[Winston & Strawn LLP]
VOLUME 14, NO. 5
February 4, 2019
Insights from Winston & Strawn Winston & Strawn’s Reminder of Annual Requirements for Investment Managers – 2019 Feature: The Government Shutdown’s Lasting Damage to Wall Street’s Adoption of Cryptocurrency FINRA Banking Agency Developments Treasury Department Developments Securities and Exchange Commission Commodity Futures Trading Commission Disruptive Technology Developments Federal Rules Effective Dates Exchanges and Self-Regulatory Organizations Industry News
Insights from Winston & Strawn
FINRA 2019 Risk Monitoring and Examination Priorities Letter
The Financial Industry Regulatory Authority, Inc. (FINRA) recently issued its annual, but renamed, Risk Monitoring and Examination Priorities Letter (Priorities Letter). This year’s Priorities Letter departs from previous letters in two main respects. First, FINRA makes it clear that the covered priorities are relevant not only to its examinations program but also to its risk monitoring program as well. Practically speaking, this means that firms that engage in activities addressed in the Priorities Letter that FINRA is likely to view as presenting a significant risk should factor in an increased likelihood of being contacted by FINRA’s examination program. Second, this year’s Priorities Letter focuses primarily on new and emerging topics. That is not to say, however, that FINRA intends to decrease its focus on compliance with perennial concerns, such as suitability, complex products, margin, outside business activities and private securities transactions, private placements, communications with the public, anti-money laundering, best execution, fraud (including microcap fraud), insider trading and market manipulation, net capital and customer protection, trade and order reporting, data quality and governance, recordkeeping, risk management, cybersecurity, associated persons with a problematic regulatory history, and supervision of the foregoing topics and other areas.
The Priorities Letter highlights three emerging activities of special concern. These consist of involvement by members in online securities distribution platforms, fixed-income mark-up disclosure, and regulatory technology.
With respect to online securities distribution platforms, FINRA is concerned that members involved in such platforms are taking the position that they are not selling or recommending securities to customers and, therefore, are not addressing the sales practices and other regulatory obligations that FINRA believes will typically apply to these members.
With respect to fixed-income mark-up disclosure, FINRA will be reviewing for compliance with recent amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15 (Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers).
With respect to innovative regulatory technology, the Priorities Letter lists a number of possible regulatory issues that members should consider, including supervision and governance, third-party vendor management, safeguarding customer data, and cybersecurity.
As to areas of ongoing concern, e.g., suitability, the Priorities Letter focuses on aspects of those topics that have not been previously a focus in prior priority letters. These areas as well as the highlighted areas above are discussed in more depth in my client briefing on this topic, which is available immediately below.
All FINRA members are likely to benefit from a careful review of the Priorities Letter together with consideration of its possible applicability to their business activities. Members should consider how well their practices, policies, and procedures address any applicable concerns as well as the extent they would be able to demonstrate their supervision and oversight through documentation.
Glen P. Barrentine
FINRA’s 2019 Risk Monitoring and Examination Priorities Letter
On January 22, the Financial Industry Regulatory Authority, Inc. (FINRA) released its annual, but renamed, (Priorities Letter) for 2019. As discussed in the prefatory cover letter from FINRA President and CEO, Robert Cook, this year’s Priorities Letter departs from previous letters in two main respects. Briefing.
Winston & Strawn’s Reminder of Annual Requirements for Investment Managers – 2019
Investment Managers face seemingly ever increasing regulatory requirements, many of which are triggered at the beginning of the calendar year or an Investment Manager’s fiscal year. This client briefing is intended as a primer for Investment Managers regarding ongoing compliance obligations and includes best practice recommendations. Briefing.
Feature: The Government Shutdown’s Lasting Damage to Wall Street’s Adoption of Cryptocurrency
On January 29th, Cointelegraph discussed the ways in which the 35-day partial government shutdown has made a lasting impact on the cryptocurrency market, due to the limited operations at both the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”).
