies. The Financial Crimes Enforcement Network (“FinCEN”) issued an Advisory on September 21st announcing the revisions to FATF’s list.
NFA Reminds Members of Upcoming Board and Nominating Committee Vacancies and Election Procedures
On September 24th, the NFA issued a Notice to Members that provides information about the elected Directors and the members of the Nominating Committee whose terms will expire at the NFA Board of Directors' regular annual meeting on February 21, 2019, and requests nominations of eligible persons to fill those positions. The Notice also reminds members that they must designate an Executive Representative to sign nominating petitions; receive notices of Member meetings and proxy materials; complete proxy cards and provide voting instructions; and cast votes on behalf of the Member.
NYSE NYSE American Proposes Amendments to Rules on Give Up of a Clearing Member by ATP Holders
On September 25th, the SEC requested comments on NYSE American LLC’s (“NYSE American”) proposal to amend its rules regarding the Give Up of a Clearing Member by American Trading Permit (“ATP”) Holders to provide a means for a Designated Give Up to opt out of acting as the give up for certain ATP Holders. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 1, 2018. SEC Release No. 34-84285.
SEC Seeks Comments on NYSE Arca’s Proposal on Designated Give Ups for OTPs
On September 21st, the SEC provided notice of a proposed rule change filed by NYSE Arca Inc. (“NYSE Arca”) that would modify Rule 6.15-O regarding the Give Up of a Clearing Member by Options Trading Permit (“OTP”) Holders and OTP Firms to provide a means for a Designated Give Up to opt out of acting as the give up for certain OTPs. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 1, 2018. SEC Release No. 34-84284.
NYSE Arca Proposes Changes to Listing Standards for Equity-Linked Securities
On September 25th, the SEC requested comments on NYSE Arca’s proposal to amend its listing standards for Equity-Linked Securities to provide that all component securities of an index underlying an issue of Equity Index-Linked Securities shall be either U.S. Component Stocks that are listed on a national securities exchange and are NMS Stocks or Non-U.S. Component Stocks that are listed and traded on an exchange that has last-sale reporting. Comments should be submitted should be within 21 days of publication in the Federal Register, which is expected the week of October 1, 2018. SEC Release No. 34-84279.
SEC Takes More Time to Consider NYSE’s Proposed Amendments to Rules for DMM Transactions
On September 24th, the SEC designated November 14, 2018, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning the New York Stock Exchange LLC’s (“NYSE”) proposal to amend NYSE Rule 104 governing transactions by designated market makers (“DMMs”). SEC Release No. 34-84276.
Judicial Developments
Sixth Circuit Revives Securities Fraud Suit Against Drug Company That Misled Investors About FDA Meeting
Following a meeting with the FDA, the CEO of a pharmaceutical company announced that the company would not be required to complete a cardiovascular outcomes trial for its new cholesterol drug prior to FDA approval. When the FDA’s final meeting minutes indicated that the FDA might require a completed trial before approving the drug, the company’s stock plummeted. Stockholders brought a securities-fraud class action, alleging that the company willfully and recklessly misled investors in its statements following the meeting with the FDA. On September 27th, the U.S. Court of Appeals for the Sixth Circuit held that plaintiffs adequately alleged scienter. Plaintiffs’ allegations support a strong inference that the company recklessly misstated to its investors what the FDA said during the meeting. Additionally, the court held that the company’s statements fall outside the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor for forward-looking statements because the truth or falsity of the statements was discernible at the time they were made.
General Partnership Interests Qualify as Securities under Federal Law
Defendant engaged in the business of identifying tracts of land to purchase and sell to investors by means of general partnership interests. The SEC alleged that the general partnership interests were investment contracts and qualified as securities under federal law, and that defendant violated federal securities law by selling unregistered securities and defrauding his investors. On September 26th, the U.S. Court of Appeals for the Ninth Circuit held that the general partnership interests at issue qualified as securities under federal law. The undisputed facts established that the general partnership interests were stripped of the hallmarks of a general partnership and marketed as passive investments. The court vacated the civil penalty ordered by the district court in light of defendant’ death and vacated and remanded the disgorgement order for reconsideration in light of the Supreme Court’s decision in Kokesh v. SEC.