After the shutdown ended on January 25th, the SEC’s Division of Corporation Finance issued an announcement regarding recommencement of operations describing how it will address the buildup of transactional and disclosure filings, as well as shareholder proposals that it amassed during the shutdown. According to this guidance, the initial public offerings (“IPO”) market was affected, as there was a delay in applications of companies looking to go public in the first quarter of 2019. Steve Ehrlich, chief operating officer of the Wall Street Blockchain Alliance, toldCoinDesk in an email that “[c]onversations that had been ongoing between startups and relevant regulators such as the SEC (including its newly created FinHUB) about business models and plans have likely lost critical momentum and will take time to recover.”
The CFTC’s operations were also severely reduced by the shutdown. On December 11th, the agency had requested public comments and feedback to help it better understand the technology, mechanics, and markets for virtual currencies beyond Bitcoin, specifically Ether and its use on the Ethereum (“ETH”) Network. Although the comment submission period does not expire until mid-February, CFTC staff that normally would have been engaged in the review of submitted comments was absent during the shutdown. Additionally, the application of cryptocurrency exchange ErisXis likely postponed. ErisX requires CFTC approval since the crypto exchange is seeking to accommodate the futures market.
Likewise, digital assets platform Bakktwill probably also face another delay. So far, no timeline has been set for when Bakkt may go live.
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
OCC Subsidiaries and Equity Investments: Updated Comptroller’s Licensing Manual Booklet
On January 31st, the Office of the Comptroller of the Currency (“OCC”) announced that it has issued a revised “Subsidiaries and Equity Investments” booklet of the Comptroller’s Licensing Manual. The updated version of the booklet has been expanded to provide additional guidance describing activities of federal savings associations that the OCC, or a predecessor regulator of federal savings associations, has determined may be performed in operating subsidiaries and service corporations, or through pass-through investments.
OCC to Host Risk Governance and Credit Risk Workshops in Dallas
On January 28th, the OCC announced that it will host two workshops at the OCC Southern District Office in Dallas, Texas, March 5-6, for directors of national community banks and federal savings associations supervised by the OCC. The Risk Governance: Improving Director Effectiveness workshop on March 5th will provide practical information for directors to effectively measure and manage risks and will also focus on the OCC’s approach to risk-based supervision and major risks in the financial industry. The Credit Risk: Directors Can Make a Difference workshop on March 6th will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems and will also cover the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change.
Treasury Department Developments
U.S. Department of the Treasury TIC Data for November 2018
On January 31st, the U.S. Department of the Treasuryreleased Treasury International Capital (“TIC”) data for November 2018. The next release, which will report on data for December 2018, is scheduled for February 15, 2019.
Economy Statement for SIFMA’s Treasury Borrowing Advisory Committee
On January 31st, the Treasury Department published Acting Assistant Secretary Diana Furchtgott-Roth’s economy statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association (“SIFMA”).
SIFMA’s Treasury Borrowing Advisory Committee Sends Report to Treasury Secretary
On January 29th, the Treasury Department published the report to the Secretary of the Treasury from SIFMA’s Treasury Borrowing Advisory Committee.
Securities and Exchange Commission
No-Action Relief and Exemptive Orders SEC Grants Limited and Temporary Security-Based Swap Exemptions
On January 25th, the SEC issued an order granting a limited exemption under the Securities Exchange Act from the definition of “penny stock” for transactions in security-based swaps between eligible contract participants; granting a limited exemption from the definition of “municipal securities” for security-based swaps; and extending until February 5, 2020, certain temporary exemptive relief originally provided in connection with the revision of the definition of “security” in the Exchange Act to encompass security-based swaps.
Speeches and Statements SEC Chair, Divisions Provide Statements on Reopening of SEC Operations
On January 27th, the SEC’s Divisions of Corporation Finance, Investment Management, Trading and Markets, and Office of Compliance Inspections and Examinations (“OCIE”) issued statements regarding their plans to resume operations. All of the statements explained that the Divisions will process filings, submissions, and requests for staff action in the order in which they were received, unless there are compelling circumstances to expedite assistance. The Division of Corporation Finance indicated that it would consider requests to accelerate the effective date of registration statements filed without delaying amendments if they are amended to include the amendment prior to the end of the 20-day period and acceleration is appropriate. See also the statement issued by SEC Chairman Jay Clayton regarding the resumption of normal operations at the SEC.