Trusts Can't Pursue Arbitration Against Swiss Bank Partners Associated with FINRA Member Firm
After an independent asset manager stole money from the custodial accounts they opened at a Swiss bank, two investment trusts initiated an arbitration proceeding before FINRA against the partners who owned the bank and several of the bank’s corporate affiliates, one of which was a FINRA member. On September 24th, the U.S. Court of Appeals for the Eleventh Circuit held that the trusts’ claims are not arbitrable under FINRA Rule 12200. The dispute between the trusts and the partners did not arise in connection with the partners’ business activities as associated persons of a FINRA member.
Industry News
SEC Taking Closer Look at Exchanges’ Data Fees
On September 27th, The Wall Street Journal reported on recent decisions by the SEC to examine more closely requests by stock exchanges to increase the fees they charge for data feeds. The SEC’s scrutiny of exchanges’ data feed practices is considered a victory for brokers and traders, who believe exchanges overcharge for the data they provide.
Risky Loans Remain Beyond the Grasp of Regulators
On September 27th, Bloomberg reported that regulators are struggling to rein in risky transactions in the leveraged loan market, as the “most aggressive financing is being done outside the traditional banking sector” and, therefore, outside the reach of regulators.
More Investors Eligible to Participate in Private Offerings
SEC Chairman Jay Clayton revealed in a recent interview that he would like to open up private offerings to more investors. The Wall Street Journal reported on September 23rd that over 16 million households in the U.S. are already eligible to invest in private companies, which represents a 10-fold increase in the number of eligible investors since the 1980s.
Venture Capitalists Push for #MeToo Clawback Provisions
On September 23rd, The Wall Street Journal reported on efforts by venture capitalists to include a standard clawback clause in agreements between investors, private-equity managers, and firms that would automatically penalize firms if their employees engage in sexual misconduct. Proponents of so-called #MeToo clawbacks maintain that sexual misconduct by executives is a harbinger of other weaknesses in a company’s governance and corporate culture.
Winston & Strawn Publications
Impact of CFIUS Reform On Private Equity Transactions
On August 13, the President signed into law the National Defense Authorization Act for Fiscal Year 2019 (“NDAA”), which included the bipartisan Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). Briefing.
$200 Billion in Chinese Imports Subject to Additional Duties
On September 17, 2018, the United States Trade Representative (“USTR”) released a list of 5,745 categories of products imported from China that will be subject to additional duties. This imposition of an additional duty is part of the U.S.’ response to the Section 301 investigation that found that China was engaging in unfair trade practices related to the forced transfer of American technology and intellectual property. Briefing.
Update: China to Grant Favorable Treatment to Hong Kong Reinsurers
The Hong Kong Insurance Agency (“HKIA”) recently announced that the China Banking and Insurance Regulatory Commission (“CBIRC”) has agreed to grant preferential treatment to Hong Kong reinsurers. Briefing.
Employer Background Checks – New Forms Required for FCRA Compliance
Last week, the Consumer Financial Protection Bureau (CFPB) issued an interim final rule updating two model disclosure forms to reflect changes made to the Fair Credit Reporting Act (FCRA) in recent legislation. Briefing.
Interest Rates Are On the Rise for SBICs: September 2018 Debenture Pooling
The September 2018 pooling of Small Business Investment Company (“SBIC”) debentures was priced at 3.548%. This most recent semi-annual pricing of SBIC debentures reflected an increase to the rate set in March 2018 at 3.187%. Briefing.
Contact Us
For more information regarding the Financial Services Update and the Financial Services Practice please contact: Basil V. Godellas (+1 (312) 558-7237 or bgodellas@winston.com) or Jay Gould (+1 (415) 591-1575 or jgould@winston.com), Co-Chairs of Winston’s Financial Services Corporate Practice Group. Please click here to see a list of Winston & Strawn professionals with practices in the financial services industry.
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