Other Developments SEC Lifts Stay of Pending Administrative Proceedings
On January 30th, the SEC issued an order lifting the stay of all pending administrative proceedings for a hearing before either an administrative law judge (“ALJ”) or the Commission. The order stated that any filing in a previously stayed proceeding due between December 27, 2018, and January 30, 2019, should be filed within 14 days, although reasonable requests for extensions of time may be granted by an ALJ or the Commission.
Staff Announcements
The SEC announced on January 29th that it has named Manisha Kimmel Senior Policy Advisor for Regulatory Reporting to Chairman Jay Clayton. Kimmel will coordinate the SEC’s oversight of the creation and implementation of the Consolidated Audit Trail (“CAT”). On January 28th, the SEC announced that Shamoil Shipchandler, the Director of the SEC’s Fort Worth Regional Office, has resigned from the agency. According to the Houston Chronicle, Associate Regional Directors Marshall Gandy and Eric Warner will lead the Fort Worth office until the SEC appoints Shipchandler’s permanent replacement.
Commodity Futures Trading Commission
CFTC’s Release Schedule for Delayed Market Data Reports
On January 29th, the CFTC’s Market Intelligence Branch of the Division of Market Oversight announced an updated release schedule for CFTC market data reports that were delayed during the lapse in appropriations, during which the CFTC suspended publication of the weekly Commitments of Traders report, the weekly Cotton On Call report, and the monthly Bank Participation Report.
CFTC Chairman Delivers Keynote Address Before ABA Business Law Section, Derivatives & Futures Law Committee
On January 25th, CFTC Chairman J. Christopher Giancarlo delivered the keynote address before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting, where he discussed the cross-border application of CFTC swaps regulations and the agency’s recently proposed revisions to the existing Swap Execution Facilities rules.
Disruptive Technology Developments
Cryptocurrency Investors Are ‘Staking’ in Order to Earn Interest on Their Holdings
On February 1st, Bloomberg reported that investors are engaging in a practice called “staking,” where their tokens are put into digital wallets and used to help authenticate transactions that produce new blocks in blockchain networks. In exchange, the investors receive rewards in the form of coins.
China and the U.S. Are in the Lead for AI Domination
On January 31st, Reuters reported that China and the U.S. are ahead of the worldwide competition to lead in the race for artificial intelligence (“AI”) in terms of numbers of applications and in scientific publications. According to a study by the U.N. World Intellectual Property Organization, U.S. tech giant IBM has the biggest AI patent portfolio, while China accounts for 17 of the 20 academic institutions involved in patenting AI.
Artificial General Intelligence Is the Next Generation of AI
On January 28th, Government Technology reported that the next generation of AI, Artificial General Intelligence (“AGI”), will boast advance computational powers and human level intelligence. While AGI could transform humanity with its most powerful applications that include curing diseases and solving climate change, failure to implement appropriate controls could lead to disastrous consequences.
Federal Rules Effective Dates
February 2019 – April 2019
Consumer Financial Protection Bureau
April 1, 2019
Rules Concerning Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z). 83 FR 6364.
Federal Reserve System
February 1, 2019
Large Financial Institution Rating System; Regulations K and LL. 83 FR 58724.
Securities and Exchange Commission
February 25, 2019
Modernization of Property Disclosures for Mining Registrants. 83 FR 66344.
Exchanges and Self-Regulatory Organizations
Cboe Global Markets EDGX Withdraws Proposed Plan for Complex Reserve Order Functionality
On January 28th, the SEC provided notice that Cboe EDGX Exchange Inc. (“EDGX”) has withdrawn its proposal to adopt Complex Reserve Order functionality. SEC Release No. 34-84992.
Financial Industry Regulatory Authority SEC Takes More Time to Review FINRA’s Plan to Permit E-Signatures for Associated Persons on Discretionary Accounts
On January 30th, the SEC designated March 17, 2019, as the date by which it will approve, disapprove, or institute disapproval proceedings for the Financial Industry Regulatory Authority’s (“FINRA”) proposed rule change to amend FINRA Rule 4512 (Customer Account Information) to permit the use of electronic signatures and to clarify the scope of the rule. SEC Release No. 34-85003.
FINRA Launches New Initiative to Encourage Self-Reporting of 529 Plan Violations
FINRA announced on January 28th that it has commenced the 529 Plan Share Class Initiative, a self-reporting initiative to promote firms’ compliance with the rules governing the recommendation of 529 savings plans. In a Regulatory Notice setting out the details of the initiative, FINRA explained that firms should self-report possible issues with their 529 plan share-class supervision by April 1, 2019, and confirm their eligibility to participate in the initiative by May 3, 2019. Eligible firms who self-report and submit detailed remediation plans will receive recommendations for favorable enforcement settlement terms from FINRA’s Department of Enforcement.
FINRA Analyzes Impact of Broker-Affiliated ATS Order Routing on Execution Quality
On January 28th, FINRA announced the publication of a working paper authored by FINRA’s Office of the Chief Economist that studies whether order routing by brokers to Alternative Trading Systems (“ATSs”) that they own affects execution quality. FINRA’s analysis of detailed order-handling information over the life of millions of institutional orders routed by 43 active institutional brokers found that these orders generally received lower order fill rates and higher execution costs.
FINRA Notifies ATSs and ATS Subscribers of Upcoming Requirements for Disaggregated Transaction Reporting
In a Regulatory Notice published on January 25th, FINRA reminded firms that, beginning on April 13, 2019, ATSs and ATS subscribers will be required to report to the Trade Reporting and Compliance Engine (“TRACE”) each transaction in U.S. Treasury securities executed in trading sessions on an ATS on a disaggregated basis.
International Swaps and Derivatives Association ISDA Updates OTC Derivatives Compliance Calendar
On January 31st, the International Swaps and Derivatives Association (“ISDA”) published an updated version of its OTC Derivatives Compliance Calendar, which contains compliance deadlines and regulatory dates for the OTC derivatives space.
ISDA Analyzes Regulatory Driven Market Fragmentation
On January 30th, ISDA announced that it has published a paper highlighting how differences in the implementation of global standards on clearing, margin, trading, and capital in individual jurisdictions has led to inefficiencies, higher costs for derivatives users, and increased risk. The paper also offers ISDA’s recommendations for redressing the market fragmentation caused by inconsistent implementation of the standards across jurisdictions.
ISDA Publishes Initial Legal Guidelines for Smart Derivatives Contracts
On January 30th, ISDA announced the publication of the first in a series of legal guidelines for smart derivatives contracts. The first set of guidelines outlines some potential smart derivatives contract models; sets out principles for the development of smart derivatives contracts; and identifies contractual and documentation issues that may be relevant in the development and implementation of new technology platforms, products, and solutions.
ISDA Releases 2018 Interest Rate Benchmarks Review
On January 29th, ISDA published its review of interest rate benchmarks for the full year and the fourth quarter of 2018. Among other things, ISDA’s analysis found that transactions referencing alternative risk-free rates (“RFRs”) accounted for less than 5% of total interest rate derivatives (“IRD”) traded notional during the full year 2018, with Sterling Overnight Index Average (“SONIA”) swaps representing the majority of the transactions referencing RFRs.
ISDA Plans Conferences on Brexit
On January 28th, ISDA announced that it will host several symposiums in February exploring the implications of Brexit on derivatives markets. Topics will include clearing, contract continuity, use of U.K. benchmarks, and capital requirements.
Investors Exchange LLC SEC Extends Time to Consider IEX’s Proposed Changes to Discretionary Peg Order Pricing
On January 31st, the SEC designated March 19, 2019, as the date by which it will approve, disapprove, or institute disapproval proceedings for Investors Exchange LLC’s (“IEX”) proposed rule change to modify the resting price of discretionary peg orders. SEC Release No. 34-85016.
IEX Submits Analysis of Market Data Costs to Bolster Claims of Excessive Fee Profits
The Wall Street Journal reported on January 29th that IEX has submitted a report to the SEC, which offers an analysis of its own costs to provide market data compared to the fees its pays to other exchanges for market data. In an accompanying letter, IEX CEO Bradley Katsuyama maintained that the report “provides critical evidence” to support complaints that “entrenched exchange operators” are “abusing their regulatory position by charging excessive markups on products that many participants require to conduct their business.”
Municipal Securities Rulemaking Board MSRB Extends Effective Date for Amendments to Advertising Rules
On January 29th, the SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) request to extend the effective date of previously-approved amendments to Rule G-21, on advertising by brokers, dealers or municipal securities dealers, and the adoption of Rule G-40, on advertising by municipal advisors. The rule amendments, which were slated to become effective on February 7, 2019, will now become effective within 6 months following an announcement by the MSRB, which the MSRB expects to publish on its website within 60 days of the publication of the SEC’ approval notice in the Federal Register.
Nasdaq OMX Group SEC Delays Action on Nasdaq’s Proposed Disclosure Requirements for Certain Securities
On January 29th, the SEC designated March 19, 2019, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The Nasdaq Stock Market LLC’s (“Nasdaq”) proposed rule change to amend Nasdaq Rules 5705 and 5710 to adopt a disclosure requirement for certain securities that seek to provide a return based on a specified multiple or inverse multiple of an underlying index or reference asset. SEC Release No. 34-85000.
National Futures Association NFA Provides Notice of Internal Control System Requirements for CPOs
On January 31st, the National Futures Association (“NFA”) notified members that it has adopted an Interpretive Notice that will require commodity pool operator (“CPO”) members, which have the ability to control customer funds, to implement an internal controls framework designed to protect customer funds, provide reasonable assurance that the books and records of a CPO’s commodity pools are accurate and reliable, and ensure that the CPO is in compliance with all CFTC and NFA requirements. The Interpretive Notice will become effective on April 1, 2019.
NYSE SEC Delays Action on Changes to NYSE’s Rules on Discretionary Orders, Auction-Only Orders, Discretionary Modifier, and Yielding Modifier
On January 31st, the SEC designated March 18, 2019, as the date by which it will approve, disapprove, or institute disapproval proceedings for NYSE’s proposal to amend its Rule 7.31 Relating to Discretionary Orders, Auction-Only Orders, Discretionary Modifier, and Yielding Modifier and to make related amendments to Rules 7.16, 7.34, 7.36, and 7.37. SEC Release No. 34-85019.
SEC Approves Changes to NYSE’s Closing Procedures Rule
On January 31st, the SEC approved NYSE’s proposed rule change to amend its rules on closing procedures to extend the cut-off times for order entry and cancellation for participation in the closing auction and to change the times during which NYSE will disseminate order imbalance information for the closing auction. SEC Release No. 34-85021.
SEC Takes More Time to Mull NYSE’s Amendments to Shareholder Approval Rules
On January 30th, the SEC designated March 20, 2019, as the date by which it will approve, disapprove, or instituted disapproval proceedings concerning NYSE’s proposal to amend the Listed Company Manual to modify the price requirements that companies must meet to avail themselves of certain exceptions from the shareholder approval requirements. SEC Release No. 34-85005.
NYSE Reminds Members of Change in Administration of Floor Member Continuing Education
In an Information Memo published on January 29th, NYSE Regulation reminded members and member organizations that members holding the Series 7A and/or Series 7B registrations who do not also hold one or more FINRA registrations will satisfy their continuing education requirement via NYSE’s Floor Member Continuing Education (“FMCE”) program. Due to recent rule amendments eliminating the requirement for certain NYSE members to also be FINRA members, FINRA will no longer administer continuing education for NYSE members that do not also hold a FINRA registration.
Industry News
EU Is Investigating Banks for Colluding on Buying and Selling European Government Bonds
On January 31st, The New York Times reported that the European Commission (“EU”) is currently investigating eight banks, which it has not named, for functioning as a cartel in the buying and selling of European government bonds from 2007 to 2012. According to the commission, this “behavior would violate EU rules that prohibit anticompetitive business prices such as collusion on prices.”
Possible Second Government Shutdown Could Mean More Bad News for the IPO Market
On January 29th, MarketWatch reported that the possibility of a second government shutdown could be bad news for companies that are looking to sell shares to the public. Launching an IPO without approval from the SEC could expose companies to future legal challenges.
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 [email protected]) or Jay Gould (+1 (415) 591-1575 or [email protected]), 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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